Sept. 8 (Bloomberg) -- As the White House and Congress debate how to regulate financial firms to avoid another economic crisis, judges have assumed the point position in punishing Wall Street for causing the worst recession since the 1930s.

The executive and legislative branches have been discussing reforms such as more regulation of hedge funds and transparency for derivatives as a response to the financial crisis that began a year ago. As that battle with a reluctant Wall Street inches forward about how to prevent another disaster, judges are taking the first steps toward the same goal, punishing executives and issuing rulings with national impact.

Last week, U.S. District Judge Shira Scheindlin threw out a key free-speech defense that credit raters had used for years to thwart investors’ fraud suits, knocking $1.5 billion off the market value of Moody’s Investors Service Inc. and the parent of Standard & Poor’s LLC.

“Judges have lifetime appointments and are freer to act on their conscience than regulators,” said Charles Elson, chair of the University of Delaware’s corporate-governance center. Judges can act more decisively than regulators or politicians because they’re “insulated from the political process,” he said.

Free from the pressures of lobbyists, judges typically refrain from showing emotion or expressing opinions during court proceedings to appear impartial. During sentencings in criminal cases, they sometimes let their hair down about their feelings about the damage Wall Street firms or their executives did.

In sentencing imprisoned con man Bernard Madoff June 29 to the maximum penalty of 150 years in prison, U.S. District Judge Denny Chin described Madoff’s crimes as “extraordinarily evil.” He made the sentences of Madoff’s various offenses run consecutively, rather than the more common concurrent method.

Six Times Longer

The sentence was six times longer than those of the chief executives of Enron Corp. and WorldCom Inc. after they were convicted of fraud.

“This was not merely a bloodless financial crime that occurred on paper but one that took a staggering toll,” Chin told Madoff in a courtroom filled with victims who spoke before his sentencing. “The breach of trust here was massive.”

Frank DiPascali, Madoff’s chief financial officer, got harsh treatment too even though he was helping prosecutors incriminate Madoff’s other co-conspirators. After pleading guilty in August to helping his boss carry out a $65 billion Ponzi scheme, he was immediately sent to jail as a flight risk by U.S. District Judge Richard Sullivan. The judge ignored a request by prosecutors to grant DiPascali bail to make it easier for him to cooperate than if behind bars.

‘Completely Dwarfed’

The proposed bail was “completely dwarfed by the amount of restitution and forfeiture in this case,” the judge said at an Aug. 12 hearing. “It would seem that a $2.5 million bond package thrown on top of that mountain doesn’t count for much.”

Former Monster Worldwide Inc. Chief Operating Officer James Treacy, who had proposed no prison time for what his lawyer called a “technical” crime, was sentenced to two years in jail for improperly accounting for backdated stock options.

U.S. District Judge Jed Rakoff called Treacy’s conduct, which prosecutors said earned him at least $14.5 million, “appalling.”

“It is disgusting that this practice went on,” Rakoff said at a Sept. 3 hearing in Manhattan.

Tough sentences like those for Madoff and Treacy “are going to be the way for a while,” said James Cox, a professor of law at Duke University in Durham, North Carolina.

“If we’re serious about protecting investors and consumers, we have to understand it’s individuals not entities who commit violations and should be hung out to dry,” he said.

‘Culture of Corruption’

After a jury found Eric Butler, a former Credit Suisse Group AG broker, guilty of securities fraud on Aug. 18, U.S. District Judge Jack Weinstein in Brooklyn told lawyers on both sides that, in their sentencing briefs, they should put Butler’s acts in the context of “how pernicious and pervasive was the culture of corruption” on Wall Street that “brought our financial system to its knees.”

Judges are also demanding more accountability from regulators and are urging rule changes to punish wrongdoers.

Rakoff last month refused to sign off on Bank of America Corp.’s $33 million settlement with the U.S. Securities and Exchange Commission over bonus disclosures. After an initial explanation that the executives in question relied on lawyers’ advice in not disclosing bonus information, Rakoff demanded a fuller explanation of the deal by Sept. 9.

$3.6 Billion in Bonuses

The settlement would resolve claims that Bank of America didn’t tell investors it had agreed to let Merrill Lynch & Co. pay as much as $3.6 billion in employee bonuses and incentives.

Rakoff asked whether the lawyers who made “decisions that resulted in a false proxy statement” should be “held legally responsible.”

Calls to Scheindlin’s and Rakoff’s chambers seeking comment were not returned.

U.S. District Judge Gerald Lynch urged Congress in a recent ruling in Manhattan to revisit a 1995 rule that authorizes the SEC -- but not private parties -- to sue those who aided or abetted a fraud. Under current law, he said he was forced to dismiss a lawsuit in March that was filed by investors seeking to recoup losses from Joseph Collins, a former lawyer for Refco Inc. The futures trader firm went bankrupt after hundreds of millions in hidden debt was found.

“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 said.

No Lobbyists

Judges aren’t targeted by lobbyists to influence their rulings the way the other branches of government are. They aren’t paid much either compared with the defendants who come before them. The Chief Justice of the United States makes $223,500 -- about the same as a junior lawyer at a large New York law firm -- and all other U.S. judges make less.

Judges in Ohio and Pennsylvania have taken unprecedented actions to slow or prevent foreclosures by Wall Street banks as the impact of the recession, including loss of jobs, made it impossible for homeowners to make mortgage payments -- sometimes on homes whose values dropped to less than the amount borrowed.

U.S. District Judge Christopher Boyko kicked off the trend of no longer rubber-stamping big banks’ foreclosure requests. In Cleveland in October 2007, he ruled that Deutsche Bank AG couldn’t foreclose on 14 properties because it couldn’t come up with the paperwork to prove it owned the delinquent loans, which had been pooled for a securitization.

On the Hot Seat

More recently, in August, U.S. Bankruptcy Judge Randolph Haines summoned a Wells Fargo & Co. executive to Phoenix so a bankrupt homeowner could cross-examine him about why his bank had taken months to respond to her request to modify her loan.

The homeowner, Bobbi Jean Giguere, wrote the judge after the bank refused to talk with her unless she hired a lawyer, an expense she said she couldn’t afford. She said the bank told her “to abandon her home.”

“I can’t do this mentally, emotionally or financially at the time,” she wrote the judge, according to a court filing. “It is and has been my goal to save the home. But I am getting nowhere with Wells Fargo.”

After the cross-examination, the judge blocked any foreclosure while authorizing a modification of her mortgage.

To contact the reporter on this story: Cary O’Reilly in Washington at caryoreilly100@yahoo.com; Linda Sandler in New York at lsandler@bloomberg.net.

Last Updated: September 8, 2009 00:01 EDT