Prosecution of white-collar crime is at a twenty-year low.
In the summer of 2012, a subcommittee of the U.S. Senate released a report so brimming with international intrigue that it read like an airport paperback. Senate investigators had spent a year looking into the London-based banking group HSBC, and discovered that it was awash in skulduggery. According to the three-hundred-and-thirty-four-page report, the bank 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.”
With four thousand offices in seventy countries and some forty million customers, HSBC is a sprawling organization. But, in the judgment of the Senate investigators, all this wrongdoing was too systemic to be a matter of mere negligence. Senator Carl Levin, who headed the investigation, declared, “This is something that people knew was going on at that bank.” Half a dozen HSBC executives were summoned to Capitol Hill for a ritual display of chastisement. Stuart Gulliver, the bank’s C.E.O., said that he was “profoundly sorry.” Another executive, who had been in charge of compliance, announced during his testimony that he would resign. Few observers would have described the banking sector as a hotbed of ethical compunction, but even by the jaundiced standards of the industry HSBC’s transgressions were extreme. Lanny Breuer, a senior official at the Department of Justice, promised that HSBC would be “held accountable.”
What Breuer delivered, however, was the sort of velvet accountability to which large banks have grown accustomed: no criminal charges were filed, and no executives or employees were prosecuted for trafficking in dirty money. Instead, HSBC pledged to clean up its institutional culture, and to pay a fine of nearly two billion dollars: a penalty that sounded hefty but was only the equivalent of four weeks’ profit for the bank. The U.S. criminal-justice system might be famously unyielding in its prosecution of retail drug crimes and terrorism, but a bank that facilitated such activity could get away with a rap on the knuckles. A headline in the Guardian tartly distilled the absurdity: “HSBC ‘Sorry’ for Aiding Mexican Drug Lords, Rogue States and Terrorists.”
In the years since the mortgage crisis of 2008, it has become common to observe that certain financial institutions and other large corporations may be “too big to jail.” The Financial Crisis Inquiry Commission, which investigated the causes of the meltdown, concluded that the mortgage-lending industry was rife with “predatory and fraudulent practices.” In 2011, Ray Brescia, a professor at Albany Law School who had studied foreclosure procedures, told Reuters, “I think it’s difficult to find a fraud of this size . . . in U.S. history.” Yet federal prosecutors filed no criminal indictments against major banks or senior bankers related to the mortgage crisis. Even when the authorities uncovered less esoteric, easier-to-prosecute crimes—such as those committed by HSBC—they routinely declined to press charges.
This regime, in which corporate executives have essentially been granted immunity, is relatively new. After the savings-and-loan crisis of the nineteen-eighties, prosecutors convicted nearly nine hundred people, and the chief executives of several banks went to jail. When Rudy Giuliani was the top federal prosecutor in the Southern District of New York, he liked to march financiers off the trading floor in handcuffs. If the rules applied to mobsters like Fat Tony Salerno, Giuliani once observed, they should apply “to big shots at Goldman Sachs, too.” As recently as 2006, when Enron imploded, such titans as Jeffrey Skilling and Kenneth Lay were convicted of conspiracy and fraud.
Something has changed in the past decade, however, and federal prosecutions of white-collar crime are now at a twenty-year low. As Jesse Eisinger, a reporter for ProPublica, explains in a new book, “The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives” (Simon & Schuster), a financial crisis has traditionally been followed by a legal crackdown, because a market contraction reveals all the wishful accounting and outright fraud that were hidden when the going was good. In Warren Buffett’s memorable formulation, “You only find out who is swimming naked when the tide goes out.” After the mortgage crisis, people in Washington and on Wall Street expected prosecutions. Eisinger reels off a list of potential candidates for criminal charges: Countrywide, Washington Mutual, Lehman Brothers, Citigroup, A.I.G., Bank of America, Merrill Lynch, Morgan Stanley. Although fines were paid, and the Financial Crisis Inquiry Commission referred dozens of cases to prosecutors, there were no indictments, no trials, no jail time. As Eisinger writes, “Passing on one investigation is understandable; passing on every single one starts to speak to something else.” (...)
The very conception of the modern corporation is that it limits individual liability. Yet, in the decades after the United Brands case, prosecutors often pursued both errant executives and the companies they worked for. When the investment firm Drexel Burnham Lambert was suspected of engaging in stock manipulation and insider trading, in the nineteen-eighties, prosecutors levelled charges not just against financiers at the firm, including Michael Milken, but also against the firm itself. (Drexel Burnham pleaded guilty, and eventually shut down.) After the immense fraud at Enron was exposed, federal authorities pursued its accounting company, Arthur Andersen, for helping to cook the books. Arthur Andersen executives, desperate to cover their tracks, deleted tens of thousands of e-mails and shredded documents by the ton. In 2002, Arthur Andersen was convicted of obstruction of justice, and lost its accounting license. The corporation, which had tens of thousands of employees, was effectively put out of business.
Eisinger describes the demise of Arthur Andersen as a turning point. Many lawyers, particularly in the well-financed realm of white-collar criminal defense, regarded the case as a flagrant instance of government overreach: the problem with convicting a company was that it could have “collateral consequences” that would be borne by employees, shareholders, and other innocent parties. “The Andersen case ushered in an era of prosecutorial timidity,” Eisinger writes. “Andersen had to die so that all other big corporations might live.”
With plenty of encouragement from high-end lobbyists, a new orthodoxy soon took hold that some corporations were so colossal—and so instrumental to the national economy—that even filing criminal charges against them would be reckless. In 2013, Eric Holder, then the Attorney General, acknowledged that decades of deregulation and mergers had left the U.S. economy heavily consolidated. It was therefore “difficult to prosecute” the major banks, because indictments could “have a negative impact on the national economy, perhaps even the world economy.”
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. (...)
In the summer of 2012, a subcommittee of the U.S. Senate released a report so brimming with international intrigue that it read like an airport paperback. Senate investigators had spent a year looking into the London-based banking group HSBC, and discovered that it was awash in skulduggery. According to the three-hundred-and-thirty-four-page report, the bank 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.”
With four thousand offices in seventy countries and some forty million customers, HSBC is a sprawling organization. But, in the judgment of the Senate investigators, all this wrongdoing was too systemic to be a matter of mere negligence. Senator Carl Levin, who headed the investigation, declared, “This is something that people knew was going on at that bank.” Half a dozen HSBC executives were summoned to Capitol Hill for a ritual display of chastisement. Stuart Gulliver, the bank’s C.E.O., said that he was “profoundly sorry.” Another executive, who had been in charge of compliance, announced during his testimony that he would resign. Few observers would have described the banking sector as a hotbed of ethical compunction, but even by the jaundiced standards of the industry HSBC’s transgressions were extreme. Lanny Breuer, a senior official at the Department of Justice, promised that HSBC would be “held accountable.”What Breuer delivered, however, was the sort of velvet accountability to which large banks have grown accustomed: no criminal charges were filed, and no executives or employees were prosecuted for trafficking in dirty money. Instead, HSBC pledged to clean up its institutional culture, and to pay a fine of nearly two billion dollars: a penalty that sounded hefty but was only the equivalent of four weeks’ profit for the bank. The U.S. criminal-justice system might be famously unyielding in its prosecution of retail drug crimes and terrorism, but a bank that facilitated such activity could get away with a rap on the knuckles. A headline in the Guardian tartly distilled the absurdity: “HSBC ‘Sorry’ for Aiding Mexican Drug Lords, Rogue States and Terrorists.”
In the years since the mortgage crisis of 2008, it has become common to observe that certain financial institutions and other large corporations may be “too big to jail.” The Financial Crisis Inquiry Commission, which investigated the causes of the meltdown, concluded that the mortgage-lending industry was rife with “predatory and fraudulent practices.” In 2011, Ray Brescia, a professor at Albany Law School who had studied foreclosure procedures, told Reuters, “I think it’s difficult to find a fraud of this size . . . in U.S. history.” Yet federal prosecutors filed no criminal indictments against major banks or senior bankers related to the mortgage crisis. Even when the authorities uncovered less esoteric, easier-to-prosecute crimes—such as those committed by HSBC—they routinely declined to press charges.
This regime, in which corporate executives have essentially been granted immunity, is relatively new. After the savings-and-loan crisis of the nineteen-eighties, prosecutors convicted nearly nine hundred people, and the chief executives of several banks went to jail. When Rudy Giuliani was the top federal prosecutor in the Southern District of New York, he liked to march financiers off the trading floor in handcuffs. If the rules applied to mobsters like Fat Tony Salerno, Giuliani once observed, they should apply “to big shots at Goldman Sachs, too.” As recently as 2006, when Enron imploded, such titans as Jeffrey Skilling and Kenneth Lay were convicted of conspiracy and fraud.
Something has changed in the past decade, however, and federal prosecutions of white-collar crime are now at a twenty-year low. As Jesse Eisinger, a reporter for ProPublica, explains in a new book, “The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives” (Simon & Schuster), a financial crisis has traditionally been followed by a legal crackdown, because a market contraction reveals all the wishful accounting and outright fraud that were hidden when the going was good. In Warren Buffett’s memorable formulation, “You only find out who is swimming naked when the tide goes out.” After the mortgage crisis, people in Washington and on Wall Street expected prosecutions. Eisinger reels off a list of potential candidates for criminal charges: Countrywide, Washington Mutual, Lehman Brothers, Citigroup, A.I.G., Bank of America, Merrill Lynch, Morgan Stanley. Although fines were paid, and the Financial Crisis Inquiry Commission referred dozens of cases to prosecutors, there were no indictments, no trials, no jail time. As Eisinger writes, “Passing on one investigation is understandable; passing on every single one starts to speak to something else.” (...)
The very conception of the modern corporation is that it limits individual liability. Yet, in the decades after the United Brands case, prosecutors often pursued both errant executives and the companies they worked for. When the investment firm Drexel Burnham Lambert was suspected of engaging in stock manipulation and insider trading, in the nineteen-eighties, prosecutors levelled charges not just against financiers at the firm, including Michael Milken, but also against the firm itself. (Drexel Burnham pleaded guilty, and eventually shut down.) After the immense fraud at Enron was exposed, federal authorities pursued its accounting company, Arthur Andersen, for helping to cook the books. Arthur Andersen executives, desperate to cover their tracks, deleted tens of thousands of e-mails and shredded documents by the ton. In 2002, Arthur Andersen was convicted of obstruction of justice, and lost its accounting license. The corporation, which had tens of thousands of employees, was effectively put out of business.
Eisinger describes the demise of Arthur Andersen as a turning point. Many lawyers, particularly in the well-financed realm of white-collar criminal defense, regarded the case as a flagrant instance of government overreach: the problem with convicting a company was that it could have “collateral consequences” that would be borne by employees, shareholders, and other innocent parties. “The Andersen case ushered in an era of prosecutorial timidity,” Eisinger writes. “Andersen had to die so that all other big corporations might live.”
With plenty of encouragement from high-end lobbyists, a new orthodoxy soon took hold that some corporations were so colossal—and so instrumental to the national economy—that even filing criminal charges against them would be reckless. In 2013, Eric Holder, then the Attorney General, acknowledged that decades of deregulation and mergers had left the U.S. economy heavily consolidated. It was therefore “difficult to prosecute” the major banks, because indictments could “have a negative impact on the national economy, perhaps even the world economy.”
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. (...)
Numerous explanations have been offered for the failure of the Obama Justice Department to hold the big banks accountable: corporate lobbying in Washington, appeals-court rulings that tightened the definitions of certain types of corporate crime, the redirecting of investigative resources after 9/11. But Eisinger homes in on a subtler factor: the professional psychology of élite federal prosecutors. “The Chickenshit Club” is about a specific vocational temperament. When James Comey took over as the U.S. Attorney for the Southern District of New York, in 2002, Eisinger tells us, he summoned his young prosecutors for a pep talk. For graduates of top law schools, a job as a federal prosecutor is a brass ring, and the Southern District of New York, which has jurisdiction over Wall Street, is the most selective office of them all. Addressing this ferociously competitive cohort, Comey asked, “Who here has never had an acquittal or a hung jury?” Several go-getters, proud of their unblemished records, raised their hands.
But Comey, with his trademark altar-boy probity, had a surprise for them. “You are members of what we like to call the Chickenshit Club,” he said.
Most people who go to law school are risk-averse types. With their unalloyed drive to excel, the élite young attorneys who ascend to the Southern District have a lifetime of good grades to show for it. Once they become prosecutors, they are invested with extraordinary powers. In a world of limited public resources and unlimited wrongdoing, prosecutors make decisions every day about who should be charged and tried, who should be allowed to plead, and who should be let go. This is the front line of criminal justice, and decisions are made unilaterally, with no review by a judge. Even in the American system of checks and balances, there are few fetters on a prosecutor’s discretion. A perfect record of convictions and guilty pleas might signal simply that you’re a crackerjack attorney. But, as Comey implied, it could also mean that you’re taking only those cases you’re sure you’ll win—the lawyerly equivalent of enrolling in a gut class for the easy A.
You might suppose that the glory of convicting a blue-chip C.E.O. would be irresistible. But taking such a case to trial entails serious risk. In contemporary corporations, the decision-making process is so diffuse that it can be difficult to establish criminal culpability beyond a reasonable doubt. In the United Brands case, Eli Black directly authorized the bribe, but these days the precise author of corporate wrongdoing is seldom so clear. Even after a provision in the Sarbanes-Oxley Act, of 2002, began requiring C.E.O.s and C.F.O.s to certify the accuracy of corporate financial reports, few executives were charged with violating the law, because the companies threw up a thicket of subcertifications to buffer accountability.
As Samuel Buell, who helped prosecute the Enron and Andersen cases and is now a law professor at Duke, points out in his recent book, “Capital Offenses: Business Crime and Punishment in America’s Corporate Age,” an executive’s claim that he believed he was following the rules often poses “a severe, even disabling, obstacle to prosecution.” That is doubly so in instances where the alleged crime is abstruse. Even the professionals who bought and sold the dodgy mortgage-backed instruments that led to the financial crisis often didn’t understand exactly how they worked. How do you explicate such transactions—and prove criminal intent—to a jury?
Even with an airtight case, going to trial is always a gamble. Lose a white-collar criminal trial and you become a symbol of prosecutorial overreach. You might even set back the cause of corporate accountability. Plus, you’ll have a ding on your record. Eisinger quotes one of Lanny Breuer’s deputies in Washington telling a prosecutor, “If you lose this case, Lanny will have egg on his face.” Such fears can deter the most ambitious and scrupulous of young attorneys.
The deferred-prosecution agreement, by contrast, is a sure thing. Companies will happily enter into such an agreement, and even pay an enormous fine, if it means avoiding prosecution. “That rewards laziness,” David Ogden, a Deputy Attorney General in the Obama Administration, tells Eisinger. “The department gets publicity, stats, and big money. But the enormous settlements may or may not reflect that they could actually prove the case.” When companies agree to pay fines for misconduct, the agreements they sign are often conspicuously stinting in details about what they did wrong. Many agreements acknowledge criminal conduct by the corporation but do not name a single executive or officer who was responsible. “The Justice Department argued that the large fines signaled just how tough it had been,” Eisinger writes. “But since these settlements lacked transparency, the public didn’t receive basic information about why the agreement had been reached, how the fine had been determined, what the scale of the wrongdoing was and which cases prosecutors never took up.” These pas de deux between prosecutors and corporate chieftains came to feel “stage-managed, rather than punitive.”
But Comey, with his trademark altar-boy probity, had a surprise for them. “You are members of what we like to call the Chickenshit Club,” he said.
Most people who go to law school are risk-averse types. With their unalloyed drive to excel, the élite young attorneys who ascend to the Southern District have a lifetime of good grades to show for it. Once they become prosecutors, they are invested with extraordinary powers. In a world of limited public resources and unlimited wrongdoing, prosecutors make decisions every day about who should be charged and tried, who should be allowed to plead, and who should be let go. This is the front line of criminal justice, and decisions are made unilaterally, with no review by a judge. Even in the American system of checks and balances, there are few fetters on a prosecutor’s discretion. A perfect record of convictions and guilty pleas might signal simply that you’re a crackerjack attorney. But, as Comey implied, it could also mean that you’re taking only those cases you’re sure you’ll win—the lawyerly equivalent of enrolling in a gut class for the easy A.
You might suppose that the glory of convicting a blue-chip C.E.O. would be irresistible. But taking such a case to trial entails serious risk. In contemporary corporations, the decision-making process is so diffuse that it can be difficult to establish criminal culpability beyond a reasonable doubt. In the United Brands case, Eli Black directly authorized the bribe, but these days the precise author of corporate wrongdoing is seldom so clear. Even after a provision in the Sarbanes-Oxley Act, of 2002, began requiring C.E.O.s and C.F.O.s to certify the accuracy of corporate financial reports, few executives were charged with violating the law, because the companies threw up a thicket of subcertifications to buffer accountability.
As Samuel Buell, who helped prosecute the Enron and Andersen cases and is now a law professor at Duke, points out in his recent book, “Capital Offenses: Business Crime and Punishment in America’s Corporate Age,” an executive’s claim that he believed he was following the rules often poses “a severe, even disabling, obstacle to prosecution.” That is doubly so in instances where the alleged crime is abstruse. Even the professionals who bought and sold the dodgy mortgage-backed instruments that led to the financial crisis often didn’t understand exactly how they worked. How do you explicate such transactions—and prove criminal intent—to a jury?
Even with an airtight case, going to trial is always a gamble. Lose a white-collar criminal trial and you become a symbol of prosecutorial overreach. You might even set back the cause of corporate accountability. Plus, you’ll have a ding on your record. Eisinger quotes one of Lanny Breuer’s deputies in Washington telling a prosecutor, “If you lose this case, Lanny will have egg on his face.” Such fears can deter the most ambitious and scrupulous of young attorneys.
The deferred-prosecution agreement, by contrast, is a sure thing. Companies will happily enter into such an agreement, and even pay an enormous fine, if it means avoiding prosecution. “That rewards laziness,” David Ogden, a Deputy Attorney General in the Obama Administration, tells Eisinger. “The department gets publicity, stats, and big money. But the enormous settlements may or may not reflect that they could actually prove the case.” When companies agree to pay fines for misconduct, the agreements they sign are often conspicuously stinting in details about what they did wrong. Many agreements acknowledge criminal conduct by the corporation but do not name a single executive or officer who was responsible. “The Justice Department argued that the large fines signaled just how tough it had been,” Eisinger writes. “But since these settlements lacked transparency, the public didn’t receive basic information about why the agreement had been reached, how the fine had been determined, what the scale of the wrongdoing was and which cases prosecutors never took up.” These pas de deux between prosecutors and corporate chieftains came to feel “stage-managed, rather than punitive.”
