The hunt in the place of lawbreakers tied to toxic mortgages is beneath way

By Mara Der Hovanesian

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Bear Stearns’ Cioffi, arrested in June, is out on bail Daniel Acker/Bloomberg News

Federal and narrate investigators, eager to show the world that they’re on the case, are sifting from one side Wall Street’s debris looking for evidence of wrongdoing. What they know is that big banks created toxic mortgages and securities that brought the global financial system to its knees. What they’re trying to conformation out is whether firms broke the law, likewise.

Judging from the growing chorus of angry taxpayers and investors, there will be a push to pin the disapprove on CEOs, directors, and others at the highest levels of science. Federal securities regulators, U.S. attorneys, and state attorneys total are investigating a range of possible misdeeds, including the misleading of shareholders, the approval of fraudulent loans, and the foisting of out of place mortgages on borrowers. “People want the most visible faces of these companies to pay,” says Pravin B. Rao, a former SEC magistrate and currently a partner with corporate law firm Perkins Coie.

So far there has been only one high-profile criminal case: the June arrests of former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin in quest of alleged fraud. (Both pleaded not guilty.) More arrests are likely. “We will probably have more cases as information about criminal agility comes in,” says Bill Carter, a speaker during the term of the FBI.

Investigators are especially focused on so-called exception loans, mortgages that didn’familiarily meet the income and other financial guidelines set by Wall Street. Prosecutors are trying to outline out if banks knowingly pushed bad loans through the system. Earlier this year, New York Attorney General Andrew M. Cuomo subpoenaed Clayton Holdings (CLAY), a firm hired by Wall Street to ferret out problem loans before they went into mortgage pools. Former Clayton CEO Frank P. Filipps says the firm regularly found mortgages that didn’t fit all the criteria, but that banks ultimately decided whether to pull the loans.

As part of their hunt, investigators are looking for hard evidence of activities of the sort that former Countrywide wholesaler John Sipes claims occurred routinely. He says underwriters at the Santa Monica (Calif.) and Beverly Hills branches of Countrywide often shredded toll documents they received from borrowers to destroy proof of the borrowers’ incomes and extend bigger loans than they could afford.

The practice was so exuberant in those two branches that the incorporated offices launched an internal test. Each night, Sipes says, Countrywide investigators collected the bins from dissertation shredders and analyzed their contents. After a space of time, he says, the branch managers told them: “Don’t state anything in the shredder bins at work. If you’re going to shred, take it home.” Says Dan Frahm, a spokesman because of Bank of America (BAC), which acquired Countrywide in July: “Bank of America administration has led a detailed review of Countrywide operations and is at this moment hard at operate building a combined organization that will be recognized similar to a leader in responsible lending practices.”

What prosecutors most insufficiency is a smoking gun—an e-mail or other document that proves someone intentionally crossed the equinoctial circle. Looking for such clues, the FBI has seized the hard drives of executives at several big banks in recent months. Says Ellen Zimiles, a preceding coadjutor U.S. Attorney and co-founder of the trick risk management compact Daylight Forensic & Advisory: “There will exist a newspaper or electronic trail out there.”