<b>Incite</b>: Pimco’s loss is Wall Street’s gain

Crime didn’t pay for Joseph Collins, a former corporate lawyer who received a seven-year prison sentence in January for securities fraud. It just has cost him a lot less money than it should have.

Collins, a former partner at the law firm Mayer Brown LLP, was the chief outside counsel for Refco Inc. when the futures- trading firm collapsed in October 2005, two months after its initial public offering. He was convicted last July on five felony counts for helping Refco executives fleece the company’s investors and lenders of $2.4 billion. Yet Collins, 60, hasn’t been forced to pay compensation to anyone who lost money when Refco went bust.

That’s mainly because Congress has made sure only the government has the right to bring civil court claims against defendants for aiding and abetting securities fraud. Private litigants are barred from doing so under federal law. That means outside investors typically have no means to seek redress in such cases, unless prosecutors or regulators choose to pursue restitution for them. As for the Collins case, the government has proved worthless in that respect.

Last week, the Securities and Exchange Commission settled its own civil complaint against Collins. His deal included no monetary penalties. His only punishment was a court order barring him from violating the securities laws’ anti-fraud provisions in the future. He also was allowed to settle the suit without admitting or denying the SEC’s allegations, an absurd formality considering he’s already been found guilty of a crime.

No Recovery

Investors aren’t slated to recover any money as part of his conviction, either. His sentence included a mere $500 fine. The judge who presided over his trial denied prosecutors’ request for a forfeiture order, under which Collins’s assets could have been used to compensate victims of Refco’s fraud.

Before that, Collins and Mayer Brown got off scot free in an investor lawsuit led by Pacific Investment Management Co., the world’s largest bond-fund manager. The federal district judge overseeing that case, Gerard Lynch of New York, threw out the plaintiffs’ claims against Collins and his former firm last year.

“It is perhaps dismaying that participants in a fraudulent scheme who may even have committed criminal acts are not answerable in damages to the victims of the fraud,” Lynch wrote in an opinion upheld two months ago by the 2nd U.S. Circuit Court of Appeals. “The fact that the plaintiff-investors have no claim is the result of a policy choice by Congress.” He added that “this choice may be ripe for legislative re- examination.”

Change Rejected

Members of Congress did reconsider the policy last week at the House-Senate conference committee, where final terms of the financial-overhaul legislation are being negotiated. However, senators on the committee rejected a House amendment that would have restored aiding-and-abetting liability claims for private litigants. They offered instead to have the Government Accountability Office study the merits of such a proposal, which is a polite way of killing it.

The beneficiaries of the status quo include corporate law firms, accounting firms and investment banks. The way the law works now, under a 2008 U.S. Supreme Court ruling known as the Stoneridge decision, private-sector plaintiffs must prove they relied upon a defendant’s material misrepresentation or omission of fact to prevail in a securities-fraud suit.

Collins drafted SEC filings and other documents that Refco used to cheat investors. Prosecutors alleged he knew about the long-running fraud and helped conceal it. However, neither he nor Mayer Brown made any public representations about Refco, meaning they made no misstatements that the public could have relied upon. So Pimco lost its case against them.

Not Clear Yet

To be sure, Collins isn’t in the clear yet. He and Mayer Brown are defendants in a separate suit by three funds associated with Thomas H. Lee Partners LP, over representations Collins made to the private-equity firm in connection with its purchase of a majority stake in Refco in 2004, before the IPO.

As for the government’s efforts, the judge in the criminal proceedings, Robert Patterson of New York, rejected prosecutors’ request for a forfeiture order after concluding that Collins received no personal benefit for his participation in the fraud. Prosecutors are appealing that ruling, as well they should.

Mayer Brown billed Refco, Collins’s most lucrative client, more than $40 million in fees from 1997 through 2005, according to court records. Collins’s annual income usually topped $1 million during the same time span. The SEC nonetheless agreed with Patterson’s ruling, which paved the way for Collins’s sweetheart settlement with the commission.

True justice for investors duped by Refco would include the opportunity to seize everything Collins owns. As Eddie Murphy’s character Billy Ray Valentine said in the 1983 hit comedy, “Trading Places,” the best way to hurt rich people is to turn them into poor people. The Congress instead has decided to protect fraudsters such as Collins from the public. It’s supposed to be the other way around.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)