Self-deception is a confused and confusing concept. It is especially relevant in the context of financial crimes as the prosecuting attorney is often required to prove, among other material elements, specific intent. For example, in (mis-) selling financial instruments (e.g., asset-backed securities – ABS) to a client / purchaser, the seller might contend that he/she neither knew of the material defects in the underlying assets nor intended to deceive the client / purchaser. This might be supported in underlying documentation (e.g., emails) wherein the seller and his/her agents did not acknowledge, directly or indirectly, the true nature of the underlying assets / transactions.

Smoking gun emails are not as common as they once were. Whether this has been caused by enhanced ethics of market participants and/or enhanced experience on the part of market participants of the investigative means and methods commonly deployed by law enforcement agencies (and/or other factors), I don’t know.

Though market participant conduct that falls short of reasonableness may comprise the basis for civil / administrative action, it is often not sufficient as the basis for criminal action. Thus, sticking to one’s story about the nature of the transactions, assets, financial condition, etc. lays a potentially credible defense against the prosecution RE: State of mind / culpability. Whether such stickiness comprises self-deception is intriguing and relevant.

Conceivably, a fact-finder may reason that a defendant deceived him/herself and therefore did not intend to deceive the market generally or buyer specifically in arriving at a verdict of not guilty to the financial crime(s) at issue. Though self-deception is a longstanding and deeply studied issue (e.g., Freud), it is still a practical concern in the investigation and prosecution of financial crimes. One may even conclude that self-deception (at least, self-deception not controverted by the documentary and other evidence) comprises an important anticipatory defense.