How Wall Street Crooks Get Out of Jail Free
When Charles Ferguson received an Oscar for his documentary on the financial crisis, Inside Job, he reminded the audience that “not a single financial executive has gone to jail, and that’s wrong.” Given the abundant evidence of massive fraud, Americans everywhere have asked the same question: Why haven’t any of those bankers gone to jail? If federal investigators could not establish criminal intent for any top-flight executives, didn’t they have enough evidence to prosecute banks or financial houses as law-breaking corporations?
Evidently not. Except for occasional civil complaints by the Securities and Exchange Commission, the nation is left to face a disturbing spectacle: crime without punishment. Massive injuries were done to millions of people by reckless bankers, and vast wealth was destroyed by elaborate financial deceptions. Yet there are no culprits to be held responsible.
Former Senator Ted Kaufman was especially upset by this. Kaufman was appointed in 2008 to fill out the remaining two years of Vice President Biden’s term as senator from Delaware. With no ambition to stay in politics, he was free to speak his mind. He made unpunished bankers his special cause.
“People know that if they rob a bank they will go to jail,” Kaufman declared in an early speech. “Bankers should know that if they rob people, they will go to jail too.” Serving on the Senate Judiciary Committee, he helped get expanded funding and manpower for investigative agencies. In hearings, he politely prodded the Justice Department, the SEC and the FBI to be more aggressive.
“At the end of the day,” Senator Kaufman warned, “this is a test of whether we have one justice system in this country or two. If we do not treat a Wall Street firm that defrauded investors of millions of dollars the same way we treat someone who stole $500 from a cash register, then how can we expect our citizens to have any faith in the rule of law?”
Kaufman, now retired, sounded slightly embarrassed when I reminded him of his question. “When you look at what we got, it ain’t very much,” he conceded. “I’m genuinely concerned there are a lot of guys walking around Wall Street, the bad apples, saying, ‘Hey, man, we got away with it. We’re going to do it again.’”
If the legal system cannot locate the villains in this story, then “the law is a ass—a idiot,” as Charles Dickens put it. The technical difficulties in making a case for criminal prosecutions are real enough, given the complexities of modern finance. But the government’s lack of response to enormous wrongdoing reflects a deeper conflict of values. Will society’s sense of right and wrong prevail, or will corporate capitalism’s amoral need to maximize profit? So far, the marketplace appears to be winning.
The government’s ambivalence about prosecuting the largest corporate interests could be heard in the president’s comments. “Nothing will be gained by spending our time and energy laying blame for the past,” Barack Obama said in a different context (crimes of torture and unlawful detention committed under the Bush administration). Treasury Secretary Timothy Geithner bluntly dismissed the “public desire for Old Testament justice.” That might be morally satisfying, he said, but it would be “dramatically damaging” to economic recovery.
No one had to tell federal prosecutors to go easy. They can read the newspapers. The Treasury’s inspector general called the financial system “a target-rich environment” for financial fraud. But the government at the same time expended a vast fortune in public funds to rescue and restore the biggest banks and brokerages. Criminal indictments would not be good for investor confidence.
The economic argument dilutes, even checks, law enforcement. This occurred in government policy long before the financial crisis erupted, with its revelations of widespread fraud. During the past decade, the government demonstrated a similar reluctance to act aggressively against corporations. The Justice Department instead adopted a softer, more forgiving approach, at least for major companies. The intention was to limit the economic damage that can result from vigorous prosecution.
Instead of “Old Testament justice,” federal prosecutors seek “authentic cooperation” from corporations in trouble, urging them to come forward voluntarily and reveal their illegalities. In exchange, prosecutors will offer a deal. If companies pay the fine set by the prosecutor and submit to probationary terms for good behavior, perhaps an outside monitor, then government will defer prosecution indefinitely or even drop it entirely. The corporation thus avoids the stigma of a criminal trial and the bad headlines that depress stock prices. More to the point, the “deferred prosecution agreement,” as it’s called, allows the company to escape the more severe consequences of criminal conviction—the loss of banking and professional licenses, charters, deposit insurance or other government benefits, including eligibility for federal contracts and healthcare programs. In other words, the punishment prescribed in numerous laws.
“With cooperation by the corporation, the government may be able to reduce tangible losses, limit damage to reputation, and preserve assets for restitution,” the Justice Department’s authorizing memorandum explained in 2003. “A deferred prosecution or non-prosecution agreement can help restore the integrity of a company’s operations and preserve the financial viability of a corporation that has engaged in criminal conduct.”
The favored argument for the more conciliatory approach was that criminal indictment may amount to a death sentence for a corporation. The fallout will destroy it, and the economy will lose valuable productive capacity. The collateral consequences are unfair to employees who lose jobs and stockholders who lose wealth. Corporate defenders cited Arthur Andersen, the giant accounting firm that imploded after it was convicted in 2002 of multiple offenses in Enron’s collapse. But was it the firm’s indictment or its criminal behavior that caused clients, accountants and investors to abandon it?
A better name for the Justice Department’s softened policy might be “too big to prosecute.” Just as the Federal Reserve used the “too big to fail” doctrine to rescue big financial institutions from their mistakes, Justice has created an express lane for businesses and banks to avoid the uglier consequences of their illegal behavior. As a practical matter, the option is reserved for the larger companies represented by the leading law firms. They have the skill and clout to negotiate a tolerable settlement.
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Russell Mokhiber, longtime editor of the Corporate Crime Reporter, describes deferred prosecutions as another chapter in the long-running degradation of corporate law. “Over the past twenty-five years,” Mokhiber says, “the corporate lobbies have watered down the corporate criminal justice system and starved the prosecutorial agencies. Young prosecutors dare not overstep their bounds for fear of jeopardizing the cash prize at the end of the rainbow—partnership in the big corporate defense law firms after they leave public service. The result—if there are criminal prosecutions, they now end in deferred or nonprosecution agreements—instead of guilty pleas. If executives are criminally prosecuted, they tend to be low-level executives.”
Deferring prosecution was made standard practice by George W. Bush’s Justice Department, which over eight years deferred or canceled some 108 prosecutions. The Los Angeles law firm Gibson, Dunn & Crutcher took the lead in promoting the new policy and has negotiated numerous agreements. A lawyer in a rival firm wisecracked that Gibson, Dunn had become “the West Coast branch of the Bush Justice Department.”
During Obama’s first two years, Justice deferred action on fifty-three corporate defendants. None of those cases stemmed from the financial crisis. In a recent article Gibson, Dunn’s leading lawyers dubbed deferred prosecution “the new normal for handling corporate misconduct.” The Justice Department does still indict hundreds of business entities every year for crimes ranging from routine price-fixing to environmental destruction. Some major corporations still plead guilty as charged, especially drug companies, but prosecutions are overwhelmingly aimed at garden-variety fraud and crimes of smaller enterprises. As Gibson, Dunn lawyers put it, negotiated settlements “are now the primary tool in DoJ’s efforts to combat corporate crime.” The statistics in this account are unofficial, drawn from Gibson, Dunn’s periodic reports to clients on deferred prosecutions.
Important corporations that have settled without a public trial include Boeing, AIG, AOL, Halliburton, BP, Health South, Daimler Chrysler, Wachovia, Merrill Lynch, Pfizer, UBS and Barclays Bank. The crimes ranged from healthcare fraud to cheating the government on military contracts, bribing foreign governments, money laundering, tax evasion and violating trade sanctions.
“Too big to prosecute” has generated controversy in legal circles but very little in politics. William Lerach, the notorious trial lawyer who has won huge investor lawsuits against Enron and many other corporations, describes deferred prosecutions as “sham guilt. They create a thin veneer of responsibility, but nothing really happens.” (Lerach is not a neutral or untarnished expert, having gone to prison himself for illegally recruiting plaintiffs.) “I call them headline fines—they make for good reading, but that’s all,” Lerach says. “The companies can pay them in a heartbeat. You know what it is to them? A cost of doing business, that’s all. The profitability of the illegal activity far exceeds the cost of the penalty.”