Wall Street Fraudsters’ Sentences Bake in Risk of Future Crimes

A federal judge sentencing Ozy Media founder Carlos Watson to prison last month for lying to big-name funders about his now-defunct media startup said the “quantum of dishonesty in this case was exceptional.” But what Watson might do next concerned the judge even more.

“I don’t see any reason why, as soon as you were able to, that you wouldn’t simply repeat the behaviors that led us to this point,” Judge Eric Komitee of the US District Court for the Eastern District of New York told Watson as he handed down a nearly 10-year prison sentence.

A Southern District of New York judge sentencing embattled FTX crypto mogul Sam Bankman-Fried to 25 years cited a “risk that this man will be in a position to do something very bad in the future, and it’s not a negligible risk at all.”

Likewise, Bill Hwang of Archegos Capital Management, convicted of defrauding Wall Street banks and manipulating markets, was hit with an 18-year prison term after federal prosecutors argued a “significant sentence will be required to deter Hwang—a recidivist and unrepentant fraudster—and to signal to even the most hubristic investors that their grand schemes will be met with serious sentences.”

Judges and prosecutors say they want to deter future misdeeds, showing white-collar defendants and their peers the steep consequences their offenses can bring, even though corporate fraudsters haven’t historically fit the archetype of a repeat offender.

For their part, civil antifraud enforcers are poised to focus on individual wrongdoers in the months ahead as President-elect Donald Trump—himself the first US president convicted for a felony—nominates Paul Atkins to lead the Securities and Exchange Commission, with an anticipated focus on individual penalties over sweeping corporate crackdowns.

Faces of Fraud

High-profile cases are fertile ground for sentencing that sends a message, and judges understand they can set an example, according to Emily Nix, professor of finance and business economics at the University of Southern California.

“For people not to commit financial crimes, we either have to rely on their morality, or we have to rely on their fear,” she said. “For them to fear what happens when they commit a white-collar crime, they have to see other people get punished for it.”

Financial crime defendants have more avenues to commit fraud that can affect larger groups of investors than ever before, including through crypto-based and online schemes.

“It’s just becoming increasingly easy to commit fraud across a variety of domains, and maybe it does have to do with the lack of punishment,” Nix said. “If you are punishing the corporation through a slap-on-the-wrist financial penalty, that is maybe not going to be as strong a deterrence as if you punish the specific individual who defrauded millions of Americans out of their hard-earned savings.”

Recidivism and lack of remorse should be considered in tandem by courts, which they can use to weigh whether a defendant is “incorrigible,” according to Steve Hall, legal director for Better Markets.

“In the Archegos scandal that was engineered and controlled by Hwang, you had massive financial harm,” he said. “Recidivism was definitely something the US Attorney’s Office focused on in its sentencing recommendation, but that was an example where the court stopped short of the 21 years that the government was urging the court to impose on Hwang.”

In cases where a whole company is responsible for fraud, sentencing can be an important mechanism for holding any involved officers, directors, or other leaders accountable.

“There’s a way to put a face on it, even if it’s just the institution, by going after the individuals that are responsible in a meaningful way,” Hall said.

SEC Enforcement Shift

SEC actions that often accompany criminal cases brought by the government may also bring renewed attention to penalizing individual fraud rather than large institutions.

Atkins could take a step back from filing actions against companies to set his administration apart from Chair Gary Gensler’s “regulation by enforcement” reputation, according to Eric Kuwana, a partner at Alston & Bird LLP who has represented companies and their leaders in securities litigation.

“There will be a reluctance to pursue companies because of his belief that those actions hurt shareholders, not wrongdoers,” Kuwana said. “When he was at the Commission years ago, he pushed back on enforcement actions against a number of companies and he took the enforcement staff to task for enforcement actions that went after companies in a manner they didn’t deserve.”

Hall agreed that individual securities fraudsters will likely get heightened scrutiny from the SEC under the incoming administration.

“Either the enforcement numbers overall will dip, or they won’t dip, but the focus will be on the small fries,” he said. “It’s distinguishable in a meaningful sense from the kind of systemic violations that deserve much more focused prosecutorial effort and attention.”