Financial journalist Jesse Eisinger argues in a new book that federal agencies like the Department of Justice and the Securities and Exchange Commission are “broken” systems that allow corporate bosses to evade the criminal consequences of wrongdoing. He explains why in a conversation with TCR.
When Pulitzer Prize-winner Jesse Eisinger covered capital markets for the Wall Street Journal and Conde Nast Portfolio in the early 2000s, he began to see early hints that the subprime market bubble was close to bursting. When the inevitable crash happened, he probed further into the roots of the disaster for ProPublica. His exploration of what he terms “bad behavior” has now turned into a book that bluntly takes the federal government to task for not prosecuting the financial skullduggery that seemed hard to miss at the time.
Like the book’s title, “The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives,” Eisinger doesn’t mince words. In a conversation with TCR Deputy Editor Victoria Mckenzie, he explains how the “culture” of prosecution at the Justice Department has subtly changed as “hot-shot” government lawyers look forward to lucrative careers as white-collar defense attorneys, why he thinks the Obama Administration accentuated the shift, and why the DOJ should consider hiring lawyers who are older and come from more diverse backgrounds.
The Crime Report: What drove you to write the book?
Jesse Eisinger: (When I moved to Pro-Publica) we did a series of stories about bad behavior from the banks in the lead-up to the financial crisis. Misleading investors about CDOs [Collateral Debt Obligations]. It was sort of excavating the big short trade, where people were secretly betting against these structures. And what we found was a hedge fund that had secretly gone to investment banks to have them make these mortgage securities, and then secretly was betting against them. Sometimes the investment banks knew.
We found a lot of other (bad) behavior in this CDO market, which were bundles of bundles of mortgages, very complicated instruments, and we thought it was obvious that there was going to be a huge crackdown coming. And then really nothing happened. No criminal investigations. My book is not a criminal brief, making the case for prosecutions of some individuals. I’m not a lawyer, that wasn’t the task I set before myself. But I set out to explore why this (prosecutions) isn’t happening. And one of the reasons it’s not happening is that they didn’t really even look. If you don’t look, you’re not going to find crimes.
It started to dawn on me that the Department of Justice and the SEC were broken institutions when it came to corporate white-collar (crime) enforcement. In the wake of the financial crisis, I started to see other examples in the tech world, in the pharmaceutical world, in the industrial world, in retail— Walmart, Google, Pfizer— companies that were making mistakes, admitting to wrongdoing, (even) criminal wrongdoing, but no senior individuals were being charged. I realized that this is a broken system, and I thought this really needed some kind of true examination from a historical perspective. I wanted to figure out— how did this evolve?
TCR: One of the large themes in your book was that zealous DOJ prosecutors in the early 2000s actually created the market for white collar criminal defense (or ‘Big Law’), and the two almost evolve into a single entity in some senses. You write that it is now almost a forgone conclusion that a young prosecutor will end up in a lucrative private firm.
JE: That’s a really big part of the problem, and I wanted to do trace how it came to happen. When you had these big white-shoe law firms in the 1950s, 1960s, they didn’t do criminal representation for their corporate clients. That was done by boutique (firms) that specialized in criminal law. In fact the criminal bar was kind of looked down upon by the white-shoe firms at that point.
Today, there’s a seamless world, where prosecutors– mostly young— in the Southern District and Main Justice, the hottest shots from the Department of Justice, almost all go to white collar criminal defense work after their stint at the DOJ. Essentially, the DOJ is being treated like a training ground for future criminal defense lawyers.
The people at the Southern District and now in Main Justice are the best of the best of the best. They have gone to the best high schools, to get into the best colleges, to get into the best law schools, to get the best clerkships, and then they’ve gotten these very competitive jobs as prosecutors. They’re pleasers. They’re not free spirits, they’re not entrepreneurs particularly— they’ve taken a relatively safe path to be lawyers. They are straight arrows— admirable people who want to do public service. It’s not the ‘bro’ culture of Silicon Valley. But they’re kind of rigid in their thinking.
(But when) you’re in the prosecutorial role, it’s a completely different incentive. You need to be a displeaser, you need to seek to deprive people of their liberty when they’ve done something wrong. And when you’re going up against corporate criminals, you’re going up against the sons and daughters of your professors or the parents of your classmates. There’s a sort of elite affinity where they just don’t look at well dressed, articulate, well-dressed bankers from Goldman Sachs, and see a criminal.
TCR: You write that in fact, these young prosecutors have to become “class traitors.”
JE: Yeah. (Robert) Morgenthau was a traitor to his class. But these [current] people are not, by and large, and it takes an enormous effort for them to overcome that, and I just don’t think they can.
TCR: When you get into the Obama period, those are really the “scorched earth” chapters. But did this shift have roots in the Enron and Andersen prosecutions of the early 2000s?
JE: The point of those [Enron/Andersen] chapters is that it is the most recent high-water mark for corporate prosecutions– but it is also the beginning of the undoing. And they have success prosecuting the top executives from Enron, and they also end up prosecuting the top executives from Worldcom, Adelphia, Tyco, Global Crossing. They bring the top executives from Health South to trial. So they really do most of the big marquee corporate scandals of the age, they manage to prosecute the executives.
Prosecutors will say those were easier, more obvious crimes, or those were inevitable, or it was obvious that they were going to get the Enron guys because that was a total fraud— but in fact, I don’t agree with any of that. I don’t think it was inevitable that they were going to prosecute those people. And especially I think that getting the two heads of Enron, Ken Lay and Jeff Skilling, was extremely difficult. They had to work for years at it. They got a little lucky, they worked very hard. They had very good strategy. They didn’t have any direct evidence against them, so they had to flip people, work your way up the way you need to do it if you’re prosecuting the mob. And they did.
What happens, bizarrely, is that the lesson from the Arthur Andersen prosecution becomes unlearned, or the Department of Justice learns the entirely opposite lesson from it— which is that we should never prosecute another large company again, because we throw people out of work. There are collateral consequences–either systemic disruption of the markets (we see that later in the financial markets) or we see people being put on the street, unemployed. I don’t think that’s proper for a prosecutor to think about.
We don’t think of the collateral consequences of putting an embezzler in prison, or a murderer in prison, or the thief of a television in prison. But we do think about it with a corporation.
TCR: Although reformers do talk about that when it comes to street level crime, it’s one argument for reducing sentences, punishment, etc— you’re hurting families, you’re hurting society, the economy [mass incarceration].
JE: My argument is, in a nutshell, we should put fewer of a certain kind of person in prison, and more of another kind of people in prison— basically, fewer young black men and more older white men, to be overly simplistic about it.
I think putting (an executive) in prison for three to five years is something they need to refocus on. They need to go back to prosecuting individuals, and they need to seek sentences— but they shouldn’t seek draconian, insane sentences. One of the problems is that they prosecute so few individuals that they throw the book at them. They overcharge them, they invest so many resources and time into it and then they want to get some extraordinary prison sentence out of it— 18 years, 30 years.
TCR: Is that what happened when former acting Attorney General Sally Yates came in, and tried to bring the focus back to prosecuting individuals rather than just settling with companies?
JE: Yes. It was too early to see whether the Yates memo was taking effect, and now under (Attorney General Jeff) Sessions it seems highly unlikely that they’ll do that. So I’m extremely skeptical that they’ll be tougher on corporate criminals than the Obama administration, and the Obama administration was extremely light-handed. But we have to see. What’s going to happen I think in the Sessions case is that they’ll get a few low-level individuals, but they’ll not even do the corporate settlements, so that settlements will come way down.
I think the fact that we don’t prosecute criminal executives in this country undermines the sense of justice for the person on the street. I think that they see this as a rigged system, and it is a rigged system. It’s rigged in the favor of these criminals who can commit crime with impunity as long as you’re in a certain position in a corporation.
TCR: Why was there so much political fear and meddling from the front office during the Obama administration?
JE: Before we get to timidity, there are a few things to point out. One is that the resources have shifted, so that there are fewer people in the FBI who are really trained in this. The SEC was hollowed out in the second half of the Bush administration, and so it was suffering, morale was really in bad shape. Those are two sort of structural problems that the Obama administration had going into the financial crisis, that they couldn’t really do anything about. So that’s sort of step one.
Step two is after a decade of focusing on settlements, there has been an erosion of talent. Erosion of skill, especially trial skill. They do fewer trials, and this is happening across the criminal justice system. The problem with doing fewer trials, especially in the corporate white collar space, is that your skill set erodes, you become very scared of trials, they seem very difficult to do, you’re going up against defense attorneys that have done a lot of these cases and had trials, so you’re enormously intimidated by the prospect of having to persuade a jury.
So it’s not just timidity: I think they have lost the ability to prosecute these cases.
TCR: Effectively, this has cut out the public?
JE: It has cut out the public, because the public cannot see the evidence— they don’t have an airing of the wrongdoing, and public airing of wrongdoing is an enormously beneficial thing for a society. The sense that no one was held accountable, there’s no debate— fueled the rise of Donald Trump. I mean, Donald Trump talked about Goldman Sachs owning politicians.
Of course, then he installs Goldman Sachs executives in the White House and gives it over to the bankers and corporations— but he tricked his supporters into thinking that he was somehow their champion, by attacking corporations for not being held accountable.
TCR: In the book, you make a strong call for diversity in the justice department.
JE: Part of the solution is more diversity— and I don’t mean just the way the phrase is used in terms of gender diversity or racial diversity. What I’m talking about is class and geographic and professional diversity. You want to break the grip that the elite law schools have on feeding the Department of Justice’s elite offices. Go to Wisconsin, go to Minnesota. Go out of Virginia and go to Georgia tech. Go to the West Coast, go to Montana.
The other thing is that you need age diversity. There’s a culture at the Department of Justice, if you’ve worked there for six or eight years or longer, then you’ll start to be looked down upon, like you’re a “lifer.” What we should do instead is get some people who are sick and tired of corporate law at age 52, and 55, who know where all the bodies are buried, and want to spend the last ten years of their careers serving society, and doing public service. They’re not trying to burnish their resume, you want them to be sick and tired of it.
And then I think you need plaintiffs’ lawyers, you need advocates, you need consumer lawyers— you don’t just want defense lawyers, or future corporate defense lawyers to go become prosecutors. And if you break that mold, you’ll start to help the culture.
I think they need to do many more trials. They need to seek lower sentences, so that any one single trial isn’t invested with all this importance. The other thing that they need to do is to focus on individuals, and somehow allow prosecutors to work on cases that don’t come to fruition very quickly, that build slowly and quietly,
TCR: How many prosecutors, and former prosecutors, did you speak to in the course of writing this book?
JE: Probably well over a hundred— dozens and dozens.
TCR: What insight did you get into how an irascible, tough white-collar prosecutor shifts to representing corporate criminals? What did people think that they were doing? How did they describe it?
JE: Well, it’s a real mix— from people who weren’t that interested in being prosecutors, they were always interested in making a lot of money and being defense lawyers, but this was a way to burnish their resumes. There are some people on the opposite spectrum, who feel a little bit rotten about it, but they felt like they had no choice because they needed to support their family.
And also they had no choice because in their careers, they had to keep moving. They had been conditioned to always be succeeding,
TCR: When it comes to financial crime, why is ignorance of the law a defense?
JE: It’s very hard to understand. In street crime, you don’t have to prove mens rea, because you’re essentially supposed to know that drug dealing is wrong, or murder is wrong, or recklessly driving a vehicle is wrong. And so that’s all implicit— it’s part of the law, but it’s implicit. But in white collar law, and this is the most difficult thing— you have to demonstrate that… so, mens rea is not just special to white collar law, corporate law. But the problem is that when you’re dealing with accounting, or securities, things like that, you have to show that not only was the accounting wrong, but you knew it.
And it makes some sense, I think. You don’t want to throw people in prison for innocent mistakes. The problem is, it makes it so difficult to actually prove a crime that they become wary of it and they don’t even try.
TCR: And this further insulates executives?
JE: Executives have an enormous amount of insulation, and they also get to rely on the experts— they rely on legal counsel, they rely on accountants, and you have to break that. And the way you break that is you need to pick your cases of accountants and lawyers and investment bankers who are giving advice to these executives, who turned out to be criminal. And because of that, you put these professional classes, these professions… the law, accounting, auditing, on notice. And there’s a real deterrent effect.
Victoria Mckenzie is Deputy Editor (Content) of The Crime Report. This interview has been condensed and edited for space. Readers’ comments are welcome.