What is it about internet chat rooms that causes Wall Street traders to incriminate themselves?

Whatever it is, the egregious proof those chatrooms provide is not enough to force the Department of Justice to actually send people to jail for corporate crimes.



Another set of damning bank-chat transcripts led to a $4.25bn fine for the world’s biggest banks: JP Morgan Chase, Citigroup, Bank of America, Royal Bank of Scotland, HSBC and UBS. Authorities in the US, Britain and Switzerland charge that the bank traders conspired with one another in Internet chat rooms to manipulate benchmark currency prices for the euro, dollar and Swiss franc.

Like so many other cases of egregious financial fraud over the past several years, regulators used softball tactics to go easy on the banks. No bank was even forced to admit wrongdoing in the orders by the US Commodity Futures Trading Commission and the Office of the Comptroller of the Currency. Regulators avoided court and settled for cash, which the traders won’t pay – the bank’s shareholders will. Officials presented a minimal amount of evidence, lacking the full details of the traders’ misconduct. They sought no judicial review.

In short, banks got away with their crimes for a pittance; their stocks even rose on the news of the settlements because the market believes the trouble is over.



The banks are right. The trouble is over. The US Justice Department, which actually has the power to put people in jail, has opened criminal investigations into the currency rigging.



Good news? Not exactly. The DoJ is bringing out the biggest softball tactic of all. The DoJ has increasingly used a relatively new and declawed method to deal with the aftermath of the financial crisis: the deferred prosecution agreement (DPA).



These agreements were created 100 years ago to give juvenile defendants and first-time offenders a chance to for rehabilitate themselves. Only in the last 20 years have DPAs migrated to the field of corporate criminals, treating them like kids who’ve just gone down a bad path in life.

Mary Jo White, who is now the chair of the Securities and Exchange Commission, kicked off the trend of corporate DPAs in a 1994 settlement with Prudential Insurance.

Facebook Twitter Pinterest The DOJ treats banks like juvenile offenders – sweeping floors, perhaps, but never really facing adult penalties. Photograph: Antonio Olmos

No one goes to jail and no one ever gets prosecuted. Under a deferred prosecution agreement, the Justice Department allows corporations to pay a fine, then agree to some enhanced supervision and monitoring. The Justice Department appears to admit this in the US Attorney’s manual, when they describe these deals as “agreements not to enforce the law under particular conditions”.

Needless to say, a deferred prosecution agreement never acts as a deterrent. “Deferred” is a convenient fiction; the Justice Department almost never returns to prosecute. Executives never see a jail cell.



“It makes a mockery of the law,” says Peter Reilly, associate professor at Texas A&M School of Law.



Deferred prosecution agreements make it appear that banks have been held accountable, when in reality they allow federal prosecutors to ignore their own guidelines on charging the people who authorized and committed the crimes. The US Attorney’s manual clearly states, “Only rarely should provable individual culpability not be pursued, particularly if it relates to high-level corporate officers.”

Facebook Twitter Pinterest So rich, yet so stupid: bank traders cheer their success at rigging the prices of currencies. In print. Photograph: Commodity Futures Trading Commission

The Justice Department is leaning on these toothless agreements more and more. Of the DoJ’s 283 deferred prosecution agreements since 2000, half have come since 2010, Reilly found in a working paper for BYU Law Review.



Why has the DoJ been so keen on deferred prosecution since 2010? It coincides exactly with investigations into the 2008 financial crisis.

Deferred prosecution agreements have become a “mainstay of white-collar criminal law enforcement,” according to Lanny Breuer, former head of the DoJ’s criminal division.

Facebook Twitter Pinterest Parmalat founder Calisto Tanzi was sentenced to 10 years in jail for market-rigging in 2008 over the company’s 2003 collapse. Photograph: DANIELE LA MONACA/REUTERS

This safety valve, Reilly argues, weakens the threat of criminal prosecution.



Each deferred prosecution agreement is negotiated individually. There is no thought to creating a future record: no trials, no jury verdicts, no appellate court decisions, no case law and no binding precedent. This makes it impossible to determine the boundaries of the law. The same conduct can be treated differently, depending on the prosecutor.

Let’s clear up one thing: corporations don’t actually suffer from prosecution. According to attorney Gabriel Markoff, no publicly traded company failed due to a conviction from 2001 to 2010. Even US Attorney Preet Bharara has called the threat of catastrophic consequences for corporate prosecution a “Chicken Little routine … the sky does not fall.”

Corporations are supposed to be prosecuted if they breach the deferred prosecution agreement. But DoJ rarely, if ever, uses this leverage. You can see this in the official paralysis over what to do about repeat offenders on Wall Street.



Instead, law enforcement tries to use the agreements to change corporate behavior from the inside, even though they have little expertise at doing so. A 2009 Government Accountability Office report found that DoJ has no way to evaluate whether their efforts at improving corporate governance have worked.



“Do we really want our federal prosecutors to focus on reforming corporate culture rather than on indicting, prosecuting and punishing?” said Reilly.

The ubiquity of DPAs has led to increased scrutiny around their usage. Brandon Garrett’s book Too Big to Jail has exposed these backroom deals, finding that they turn corporate crimes into “a line-item cost of doing business”. Peter Reilly believes that Congress should act to limit or ban DPAs from the corporate context, but the possibility of that, with Republicans taking over the Senate, is remote.

Meanwhile, hopes that a new regime in the Justice Department might put an end to this practice must contend with this fact: Loretta Lynch, nominated to become attorney general, touts her record on financial fraud with a case against HSBC for facilitating money laundering.



The result of that case? A deferred prosecution agreement.

