CHAPTER TWELVE Neoliberalism and the Rediscovery of Business Fraud

Since the 1970s, the problem of business fraud has taken a firmer hold on

the American imagination. According to Google Books, the frequency of the phrases “corporate fraud” and “business fraud” in published works has doubled every ten years since 1975.¹ Growth in the number of articles that use one of these phrases in the New York Times, Wall Street Journal, Washington Post, and Los Angeles Times reflects a similar exponential curve.² Every year, American newspapers, magazines, and blogs produce thousands of pages about specific fraud scandals and broader patterns of intentional economic du­plicity, continuing the 150-year tradition of the journalistic fraud beat.

Consider the following examples, all familiar to readers of either the old- fashioned financial pages or, for more recent events, economics blogs. Begin­ning in the mid-1970s, the United States encountered an epidemic of telemar­keting fraud. The boiler room brigades extended their stock-in-trade beyond penny stocks into real-estate investments, “useless merchandise,” “unnecessary insurance,” and advance-fee scams involving sweepstakes and “credit repair” services. By 1994, one accounting organization estimated annual losses from telemarketing fraud at around $16 billion; a year later the FBI pegged a sum more than twice as high.³ During the 1980s and 1990s, systematic strategies of overbilling generated billion-dollar contracting fraud scandals in defense pro­curement and the Medicare and Medicaid programs.⁴ From the earliest days of the internet, latter-day Peter Funks have taken advantage of the explosive growth in online commerce, creating fake firms, rigging electronic auctions, selling counterfeit goods, and peddling web-based investment scams.⁵

The most far-reaching impositions occurred within the financial industry.

In the late 1990s and early 2000s, American securities markets were beset by new twists on the old game of pump and dump. Several of the country's largest public corporations, including Cendant, WorldCom, Tyco, Health­South, and Enron, obscured unfavorable financial results through deceptive accounting. These firms treated loans as revenue, capitalized expenses, booked current profits on the basis of aggressive projections of future earnings, and manipulated stock prices through transactions with special-purpose entities controlled by company insiders. Their ability to hide financial problems was facilitated by professional gatekeepers. Investment bankers devised complex off-balance-sheet financing vehicles that hid poor results. Accountants (in many cases, the firm of Arthur Andersen) and lawyers blessed such sleights- of-hand as meeting disclosure obligations.

During the early 2000s, two wonders of the financial world, Allen Stanford and Bernard Madoff, ensnared thousands of investors in massive Ponzi schemes that reached into the billions of dollars. Scores of promoters pulled off less grandiose pyramid scams, leading one regulator to describe an era of “rampant Ponzimonium.”⁸ The damage from fraud in the nation's housing markets achieved even more colossal dimensions, as intentional misrepresen­tations became business as usual within the chain of financing home mort­gages. By 2006, every link in that chain, from home appraisals and mortgage brokerage, to loan securitization and bond rating, to the use of credit default swaps, was shot through with conflicts of interest, false claims about underly­ing assets and creditworthiness, and duplicitous marketing. At the end of the chain, investment banks and hedge funds engaged in complex manipulation of derivatives markets. Direct losses attributable to these misrepresentations and frauds ran into the hundreds of billions of dollars, implicating almost every large American bank and bringing down Lehman Brothers, Countrywide Fi­nancial, Washington Mutual, and a slew of other nonbank lenders. These fail­ures placed severe stress on the banking system and triggered a global down­turn that threw millions of people out of work and destroyed several trillion dollars of household wealth in the United States alone. Then, in the aftermath of the collapse, financial firms engaged in pervasive misrepresentations and outright lies about legal titles to properties in order to streamline foreclosures against nonpaying debtors.⁹

The enormity of these post-1980 scandals casts a different light on the busi­ness frauds of the preceding half-century, as well as the regulatory efforts to constrain them.

With these business frauds being of such recent vintage, historians have yet to spill much ink about them. Within the historical guild, most scholars shy away from analysis of events until at least a generation or two has passed. As a result, few fine-grained historical case studies have appeared that would fa­cilitate broader causal synthesis. But journalists, economic sociologists, politi­cal scientists, and legal scholars have been far less reticent, offering several assessments of more recent fraud episodes. Their accounts offer helpful build­ing blocks for an overarching explanation of this dramatic inflection point, which must engage with how post-1975 deregulation widened the opportuni­ties for large-scale business frauds. But any narrative must also take note of regulatory countercurrents, as the past four decades have also included sig­nificant antifraud initiatives, again both public and private.

The Many Faces of Deregulation

The occurrence of gigantic American business frauds after 1975 depended in part on structural shifts in modern capitalism. Rapid growth in telemarketing fraud was made possible by technological breakthroughs that drove down the costs of mass marketing over the phone lines. Similarly, the emergence of the internet as a platform for communication and commerce proved a godsend to con artists and scamsters. Anonymity within the online world complicated reputational checks; its many routes for bypassing legal borders muddled juris­dictional authority. The most extensive investment frauds involved compli­cated financial instruments that came into existence only because dramatic advances in computing power facilitated the underlying mathematical model­ing. Processes of globalization constituted still another structural precondition for the largest financial frauds. The geographic expansion of integrated finan­cial markets allowed intermediaries to sell more easily across oceans, increas­ing the potential for asymmetries of information. Steady growth in economic inequality since the early 1970s was an additional contributing factor. Stagnat­ing incomes led to soaring household debt among less well-off Americans, opening up paths for debt-related frauds.

Demographic changes represent yet another explanatory variable. The rapid graying of America increased the size of a social group that has always served as a prime target for investment swindles and high-pressure selling. Con artists and fraudulent businesses sought out elderly Americans for the same reason that thieves seek out neighborhood financial institutions. The “nest eggs” of retired persons, like bank vaults, were where one could count on finding ready money, comprising roughly half of all US financial assets in 2000.

The most common theme running through accounts of large-scale Ameri­can business frauds since 1975, however, has been the corrosive impact of de­regulation, often linked to the insistent lobbying of firms and industry groups who pleaded for regulatory relief during the three decades that stretched from Jimmy Carter's election into the George W. Bush administration.¹¹ In popular discourse and political rhetoric, “deregulation” often refers to actions that curb governmental restraints on the maneuverability of firms. But the term requires careful parsing, because policymakers can take many different steps that relax regulatory fetters. This attention to detail is especially important in explaining post-1975 American business fraud. Different aspects of the more general de- regulatory impulse have mattered more in encouraging some types of system­atic corporate deception than others.

The most thoroughgoing form of deregulation uproots regulatory frame­works for specific industries, either by abolishing regulatory agencies or break­ing down market partitions. This type of deregulatory policy, such as the repeal of the structures overseeing routes and rates for passenger airlines, railroads, and long-distance trucking that occurred during the Carter administration, played at least an indirect role in some fraud episodes. The removal of entry and pricing regulations over long-distance telephone rates and telephone equipment in the 1980s and 1990s, for example, facilitated the rapid expansion of firms such as WorldCom, whose aggressive pursuit of market share and short-term stock price appreciation led to deceptive accounting practices.¹² Similarly, the replacement of rigid energy pricing regulation with futures trad­ing platforms gave Enron an opening to engage in the rigging of California energy spot markets, the sort of market manipulation that New Deal financial regulation had outlawed for stock and bond markets.¹³

Reconfigurations of rules structuring markets also sometimes encourage fraud outbreaks, as with the Savings and Loan crisis of the 1980s and early 1990s and the mortgage financing debacle of the mid-2000s. In the first of these episodes, persistent inflation during the 1970s weakened the financial position of S&Ls, which were locked in to long-t erm, low-rate mortgages. Congress responded in 1982 by easing previous limits on S&Ls' capacity to at­tract brokered deposits with aggressive interest rates, expanding their invest­ment options to include commercial real-estate and business loans, and re­moving the requirement that Savings and Loans have at least four hundred shareholders. All of these changes contributed to the rapid expansion of specu­lative real-estate developments and fraudulent financing schemes.¹⁴

The subprime mortgage fiasco had important roots in several deregulatory statutes and administrative reforms. The former included the 1995 Private Se­curities Litigation Reform Act (PSLRA), the Graham-Leach-Bliley Act of 1999, and the 2000 Commodity Futures Modernization Act (CFMA). The PSLRA raised procedural and evidentiary hurdles associated with private securities fraud lawsuits against third parties such as accounting firms. Graham-Leach- Bliley repealed the New Deal prohibition on integrating the operations of commercial and investment banks. After 1999, the largest financial institutions could draw on commercial banking arms for capital, expanding their capacity to create and distribute mortgage-backed securities, as well as to finance non­bank lenders who supplied loans to securitize. This ready access to financing increased the supply of mortgage bonds and related derivatives, widening op­portunities for deceptive practices in the debt markets. The CFMA exempted most over-the-counter derivatives from federal regulation, which left the sausage-making of securitization and credit default swaps in the shadows, and so enabled falsification and manipulation. A crucial deregulatory action that eased the path to “liars' loans” (mortgages predicated on false claims about borrower incomes) occurred in 1997, when the Office of Thrift Supervision replaced its underwriting standards for residential mortgages with unenforce­able “guidelines.”¹⁵

More subtle dimensions of American deregulation also promoted the pro­liferation of late twentieth-century business fraud. The impulse to loosen regu­latory burdens often operated not so much through wholesale reconstruction of regulatory rules and institutions, but rather budget cuts or unwillingness to increase agency resources in the face of expanding market activity; appoint­ment of officials committed to more cooperative relations with regulated busi­nesses; and expanded delegation of fraud monitoring to private parties, includ­ing regulated entities themselves and third parties such as ratings agencies. These adjustments had dramatic impacts on antifraud enforcement.

Insufficient investment in policing played a central role in almost every major post-1975 fraud episode. The schemes undertaken by hundreds of S&L executives in the 1980s and early 1990s all depended on lax oversight by un­derfunded and overworked bank examiners.¹⁶ Contractors who defrauded fed­eral defense procurement and healthcare programs calculated that auditing mechanisms would not be able to keep up with sophisticated strategies to max­imize billing.¹⁷ At the SEC, budget cuts in the 1990s compromised its capacity to identify the accounting frauds that emerged amid the dot-com boom.¹⁸ During the George W. Bush administration, the FBI shifted scores of field in­vestigators with a background in fraud cases to join the War on Terror.¹⁹ Over those same years, Alan Greenspan’s Federal Reserve declined to use its author­ity to crack down on deceptive tactics by mortgage brokers and lenders.²⁰

The point here is not that every American antifraud professional looked the other way. Harry Markopolos, a midlevel securities executive in Boston, amassed evidence that Bernard Madoff was running a sophisticated Ponzi scheme as early as 1999, sharing his findings on several occasions with SEC officials and the New York State attorney general’s office. At least two SEC staff­ers encouraged him to continue his research and statistical analysis. At Enron, internal auditor Sherron Watkins informed her superiors about indefensible inflation of earnings and obscuring of losses through the use of special­purpose entities and deceptive internal financial reports. Within the Federal Reserve, board member Edward Gramlich sounded alarms about lax oversight of the mortgage markets in 2000. His fears were echoed by a 2004 report by the FBI’s mortgage fraud unit, which detailed widespread misrepresentations and outright duplicity. And the head of the Commodity Futures Trading Commis­sion (CFTC), Brooksley Born, recognized the dangers lurking in unregulated derivatives such as credit default swaps and spearheaded an effort to regulate them in 2000.²¹

Such cautions, however, found unreceptive audiences among higher-level regulatory officials, prosecutors, and the most influential legislators. At large financial institutions, internal whistleblowers who raised concerns about mortgage fraud before 2008 were either stonewalled by management or fired.²² In some instances, such as the Madoff case, this official skepticism reflected disinclination to take action against a well-connected member of the financial elite. In addition, the shift toward deregulatory premises in American policy­making reduced the salience of investor and consumer protection as officials sought to balance conflicting policy goals—at least until the economic ramifi­cations of a specific kind of fraud became too obvious to ignore. Thus, the CFTC’s attempt to regulate credit default swaps generated a firestorm of op­position from the financial industry, the Federal Reserve, Treasury Secretary Robert Rubin, and powerful members of Congress from both parties.²³ At­tempts in 2000 and 2001 by Sheila Bair, then head of the Federal Deposit In­surance Corporation (FDIC), to create a voluntary set of mortgage underwrit­ing standards were undermined by Federal Reserve officials.²⁴ Legislative efforts in both Georgia and New Jersey to tighten the regulation of mortgage lending in the early 2000s prompted furious objections from Wall Street pow­erbrokers and Washington regulators. After these two states made the securi- tizers of mortgage loans liable for damages if the underlying debts resulted from fraudulent transactions, ratings agencies refused to assess securitizations that included loans from New Jersey or Georgia, leading legislators to repeal key elements of their reforms. Federal banking regulators also moved to ex­empt federally chartered financial institutions from state oversight of mortgage practices.²⁵ At moments like these, the policy decisions that facilitated new av­enues for fraud were refusals to impose new regulations, rather than repeal of long-existing rules or atrophy of hard-nosed enforcement.

One needs to place the evolving priorities of so many antifraud officials in the context of resurgent American antistatism. Throughout the twentieth cen­tury, conservative political thinkers had never lost their skepticism of onerous regulation, even as the consolidation of New Deal institutions marginalized this viewpoint. Antagonism toward heavy-handed, intrusive economic regula­tion regained some credence from the academic critiques of the regulatory state put forward by Marver Bernstein, Gabriel Kolko, George Stigler, and Richard Posner, as well as scores of additional studies that built on their prem­ises. By the time of the Carter administration, expectations that regulatory agencies would bog down in bureaucratic morass had seeped into conven­tional wisdom. Social scientists across the political spectrum tended to portray those agencies as favoring big business at the expense of smaller competitors and consumers, whether by design, through continuous lobbying by corporate interests, or because officials came to identify with the firms they regulated.²⁶

Macroeconomic developments intensified the appeal of these critiques, alongside companion proposals for formal deregulation. The persistent infla­tion caused by Vietnam War spending and Middle East oil shocks heightened concern about regulatory costs. With consumer prices rising 8 percent and then 15 percent a year in the 1970s, it became easier to argue that government officials could best look out for consumers by reducing regulatory burdens on corporations, because the latter responded to new rules by raising prices. Tech­nological developments in some fields, such as telecommunications and bank­ing, made existing regulatory frameworks seem like barriers to rapid adoption of efficiency-enhancing innovations in digital data services, cellular networks, financial data processing, and automatic teller machines. By the 1990s, the winds of globalization, fostered by global trading frameworks that reduced tar­iffs and nontariff trade barriers, also appeared in arguments for loosening up regulatory constraints. Unless America removed regulatory fetters, the argu­ment ran, US firms would continue to lose out to less regulated competitors, whether in emerging markets or to longstanding rivals such as London's finan­cial markets.²⁷

Permeating these arguments was a deepening faith in the pervasiveness of economic rationality and the transformative power of markets.²⁸ Building on the arguments of George Stigler and Richard Posner, critics of restrictive regu­lation beseeched policymakers to reconsider how individuals made economic decisions and how markets adapted to problems such as deception. Most eco­nomic actors could look out for their own long-range interests. Absent regula­tory mandates, companies would still disclose relevant financial data to lower their capital costs. Corporate executives would safeguard their good names by insisting upon trustworthy internal accounting, just as retailers would stand by promises in order to cultivate goodwill. For similar reasons, auditors, under­writers, and legal counsel would take care to sustain their reputations.

To the extent that fraudulent behavior intruded into marketplaces, critics of aggressive antifraud regulations adopted a Schumpeterian perspective, arguing that market discipline and entrepreneurial innovation offered the best means of addressing such problems. If firms misled investors or customers, any im­mediate gains would be counterbalanced by reputational consequences, espe­cially in the case of settled businesses that had no intention of emulating the “fly-by-night” crowd. Over the long term, one could count on “informational intermediaries” to guide economic actors in assessing the trustworthiness of counterparties. This set of ideas, then, incorporated key dimensions of the ear­lier legal framework of caveat emptor. Adherents of this view also stressed the significance of long-term structural changes in American financial markets. By the 1980s, most purchasers of financial assets were not individuals, but rather mutual funds, pension funds, insurance companies, and hedge funds. Manag­ers at these organizations presumably had the education, training, and moxie to look out for themselves, as well as the interests of the investors, workers, and policyholders whose capital they controlled.²⁹

Policy elites did not always broadcast these understandings, beliefs, and more inchoate attitudes about business fraud. Indeed, public rhetoric some­times masked private belief, which seems to have been the case for Alan Greenspan, the powerful member and then Chair of the Federal Reserve Board who served from 1987 to 2006. In his 2007 memoir, written as concerns about mortgage fraud were beginning to crest, Greenspan described the “rooting out of fraud” as “an area in which more rather than less government involvement is needed.” Deceit, he proclaimed, was “the bane of the market system,” a “de­stroyer of the market process itself because market participants need to rely on the veracity of other market participants.” Accordingly, he advocated “greatly stepping up enforcement of anti-fraud and anti-racketeering laws.” In private during the late 1990s and early 2000s, Greenspan seems to have sung a differ­ent tune. According to journalist Joe Nocera and former regulator Michael Greenberger, the Fed chair made clear in discussions about banking deregula­tion that “he didn't believe that fraud was something that needed to be en­forced or was something that regulators should worry about,” because “the market will figure it out and take care of the fraudsters”³⁰

On occasion decision-makers did bring such thinking more fully into view. Federal Circuit Court Judge Edith Jones demonstrated how these assumptions could shape judicial reasoning in a 1997 securities fraud class action involving alleged misrepresentations by a Texas used-car-lot chain that focused on high- risk customers. As a partial justification for the court's decision to throw out this suit, which investors had brought against the corporation and its auditors, Coopers & Lybrand, Judge Jones found that the plaintiffs had not demon­strated the accounting firm's “motive” for certifying the adequacy of financial reports that they allegedly knew to be misleading. “Accounting firms,” Jones conceded, “like all rational economic actors[,] seek to maximize their profits” But because “an accountant's greatest asset is its reputation for honesty,” it was “extremely unlikely that Coopers & Lybrand was willing to put its professional reputation on the line by conducting fraudulent auditing work.” For Jones, the legal default was that powerful economic players would not risk reputational capital.³¹

Entrepreneurial Innovation and Business Fraud in Greenspan's America

The tilting of regulatory discretion toward permissiveness after 1980, even in the face of credible evidence of far-reaching intentional deception, underscores the importance of more diffuse norms and cognitive defaults as shapers of business environments. At the height of America's recent age of deregulation, politicians and policymakers lionized risk-taking, innovation, short-term monetary incentives, and market discipline as the most desirable features of modern economic life. Such ideals, which also received a thorough airing in business schools and managerial discourse, seemed like a much-needed tonic for shaking off 1970s stagnation and meeting the stiff challenges of European and Japanese competition.³²

Over the 1980s and 1990s, these shifts in public values encouraged aggres­siveness among business executives. So did bold takeover campaigns by corpo­rate raiders such as Michael Milken and Carl Icahn, who threatened sleepy corporations with leveraged buyouts. Investors channeled money and the busi­ness press directed plaudits toward brash, hard-headed managers. Both groups also advocated restructuring executive compensation to “align” the interests of managers with shareholders, whether through bonuses or stock options. Such compensation schemes spread rapidly in the 1990s, justified as ways to maxi­mize shareholder value. Amid the resulting unforgiving, “hyper-competitive” environment, upper-level managers could more easily rationalize sharp busi­ness practices; those executives confronted insistent expectations from institu­tional investors for short-term stock performance. Executives, in turn, pres­sured middle managers to achieve ever more ambitious quarterly production goals and sales quotas. As one business ethics consultant summarized the gen­eral orientation of corporate America in the early 1990s, “The message out there is, Reaching objectives is what matters and how you get there isn't that important.” By the late 1990s, “rank and yank” became a standard technique of assessing managerial performance at both brash new corporations such as Enron and many companies with a much older pedigree, such as General Elec­tric. Managers with the best rankings received promotions and enviable remu­neration; those in the middle received minimal raises and goads to improve; those at the bottom found themselves looking for new jobs. This approach to managerial evaluation generated strong incentives to shade internal financial statements, with some confidential surveys indicating that as many as one- third of corporate managers had intentionally falsified reports.³³

In many of the biggest instances of corporate accounting manipulations of the late 1990s and early 2000s, midlevel managers and internal accountants alleged far more “coercive” pressure to assist in systematic deception. At com­panies such as WorldCom, Enron, Sunbeam, and HealthSouth, chief executive officers, chief financial officers, and other high-level executives badgered sub­ordinates to deliver reports that would meet market expectations. At Health­South, according to an eventual federal criminal complaint, CEO Richard Scrushy and CFO Michael Martin set targets for earnings per share and then instructed internal accountants to find a way to meet the numbers. The result­ing conclaves, referred to as gatherings of “the family,” focused on how to fill the “holes” in the corporation's earnings with sufficient “dirt,” by which prose­cutors alleged they meant modes of inflating revenues.³⁴

An analogous mindset filtered into the organizational culture of private gatekeepers such as accounting firms, investment analysts, ratings agencies, and law firms. These providers of business services came to stress profitability themselves, which eroded dedication to professional responsibility. Resulting conflicts of interest undermined commitments to transparency and investor protection.³⁵ The weakening of legal constraints and social norms against de­ceit unleashed a “Gresham's dynamic” in American financial markets: that is, duplicitous business practices drove out less ruthless approaches, in some con­texts even fostering business cultures that normalized criminal behavior. The mantra of shareholder value, measured in terms of quarterly financial results, pushed the sensibilities of the used-car lot into corporate boardrooms and cu­bicles, the offices of white-shoe law firms, and the workplaces of auditors.³⁶

Throughout the early twenty-first-century chain of American debt financ­ing, sharp competition led thousands of businesses down this path. Real-estate agents and appraisers, mortgage brokers, loan underwriters, and analysts at credit rating agencies all grasped that if they balked at the prevailing strategies for feeding the maw of debt securitizers, they risked lost business, disapprov­ing peers, and angry bosses. Real-estate agents and mortgage brokers who did not tout liars' loans and steer low-income Americans into abusive loan prod­ucts gave juicy commissions away to their competitors. Appraisers who balked at signing off on inflated property-value estimates could look forward to lonely afternoons in their offices. Undertrained and understaffed employees at third- party loan-quality assessors learned how to say yes, and say it quickly, or found themselves holding pink slips. Within investment banks that oversaw the sausage-making of securitized debt instruments and the ratings agencies that assessed their riskiness, decision-makers contended with similar pressures. In­vestors had come to expect investment returns that only high volume could provide, and high volume required minimal regard for candor about the un­derlying quality of debt. Ratings agencies complied with demands that they certify collateralized mortgage instruments as investment-grade, even if they contained all manner of “trash” and “garbage.” They knew that refusals meant a loss of extremely profitable business. As the CEO of Citigroup, Charles Prince, described the imperative of matching the business practices prevalent in the financial industry, “as long as the music is playing, you have to get up and dance.”³⁷

The central rationale for deregulation was to spur technological, organiza­tional, and financial entrepreneurship, to unleash the creative energies of indi­viduals and firms. But the longer trajectory of US business and legal history demonstrates enduring links between far-reaching commercial innovation— Joseph Schumpeter's process of creative destruction—and fraud. Fraudulent business practices and investment schemes have always clustered in sectors at the frontiers of economic change. This was so for Western real-estate develop­ment, railroad-building, and mail-order marketing in the nineteenth century; for early twentieth-century ventures in radio, aviation, and mutual stock funds; for mid-twentieth-century home improvement companies and franchising schemes. Consumers and investors confront significant asymmetries of infor­mation on the entrepreneurial margin, while the latter often prove less skepti­cal about dubious representations, because new technologies, marketing ap­proaches, and organizational strategies encourage visions of killer capital gains. The disorder unleashed by transformative innovations, economist Paul Krug­man noted in reflecting on the implications of Enron's collapse, “creates the kind of confusion in which scams flourish. How do you know whether a com­pany has really found a highly profitable new-economy niche or is just faking it?” Whenever a cycle of creative destruction unleashes a speculative boom, the temptation to engage in profitable misrepresentation spreads, as does sus­ceptibility to overconfident estimations of investment prospects by promoters and investors. When optimistic financial markets lead “the public [to] believe in magic,” Krugman observed, “it's springtime for charlatans.”³⁸

Formal rules and informal norms, moreover, tend to be less clear in sectors undergoing entrepreneurial disruption, which makes it easier for economic ac­tors to embrace strategies that strike counterparties and other observers as de­ceptive. Novel economic situations, such as nineteenth-century mail-order commerce, often lack established moral and legal anchors. Such circumstances amplify the incentives to take advantage of information asymmetries, while offering individuals ample ground to argue, to themselves and to others, that they did not transgress any established prohibitions. Indeed, research in cogni­tive psychology suggests that creative individuals—the sort likely to be at the forefront of entrepreneurial innovation—are more adept at rationalizing self­dealing and forms of commercial dishonesty, of “com[ing] up with good sto­ries that help... justify... selfish interests,” and “developing] original paths around rules, all the while allowing” individuals to “reinterpret information in a self-serving way.”³⁹ Insofar as innovation leads to newfangled financial in­struments or unprecedented accounting questions, it also fosters ways to hide unanticipated problems behind a faςade of hard-to-decipher accounting.

Some of the larger fraud episodes in the late twentieth and early twenty-first centuries fit this enduring historical pattern. The cluster of Medicare and Med­icaid reimbursement scandals turned, in part, on the complex question of how to assign standardized payment codes to hospital treatments. On the margin, should back-office staff characterize services rendered to a patient with a bleeding ulcer as Diagnostic Related Group (DRG) 155, “Bleeding Ulcer,” or DRG 154, “Bleeding Ulcer with Complications,” the latter of which triggered higher payment from the government? During the 1990s, private hospital chains and many nonprofit healthcare providers answered that question by training billing staffs in “upcoding,” the healthcare analogue of upselling. In­stead of jawboning customers into purchasing pricier models, the idea was to find justifications for moving medical treatments into more expensive ac­counting categories, as by making sure that ulcer patients received nutritional workups.⁴⁰

At Enron, executives embraced the goal of transforming a one-time energy pipeline company into a financial-services juggernaut dedicated to the inven­tion of new derivatives contracts, energy market platforms, and modes of orga­nizing business units. Enron's leaders touted the advantages of pursuing large- scale projects and managing the resulting risks through complicated hedging strategies. This invocation of entrepreneurial risk-taking, in combination with “rank and yank” employee performance reviews, created strong incentives for misleading depictions of business results, as well as manipulation of the new energy markets. The labyrinthine nature of so many Enron activities and fi­nancial products facilitated these misrepresentations, as did the optimism fos­tered by internal breast-beating, years of outsized stock performance, and ac­colades from the business press.⁴¹

The biggest business frauds of the post-1980 period depended on the opac­ity that has so often accompanied the most abstruse financial innovations. Rot­tenness in the chain of debt securitization depended on the complexity of col­lateralized debt obligations and credit default swaps. In the early 2000s, financial engineers found even more intricate ways to construct securities out of other financial assets, extending the risk-management principles of portfo­lio diversification. Investment bankers started with mortgage-backed securi­ties (MBS), assets backed by scores of mortgages. From the 1960s through the 1980s, the MBS market was limited to securities marketed by the Federal Na­tional Mortgage Association (Fannie Mae) and the Federal Home Loan Mort­gage Corporation (Freddie Mac), federal agencies that packaged loans meeting strict government underwriting standards. During the 1980s and 1990s, Wall Street bankers saw an opportunity to emulate this approach first with jumbo mortgages, whose higher loan amounts made them ineligible for bundling by Fannie Mae or Freddie Mac, and later with higher-risk subprime mortgages, as well as car loans, credit-card balances, and commercial loans. Securitizers pur­chased pools of mortgages or other forms of debt and sliced them into differ­ent tranches, which possessed varying degrees of risk. The first tranche would receive the initial slice of payments from the overall pool; the last would re­ceive the very last payments, and so had the highest risk.

Once these debt-backed securities gained significant traction in the finan­cial markets, some underwriters realized that they could extend this approach by creating a new type of security, called a collateralized debt obligation (CDO). This financial instrument would be made up of a given tranche from many different collateralized obligations of a given type of debt. Some financial alchemists went yet one step further, creating CDOs out of a pool of underly­ing CDOs. Others created credit default swaps, which gave CDO investors the opportunity to hedge their positions through premium payments linked to es­timations of default risk, and speculators a means of shorting a given debt market. As soon as credit default swaps became commonplace, investment banks came up with synthetic CDOs built out of pools of credit default swaps.⁴² One insider described the process of assessing the quality of a plain vanilla CDO as akin to “taking 10 different vegetables and pureeing them in a food processor until you have something close to soup. Ask someone to identify the ingredients but don't let him taste it—make him rely strictly on his sense of sight. Your concoction is sure to make him wonder what's inside.”⁴³ Each level of additional securitization further muddled the soup.

Even sophisticated American investors had great difficulty in scrutinizing the resulting financial stews. As a result, they tended to rely on the judgments of ratings agencies, which investment banks paid to assess the risk associated with these complex financial instruments. Despite the rickety foundations of underlying mortgages, car loans, or other debts, Moody's, Standard and Poor's, and Fitch Ratings all treated the upper tranches of synthetic CDOs as gilt- edged investments, reasoning that diversification and overcollateralization provided safety. They accordingly furnished them with AAA ratings, equiva­lent to the seals of approval given to the least risky corporations and sovereigns with unimpeachable credit. This rating made the complicated instruments eli­gible for the portfolios of insurance companies, pension funds, and other insti­tutional investors that were prohibited from buying risky assets. Such analyti­cal snake oil was facilitated by the novelty of collateralized debt and loan obligations, which posed new questions about how to assess their riskiness. Analysts at ratings agencies based their risk models on historical payment data that went back only to the late 1980s, when the market for them became siz­able. That choice absolved them from reckoning with the possibility of a na­tionwide downturn in property values, something that had not occurred since the 1930s.⁴⁴

Wall Street received a signal about the vulnerabilities of experienced corpo­rate investors in evaluating complex structured-debt vehicles during the early 1990s, as a result of fraud allegations leveled against Bankers Trust by Gibson Greetings, Inc. and Procter & Gamble. Brokers at Bankers Trust convinced se­nior executives at both companies to enter into interest-rate swaps that they did not understand, leading Bankers Trust employees to joke about how they were taking advantage of their counterparties.⁴⁵ The far more convoluted structures of CDOs multiplied openings for sharp dealing, as demonstrated by the Abacus affair at Goldman Sachs. At the height of the real-estate bubble in 2007, a Goldman Sachs client, the Paulson hedge fund, wanted to short the subprime market, a strategy that Goldman was also employing. Goldman trad­ers obliged by allowing Paulson to select several mortgage-backed securities with weak assets as the basis for a specific synthetic CDO in a class of financial instruments that the investment bank had dubbed Abacus. Goldman then sold the financial instrument to two European banks without disclosing Paulson's participation in the selection process—it instead emphasized the role of a third party that specialized in this work—and helped Paulson purchase credit­default swaps against the new security. This arrangement cost the banks nearly $1 billion, with Paulson profiting by a similar amount.⁴⁶

Such predatory conduct recalls the tactics of Gilded Age promoters of fake companies and blind stock pools, or 1960s inner-city retailers who sold shoddy merchandise on credit before transferring debts to confederate finance compa­nies. The fabulous bonuses available to wizards of the modern debt-trading desks encouraged this sort of behavior. But it is hard to see how such practices could have become standard operating procedure within Wall Street's loftiest firms without a quarter-century's worth of public veneration for imaginative financial invention. If the inventors of CDOs and synthetic CDOs, the analysts who rated them as AAA, or the salesmen who peddled them harbored any doubts about the propriety of their daily work, they could console themselves with reflections on the capacity of financial innovation to tame risk and sustain America's competitive position in the global economy.

Pockets of Regulatory Action

Through several channels, then, neoliberal preferences to constrain govern­ment regulation encouraged businesses, including prominent corporations, to take greater liberties with marketing practices and financial reporting. But in spite of the dominant tendency toward deregulation and faith in unrestrained innovation, the period after 1975 also included moments of heightened regula­tory stringency. These episodes often followed close on the heels of fraud scan­dals that garnered the attention of journalists, consumer groups, business elites, and governmental officials. Amid the moves toward regulatory disen­gagement, there were sporadic efforts to pin back opportunities for overbilling, phony accounting, and other forms of commercial or financial deceit.

One such regulatory counterstrike sought to root out government contract­ing fraud in defense procurement and healthcare reimbursement. Stung by revelations of massive overcharging by defense contractors and confronting hundred-billion-dollar annual deficits resulting from Reagan administration tax cuts, Congress enacted the Federal False Claims Act in 1986. Much like the Civil War-era statute on which it was based, the False Claims Act provided a mechanism for whistleblowers to bring fraudulent billing to light through pri­vate lawsuits. Ongoing post-Reagan budget deficits also heightened congres­sional concern about “waste, fraud, and abuse” in federal spending, which prompted tighter regulatory oversight and expanded investigative and prose­cutorial capacity in the Departments of Defense, Health and Human Services, and Justice.⁴⁷

A parallel burst of antifraud regulation occurred in response to the S&L crisis. In this case, elected officials viewed tough regulatory action as vital be­cause of potential costs to the United States Treasury resulting from public deposit insurance. In 1989, President George H. W. Bush signed the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) into law. FIR- REA created a new regulatory overseer of Savings and Loans, the Office of Thrift Supervision, gave that agency authority to remove S&L officers and di­rectors for malfeasance, and established new sanctions for false financial re­ports. It also increased civil and criminal penalties for the insider looting that had driven so many thrifts into financial difficulties, created mechanisms for disgorgement of assets illegally obtained by bank executives, and tightened standards for loan-related appraisals of real estate. In addition, the S&L crisis was one rationale for the statutory establishment of a Federal Sentencing Com­mission. Among other tasks, Congress charged the Commission with devising formal sentencing parameters in cases involving white-collar crime, so that individuals and organizations convicted of fraud and other forms of financial malfeasance would not so readily avoid hefty fines and/or jail time. During the late 1980s and early 1990s, federal agencies coordinated thousands of S&L- related criminal investigations, which culminated in over one thousand felony convictions. Mirroring the SEC's moves in the 1970s against gatekeepers who abetted financial frauds, the FDIC also went after prominent accounting and law firms that provided auditing and legal services to failed S&Ls, seeking monetary recompense for their “breach of fiduciary duty and negligence.” Set­tlements resulting from these cases reached as high as $400 million.⁴⁸

The dot-com era's corruptions involving financial analysts and accounting frauds generated still another intense round of antifraud policymaking. One important locus of action occurred in New York State, where Attorney General Eliot Spitzer directed investigations into Wall Street conflicts of interest. The inquiry uncovered emails in which financial analysts described the high-flying internet stocks that they publicly touted (and which brought their investment banks lucrative underwriting fees) as “crap” and “dogs.” These revelations led to a global settlement with several large brokerages and investment banks, which compelled them to pay more than $1 billion in fines, change compensa­tion practices, and disclose financial interests linked to recommended stocks.⁴⁹

That same year, Congress passed the Sarbanes-Oxley Act, which tightened standards for corporate accounting, created a new oversight board for financial reporting, prohibited auditing firms from undertaking consulting work that created conflicts of interest, and mandated the medium-term rotation of exter­nal corporate auditors. In addition, the legislation delegated new regulatory responsibilities to corporate officials, requiring corporate attorneys to report instances of false accounts or other securities frauds, and mandating that cor­porate executives certify the truthfulness of financial reports. According to several leading legal scholars and economists, these new rules and monitoring structures improved the quality of internal and external auditing, as well as corporate financial reporting. Once large corporations implemented adjust­ments to internal audit systems, moreover, initial complaints about compliance costs dissipated.⁵⁰

The most ambitious spurt of antifraud regulation occurred in the wake of the 2008 global financial crisis, centered on the Dodd-Frank Act of 2010. This mammoth statute sought to make the financial system more stable and reduce the risk of massive public bailouts for imperiled financial institutions. It also targeted the sort of deceptive marketing and fraudulent behavior that had helped to cause the 2008 crisis. Dodd-Frank authorized a well-funded, power­ful new Consumer Financial Protection Bureau (CFPB), following the blue­print of then Harvard law professor Elizabeth Warren, who first proposed such an agency in 2007. Located in the Federal Reserve, the CFPB had a single di­rector rather than the more cumbersome arrangement of multiple commis­sioners, obtained funding from the Fed independent of annual congressional appropriations, and received a broad mandate to combat deceptive practices in consumer and residential lending. Dodd-Frank also established new disclo­sure standards for mortgage lending and loan securitization, tightened over­sight of debt ratings agencies, and required that corporations adopt mecha­nisms to claw back incentive-based executive compensation based on false financial results.⁵¹

Two additional overlapping antifraud initiatives have occupied elected offi­cials and national regulators in the late twentieth and early twenty-first centu­ries, albeit with far less public fanfare. Congress, the FTC, state authorities, and consumer-oriented NGOs have waged intense campaigns against elder fraud (commercial or financial deceptions that target senior citizens) and internet fraud. Since 1980, these campaigns have spawned more than twenty congres­sional hearings, recurrent legislation and administrative rule-making, and large investments in public education. As a result of the Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 and subsequent FTC reg­ulations, for example, telemarketers faced a much more restrictive legal envi­ronment. They were prohibited from using deceptive ice-breakers to disguise the sales focus of calls, misrepresenting “the cost, quantity, and other aspects of the offered goods or services,” and offering “recovery services” that promised

to aid aggrieved consumers in gaining refunds from previous scams. Busi­nesses that ignored these rules were subject to injunctions, fines that could reach up to $11,000 per violation, and restitution orders. State attorneys gen­eral also received authority to bring enforcement cases in federal courts, which, as an observer of the industry noted, placed “51 new cops on the national tele­marketing fraud beat.”⁵²

Even before the adoption of these regulations, the FBI, Justice Department, Postal Inspectorate, and state consumer protection agencies mounted major enforcement sweeps against fraudulent telemarketers, such as Operation Dis­connect in 1993, Operation Sunstroke in 1994, and Operation Senior Sentinel in 1995. Adopting the same tactics as Anthony Comstock a century earlier, these campaigns used decoy customers and undercover employees to marshal evidence, and generated criminal prosecutions of hundreds of businesses and individuals. Once the FTC finalized its rules in 1995, it carried out further in­vestigations in conjunction with state authorities through “Project Jackpot,” which led to dozens of enforcement lawsuits in 1996 alone.⁵³ In the early 2000s, the FTC and SEC coordinated similar wide-ranging investigations of internet fraud, such as “Operation Top Ten Dot Cons” in 2000, “Operation Bidder Be­ware” in 2003, and “Operation Empty Promises” in 2011. Reflecting the inter­national character of e-commerce, these endeavors drew on the assistance of not only federal and state agencies, but also consumer protection officials from many other countries.⁵⁴

Outside the realm of governmental policy, the continuing salience of busi­ness fraud prompted extensive media coverage. Consumer groups continued their missions of education and cooperation with law enforcement, but now deployed online information clearinghouses and complaint mechanisms. Thus, the National Consumer League established Fraud.org in 1996, while the American Association of Retired Persons (AARP) beefed up its online anti­fraud initiative in the late 1990s. Like earlier organizations focused on con­sumer and investor protection, these websites offered compendiums of specific scams and more general warning signs, as well as guidance about how to make effective complaints. From as early as 1996, specific complaints to Fraud.org fed a national fraud database used jointly by the FTC and the National Asso­ciation of Attorneys General. AARP also replicated earlier communal tactics of reliance on dispersed volunteers, encouraging its members to become official “fraud fighters” who educated neighbors about prevalent rip-offs and served as community sentinels.⁵⁵

A growing number of firms also sought profitable angles in the public de­mand for fraud protection. One idea, pushed by several startups and some nonprofits, was to foster a market for “trustmarks.” These third-party certifica­tions would not only reassure consumers and businesses that online firms were real businesses, but also that they eschewed deceptive practices. Providers such as SquareTrade offered the use of a “digitally watermarked Seal,” which sellers could obtain on the basis of reference checks, evidence about customer service, and a pledge to use the website's dispute resolution mechanism. A competing approach focused on giving consumers an outlet to “vent” anger toward firms that they viewed as having ripped them off or treated them shabbily. At sites such as RipofiReport.com, Scambook.com, My3Cents.com, and Pissed consumer.com, disgruntled Americans could tell their side of individual trans­actions gone sour, in their own unedited words. Their stories found audiences in the tens of thousands. Consumer sites less focused on fraud, such as Yelp and TripAdvisor, amplified the capacity of consumers to share marketplace ex­periences.⁵⁶ Through all of these online communities, scathing reviews mir­rored the nineteenth-century signs that warned of Peter Funks, the cautions in early twentieth-century BBB newsletters, and leaflets distributed by CEPA members—they brought a communal hue and cry to bear on the online cheat.

Whether through certifying trustworthiness or magnifying consumer gripes, these innovations aimed to prevent sharp dealing through timely provi­sion of information about the behavior of businesses. Yet there were also pro­found limitations to these modes of informal regulation. So many entities of­fered “trustmarks” that their value depreciated. Amid a scramble for market share, some certification schemes did minimal screening and so suffered from adverse selection, attracting businesses that needed a boost for compromised reputations. Sites with more stringent requirements often struggled to earn enough business to remain afloat.⁵⁷

As soon as consumer complaint sites gained traction with web users, they drew criticism as constituting a new “Wild West.” Spokespersons for some businesses pointed out that without editorial or regulatory filters, the truthful­ness of reports remained open to question. Complaint sites could become plat­forms for false allegations by “disgruntled employees” or “rival companies.” An emerging set of reputation management firms claimed that these websites en­gaged in a form of extortion reminiscent of the appliance repair scams of the 1950s and 1960s. After posting devastating reviews, these critics alleged, the sites offered to scrub them for a fee or in exchange for advertising placements. In 2011, by contrast, RipoffReport.com discovered that its site had been hacked by a reputation management firm, which then removed negative commentary about its clients.⁵⁸ After a comprehensive 2010 study, the Consumer Federation of America concluded that the great majority of complaints on the most repu­table websites were genuine. But the report stressed a different shortcoming— even when rants about abusive or fraudulent practices warned off future con­sumers, they did nothing to redress past injustices. The tellers of commercial tales of woe on Pissedconsumer.com could not count on site visitors to join them as they visited a place of business to seek redress, nor to participate in actual pickets if it was not forthcoming.⁵⁹

Still other organizations and businesses focused on the burgeoning problem of deceit inside large-scale corporations. Concern over the accounting dimen­sions of the S&L crisis prompted Joseph Wells, a Texas CPA who had spent part of his career with the FBI, to establish the National Association of Certi­fied Fraud Examiners (NACFE) in 1988. Headquartered first in Dallas, ground zero of the S&L debacle, NACFE gained thousands of members who saw the opportunity to offer specialized services to companies. The organization of­fered professional development courses, credentialed accountants who passed a two-day exam in forensic accounting, and kept its members abreast of finan­cial innovations, ongoing fraud investigations, and shifts in regulatory policies. A few years after its launch, it dropped the word “National” to reflect its move onto the international stage, and began to commission annual studies of fraud costs, pegging them at $400 billion a year in the United States for 1994— roughly 6 percent of overall economic activity. Although this organization fo­cused on aspects of occupational fraud, such as embezzlement, it also paid at­tention to the issues posed by corporate deceptions that harmed suppliers, customers, and investors. During the 1990s, the proliferation of deceit within the corporate world led major accounting firms to hire scores of ACFE- certified accountants.⁶⁰ It also prompted the emergence of boutique firms spe­cializing in forensic accounting, and convinced some providers of general in­vestigative services to corporations, such as Kroll Associates, to invest in fraud-related consulting services.⁶¹

After 1975, self-regulatory organizations continued to dot the American antifraud landscape. The Better Business Bureau network sustained its national coverage, though it experienced a slight drop in the number of local chapters, settling around 115. At the behest of business leaders who felt under siege from class-action lawsuits, local BBBs initiated formal dispute resolution programs in the late 1970s, and then encouraged members to handle unresolvable con­sumer complaints through BBB-trained arbitrators. The Bureaus also offered this service to consumers whose complaints it viewed as legitimate, and which were not resolved through initial mediation. Arbitration rapidly became a cen­tral BBB endeavor, with as many as one-third of member businesses in some metropolitan areas pledging to abide by its outcomes. Several national corpo­rations also turned to the program to handle disputes over warranties. As a result, BBBs recruited thousands of attorneys and other volunteers across the country to serve as arbitrators.⁶²

BBBs were also early movers into cyberspace, connecting local Bureaus to the Council of BBBs website, which offered “Scam Alerts,” a library of “Tips” for avoiding rip-offs, searchable databases of business reviews, and the oppor­tunity to file a complaint from one's keyboard. In the late 1990s, the organiza­tion created its own trustmark—an online BBB Torch available only to mem­ber firms, ostensibly testifying to integrity and fair dealing. A decade later, it introduced a more elaborate system of accreditation for all enterprises. BBB staff members based their system of letter grades (A to F) on information pro­vided by businesses, the BBBs' own records of how they handled consumer complaints, and whether or not the firms were BBB members. These grades went into the BBB online database of business reviews. In 2014, the Council of Better Business Bureaus also launched “Scam Tracker.” Drawing on the crowd­sourced input of consumers, this “free interactive online tool” gave consumers and law enforcement officials “a heat map showing where scams are being reported.”⁶³

Nonetheless, the criticisms leveled at the BBBs at the height of the 1970s consumer movement did not fall away. From the 1980s onward, the BBB's own marketing practices attracted media scrutiny. Journalists found that some local BBBs had pursued aggressive strategies to boost dues-paying membership, raising questions about conflicts of interest and flirtations with deception.⁶⁴ After the introduction of accreditation grades, more serious allegations sur­faced that some BBBs would upgrade ratings if businesses agreed to become members. The sharpest allegations came from firms with poor BBB ratings, which portrayed the network as having become “a private interest” that pur­sued the sort of “pay for play scheme” that its leaders had long decried when practiced by others. After a 2010 expose on the ABC news program 20/20, which documented the ease with which fictional businesses could achieve BBB ratings of A or A+, the BBB network pledged to revamp its accreditation pro­cess, removing any advantages associated with membership.⁶⁵

Toward the end of the twentieth century, new forms of antifraud business self-regulation emerged alongside the BBBs and the securities and commodi­ties exchanges, lodged inside America's largest corporations. Within sectors dependent on government contracting, such as defense and healthcare, corpo­rate leaders once again turned to self-regulatory experiments as a means of deflecting pressures for more statist regulatory oversight. As the press and Congress bore down on defense suppliers in the 1980s and healthcare provid­ers the following decade, each developed elaborate internal “Ethics & Compli­ance” departments charged with reforming billing practices. These new bu­reaucracies took on all of the classic regulatory functions. They generated mission statements and more detailed codes of conduct, as well as training modules for corporate staff. Contractors created “ethics and compliance offi­cers” at subsidiaries and within divisions, and established anonymous phone hotlines to encourage flows of information about problematic behavior in the ranks. Just as stock exchanges used the latest computer software to identify trading patterns that suggested illegal manipulation, defense and healthcare firms developed computer algorithms that identified evidence of suspect cod­ing or billing patterns. Hospital companies centralized coding and billing op­erations, while nudging far-flung medical facilities to forge cultures of regula­tory compliance and voluntarily disclose “problems affecting corporate contractual relations with government.” In both defense and healthcare, lead­ing firms forged industrywide organizations—the Defense Industry Initiative and the Health Care Compliance Association—to “share experiences” and hone best practices.⁶⁶

Some corporations vulnerable to fraud or dependent on consumer confi­dence took even more elaborate steps to combat deceitful behavior. Credit­card companies confronted waves of fraudulent charges in the 1990s, both from unscrupulous businesses and as a result of stolen cards. To head off this threat, card issuers invested several hundred million dollars in security fea­tures, as well as computer systems that would identify suspicious purchasing patterns. Once alerted, company employees or automated calling systems con­tacted cardholders to verify that payments were legitimate.⁶⁷ As web com­merce took off, the prevalence of online auction fraud threatened public confi­dence in new platforms for commercial transactions. The popular auction and direct sales site eBay responded by building a robust internal fraud unit di­rected by “a former prosecutor” and by fashioning an elaborate governance structure for online sellers and buyers. These systems relied on satisfaction rat­ings from buyers and sellers and sophisticated computer programs to identify individuals who engaged in bid-rigging, misrepresentation, or nondelivery of goods. Such measures improved eBay's ability to warn users about abusive sell­ers and shut down the worst offenders. When the company's CEO, Meg Whit­man, become convinced that endemic deceit endangered profitability, she marshalled the financial resources and expertise to address the problem. As Whitman explained in a 1999 press release trumpeting “new upgrades” to the site's antifraud software, “eBay has zero tolerance for fraud.” Noting that “fraud and other trust and safety issues are not new,” she emphasized that “eBay's so­lutions are. We... will continue to commit resources to have the most com­prehensive programs in order to keep eBay a safe harbor for online person-to- person trading.”⁶⁸

Ghosts of the Regulatory Past, Present, and Future

What to make of all this antifraud activity punctuating a neoliberal age? There are analytical dangers for historians who venture onto the terrain of the recent past, one reason so few have surveyed contemporary business culture, political economy, and regulatory institutions. Nonetheless, the longer arc of business fraud and antifraud regulation in the United States suggests some useful frames of reference. One important insight concerns an enduring feature in American political economy. Policymakers have never been comfortable with pure reliance on the checks and balances within markets to control duplicity. As the threat that business fraud poses to economic confidence becomes more obvious to journalists, academics, the business community, government offi­cials, and the wider public, pressures for regulatory reform mount, and policy entrepreneurs come forward with specific plans of action.

Prevailing ideas about the trustworthiness of government nonetheless have channeled regulatory responses. During the Progressive Era, the New Deal, and the 1960s and 1970s, supporters of tougher measures against fraud thought in terms of administrative bureaucracy. By contrast, late twentieth-century policymakers manifested abiding skepticism about this institutional orienta­tion. The move against contracting fraud was spearheaded by Charles Grassley, a conservative Iowa senator. He structured the 1986 False Claims Act around private legal actions by whistleblowers, who would share handsomely in any monies that the government recouped as a result of their revelations.⁶⁹ Federal policymakers also sought to delegate much of the responsibility for preventing fraudulent billing to contractors. The Reagan administration’s Packard Com­mission, convened to devise ways to curb procurement fraud, prodded defense companies to embrace self-regulation. The movement to create Ethics and Compliance Departments gained a further boost from the 1991 Federal Sen­tencing Guidelines for criminal convictions, which promised easier treatment for corporations that could show good-faith efforts to rein in wrongdoing by their employees.⁷⁰ By the same token, private modes of regulation dominated responses to online business fraud, in part because government policymakers shied away from forceful actions during the web’s formative years. As President Bill Clinton described this largely bipartisan consensus in a 1998 press brief­ing, “we will do nothing that undermines the capacity of emerging technolo­gies to lift the lives of ordinary Americans.”⁷¹

Experiences with American business fraud since the mid-1970s also repli­cated earlier patterns concerning the workings of self-regulatory organizations or self-regulatory mechanisms within corporations. When leaders of firms and industries saw that antifraud regulation mattered to policymakers, self­regulation could make a difference. So long as executives and trade association heads had to look over their shoulders at public regulators and prosecutors, they had strong reasons to make regulatory compliance a priority. This level of concern existed in the wake of defense and healthcare contracting scandals. The spotlight of congressional hearings and journalistic exposes, along with the pressure of whistleblower lawsuits and federal investigations, spurred meaningful commitments to clean up abuses. By contrast, reliance on self­regulation without a credible expectation of accountability furnished the thin­nest of regulatory veneers, unless businesses deemed antifraud mechanisms as crucial to profitability. Defense contractors and eBay had reason to make self­regulation work; third-party mortgage-loan reviewers and credit ratings agen­cies did not.

Another recurring pattern involves the willingness of policymakers who dislike state regulation and who extol individual responsibility to make excep­tions for consumers and investors whom they see as especially susceptible to fraud. During the height of adherence to a philosophy of caveat emptor, nineteenth-century prosecutors, judges, and juries demonstrated sympathy for allegations of fraud from elderly women or recent immigrants. Similar judg­ments led late twentieth-century conservatives such as Charles Grassley to support the deployment of public resources against elder fraud (along with pragmatic electoral considerations, given the high propensity of senior citizens to vote).⁷²

As the economic, political, and intellectual fallout from the 2008 global fi­nancial crisis continues to unsettle the United States, the degree to which this episode represents a regulatory watershed remains an open question. The re­cent crisis most certainly shook confidence in the integrity of markets, among elites as well as the general public. Whether that jolt will prompt a fundamen­tal reorientation of American regulatory policymaking away from the neolib­eral premises of caveat emptor is less clear.

The establishment of the Consumer Financial Protection Bureau points to­ward a reassertion of the state's responsibilities to sustain public confidence in markets and protect the interests of vulnerable economic actors. Despite vehe­ment political opposition from Republicans in Congress, which included a yearlong opposition to the appointment of former Ohio Attorney General Richard Cordray as its director, the CFPB has moved ahead on numerous reg­ulatory fronts. Incorporating some former employees of the Office of Thrift Supervision, which Dodd-Frank eliminated, as well as a corps of experienced bank examiners, the Bureau also hired hundreds of highly educated, “idealis­tic” staff members, many with experience in the financial industry, who em­braced its mission to bring consumer protection to credit markets. Over its first five years, it conducted detailed studies on financial literacy, arbitration, the student loan sector, and the impact of financial coaching, injected a new concern for consumer impacts in the regulatory monitoring of bank and non­bank lenders, and formulated several new regulatory rules. The most impor­tant of the latter clarified underwriting and disclosure standards for mortgages and several forms of consumer credit. The Bureau initiated scores of enforce­ment actions against lenders, loan originators, mortgage servicers, and collec­tion agencies that engaged in abusive or deceptive behavior, resulting in resti­tution of $2.6 billion to millions of Americans through 2015, as well as more than $7 billion in additional relief to consumers. CFPB officials reached out to the segments of the credit markets that they regulated, soliciting feedback on every aspect of the Bureau's decision-making, and forged relationships with other federal agencies and state and local counterparts. The Bureau has also brought a new intellectual sophistication to consumer outreach, information disclosure, and enforcement strategy.⁷³

The CFPB's policy innovations recall the flexibility and institutional creativ­ity of many earlier antifraud institutions. The thorny nature of business fraud— the challenges associated with detection, the complexity of prosecutions, the protean character of scams and systemic misrepresentations—has often en­couraged experimentation in regulatory design and strategy, driven by aspir­ing groups of experts and professionals. In the late nineteenth and early twen­tieth centuries, the key protagonists were accountants, scientists, a segment of the advertising community who wished to improve its status, and lawyers who built up regulatory bureaucracies. At the CFPB, this role has been taken up by a cluster of behavioral economists, cognitive psychologists, sociologists, and statisticians, working in conjunction with legal staff. These experts have fo­cused on tailoring educational materials, online complaint databases, and lender disclosures to improve their salience for borrowers, as with a less- complex standard mortgage disclosure form that facilitates comparison shop­ping. They have also integrated analysis of complaint patterns into monitoring and enforcement, calibrating the degree of scrutiny that a lender, mortgage broker, or debt collector receives in light of its complaint profile.

At the same time, some CFPB staff members have expressed frustration with bureaucratic decision-making. The need to gain clearance from the chain of command to go forward with an enforcement action, such as multiple rounds of review for policy proposals, struck these young public servants as reflective of excessive timidity. “Important, productive initiatives,” one former staff attorney recalled, “could get delayed all too easily by someone, seemingly at any level, suggesting it might make sense to wait for a more certain environ­ment.”⁷⁴ This comment evokes the now century-old trade-off between adopt­ing the most effective means of curtailing commercial deception and retaining respect for fair regulatory process and the rule of law.

So too do critiques of Operation Choke Point, a joint effort begun by the Department of Justice and the Federal Deposit Insurance Corporation (FDIC) in 2013 to combat a host of fraudulent and other illegal or disreputable busi­nesses by disrupting their ability to receive funds through online payment sys­tems. Almost everything about this initiative harkens back to the Post Office's late nineteenth-century regulation of mail-order commerce. The categories of targeted businesses include “credit card schemes” “credit repair services” “debt consolidation scams” “get rich products” life-time guarantees” “lottery sales” “online gambling,” “pharmaceutical sales,” “Ponzi schemes,” “pornography,” “pyramid-type sales” and “telemarketing”—a list that echoes, eerily, the types of firms that Anthony Comstock and other postal inspectors attacked from the 1870s through the turn of the twentieth century. After identifying enterprises that fell into these categories, the officials responsible for Operation Choke Point pressured banks and third-party payment processors to stop online transfers of funds to them. As with the postal fraud order, the idea was to take away access to the basic infrastructure of commerce. Also like the postal fraud order in its first decades, this refusal of admission to economic life occurred without notice, hearings, or any other basic features of due process. Such ac­tions could have devastating impacts on fraudulent businesses, but also on any other individuals or entities singled out as requiring regulatory discipline. They struck some observers, both conservative and liberal, as a turn to an “electronic Panopticon,” a dystopian world of “limitation, control, and surveil­lance” that could ruin lawful as well as illicit firms, the next Richard Sears as well as the latest Sarah Howe or Charles Ponzi.⁷⁵

If the early record of the CFPB and the dynamics of Operation Choke Point suggest comparisons to the late nineteenth-century postal inspectors' office, the New Deal SEC, or the most energetic state consumer protection agencies of the 1960s and 1970s, other aspects of antifraud regulation in the wake of the global financial crisis point in different directions. From late 2012 through 2014, the Justice Department negotiated a series of civil settlements with the largest financial institutions whose deceptive practices had helped to trigger the crisis. These settlements have clawed back tens of billions of dollars in fines, set aside billions more for restitution to still-s truggling mortgage­holders, and included admissions of systematic nondisclosures and misrepre- sentations.⁷⁶ But as yet, almost no one within the financial world has faced criminal prosecution, whether for extensive efforts to generate a steady stream of subprime mortgages dressed up with false loan-application data and phony appraisals, the systemic misrepresentations of the resulting mortgage-backed securities, or the lies that greased foreclosures. From the mid-2000s into the first term of the Obama administration, federal investigations of mortgage frauds were hampered by insufficient manpower, the disinclination of some banking regulators to participate in criminal probes, and a skimpy conceptual definition of mortgage fraud that the FBI had agreed to as part of a partnership with the Mortgage Bankers of America. High-ranking members of the Obama administration, such as Treasury Secretary Tim Geithner, also worried about the impact that criminal prosecutions might have on systemic financial stabil­ity. For many critics, though, the lack of criminal prosecutions smacked of fa­voritism to the wealthy and powerful.⁷⁷

When viewed against two centuries of American encounters with large- scale financial frauds, the Department of Justice's record-s etting mortgage fraud-related settlements look a bit like payoffs from the “squawk fund” that companies facing fraud allegations have always been willing to make in order to quiet the angriest dupes. Even as the headline numbers for these settlements have inched closer to $100 billion, they still represent only a fraction of the profits earned from a system of deceptive practices in the six or seven years before the financial crisis. These deals also remain framed around “enterprise liability,” doing little to touch the “immense wealth” accumulated by the bank executives “as a result of their control over the firm during the time of wrong­doing.”⁷⁸ By foreclosing an airing of the evidence that underpins these complex cases, the settlements have also short-circuited public assessment of the prob­lematic business practices and oversight failures that led to such pervasive and systemic frauds.

The same Congress that passed Dodd-Frank, moreover, enacted the 2012 Jumpstart Our Business Startups Act (JOBS). This bipartisan legislation ex­panded the number of companies exempted from the more onerous reporting requirements of the Sarbanes-Oxley Act, while slashing disclosure require­ments for new companies looking to raise up to $50 million in capital.⁷⁹ Far from signaling a post-crisis intent to clamp down on dissembling promoters, the JOBS Act rather sought to address persistent economic slack by widening the scope to entice capital into new ventures. Consumer groups and voices for responsible investing have expressed worries about the law's potential exploita­tion by “the less than honorable fringe.”⁸⁰ We can expect ongoing arguments about how to balance concerns about business fraud and facilitation of benefi­cial innovation. Some voices will point to the financial crisis's grave costs and demand smarter regulatory policies that improve the flow of usable informa­tion to consumers and investors, while prohibiting the worst deceptions. Where possible, those who see themselves as victims of deceit will seek redress from regulatory institutions. This has been the tack taken by thousands of for­mer students who took out guaranteed federal loans to study at for-profit uni­versities that made false claims about graduates’ career paths. These individu­als have pressed the Department of Education to void their debts, under a statutory provision that permits such action if former students show that schools lied in recruitment materials.⁸¹ Others will argue that even if business fraud has increased as a result of deregulatory policies, the socioeconomic benefits of less-encumbered markets, greater maneuverability for entrepre­neurs, and suitable wariness among investors and consumers outweigh any collateral increase in fraud. Where possible, those who rankle at overreaching regulatory institutions will do what they can to clip their wings. This perspec­tive has underpinned the movement by major corporations to create contrac­tual defaults that compel consumers to take any grievances to binding arbitra­tion, outside the ambit of the state. In a pivotal 2011 case, AT&T Mobility v. Concepcion, a sharply divided US Supreme Court gave this corporate strategy a significant boost, ruling five to four that state legislatures lacked the authority to prohibit such clauses in consumer contracts. More recently, however, the CFPB has begun consideration of a new regulation that would ban compulsory arbitration as a feature of consumer financial products.⁸²

In this and other policy debates about antifraud regulation, we can expect participants to engage in appeals to history. One struggles now to find anyone who would dispute the claim that during the past thirty years, the financial industry, along with the professional gatekeepers charged with keeping it hon­est, became far more hospitable to versions of Barnumesque humbuggery and Peter Funkism. But how should we account for this dramatic reputational de­cline? One recent explanation places much of the blame on the regulatory shift that the New Deal ushered in toward the principle of caveat venditor, which, on this view, reduced the incentives for corporations to take the standing of counterparties into account, because regulators could be trusted to discipline wayward firms. By the same token, professional gatekeepers such as law firms, external auditors, and ratings agencies no longer needed to safeguard their own reputations, because regulatory mandates compel corporate clients to re­tain their services. According to this interpretation, the way to restore reputa­tional premiums would be to undertake more deregulation of the securities market and to direct the remaining regulatory energies toward structuring in­centives that reward longer-term performance instead of short-term returns.⁸³

This argument downplays the rise of limited liability partnerships within accounting, which removed the interests of accounting partners in monitoring activities elsewhere in the firm. It elides the semi-corporatization of law firms during the late twentieth century, as well as the shift of some investment banks from partnerships to limited liability corporations, moves that also shortened managerial time horizons. More significantly, it skirts the profound impact that deregulatory fervor had on social norms within the business community (helping to drive the relentless focus on short-term financial results that con­tributed to the 2008 financial crisis) and regulatory agencies (recalibrating the mission, organizational culture, and employment filters at institutions such as the SEC). Most importantly, the presumption that a fuller deregulation would prompt greater reliance on reputational checks ignores the lessons of the past two centuries of American encounters with business fraud. Such checks did not ward off rampant manipulations and deceptions in the New York City auc­tion markets of the 1840s, on the San Francisco stock market of the 1870s, or on the Wall Street of the 1920s.

In the mid-1950s, the economist John Kenneth Galbraith surveyed the ori­gins of the 1929 stock market collapse in his now-classic history, The Great Crash. Galbraith framed much of his analysis around capsule summaries of how “American enterprise in the twenties had opened its hospitable arms to an exceptional number of promoters, grafters, swindlers, impostors, and frauds. This, in the long history of such activities, was a kind of flood tide of corporate larceny.” Such endemic violations of trust, we should remember, occurred in an era without any regulatory SEC mandates to interfere with the imperatives of investments in reputational capital. Toward the end of the volume, Galbraith mused about the inevitable progression of generational amnesia about the Great Crash and the Great Depression that it triggered. In the midst of the 1930s, he noted, the clarion call was “Never again.” But with the passage of the years, one could anticipate that perceptions of the need for regulatory con­straints would fade, as American aspirations were drawn to “some newly dis­covered virtuosity of the free enterprise system.”⁸⁴

Galbraith offers a formidable caution about reliance on historical memory as a guide to regulatory policymaking. And yet the complex narrative of American business fraud, filled with recurring motifs and tensions, but also profound evolutions in regulatory strategy, has much to offer the myriad regu­latory protagonists who deal with the problem of economic deception on a regular basis. It has become a cast of thousands—the deputy attorney general in charge of consumer protection, SEC lawyer, and CFPB investigator; the BBB representative, AARP community volunteer, local consumer activist, and con­sumer affairs journalist; the certified public accountant, accredited forensic fraud specialist, and corporate general counsel; the trade association official for mortgage brokers, automobile dealers, and hundreds of additional sectors.

The history of American business fraud offers such regulatory actors a rich set of analytical perspectives.⁸⁵ These include: an appreciation for enduring psychological vulnerabilities and evolving social norms. Some sense of institu­tional possibilities and pitfalls. The importance of understanding prevailing regulatory ecologies before embarking on policy experiments or attempting to forge new policy coalitions. Cognizance of the fine legal lines that distinguish swindling from mistaken enthusiasm, and the frequent role of social status in shaping prosecutorial outcomes. A grasp of the trade-offs between facilitating innovation and curbing deceit. Mindfulness of the capacity of antifraud regu­lation to generate unforeseen consequences or become stuck in bureaucratic quagmires, as well as its potential to reshape conceptions of self-interest and restructure business routines in constructive directions. Awareness of how regulatory infrastructures can become outmoded or taken for granted in the face of socioeconomic, technological, and intellectual change. And always, as­sistance in asking the most useful question, or framing the most sensible menu of policy choices.

One can also identify enduring features of effective antifraud regulation. As important as reputational dynamics can be in constraining deceit, they will not, by themselves, forestall the sort of systematic frauds that can undermine public confidence in economic institutions. The regulation of business fraud has to have some punitive bite, both to stifle the most unscrupulous firms and to convince all market participants that the state is serious about fighting eco­nomic deceit. But regulators should direct resources toward well-designed public education that minimizes informational imbalances, the design of transactional defaults that empower investors and consumers, and the cultiva­tion of market norms that stigmatize those willing to trade on reputation in the face of competitive pressure, or to construct enterprises on platforms of misrepresentation or conflict of interest. As they craft such strategies, policy­makers should build networks that cut across levels of government (and now international boundaries) and leverage the creativity, local knowledge, and legitimacy of nongovernmental actors, including corporations, the press, pro­fessional gatekeepers, and private antifraud NGOs. No capitalist society will ever rid itself of clever, beguiling, charismatic flim-flammers, nor established firms that, in the face of new challenges, turn to deceptive marketing or dis­honest accounting. But the history of American antifraud regulation shows that inventive governance can stay abreast of all the new twists on old games, shut down the worst frauds, fortify consumers and investors against imposi­tion, and sustain, at reasonable cost, the social trust necessary for modern capitalism.