Yesterday, two former Bear Stearns managers were arrested and face criminal charges related to the collapse of certain investment funds associated with subprime mortgages.  The managers represent the first executives to face criminal charges stemming from the subprime meltdown and current financial crisis.  The Wall Street Journal has a copy of the indictment, which charges both managers with securities fraud, wire fraud, and conspiracy, and one manager with insider trading, that can be viewed here. Both former managers were arrested outside of their respective homes.  The photos and coverage of their “perp walks” struck me as very similar to the highly publicized arrests of corporate executives involved in the accounting and corporate governance scandals post-Enron. In fact, such arrests and perp walks began occurring almost five years ago, and around the same time—during the summer months. So I was struck by the similarities between those arrests and yesterday’s arrests. Moreover, the similarities raise some interesting questions.

First, do the arrests represent the tip of the iceberg? Certainly such was the case five years ago, as the summer months seemed to reflect the beginning of an almost steady flow of corporate arrests. Moreover, the creation of Operation Malicious Mortgage (DOJ and the FBI’s concerted efforts to curb mortgage fraud) suggests that more corporate executive arrests may follow. Indeed, apparent some four hundred individuals have already been charged with fraud in connection with the operation.

Second, will the indictments lead to convictions? To be sure, many of the high-profile indictments surrounding the collapse of Enron and other entities resulted not only in convictions, but the imposition of lengthy prison terms.  According DOJ's most recent report, its Corporate Fraud Task Force—created in July of 2002 to respond to the corporate governance crisis—has been responsible for over 1300 corporate fraud convictions since its inception. And yet there were some notable “losses”—including high profile acquittals, reversals and mistrials.

Third, if there is an increase in indictments of corporate executives over the coming months, will that increase be sustained over the coming years? One 2007 survey by the American Lawyer found that in recent years the number of major corporate fraud indictments has “slowed to a trickle.”  Thus, the survey found that while there were more than 300 major corporate fraud indictments between 2002 and 2005, DOJ only identified fourteen such indictments in 2006 and twelve as of November of 2007.  To be sure, apparently some 400 people have been indicted since March as a result of Operation Malicious Mortgage. Then too, some may applaud the overall decrease in prosecutions and convictions, particularly those who believe that such actions are ineffective in curbing fraud as well as those concerned that such indictments and their resulting convictions were sometimes obtained through problematic practices that eroded important attorney-client rights.  Moreover, there are many reasons for the decline, including the possibility that both the market and corporations adapted to increased prosecutorial scrutiny.

Fourth, will these indictments make a difference?  Of course this may be the most important and yet most difficult question about which we try to respond. After all, five years after new legislation and a seeming increase in white collar crime prosecution, we seem to be back at the same place. Does that confirm that these high profile indictments, convictions, and lengthy prison sentences are not effective deterrents? Or should it cause us to question how much more fraud we may have seen if not for the increased efforts of five years ago?  Unclear.  At the very least however, the similarities between the corporate perp walks of yesterday and those that occurred five years ago suggest that while the transactions and people may change, fraud—and the corporate perp walk?—will persists.

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