To protect the investors . Yes. Arent they charged with informing investors . Yes. Why didnt they do it . Welcome to 60 minutes on cnbc. Im bob simon. Even though fraud played a significant role in the 2008 meltdown of the american economy, as of late 2012, there have been several civil suits filed against major wall street financial firms, but not a single criminal prosecution. In this edition, we look back at the 2008 financial crisis and the failure of government regulators to prosecute those who might be criminally responsible. Later, Lehman Brothers bankruptcy investigator Anton Valukas shares his findings on the collapse of the giant Investment Bank where no senior official has ever faced charges in the biggest bankruptcy in u. S. History. But first we begin with a ninemonth 60 minutes investigation looking for wall street cases that might have prosecutorial merit. In december 2011, steve kroft reported on two such cases. We begin with a woman named Eileen Foster, a former Senior Executive at countrywide financial, one of the epicenters of the crisis. Do you believe that there are people at countrywide who belong behind bars . Yes. Do you want to give me their names . No. Would you give their names to a grand jury if you were asked . Yes. But Eileen Foster has never been asked, and never spoken to the Justice Department, even though she was countrywides executive Vice President in charge of fraud investigations. At the height of the housing bubble, countrywide financial was the largest Mortgage Lender in the country, and the loans it made were among the worst, a third ending up in foreclosure or default, many because of mortgage fraud. It was fosters job to monitor and investigate allegations of fraud against countrywide employees and make sure they were reported to the board of directors and the treasury department. How much fraud was there at countrywide . From what i saw, the types of things i saw, it was it appeared systemic. It wasnt just one individual or two or three individuals. It was branches of individuals. It was regions of individuals. What you seem to be saying was, it was just a way of doing business. Yes. In 2007, foster sent a team to the boston area to search several Branch Offices of countrywides subprime division, the division that lent to borrowers with poor credit. The investigators rummaged through the offices recycling bins and found evidence that countrywide Loan Officers were forging and manipulating borrowers income and asset statements to help them get loans they werent qualified for and couldnt afford. All of thethe recycle bins, whenever we looked through those, they were full of, you know, signatures that had been cut off of one document and put onto another and then photocopied, you know, or faxed and then the you know, the creation thrown thrown in the recycle bin. And the incentive for the people at countrywide to do that was what . The Loan Officers received bonuses, commissions. They were compensated regardless of the quality of the loan. Theres no incentive for quality. The incentive was to fund the loan. And thatsthats gonna drive that type of behavior. They were committing a crime . Yes. After fosters investigation, countrywide closed six of its eight branches in the boston region, and 44 out of 60 employees were fired or quit. Do you think that this was just the Boston Office . No. No, i know it wasnt just the Boston Office. What was going on in boston was also going on in chicago and miami and detroit and las vegas and, you know, phoenix, and in all of the big markets all over florida. After the boston investigation, foster says countrywides subprime division began systematically concealing evidence of fraud from her in violation of Company Policy and countrywides internal financial controls system. Someone high up in the top levels of managementshe wont say whotold employees to circumvent her office and instead report suspicious activity to the personnel department, which foster says routinely punished other whistleblowers and protected countrywides highest earning Loan Officers. I came to find out that there werethat there was many, many, many reports of fraud as i had suspected. And those were neverthey were never reported through my group, never reported to the board, never reported to the government while i was there. And you believe this was intentional . Yes. Yes, absolutely. Foster, with the support of her boss, took the information up the corporate chain of command and to the audit department, which confirmed many of her suspicions, but no action was taken. In late 2008, with countrywide sinking under the weight of its bad loans, it merged with bank of america. Foster was promoted and not long afterwards was asked to speak with government regulators to discuss countrywides fraud reports. But she was fired before the meeting could take place. What would you have told them . I would have told them exactly exactly what ive told you. Did you have any discussions with anybody at countrywide or bank of america about what you should say to the federal regulators when they came . I got a call from an individual who, you know, suggested how how i should handle the questions that would be coming from the regulators, made some suggestions that downplayed the severity of the situation. They wanted you to spin it, and you said you wouldnt . Mmhmm. And the next day you were terminated . Mmhmm. I mean, it seems like somebody at countrywide or bank of america did not want you to talk to federal regulators. No, that was part of it. No, they absolutely did not. Do you feel like you were a victim of criminal activity . Its a crime to retaliate against someone for making reports of mail fraud, bank fraud, wire fraud, mortgage fraud, things that would harm stockholders and investors. And thats what i did, and thats why i was terminated. Were you offered a settlement . They asked me to sign a 14page document that basically. Would buy my silence in exchange for a large amount of money. But you didnt sign it . No. Why not . How many people can they can they buy off . They just pay for it. They commit the crime, and they buy their way out of it and just do it over and over and over again. I wanted them to have some sleepless nights thinking about what they would say to a federal investigator and worry about being exposed and being held accountable for committing a crime. Eileen foster spent three years trying to clear her name. In fall of 2011, she finally won a federal whistleblower complaint against bank of america for wrongful termination and was awarded nearly 1 million in back pay and benefits. Bank of america appealed the decision, and as of october 2012, the case is still pending. When we come back, we examine the Justice Departments reluctance to use one of its most powerful legal weapons the sarbanesoxley act of 2002. [ticking] huh, fifteen minutes could save you fifteen percent or more on Car Insurance. Everybody knows that. Well, did you know the great wall of china wasnt always so great . Hmmm. What should we do . Geico. Fifteen minutes could save you fifteen percent or more on Car Insurance. I take prilosec otc each morning for my frequent heartburn. Because it gives me zero heartburn. Annc prilosec otc the number one doctor recommend frequent heartburn medicine for nine straight years. One pill each morning 24 hours zero heartburn. So i can reach ally bank 24 7, but there are24 7branches . Its just im a little reluctant to try new things. Whats wrong with trying new things . Feel that in your muscles . Yeah. I do. Try a new way to bank, where no branches equals great rates. [ticking] as of late 2012, the Justice Department had not prosecuted any countrywide financial executive, despite the allegations of widespread mortgage fraud inside the company. And, as steve kroft reported, in december 2011, even more puzzling, was the Justice Departments reluctance to employ one of its most powerful legal weapons against anyone in the company. Its called the sarbanesoxley act of 2002. [applause] it was overwhelmingly passed by congress and signed by president bush following the last big round of corporate scandals involving enron, tyco, and worldcom. It was supposed to restore confidence in american corporations and Financial Markets. The sarbanesoxley act imposed strict rules for corporate governance, requiring chief executive officers and chief Financial Officers to certify under oath that their Financial Statements are accurate and that they have established an effective set of internal controls to ensure that all relevant information reaches investors. Knowingly signing a false statement is a criminal offense punishable with up to five years in prison. Frank partnoy is a highly regarded securities lawyer, a professor at the university of san diego law school, and an expert on sarbanesoxley. The idea was to have a criminal statute in place that would make ceos and cfos think twice, think three times, before they signed their names attesting to the accuracy of Financial Statements or the viability of internal controls. And this law has not been used at all in the financial crisis . It hasnt been used to go after wall street. It hasnt been used for these kinds of cases at all. Why not . I dont know. I dont have a good answer to that question. I hope that it will be used. I think there clearly are instances where ceos and cfos signed Financial Statements that said there were adequate controls, and there werent adequate controls. But i cant explain why it hasnt been used yet. We told partnoy about Eileen Fosters allegations of widespread mortgage fraud at countrywide and efforts to prevent the information from reaching her, the federal government, and the board of directorsin violation of the companys internal controls. I mean, thats a deliberate circumvention, right . It certainly sounds like it. And it certainly sounds like a good place to start a criminal investigation. In fact, according to a civil suit filed by the securities and Exchange Commission, countrywides chief executive officer, angelo mozilo, knew as early as 2006 that a significant percentage of its subprime borrowers were engaged in mortgage fraud and that it hid this and other negative information about the quality of its loans from investors. When the case was settled out of court, the s. E. C. s director of enforcement, robert khuzami, called mozilo a Corporate Executive who deliberately disregarded his duty to investors by concealing what he saw from inside the executive suite a looming disaster in which countrywide was buckling under the weight of increasing risky mortgage underwriting, mounting defaults and delinquencies, and a deteriorating business model. Mozilo, who admitted no wrongdoing, accepted a lifetime ban from ever serving as an officer or director of a publicly traded company, and agreed to pay a record 22 million fine, less than 5 of the compensation he received between 2000 and 2008. What did you think of the settlement with countrywide . Id think a lot of it if i were angelo mozilo. Id think i did pretty well for myself. No jail, a relatively small fine compared to the hundreds of millions of dollars i was able to take out of this company. Slap on the wrist. Clearly a slap on the wrist. And part of the problem is the dual nature of how we prosecute these kinds of violations. We have the department of justice, which can put people in jail, and the securities and Exchange Commission, which cant. And its sort of like we have this twoheaded monster. One head has some teeth. The other head has no teeth. And it was the head with no teeth that went after angelo mozilo. So the greatest danger he was in from the beginning was maybe hed be gummed to death, but not even that happened. Three months after the s. E. C. Settled the civil suit, federal prosecutors in los angeles dropped their criminal investigation of countrywide and its ceo, angelo mozilo. We wanted to know why the Justice Department has been unable to bring a single criminal case against countrywide or any of the major wall street banks, and lanny breuer, the head of the Criminal Division at the Justice Department, agreed to talk to us. In september of 2010, you told the congressional hearing that you seek to prosecute people who make materially false statements people who told the investors one thing and did something different. Thats absolutely right, and were doing exactly that. We spoke to a woman at countrywide, who was a senior Vice President for investigating fraud. Mmhmm. And she said that the fraud inside countrywide was systemic, that it was basically a way of doing business. Well, its hard for me to talk about a particular case. Of course, in the countrywide case, steve, as you know, a terrific office, u. S. Attorneys office in los angeles investigated that, interviewed many, many people, hundreds of people perhaps, and reviewed millions of documents. They never talked to the senior Vice President inside countrywide who is charged with investigating fraud. Well, iwe look, i i cant speak about that because i actually dont know about that particular case, but if the senior Vice President of any Company Believes they know about fraud, i want them to contact us. Breuer says the department has brought major financial prosecutions involving hedge funds, insider trading, ponzi schemes, and a huge Bank Fraud Case in florida, but he acknowledged there have been no prosecutions against Major Players in the financial crisis. In our criminal justice system, we have to prove beyond a reasonable doubt that you intended to commit a fraud. But when you cant or when we think we cant, theres still many, many important resolutions and options we have. And thats why thereve been civil lawsuits and regulatory action. Do you lack confidence in bringing cases under sarbanesoxley . Steve, no no one is really has accused this department of justice or this division or me of lacking confidence. If you look at the prosecutors all over the country, they are bringing record cases with respect to all kinds of criminal laws. Sarbanesoxley is a tool, but its only one tool. Were confident. We follow the facts and the law wherever they take us. And were bringing every case that we believe can be made. [ticking] when we come back, we talk to a whistleblower who was inside citigroup during the financial meltdown. [ticking] looks like were about to board. Mmhmm. Im just comparing Car Insurance rates at progressive. Com. Is that where they show the other guys rates, too . Mmhmm. Cool. Yeah. Hi. Final boarding call for flight 294. [ bells ring on sign ] [ vehicle beeping ] whos ready for the garlic festival . This guy bringing our competitors rates to you now, thats progressive. The ca illac summer collection is here. During the cadillac summers best event, lease this 2014 ats for around 299 a month and make this the summer of style. [ticking] if youd looked at the Financial Statements of the major banks on wall street in the weeks leading up to the financial crisis of 2008, you wouldnt have guessed that most of them were about to crumble and require a trilliondollar bailout from the taxpayers. It begs the question, did the ceos of these banks and their chief Financial Officers withhold critical information from their investors . If they did, they can be subject to prosecution under the sarbanesoxley act, yet despite some compelling evidence, as of late 2012, the Justice Department has not brought a single case against wall street executives for violating sarbanesoxley. In december 2011, steve kroft reported on 60 minutes an investigation of citigroup beginning with a former Vice President named Richard Bowen. There are things that obviously went on in this crisis, and decisions that were made, that people need to be accountable for. Why do you think nothings been done . I dont know. Until 2008, Richard Bowen was a senior Vice President and chief underwriter in the Consumer Lending division of citigroup. He was responsible for evaluating the quality of thousands of mortgages that citigroup was buying from countrywide and other Mortgage Lenders, many of which were bundled into mortgagebacked securities and sold to investors around the world. Bowens job was to make sure that these mortgages met citigroups own standards no missing paperwork, no signs of fraud, no unqualified borrowers. But in 2006, he discovered that 60 of the mortgages he evaluated were defective. Were you surprised at the 60 figure . Yes. I was absolutely blown away. Thisthis cannot be happening. But it was. And you thought it was important that the people above you in management knew this . Yes. I did. You told people. I did everything i could, from the way in the way of email, weekly reports, meetings, presentations, individual conversations, yes. How high up in the company . My warnings, which were echoed by my manager, went to the highest levels of the Consumer Lending group. Bowen also asked for a formal investigation to be conducted by the division in charge of citigroups in