Financial Crisis Inquiry Commission is Biggest Financial Investigation Since 1930s’ Pecora Commission


tom-borgers-50x50.jpg   Fraud in the News 

If we asked 99 percent of America, “What is the Financial Crisis Inquiry Commission?” only a handful would have a clue. However, for CFEs, the FCIC probably will be one of the most important commissions we’ll ever see because its mission is to investigate the worst financial crisis since the Great Depression.

CFEs should have a thorough understanding of the FCIC because it will affect our roles and demand for our services and investigation techniques. To help with the learning curve and discussion, this column will focus on the commission’s purpose and what CFEs should know. We’ll also discuss the 1930s’ Pecora Commission, which investigated the fraud that led to the Great Depression, and discuss what we learned from that investigation so it might help us understand the FCIC’s challenges.


On May 20, 2009, President Barack Obama signed into law the Fraud Enforcement and Recovery Act of 2009 (FERA). The act passed with impressive bipartisan support: the House approved it by a vote of 367 to 59, and the Senate vote was 92 to 4.

The first part of the FERA provides funding and tools to help law enforcement and prosecutors bring to justice the perpetrators of the many frauds that caused the latest mortgage and financial crisis.
The last part of the FERA addresses the establishment of the bipartisan FCIC. According to the act, the FCIC, housed in the legislative branch, will “examine the causes, domestic and global, of the current financial and economic crisis in the United States.”

The FCIC is composed of 10 commissioners accomplished in business, law, economics, and academia; several have prior government experience. Congressional leaders from both parties picked the six Democrats and four Republican members of the commission. The FCIC’s Democratic chairman is Phil Angelides, a businessman, former treasurer of California, and gubernatorial candidate. The Republican vice chairman is former Rep. Bill Thomas (R-Calif.), who spent nearly two decades on Capitol Hill.

Thomas Greene, a lawyer in California’s attorney general’s office, is the commission’s executive director – its chief investigator – for the next 16 months. According to a press release announcing the Sept. 17 public meeting of the FCIC and the new executive director, during his 25-year career in the attorney general’s office, Greene coordinated the multi-state, anti-trust remedies against Microsoft Corp., and brought several civil actions against Enron. The commission is considering candidates for staff investigators, many of whom are talented CFEs.


The FCIC, in part, is modeled after the Pecora Commission of 1933 and 1934, named after a talented former assistant district attorney from New York County, Ferdinand Pecora. Congress established the Pecora Commission in the Senate’s Banking and Currency Committee with the focused and limited mission of discovering the causes of the Great Depression, with an emphasis on the stock market.
Much has been written about the Pecora Commission’s accomplishments, but few know the Senate subcommittee went through several head investigators from 1931 to 1933 before Pecora was actually selected. According to The New York Times’ Jan. 25, 1933 article, “Pecora Appointed for Stock Inquiry,” Irving Ben Cooper, the investigator just before Pecora, said he resigned because the senators wouldn’t give him a “free hand.” In a Feb. 1, 1933 interview with The New York Times, he explained further that the senators had put too many restraints on his investigation.

Why was Pecora successful when the other investigators failed? We get some insight from a newspaper quote on his views about powerful people taking advantage of others.

According to the Feb. 19, 1933 article in The New York Times, “Pecora Denounces Stock Manipulations,” Pecora said his investigation had shown him “how men of might – not because of principle but because of economic power and wealth – have by the waving of a hand and adoption of a resolution taken millions and millions of the hard-earned pennies of the people and turned them into gold for themselves.”

An April 28, 1933 article in The New York Times, “Security Safeguard is Urged by Pecora,” quoted him as he addressed the Federal Bar Association. “Unless we adopt new rules and enforce them,” Pecora said, “we shall not have learned our lesson that the depression of the last years has taught us. When we return to prosperity –  and we have – unless we also have these rules and enforce them, prosperity will do no one any good.”

Pecora accomplished his seemingly impossible tasks because he was committed to finding the truth for citizens, and he understood that regulations are meaningless unless they’re enforced.

The Pecora Commission’s steadfast investigative activities contributed to the design of the regulations and regulatory bodies that helped protect markets for many decades. As a result of Pecora’s investigation, Congress passed the Glass-Steagall Banking Act of 1933, the Securities Act of 1933, and the Securities Exchange Act of 1934, which formed the SEC. The FCIC members would do well to review the Pecora Commission’s major challenges, approaches, and lessons.


Though the Pecora Commission’s scope changed through the years and it had no set structure, the well-defined FCIC is created by Public Law 111-21.

To demonstrate the FCIC’s massive tasks, let’s focus on just the size and complexity of the commission’s first function, “to examine the causes of the financial crisis in the United States.”

According to FERA, the FCIC will specifically investigate the role of:

1. Fraud and abuse in the financial sector including fraud and abuse toward consumers in the mortgage sector
2. Federal and state financial regulators including the extent to which they enforced – or failed to enforce – statutory, regulatory, or supervisory requirements
3. The global imbalance of savings, international capital flows, and fiscal imbalances of various governments
4. Monetary policy and the availability and terms of credit
5. Accounting practices including, mark-to-market and fair value rules and treatment of off-balance-sheet vehicles
6. Tax treatment of financial products and investments
7. Capital requirements and regulations on leverage and liquidity including the capital structures of regulated and non-regulated financial entities
8. Credit rating agencies in the financial system including reliance on credit ratings by financial institutions and federal financial regulators, the use of credit ratings in financial regulation, and the use of credit ratings in the securitization markets
9. Lending practices and securitization including the originate-to-distribute model for extending credit and transferring risk
10. Affiliations between insured depository institutions and securities, insurance, and other types of non-banking companies
11. The concept that certain institutions are ‘‘too big to fail’’ and its impact on market expectations
12. Corporate governance including the impact of company conversions from partnerships to corporations
13. Compensation structures
14. Changes in compensation for employees of financial companies as compared to compensation for others with similar skill sets in the labor market
15. The legal and regulatory structure of the U.S. housing market
16. Derivatives and unregulated financial products and practices including credit default swaps
17. Short-selling
18. Financial institution reliance on numerical models including risk models and credit ratings
19. The legal and regulatory structure governing financial institutions including the extent to which the structure creates the opportunity for financial institutions to engage in regulatory arbitrage
20. The legal and regulatory structure governing investor and mortgagor protection
21. Financial institutions and government-sponsored enterprises
22. The quality of due diligence undertaken by financial institutions

In addition to this long list, there are four other major functions of the FCIC as noted in the FERA:

1. Examine the causes of the collapse of each major financial institution that failed (including institutions that were acquired to prevent their failure) or was likely to have failed if not for the receipt of exceptional government assistance from the secretary of the Treasury during the period beginning in August 2007 through April 2009.
2. Submit a report to the president and Congress on Dec. 15, 2010 on the findings and conclusions on the causes of the financial crisis. Chairman Angelides will decide if he will include the specific findings on any financial institution examined by the commission.
3. Refer to the U.S. attorney general and any appropriate state attorney general any person that the commission finds may have violated the laws of the United States in relation to such crisis
4. Build upon the work of other entities, and avoid unnecessary duplication, by reviewing the record of any House or Senate committees or virtually any other government entity


The FCIC has far-reaching powers including subpoena rights. However, to issue any subpoena, the majority of the commission members has to approve it, and one of those must be a Republican. The FCIC might also hold hearings, take testimony, administer oaths, and receive and require all forms of evidence such as books, records, correspondence, memoranda, papers, and documents. Virtually everything in the private and government sectors will be open to the commission so it can perform its functions.


President Franklin D. Roosevelt’s support of the Pecora Commission was one of the reasons for its success. According to The New York Times’ March 14, 1933 article, “President Upholds Banking Inquiry,” Roosevelt’s backing and push for the major initiatives in regulating and enforcing the markets rebuffed high-profile financial players and allowed Pecora and his investigators to do their jobs. Pecora’s predecessor, Cooper, wasn’t as lucky. He left before Roosevelt took office.

President Obama, Congress, and governmental entities will have to actively support the FCIC’s activities. The major figures who contributed to the collapse of some of our largest companies, markets, and the economy will attempt to stall and delay because they know that the FCIC has limited time, staff, and money to answer all the major questions.

Fortunately, unlike the Pecora Commission, the FCIC has comprehensive statute support. Also, the FCIC can request the service of government employees and is authorized to hire experts and consultants (even though the rate of pay is far below normal pay grades).

The FCIC leaders will need a tremendous amount of purpose, integrity, talent, skill, expertise, administration, and people skills to manage the investigative and legal activities.
I encourage CFEs to follow the progress of the FCIC and support its efforts. If it meets its major goals, the commission’s final report should demonstrate that fraud and other related wrongdoings were the cornerstones for this domestic and international crisis.

The ACFE will play an important role in the continued investigation, recovery activities, and, of course, detection and prevention so that this crisis won’t be repeated in future generations.

Tom Borgers, CFE, is president of Felsen Network, a national consulting firm that specializes in placing CFEs, forensic accountants, and other financial professionals in positions at financial institutions, Fortune 500 companies, and consulting firms. His other firm, Felsen Consulting, provides forensic, business, and recovery services for financial institutions, Fortune 500 companies, law firms, government organizations, and individuals throughout the United States and around the world.

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