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Pulitzer Prize­-Winning Journalist Argues for Renewed Prosecution of Individuals Responsible for Financial Crimes

Chris Gaetano
Published Date:
Aug 27, 2018

Jesse Eisinger, in his most recent book, The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives, laments the current state of the Department of Justice’s fight against white-collar crime, particularly in the wake of the 2008 financial crisis—a far cry from the DOJ’s rapid response to financial fraud scandals like Enron and WorldCom in the early 2000s. The NYSSCPA awarded it the Excellence in Financial Journalism Book Award this past June. Eisinger, a Pulitzer Prize­-winning senior editor and reporter at ProPublica, took the time to talk to The Trusted Professional about what’s changed since the early 2000s and how authorities can once more pick up the fight against high-level financial crimes. Above is a video excerpt of the interview. The following Q&A has been edited for length and clarity.

In your book, you say there has been a decline in the government’s ability and resolve to confront complex white-collar cases, particularly as a result of diminishing tools once available to prosecutors and regulators. What are some of these important tools, and how were they lost?

In recent American history, there have been booms, busts and crackdowns. You had 1929, which created the Securities and Exchange Commission; you had the junk bond crisis, and they prosecuted Michael Milken and a bunch of other people; you had the savings-and-loan crisis, and we prosecuted over 1,000 individuals; and, more recently after the Nasdaq bubble burst, they prosecuted almost all the top executives that were implicated for this pandemic of accounting fraud, like those at Enron, WorldCom, Adelphia, Tycho—people remember those names.

And then, in the 2008 financial crisis, we had no prosecutions of any top executives. So what was going on? Well, after those prosecutions I referred to—particularly Enron and Arthur Andersen—the business lobby got together and the white-collar bar got together. They argued that prosecutors were excessive, that they were abusing powers to criminalize business decisions—maybe aggressive business decisions, but still business decisions—and they succeeded. They rolled back prosecution power over the next decade. And now the DOJ has lost the will and ability to prosecute top corporate executives.

You also talk about a culture in which many white-collar criminals don’t believe they’ve done anything wrong, and even people within the government seem to be adopting that perspective. You contrast this attitude with those of more aggressive enforcement periods, like the Stanley Sporkin era at the SEC. [Sporkin served as director of the Division of Enforcement from 1974 to 1981.] To what do you attribute this cultural change?

There has never been a golden age, when the wealthy and powerful had to be afraid for their liberty if they committed crimes in this country, but there have been silver ages, when the government was much more aggressive. Partially, that had to do with tools, and partially, it had to do with statutes and legal power. A lot had to do with attitude and priorities, because prosecutors have enormous amounts of discretion over what they choose to prosecute and how. Today, we do not prosecute these people, and a lot of that has to do with an elite affinity, [in] that prosecutors come from very similar schools and social milieus as execs at Goldman Sachs or JPMorgan. So you’re prosecuting either your classmates or the parents of your classmates, and it’s a very difficult thing to perceive these people as criminals. One SEC official told his staffers, “Remember, when we bring charges, these are good people who made one bad mistake.” How do they know? Maybe that’s the only bad mistake they found. And maybe they’re not good people. This is not the attitude they have toward African-American 20-year-olds dealing crack on a street corner, but they do have it toward Goldman Sachs bankers. 

You present the too-big-to-fail phenomenon, in the context of the collateral consequences guidance that came about following the Arthur Andersen prosecution, as another major factor. Even in cases where there is an ability and a desire to confront white-collar crime at large firms, there is still a hesitancy because, bluntly, it might crash the economy. You’re highly critical of this mindset. Is it more that these collateral consequences don’t matter or that they shouldn’t matter?

This is a terrible mistake on a multitude of levels. First, they do think of collateral consequences and they’re overly obsessed with that, but only for prosecuting corporations. One obvious solution is: If you don’t want to prosecute the piece of paper that is JPMorgan, or BP, why not prosecute their CEOs? The institutions will survive if you prosecute the CEO or CFO or chair of the board. So turn the focus to individual culpability. Individuals commit crimes; pieces of paper don’t.

But even applying their own logic, it’s wrong for two reasons: The collateral consequences are often overblown; markets won’t be destabilized if you lose one institution here and another there. Yes, tens of thousands of innocent employees will be put out of work sometimes, but is that worry enough to keep a corrupt institution that is serially breaking the law in place? Sometimes you have to prosecute a company if it is corrupt, even if there are social costs. We prosecute murderers who might be genuinely nice family men or women and take care of their children. There are consequences to not prosecuting those people, and this applies in the corporate space, too.

The Arthur Andersen prosecution whittled down the Big Five to the Big Four. Four is not a very large number, and these four firms dominate when it comes to public company accounting. Does the very small number of these firms make this a different situation, or do you think the same logic you just articulated applies even in this case, where there are very few capable of pulling off the audits they do?

When Arthur Andersen folded, the lawyers said, “If you prosecute us, there will be a terrible calamity: All these major Fortune 500 companies won’t have audits; it will throw the markets into disarray, because everyone will be so worried.” And then Arthur Andersen folded, and there were no collateral consequences. So that knocks down that argument. The DOJ is reluctant to investigate and prosecute in situations where you have corporate concentrations. Of course, that’s an antitrust question, which brings us to another division of the DOJ, but if there’s a concentration problem, that’s not a reason to go soft on these companies. So we should prosecute individuals and reinvigorate antitrust enforcement in this country.

One of the few individuals charged in direct response to the crisis was Fabrice Tourre, a Goldman Sachs trader, whom the SEC sued for misleading investors in a 2007 mortgage deal. The general perception was that he was essentially a fall guy. In the past, how did prosecutors combat these sorts of tactics, and do you feel they would be effective today?

I think there should’ve been criminal investigations, but today, they’re satisfied by getting one person. If they get anyone at all, often it’s some midlevel schmo, some midlevel money manager. What I think they should do is investigate completely differently than they do now—investigate the low-level individuals and then flip them like it’s a mob prosecution or drug cartel. You flip the soldiers to get to the capos, to get to the capo dei capi, and they need to approach corporate investigations that way. But they don’t, because its much more time-consuming, much more difficult; the risks of taking people to trial and losing are great, so the career risks are too great to sustain.

So this might be a little far afield, but when you brought up the Mafia don approach, my first thought was the Racketeer Influenced and Corrupt Organizations Act (RICO). Have you found regulators, prosecutors, using that approach specifically?

They’re very reluctant to use the full powers that they have, and one of the things they don’t like to use in the corporate context is RICO. Those are the kinds of statutes they have to explore and get much more aggressive about using. They’re very afraid of bringing those statutes because they’re afraid of getting a bad verdict that brings about bad law—but right now, they’re not even using them at all! Start using them, start learning from them, start making better laws, and if you think the statutes are inadequate, go to Congress and raise holy hell!

So it’s more about will than ability?

I think it’s both. First of all, there is a will problem, where they just don’t want to spend the time, and the incentives are all structured to settle with corporations for money than to try to prosecute individuals. But these guys don’t really know how to do these investigations. The FBI conducts most of them, but there has been a skill set erosion at the FBI, and they don’t know what they need to convince juries at trial. The average assistant U.S. attorney once did seven trials a year; now it’s 0.29 trials a year. They have no trial experience, and so don’t understand a jury: You are an elite, affluent American, you don’t have people in the jury pool who’d be your friends, and you don’t know how to relate to them. That’s very scary, so you think: “Why not just negotiate a giant settlement than take that risk?” 

We see the press releases going out about this record settlement, this largest fine—but in your book, you don’t seem terribly impressed with them.

Not impressed at all. These settlements almost always appear to be more than they actually are; in them, corporations get a lot of credit for the things they do anyway, so the dollar figures are not as big as the headline figures. Often, they’re tax deductible. Also, these are viewed as a cost of doing business, and they’re not paid for out of executives’ pockets but shareholders’. And the most important point is they do not work, and what I mean is they do not deter corporate crime. Recidivist corporations like Pfizer or BP or JPMorgan or Wells Fargo run afoul of the rules and laws, and they’re sanctioned, and they do it again and again. So this is a regime that simply is broken. On the other hand, prosecuting individuals, like CEOs, will deter corporate crime.

I want to return to the difficulty of explaining these things to juries. On one hand, regulators themselves might have a lot of trouble understanding the complex issues behind white-collar crime, and so they’re hobbled in their enforcement ability. But on the other, they might bring in industry insiders for insight into the issue, but they come with their own culture, their own ideology, and this has its own particular challenges. Where does the balance lie?

These are complex issues, but they’re not impossible to understand. I’m a financial reporter, but I have no financial or legal training, and I could understand the collateralized debt obligation business by getting people to talk to me and being patient. You do need to rely on experts, but ultimately, what regulators need to understand is how to sell these things to juries, and they don’t know how to take these complex stories and make them simpler. Ken Lay, the founder and CEO and chair of Enron, was successfully prosecuted—not for having knowledge of the off–balance sheet vehicles that deceived shareholders, but for lies. He told people one thing in private and another thing in public. Simple lies. And they distilled all this complexity to telling that story to the jury. Black and white. Lies and truth. That was a very successful prosecution, and this is the kind of model they need to learn and execute, but they don’t know it anymore.

How pervasive do you think fraud is in the corporate world? Let’s say tomorrow you wave a magic wand, and every white-collar criminal is suddenly transported to prison. Would there be enough people left to even have a finance industry on the scale we do now?

I think the trading floors and C-suites would be ghost towns. I think we have a moral crisis in corporate America. People feel desperate to make the quarter; they feel they are in a death struggle for competition, so they are very anxious about their positions. Corporations have become unforgiving of employees and lay them off at the slightest twitch, so employees have very little loyalty to their companies, and this sets up a terrible dynamic: Employees think, “I can cut corners to preserve the quarter because I am desperate to keep my job and also I’ll take what’s mine this quarter, and I don’t care about the institution, if it blows up later down the road.” Wells Fargo has a very aggressive sales culture, and the CEOs looked the other way. I think they understood it because they were getting bonuses and stock options based on performance, and they didn’t really care because they were short-timers. So there is a moral crisis, and I don’t know what percentage of people are actually committing fraud, but corporate America is broken. And because we’ve no deterrence mechanism, there is nothing to fix it. 

What is the solution to these problems? What role can CPAs play?

The solution is to change the culture of the DOJ, which is no easy feat. I’m under no illusions that people will be taking my advice anytime soon, but you have to change whom you recruit. Instead of recruiting many elite students from the best law schools in the country and having them go on to become white-collar defense lawyers, you want to break that. You want refugees from corporate law, partners who don’t want to go back to corporate law but know where the bodies are buried. You also want public interest lawyers and plaintiffs’ lawyers and academics, people of different ages and geographic distribution, so you break the hold of these young elites. And for CPAs, it’s the same. What we’re seeing is a return to the bad old days, with the businessman model of consulting being equal to or greater than the audit function. You can’t serve at the right hand of CEOs and be highly dependent on them for your paycheck, then audit their books and tell them the truth about their accounting fraud. So we need much more independent, much more serious-minded, much more ethical auditing firms.



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