Why the Justice Department Fails to Prosecute Executives

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We’ve covered the problem of mass incarceration on this show before — but what about the flipside: the impunity of corporate executives with cozy relationships to government regulators?

“[T]he very notion of justice has been undermined by the government’s willingness to let wealthy, lawyered-up executives walk while zealously filling America’s prisons with poor people.”

- The Chickenshit Club by Jesse Eisinger, reviewed, Slate Magazine

Pulitzer Prize–winning journalist Jesse Eisinger wanted to know why no bankers or executives went to prison after the 2008 financial crisis.

In a bygone era, the Justice Department prosecuted Wall Street executives for its high crimes and misdemeanors. Eisinger’s new book, The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives,charts the decline in enforcement of white collar crime, telling the story of a passionate U.S. Attorney for the Southern District of New York— none other than former FBI Director James Comey — and his attempts to jam the revolving doors of power between the DOJ and private law firms.

Somehow, we’ve reached a point where bad actors cannot receive the due penalty for their errors without threatening the rest of society. We’ve built a world where “too big to fail” also translates into “too big for jail.”

The revolving doors of Goldman Sachs’ headquarters in New York.

Eisinger depicts a form of “crony capitalism” that persists, in part, because the issue draws little partisan opposition. Both Democrats and Republicans — from the Bush’s to the Clintons — have deep connections to the Wall Street firms their Justice Departments have been tasked with policing. President Trump and his family’s corporations have gotten off the hook for questionable activity, and he has stacked his cabinet with a veritable “Who’s who?” of corporate big wigs.

What changed?

During the savings and loan scandals of the 1980s, the Justice Department brought cases against over 1,000 people. Even as recently as the Enron scandal of 2000, the Justice Department went after executives with harsh sentences. Financial crises were typically the periods of most vigorous law enforcement against fraud and abuses by big banks (for one, a market downturn often revealed who had been hiding losses through “creative” accounting).

But between then and the 2008 financial crisis, something changed. Nobody went to jail, and even the institutions that blatantly violated the rules went largely untouched.

One reason so many lying executives went scot-free is that their crimes are harder to understand than the typical street crime. Anyone can grasp the evils of an armed robbery, but most jurors eyes will glaze over at the mention of derivatives or mortgage-backed securities. Furthermore, the judges and prosecutors tasked with bringing justice often sympathize too much with defendants, who are of a similar social status — eating at the same restaurants, attending the same schools, etc.

Who’s in the Chickenshit Club?

The main culprit behind the decline in prosecution has been the Justice Department’s decision to penalize financial institutions with fines, rather than go after individual wrong-doers. This lessens accountability, by distributing punishment across shareholders rather than pegging the executives calling the shots.

The Southern District of New York(even older than the Washington D.C. division of the DOJ) has always had a reputation as a hardscrabble, tough-on-crime branch. They have an outstanding record when it comes to winning cases against financial institutions.

In the first chapter of The Chickenshit Club, Eisinger tells of a meeting at the Southern District office, in which then-District Attorney James Comey asked all of the lawyers who had never lost a case to raise their hands. Comey then informed the puffed-up attorneys that they were members of what he and his friends called “the Chickenshit Club.” His point was this:

There is no clearer signal of under-aggressive prosecution than to have never lost a case.

Eisinger also finds a source of this cowardice in the perfectionist culture and risk-aversion among top law students, where it’s increasingly rare for the Justice Department to bring a case to a jury if there is a chance of losing

Accordingly, it’s no surprise that the incentives for DOJ lawyers have shifted towards going after large monetary settlements, which are easier to negotiate and less likely to result in an embarrassing loss.

These settlements, however, leave the details of individual misconduct in the dark.

The New Yorker summarized Eisinger’s narrative regarding the decline in individual prosecutions since large financial institutions — and their leaders — were deemed too central to the economy to be broken up:

“Prosecutors came to rely instead on a type of deal, known as a deferred-prosecution agreement, in which the company would acknowledge wrongdoing, pay a fine, and pledge to improve its corporate culture. From 2002 to 2016, the Department of Justice entered into more than four hundred of these arrangements. Having spent a trillion dollars to bail out the banks in 2008 and 2009, the federal government may have been loath to jeopardize the fortunes of those banks by prosecuting them just a few years later.”

Why Corrupt Bankers Avoid Jail | The New Yorker July 31, 2017, By Patrick Radden Keefe

In other words, settling has replaced prosecutions of individuals.

Bad Hombres, Too Big For Jail

Yet the lying, cheating and stealing done by financial firms are no less serious than those perpetrated by the average thug. Sometimes they are much more harmful to society:

“According to the three-hundred-and-thirty-four-page report, [HSBC] had laundered billions of dollars for Mexican drug cartels, and violated sanctions by covertly doing business with pariah states. HSBC had helped a Saudi bank with links to Al Qaeda transfer money into the United States. Mexico’s Sinaloa cartel, which is responsible for tens of thousands of murders, deposited so much drug money in the bank that the cartel designed special cash boxes to fit HSBC’s teller windows. On a law-enforcement wiretap, one drug lord extolled the bank as ‘the place to launder money.’” (Keefe, 2017)

If the Justice Department wants to give its laws teeth, it needs to find way back to the old days, when real flesh-and-blood humans had to pay.

When breaking the law is only punished monetarily, it is liable to become just another cost of doing business — one factor in the analysis of a profit-maximizing institution. The economist Gary Becker framed the decision of whether to park in a no-parking zone (and accept some probability of getting a ticket) to explain why some people might rationally choose to commit a crime. This is how many corporate executives now view the decision of whether or not to commit fraud.

Back in 2002, Fortune Magazine published an expose on lenience towards white-collar criminals (already underway):

“Let’s start with the numbers. Wall Street, after all, is about numbers, about playing the percentages. And that may be the very heart of the problem. Though securities officials like to brag about their enforcement records, few in America’s top-floor suites and corporate boardrooms fear the local sheriff. They know the odds of getting caught.”

Enough Is Enough: White-Collar Criminals | Fortune, March 18, 2002

Another reason for the “soft on crime” trend is the overall decline in jury trials — previously documented on The Bob Zadek Show (Juries: The Other Fourth Branch, May 14, 2017).

Watch Jesse explain why we must put CEOs in Prison to save democracy:

To learn more, be sure to listen.

Jesse Eisinger is a senior reporter and editor at ProPublica. In April 2011, he and a colleague won the Pulitzer Prize for National Reporting for a series of stories on questionable Wall Street practices that helped make the financial crisis the worst since the Great Depression.

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