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When Bernie Madoff received his 150-year prison sentence for a massive Ponzi scheme, it seemed like justice had been served. Yet after the 2008 financial crisis, which devastated millions of Americans, virtually no high-level Wall Street executives faced criminal charges. Why not?

In this episode of the “Oh My Fraud” podcast, Miriam Baer—a former prosecutor with the prestigious Southern District of New York, corporate compliance professional, and former Vice Dean at Brooklyn Law School and currently Dean and President of California Western School of Law—shares insights from her unique career journey that help explain this paradox.

From Princeton to the Prosecutor’s Office

Baer’s journey through the world of white-collar crime began far from where she expected. After attending Princeton (where, yes, she knew Ted Cruz) and Harvard Law School, she initially had no intention of becoming a prosecutor.

Her path changed after working at a law firm on securities fraud cases, which gave her a crash course in understanding how companies manipulate their books. From there, she joined the prestigious U.S. Attorney’s Office for the Southern District of New York under then-U.S. Attorney Mary Jo White.

At the prosecutor’s office, Baer handled everything from mail and wire fraud to bank fraud and money laundering, learning the intricacies of federal criminal prosecution. This experience gave her first-hand knowledge of how prosecutors decide which cases to pursue—knowledge that helps explain why some financial criminals face justice while others seem to escape it.

Why Some Cases Get Prosecuted While Others Don’t

When massive financial scandals don’t result in criminal charges, public frustration often follows. “Why aren’t these people in jail?” becomes a common refrain. But Baer identifies a more nuanced reality than simple theories about wealthy people being above the law.

“There’s a tendency to look at the scope of the harm,” Baer explains. “Someone says, ‘Well, he caused all that horrible harm. Why aren’t you prosecuting him?’ The answer is, well, I’m bound by the statute.”

Baer identifies two distinct thresholds prosecutors consider:

The “threshold of liability” – Whether a crime technically occurred under statute
The “threshold of viability” – Whether prosecutors believe they can win the case

This second threshold is crucial but often overlooked in public discussions. Based on past wins, prosecutors develop mental “prototypes” of successful cases that shape how they evaluate new evidence.

“When someone says, ‘Is this a fraud case? Is it a viable fraud case?’ [prosecutors] think in their minds about what most recently was viable,” Baer notes.

During the 2008 financial crisis, prosecutors’ mental prototype of fraud was based on early 2000s accounting scandals that featured whistleblowers, clear paper trails, and cooperating witnesses—elements largely absent in the financial crisis cases.

“My whole theory is that especially what happened with the financial crisis is, yeah, there were folks who had passed the threshold of liability, but the prosecutors weren’t sure they were over the threshold of viability,” Baer explains.

This framework helps explain why more recent cases like Elizabeth Holmes and Sam Bankman-Fried resulted in prosecution. Both featured the crucial elements prosecutors recognize from successful cases: cooperating witnesses and defendants who “constantly talk all the time” and eventually contradict themselves.

The Problems with White-Collar Criminal Statutes

Beyond prosecutorial decision-making, Baer identifies fundamental flaws in the design of white-collar criminal statutes. Her book, “Myths and Misunderstandings in White Collar Crime,” explores these issues in depth.

“The statutes themselves are confusing us,” Baer explains. She identifies three primary problems:

1. “Flat” statutes that lack gradation

Unlike homicide laws that distinguish between first-degree murder, second-degree murder, and manslaughter, fraud statutes don’t meaningfully differentiate between degrees of severity.

“If I look up fraud, it’s just all falling under the fraud umbrella of mail fraud or wire fraud. And it really doesn’t matter that you were charged with mail fraud and I was charged with wire fraud from a moral valence,” Baer notes. “It just means you use the mails and I use the wires.”

2. “Bundled” statutes that combine vastly different crimes

Baer points to the Hobbs Act as a prime example—a single statute that criminalizes both robbery affecting interstate commerce and bribery by public officials.

“That’s very different from robbery…it’s all under the same statute,” she explains.

3. Statutes that fail to generate useful information

Perhaps most importantly, these flaws create a system that doesn’t effectively track patterns or provide clear information about white-collar crime.

“The system itself should produce information because we are the ones in charge,” Baer argues. “We can’t do that job if the system doesn’t give us information or information that we could get at.”

These structural issues create an “insider/outsider” divide in criminal justice. Those working within the system understand its peculiarities, while the public is left confused and suspicious.

“It leads to this level of people feeling estranged from the system and feeling like this system is rigged,” Baer says.

Case Studies: Timing, Complexity, and Expertise Gaps

Several practical challenges further complicate white-collar crime prosecution. One is simple timing—evidence of sophisticated fraud often emerges years after the fact, sometimes through academic research long after the statute of limitations has expired.

Baer references a paper published in 2015 that uncovered significant misrepresentations in mortgage-backed securities markets from the 2008 crisis. “Little late,” she observes wryly.

Another challenge involves proving intent at the highest corporate levels, where decisions flow through layers of management.

“The public hungers for the very top person to fall,” Baer explains. “They don’t want to hear that you got Mister mid-level dude.” Yet proving that a CEO directed fraudulent activities is often nearly impossible without direct evidence.

A third challenge stems from expertise gaps. As Baer candidly acknowledges: “I think people don’t realize the degree to which lawyers in particular are generalists… after three years of law school, I absolutely did not have forensic accounting skills.”

This knowledge gap means prosecutors must learn sophisticated financial concepts while simultaneously building cases against defendants represented by specialists in these areas.

To illustrate how criminal law sometimes misses the mark, Baer points to the “Varsity Blues” college admissions scandal. While the fraudulent behavior was clear, she questions whether criminal prosecution addressed the deeper issues.

“Whatever way you should deal with this type of behavior, which of course is terrible…it wasn’t clear to me that criminal law was doing anything to really fix it,” Baer reflects.

Implications for Accounting Professionals

For accounting professionals, Baer’s insights offer a valuable perspective. Understanding the gap between technical violations and “viable” criminal cases is crucial for effective compliance work.

“Being a world-class jerk is not the same thing as violating the mail fraud statute,” Baer points out, highlighting the gap between unethical behavior and criminal conduct.

The expertise gap between legal and financial professionals creates both challenges and opportunities. Accounting professionals who can effectively translate complex transactions for non-specialists provide immense value in both preventing and addressing potential misconduct.

Baer’s solutions include creating gradations within fraud statutes, unbundling combined statutes, and designing systems that generate better information about financial misconduct patterns. These changes would not only improve enforcement but potentially rebuild public trust.

Moving Beyond Simple Narratives

The paradox of white-collar crime enforcement shapes how our financial system operates and who faces consequences when it fails. As Baer’s analysis reveals, the seemingly contradictory patterns of prosecution stem not primarily from corruption, but from structural challenges built into our legal framework.

“If you want to have a better understanding of where the problems are and how you fix them, you need better information,” Baer emphasizes.

Baer’s book “Myths and Misunderstandings in White Collar Crime” explores these themes in greater depth. For those interested in hearing more of her insights, the whole conversation on the Oh My Fraud podcast offers a fascinating look into the world of financial crime prosecution from someone who’s seen it from multiple perspectives.

In 1973, the financial world was rocked by a scandal that seemed almost too outrageous to be true: a respected insurance company had fabricated over 56,000 policies, amounting to a staggering $2 billion fraud. This wasn’t just a case of cooking the books; it was a masterclass in how innovation, technology, and unbridled ambition could combine to create one of history’s most audacious financial deceptions.

Welcome to the Equity Funding Corporation of America world, where the line between financial innovation and fraud is blurred beyond recognition. In this episode of the Oh My Fraud podcast, we dive deep into this fascinating case, which offers crucial lessons for modern finance and fraud prevention.

Join us as we explore the birth of Equity Funding’s innovative insurance-mutual fund product, its evolution into a complex fraudulent scheme, and its ultimate unraveling. Along the way, we’ll uncover valuable insights that resonate in today’s world of high-speed trading, complex financial instruments, and ever-present market pressures. The Equity Funding scandal may be a story from the past, but its lessons are more relevant than ever in our ongoing battle against financial fraud.

The Seeds of Fraud: Financial Innovation Gone Awry

At the heart of the Equity Funding scandal lay an innovative financial product that seemed too good to be true—and ultimately proved to be just that. In the late 1950s, Gordon C. McCormick devised a clever combination of mutual funds and term life insurance that would become the cornerstone of Equity Funding’s success.

The product was revolutionary for its time. As Caleb Newquist explains, “Customers could borrow against their mutual fund holdings to pay for a ten-year term life insurance policy.” The genius was in the timing: “The idea was that at the end of the ten years, the value appreciation in the mutual funds would outpace the total amount of the loan.”

This approach offered customers a win-win scenario: they could invest for the future while securing life insurance protection, all without significant upfront costs. For Equity Funding, it was a ticket to rapid growth. The company quickly became one of Wall Street’s favorite financial insurance stocks.

However, this innovative product also laid the groundwork for fraud. Its complexity made it difficult for regulators and auditors to scrutinize, while its success created immense pressure to maintain growth. The stage was set. What began as financial innovation would soon evolve into one of the most elaborate deceptions in corporate history.

The Anatomy of Deception: Crafting a Fraudulent Empire

As Equity Funding’s success grew, so did the pressure to maintain its meteoric rise. At the helm of this growing empire were Stan Goldblum, Fred Levin, and Sam Lowell—a trio whose backgrounds ironically included insurance regulation and embezzlement detection. Goldblum’s approach to leadership was summed up in a chilling statement to Levin: “publicly held companies do not lose money.”

This pressure to always show growth led to the perversion of their innovative product into an elaborate fraud. The company began creating fake insurance policies, manipulating their original concept of combining mutual funds and life insurance into a vehicle for deception.

Technology played a crucial role in this fraud. Greg explains, “Equity funding’s Electronic Data processing department had designed a computer program that would recognize categories of insurance by a code number. Code 99 indicated a business that involved no direct billing. These blocks of policies, Code 99, were then sold to the reinsurers.”

The fraud’s complexity was mind-boggling. A group known as the “Maple Drive Gang” created physical policy files to fool auditors. In a macabre touch of realism, the company even simulated policyholder deaths at a rate comparable to actual mortality rates.

The scale of the deception was staggering. By the time the fraud was uncovered, Equity Funding had created over 56,000 fake policies worth approximately $2 billion. Of the $117 million in loan receivables booked to finance these bogus policies, $62 million was completely non-existent.

The Unraveling: Detection, Exposure, and Consequences

The elaborate fraud at Equity Funding began to unravel in February 1973 when Ronald Secrist, a recently fired vice president, made two pivotal phone calls—one to the New York Insurance Department and another to Raymond Dirks, a securities analyst.

Dirks’ investigation quickly gained momentum. He interviewed former employees, met with current executives, and compiled extensive notes. As word spread, the company’s stock plummeted. On March 27th, the stock hit a low price of $14, and trading was suspended. Desperate attempts by Goldblum and his associates to maintain the facade, including bugging their own offices, proved futile.

The legal consequences were swift and severe. As Caleb details, “On November 1st, 1973, indictments against 22 defendants on 105 counts ranging from securities fraud, mail fraud, bank fraud, filing false documents with the SEC, interstate and transportation of counterfeit securities were filed.” Goldblum, Levin, and Lowell received prison sentences of eight, seven, and five years respectively.

The Equity Funding scandal exposed significant weaknesses in auditing and regulatory oversight, particularly in the face of emerging technologies. Greg’s observation is telling: “I was surprised during the story how much they relied on computers to help perpetrate the fraud.”

This case offers enduring lessons for modern fraud prevention. It underscores the need for robust checks and balances, the importance of whistleblower protections, and the need to adapt auditing practices to keep pace with technological advancements in finance.

Lessons from a Financial Scandal

While rooted in the 1970s, the Equity Funding scandal offers timeless lessons for our modern financial landscape. This case vividly illustrates how innovation can spiral into massive fraud when warped by greed and enabled by technology.

Key insights from this scandal resonate powerfully today:

Complex financial products require equally sophisticated auditing practices
Technology can be a double-edged sword – both a tool for fraud and its detection
Robust whistleblower protections are crucial in exposing corporate malfeasance
Regulatory oversight must evolve as quickly as the financial instruments it governs

As we navigate an era of AI-driven finance, blockchain technologies, and ever-more complex derivatives, the fundamental challenges highlighted by Equity Funding persist. The methods may change, but the potential for fraud remains.

To truly appreciate the intricacies of this landmark case and its relevance to modern fraud prevention, we invite you to listen to the full episode of Oh My Fraud. Whether you’re a finance professional or simply fascinated by white-collar crime, this deep dive into the anatomy of corporate fraud offers valuable insights.

From the Courtroom to the Classroom: How a Former Prosecutor Views White-Collar Crime