Late last year, Rod Rosenstein, the Justice Department’s second in command, made a surprising admission. Addressing a gathering of corporate criminal-defense lawyers at a sprawling conference center near Washington, DC, Rosenstein announced his decision to soften a policy that was put in place by his predecessor following intense criticism of what many perceived to be the department’s ultimately deficient response to the 2008 financial meltdown, for which only a single banker went to jail. Introduced in 2015, the “Yates Memo,” as it became known, directed federal prosecutors to focus on prosecuting the individuals who are personally responsible for white-collar crime and financial fraud.
Going after flesh-and-blood executives, as opposed to simply slapping banks or corporations with a big fine and shouldering shareholders with the bill, is supposed to be the type of white-collar enforcement policy that members of both parties agree on. Under the memo, named after then–Deputy Attorney General Sally Yates, corporations that wanted to cooperate with investigations and receive lenient treatment, including steep discounts on fines, had to turn over evidence on any and all employees involved in the misconduct in question. Rosenstein, a career prosecutor who served as the US Attorney in Maryland under both Republican and Democratic administrations, said his initial reaction was that it was “a great idea.” But three years later, Rosenstein said he’d reconsidered: In short, he argued that investigating each and every culpable employee wasn’t always practical. “Our policies need to work in the real world of limited investigative resources,” he said.
In some sense, Rosenstein’s announcement that day in November washed away the final vestiges of any real acknowledgement by the Justice Department that it had failed to adequately respond to the financial crisis. To be sure, Rosenstein premised his remarks by reaffirming the department’s commitment to prosecuting executives. But the amendments to the Yates Memo, however modest, were a capitulation to corporations and the defense bar, at a time when the department’s discretionary resources have been redirected toward aggressively prosecuting even the most minor drug- and immigration-related offenses.
The Financial Crisis Inquiry Commission, which was created in 2009 to investigate the causes of the catastrophe, referred a slew of high-level executives at major financial institutions to the Justice Department for criminal investigation—to no effect. Phil Angelides, who chaired the commission, has predicted there will be lasting consequences for the failure to hold individuals personally responsible. “The Yates Memo was a belated ray of hope that the Justice Department would be turning a corner and aggressively seeking individual accountability,” Angelides told me in a recent interview. “In my view as a lay person, what’s happened is that before the department had a chance to fully effectuate the new policy, the Trump administration has decided to weaken it instead.”
The Yates Memo was important because it set new expectations for corporations facing criminal investigations, and created mechanisms within the Justice Department that were supposed to ensure prosecutors didn’t overlook individual accountability. Following the collapse of Enron and the prosecution and dissolution of the accounting firm Arthur Andersen in the early 2000s, the Justice Department began leaning heavily on out-of-court settlements known as deferred and non-prosecution agreements to resolve investigations involving corporations, for fear that a criminal conviction could negatively impact the economy or cause innocent employees to lose their jobs. Soon, it became common for the DOJ to announce a settlement with a major company or financial institution without addressing the role played by individual employees or high-level executives. With prosecutors becoming increasingly fixated on negotiating big money penalties and reliant on white-shoe law firms to search for and turn over evidence, it appeared as though the department had lost sight of individual accountability. The Yates Memo was supposed to change that.
Inside the legal community, the policy was mostly met with skepticism—sometimes even outright hostility. While the public may have viewed it as a tacit recognition of the department’s complacency, many prosecutors—both political appointees and rank-and-file—felt the public’s criticism was misplaced. Yates herself went to great lengths to praise the officials who directly oversaw financial crisis-era investigations. Those included former attorney general Eric Holder and former assistant attorney general Lanny Breuer, who became the unofficial spokesperson of “too big to jail” when he admitted that the possible repercussions of prosecuting large corporations “literally keep me up at night.”
Matt Axelrod, a deputy to Yates who helped craft the policy on individual accountability following Holder and Breuer’s departures from the department, said it was never meant to be a criticism of what happened after the crisis, even if some people read it that way. “There was a realization that although many prosecutors were already working diligently to bring cases against individuals, it was important to formalize the practice and make it consistent across the department,” Axelrod said. “What changed internally was that prosecutors knew they were going to be asked to explain why individual charges were or weren’t appropriate.”
Given that those mechanisms still exist in theory, the rollback of the Yates Memo might not seem particularly consequential. As it stands, it’s not clear the Yates Memo had much of an effect overall on the number of individual prosecutions brought by the Justice Department in white-collar cases. Before the memo, federal prosecutors charged individuals in about 34 percent of all out-of-court settlements reached between 2001 and 2014, and in 20 percent of the same type of settlements in the three years between 2012 and 2014, according to research by Brandon Garrett, a professor at Duke University School of Law and author of the 2014 book, Too Big to Jail: How Prosecutors Compromise with Corporations. In a forthcoming paper, Garrett finds that in the three years after the Yates Memo was announced, from 2016 to 2018, individuals were charged in about 24 percent of all out-of-court settlements. While there may have been an increase in individual prosecutions in specific enforcement areas, across the board not much has changed.
There are many reasons why the Yates Memo may not have translated to more individual prosecutions. For one, as Angelides points out, policies like the Yates Memo take time to yield results. Since white-collar cases are years in the making, there are likely still investigations in the pipeline that were begun not long after the policy was announced. In his speech, Rosenstein offered another explanation: After reviewing the policy, he conceded that his office found that it “was not strictly enforced in some cases because it would have impeded resolutions and wasted resources.” For his part, Axelrod disputed the notion that the policy was supposed to lead to a greater number of criminal charges against individuals (“The goal was never heads on spikes,” he told me).
Even with no quantifiable difference in the number of individual prosecutions, there had been some promising signs: The DOJ’s investigation into Volkswagen’s emission-defeat devices led to fraud and conspiracy charges against its former CEO, and prosecutors in November announced bribery and money-laundering-conspiracy charges against two Goldman Sachs bankers for the role they played in a massive corruption scandal at Malaysia’s sovereign-wealth fund. Whatever the reason for the memo’s marginal impact, Rosenstein’s amendments make it even less likely that we’ll be seeing a new era of white-collar enforcement at the Justice Department in the near future.
Rosenstein’s amendments to the Yates Memo weren’t limited to criminal prosecutions. In fact, the biggest changes altered how the policy applies to civil cases. Many of the blockbuster fines that the Justice Department did impose on major financial institutions after the crisis—the $16.6 billion imposed on Bank of America, the $7 billion imposed on Citigroup, and the $13 billion imposed on JPMorgan, to name a few—were brought as civil violations of the Financial Institutions Reform, Recovery, and Enforcement Act. Civil charges may not carry the threat of jail time, but the standard of proof is lower, and they can still have significant deterrent value.
The Yates Memo directed the Justice Department’s civil attorneys to take the same approach to individual accountability that applied to criminal cases, even when individuals were unlikely to be able to pay a fine—which the department often considers the primary goal of civil enforcement. Rosenstein argued this all-or-nothing approach was again simply too idealistic. “The idea that a company that engaged in a pattern of wrongdoing should always be required to admit the civil liability of every individual employee as well as the company is attractive in theory, but it proved to be inefficient and pointless in practice,” he said.
The changes to the Yates Memo are only the latest in a series of policy pronouncements weakening the Justice Department’s corporate-prosecution program. Under recently departed Attorney General Jeff Sessions, the department dramatically shifted its focus to immigration, drug offenses, and violent crime. Meanwhile, Rosenstein, best known for launching the special-counsel investigation into Russia’s interference in the 2016 presidential campaign, has presided over the move toward a more business-friendly approach to corporate crime.
The policy revisions around corporate enforcement have occurred steadily since Trump took office. The department created a new practice to avoid “piling on” in cases involving multiple law-enforcement bodies or regulatory agencies, in an effort to assure companies that they won’t have to pay overlapping penalties; it enlarged a program that allows companies to self-report bribes and kickbacks paid to foreign-government officials, in exchange for the presumption that prosecutors will forgo criminal charges if they do—then expanded the program to other corporate offenses; it updated a policy on using independent monitors to oversee reforms at troubled companies, promising that such monitors will be sparingly used; and it eliminated the department’s “compliance counsel,” an expert who helped federal prosecutors assess how good companies compliance programs actually were.
At every step, Rosenstein has made it clear that the department is listening closely to “private-sector stakeholders”—namely, corporate defense lawyers and the business lobby. In a 2017 speech, he smartly summed up the philosophy behind the DOJ’s new enforcement priorities. “The resources of the Department of Justice and our state and local law-enforcement partners are finite,” Rosenstein said. “When ethical business practices are widespread, law enforcement can focus on the most dangerous categories of criminals, for whom law-abiding conduct and self-policing would never be a reasonable expectation.”
These changes don’t represent a full 180-degree-turn for the Justice Department. Under President Barack Obama, prosecutors also took a business-friendly approach. Above all else, officials in both administrations have sought to establish a finely calibrated system of incentives and deterrents for businesses, with an emphasis on predictable outcomes. Yet, where the Justice Department under Obama imposed record-breaking penalties on big banks, doubling down on the use of corporate deferred and non-prosecution agreements, Trump’s DOJ has barely scratched the armor of impunity surrounding the world’s largest and most powerful corporations.
In addition to a lack of movement on individual prosecutions, Garrett’s research reveals a precipitous drop in the fines imposed on banks and corporations. In the last 18 months of the Obama administration, over $9.5 billion in fines were levied against 65 financial institutions and 31 public companies, including in out-of-court settlements and plea agreements. Subtracting legacy investigations that spilled over into the next administration, the first 18 months of Trump’s tenure resulted in only $3.4 billion in fines against 14 financial institutions and 13 public companies. (Garrett’s analysis of the decline in corporate penalties was first published in The New York Times in November.)
For Garrett, the upshot of the recent policy changes and the decline in corporate penalties is evident. “We have turned back the clock to how these cases were handled before the the financial crisis, to a time when the DOJ took a hands-off approach—when there were lower penalties for corporations and not many individuals were charged,” he said.
Many of the settlements from Trump’s first 18 months exemplify the administration’s softer touch. When HSBC entered into a $1.9 billion settlement with the Justice Department in 2012 for laundering money for Mexican drug cartels and violating economic sanctions on Iran, there was a great deal of outrage—prosecutors didn’t charge any executives, and HSBC’s fine amounted to around five weeks of the bank’s profit, according to one analyst. Yet, in January 2018, only a month after clearing the five-year probationary period established under the prior settlement, HSBC entered into yet another deferred-prosecution agreement over allegations that it attempted to manipulate foreign-exchange markets, this time paying only $101.5 million, a fine that prosecutors said reflected the banks “extensive remediation.”
Another example is the Trump DOJ’s settlement with Barclays, one of the last banks to resolve allegations surrounding the types of mortgage bonds at the center of the 2008 crisis. According to news reports, the Justice Department under Obama wanted Barclays to pay a $5 billion penalty. But the bank stalled, and its decision paid off: In March 2018, Barclays was allowed to pay a $2 billion civil penalty. The bank, like HSBC, was also under scrutiny for manipulating foreign-exchange markets, but was given a pass by the department on those allegations for, apparently, self-reporting the misconduct and cooperating with prosecutors. It was the first corporation to receive such treatment outside of the foreign bribery space, and the announcement that prosecutors were declining to prosecute Barclays, or even enter into an out-of-court settlement with the bank, served as the basis for abruptly extending the DOJ’s leniency policy for companies that self-report bribery.
Executives at HSBC and Barclays were charged over the allegations of foreign-exchange manipulation (although not for Barclay’s mortgage-backed-securities violations), but you don’t have to look far to find big cases against banks that haven’t resulted in any individual prosecutions whatsoever. Of the 14 financial institutions identified by Garrett that reached settlements in the first 18 months of the Trump administration, only two cases led to individual prosecutions. Those settlements covered money laundering by other repeat offenders like Citibank, whose misconduct looked a lot like what was described in HSBC’s high-profile 2012 settlement. And the numbers don’t even count instances where prosecutors publicly declined to prosecute a bank under its new leniency programs, as they did with Barclays.
While the decline in settlement penalties under Trump has attracted the most public attention, it’s arguably the lack of movement on individual prosecutions that’s most worrisome. Today, there’s a general consensus that simply levying big fines against executives isn’t enough to reduce white-collar crime. “As we’ve seen, the attempts to create deterrence, especially in financial sector, haven’t worked,” said Bartlett Naylor, an expert on corporate governance at Public Citizen. “What I think it comes down to, is that a rational person who is not a sociopath, won’t commit a crime if he knows he’s going to get caught.”
While the dip in corporate penalties proves the Trump administration is taking a softer stance on corporate crime, Rosenstein’s remarks in November about the difficulty of pursuing individual prosecutions undercut the Justice Department’s sole policy response to the financial crisis. A close look at the Yates Memo’s record so far indicates that the Justice Department is either unwilling to devote the necessary resources or is simply unable to aggressively prosecute executives at major financial institutions under current laws. That means that, 10 years on, we’re left without a clearly defined strategy for preventing another crisis from happening, at least when it comes to the type of deterrence typically provided by law-enforcement bodies like the Justice Department.
From his vantage point as chair of the FCIC, Angelides says he saw people of all political stripes lose faith in the fairness of the justice system after the financial crisis. “Today, there’s no proof that the Justice Department’s practices have materially changed,” he says. “There is a fundamental problem here, which now appears to be embedded policy: that individuals of enormous wealth and power are not subject to the full weight of the justice system in the US.”