Primetime subprime.

The Wall Street Journal reported today that Ben Campbell, the United States Attorney for the Eastern District of New York in Brooklyn, has formed a task force of federal, state, and local agencies to deepen and extend the criminal division’s ongoing probe into various players in the subprime mortgage meltdown. Campbell told the Journal that the “jury is still out” on whether the sudden decline in the value of securities backed by bundles of subprime mortgage instruments is the result of criminal activity or just market forces, but the scope of this invigorated inquiry is broad. They will be looking at whether the crimes of mortgage fraud, securities fraud, insider trading, accounting fraud, and making false statements have been committed. Mortgage banks, brokers, lenders, investment banks, and hedge funds will be under the prosecutor’s microscope.

The newly formed task force had its first meeting on Friday and includes officials and agents from the FBI's financial-institutions fraud unit known as C3; the U.S. Postal Inspection Service, which investigates mail fraud; financial-crimes investigators from the U.S. Secret Service; and investigators and representatives of the New York State Banking Department, the New York City Department of Investigation, and the Federal Deposit Insurance Corportaion, a federal banking regulator.

It remains to be seen whether this inquiry – along with the many investigations being pursued by other local prosecutors and a potential central Justice Department task force –will yield numerous individual criminal prosecutions. But this ramped-up effort is certainly part of an unmistakable trend that potential targets must recognize. Individual mortgage brokers, bankers, closing attorneys, investment bankers, ratings agency executives, and anyone else involved in the subprime deal flow should take note. The inquiry is bound to intensify in the coming months. Given the losses suffered in the subprime debacle, the potential for significant criminal exposure to serious jail time is high. However, there are market-based explanations for much of what has occurred, and complex accounting and disclosure requirements may provide proof that there was a general lack of intent to defraud on the part of individuals involved.

In the comments to the Journal’s law blog post on the new task force, a reader asks, “Who will defend these companies? Most big law firms are conflicted.” Whether or that is the case, small, savvy firms like ours specialize in the representation of individuals. As the Journal blog post points out, the subprime mess has been called “the latest Full Employment Act for Lawyers.” Now we smaller firms may be seeing the “trickle-down” effect of what is becoming an increasingly larger supply side of companies and individuals in trouble. CR