The New York Times’ Gretchen Morgenson dutifully tells us, based on a Los Angeles Times sighting, that federal prosecutors will not be filing charges against the Tanned One, Angelo Mozilo of Countrywide. This follows the failure of investigations to lead to a criminal prosecution of another major perp in the financial crisis, one Joseph Cassano, the head of AIG’s Financial Products unit.

There has been far too little discussion of why no legal action has been taken.

Readers can no doubt come up with additional reasons, but I see at least two. The first is that the deregulation of financial services in the 1980s and 1990s, along with some very questionable court decisions (as in ones that reversed decades of precedents), have rendered many activities that would have been impermissible perfectly kosher. Yet the very fact that that people who oversaw businesses that were clearly engaged in reckless behavior and at a minimum serious omissions and misrepresentations to investors have gotten off scott free.

The ability of executives to use lawyers and accountants as paid-for human shields has greatly hindered prosecutions. Cassano’s “get out of jail free” card was that he told his accountants what he was up to.

In the sort of thefts that little people engage in, like holding up a store, the person who drives the car is an accessory and can be prosecuted. But white collar crooks can escape if they get their advisors to wink and nod (in both criminal and civil cases, most juries will be very reluctant to find an executive guilty for something his accountant signed off on). Now that would suggest that the logical route is to go after the crooked (or at best criminally incompetent) advisors. But as we wrote in ECONNED:

Legislators also need to restore secondary liability. Attentive readers may recall that a Supreme Court decision in 1994 disallowed suits against advisors like accountants and lawyers for aiding and abetting frauds. In other words, a plaintiff could only file a claim against the party that had fleeced him; he could not seek recourse against those who had made the fraud possible, say, accounting firms that prepared misleading financial statements. That 1994 decision flew in the face of sixty years of court decisions, practices in criminal law (the guy who drives the car for a bank robber is an accessory), and common sense. Reinstituting secondary liability would make it more difficult to engage in shoddy practices.

I haven’t seen anyone itemize the various changes over the last two decades that have wound up facilitating abuses in the financial services industry; the closest I’ve seen was in Frank Partnoy’s book Infectious Greed, which was published before the crisis.

The failure of legal experts to discuss what would need to change for seemingly obvious crimes to be prosecuted successfully strikes me as peculiar. But maybe the experts have circled the wagons and don’t want to expose the many ways in which financial reform fell short.

The second reason is timid prosecutors. A commonly invoked excuse for the failure to file criminal cases is that they are hard to win. But the standard set by the investigators seems to be that they will win all or most of the cases, which is bizarre. As long as a prosecution does not look foolish or overreaching, filing cases where there are good grounds for doing so does have deterrence value. High profile cases are costly to the targets: they consume management time and generate bad PR. Stanley Sporkin, the SEC’s head of enforcement in the 1970s was feared all over Wall Street precisely because he was not afraid to go after questionable behavior, even if he might not prevail in court.

And you aren’t going to be any good at litigating financial cases if you are afraid to try them. That in turn leads to a vicious circle: you won’t attract high caliber law school grads if you aren’t seen as being a good training ground (by contrast, the County of New York Robert Morgenthau was always able to attract talent because it was recognized in the law profession as a top flight operation; Sonia Sotomayor, Eliot Spitzer, and Andrew Cuomo were all assistant DAs under Morgenthau).

An obvious example is the SEC’s recent failed prosecution against former Bear Stearn hedge funds executives. Conventional wisdom is that the outcome proves that the loss confirms that it is hard to win complex criminal cases. But Enron was vastly more complex, yet it resulted in a raft of settlements (with jail time and big fines) and convictions. The fact is the SEC did a bad job. It made rookie mistakes, like relying overmuch on e-mails that looked damaging and failing to do adequate discovery on the surrounding circumstances.

By contrast, there is a blindingly obvious case that has not been filed, namely, against Richard Fuld for Sarbanes-Oxley and SEC violations. For reasons that strike me as unfathomable, the opinion of Anton Valukas, the Lehman bankruptcy examiner, who said he did not think Lehman’s deeds rose to the level of criminal prosecution, has been taken as the final word. Valukas has an admirable record as a litigator, but attorneys will often have differences of points of view as to the viability of a cause of action, and also might come up with legal theories different than the ones Valukas contemplated (particularly since structured finance litigation is a cutting edge area of the law).

I’d welcome securities lawyer input on this one, but the argument in Fuld’s favor would seem to be that he didn’t know about Repo 105 (an unacceptable posture under Sarbox, but that might get him out of criminal liability) and that the London law firm signed off on the procedure. Against Fuld would be that Lehman was clearly desperate to dress up its financial and was engaging in numerous questionable valuations that were attracting the attention of analysts, that the firm went opinion shopping for a legal opinion, and that the financial presentation was clearly misleading.

As various readers (as well as former securities litigators) have told me, prosecution is a very effective deterrent to white collar criminals. It certainly won’t end shady behavior but it would cut the incidence down considerably. Hence its absence as a real threat is a serious loss.