The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives

By Jesse Eisinger

Simon and Schuster

This article appears in the Winter 2018 issue of The American Prospect magazine. Subscribe here.

In 1939, the Indiana University sociologist Edwin Sutherland coined the term “white-collar crime,” economic offenses by respectable people, a category of wrongdoing that went relatively unpunished in the early laissez--faire years of our business-oriented country. By the mid-20th century, corporate excesses led to regulatory legislation, but prosecuting corporate crime was not a priority.

Some notable critics—Supreme Court Justice Louis Brandeis, the SEC's enforcement chief Stanley Sporkin, federal prosecutor and later trial judge Jed Rakoff—were exceptions. Federal Judge Henry Friendly warned, “In our complex society, the accountant's certificate and the lawyer's opinion can be instruments for pecuniary laws more potent than the chisel and the crowbar.”

But white-collar crime, particularly misconduct by business corporations, continues to be treated more with empathy, employing economic sanctions rather than the harsher personal prosecutions that are used in crimes by individuals. How did our law enforcement establishment reach the point where we imprison someone for smoking marijuana or stealing relatively small amounts of money, but not executives, professionals, and organizations that commit acts that injure vast numbers of victims?

LAW STUDENTS LEARN IN our first-year law course on corporate law that a corporation is a legal fiction. But as the Pulitzer Prize–winning financial journalist Jesse Eisinger demonstrates in his book The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives, the fiction we learned in law school is not always the one applied by courts and lawyers. Acts are not the consequence of some “fiction”; people commit acts. However, in criminal cases, too often corporate executives, along with their lawyers and accountants, avoid prosecution even when the proven offenses of their companies are extraordinary—abuses resulting in financial, pharmaceutical, automobile, and tobacco class actions, for example. In these cases, the corporations often pay huge fines, but their non-fictional, real-life agents rarely suffer criminal sanctions for their roles in the misconduct.

This distorted application of the legal separation of corporate officials and their fictional corporations for criminal-law purposes is perversely waived in non-criminal cases.

Two profoundly notorious recent Supreme Court cases provided corporate officials with the rights of real people. In the Citizens United case, corporations were permitted to make huge political donations on the basis of individuals’ First Amendment free-speech protection. In the Hobby Lobby case, organizations again were treated as individuals exercising their personal constitutional freedom of religion rights. Yet tortured interpretations of the legal corporate fiction have regularly provided corporate officials and their professional colleagues with immunity from criminal responsibility. Taken to the extreme, few corporations were ever fined to death (put out of business) as individuals have been executed for their extreme offenses.

University of Virginia law professor Brandon Garrett suggested in his 2012 book, Too Big to Jail: How Prosecutors Compromise with Corporations, that there is likely a cultural reason why corporate officials rarely receive criminal sanctions for their misbehavior. Might prosecutors subconsciously pull their punches for a professional world they may later inhabit? “[P]rosecutors fail to effectively punish the most serious corporate crimes,” he wrote. They “are supposed to prioritize holding real people accountable, not corporate persons.” In The Chickenshit Club, Eisinger expands that theme of coziness between prosecutors and powerful business executives.

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As U.S. District Judge Jed S. Rakoff has pointed out in The New York Review of Books, plea deals by prosecutors govern in 97 percent of federal cases, resulting in corporate executives being treated better than other offenders, even though their misconduct hurts not only individual victims, but also shareholders, society, and the economy. The rare case—Martha Stewart, Bernie Madoff, Enron—generated much publicity, suggesting, incorrectly, that corporate wrongdoing has predictable deterrent consequences to individual wrongdoers.

Eisinger indicts the Justice Department for failing to prosecute white-collar criminals. CEOs have received relative immunity, he argues, and Wall Street executives particularly are rarely held personally responsible for pervasive, profoundly consequential wrongdoings. Corporate defendants have the resources most individuals do not have to go to litigation war with the government by empowering expensive lawyers, experts, lobbyists, and media employees to act on their behalf.

Eisinger cites depressing instances of the Justice Department being overwhelmed by powerful law firms armed with their client's resources ($700 million in one case he mentions). In the obstruction of justice case against Enron, its accounting firm, Arthur Andersen, spent $50 million on its legal defense. A key employee pleaded guilty, but the company's conviction was overturned because of disputed statutory language. The company was destroyed in the process, Garrett wrote in his book.

Eisinger's collection of major investigations of financial misconduct—their heroes and villains—explains the adage “Give white-collar defense attorneys time, and they can muddy any investigation.” While Bernie Madoff's banker, J.P. Morgan, paid almost $2 billion in fines, Madoff's investors lost $20 billion. In the investigation of Lehman Brothers for alleged accounting fraud and misleading markets that led to the 2008 subprime-credit crisis, a large law firm was paid to examine and investigate (130 lawyers for 14 months, ending in a 2,200-page report), but ultimately none of the several government agencies involved “brought civil or criminal charges against the company or any Lehman executive.”

Eisinger's story of Judge Rakoff's actions in the Bank of America–-Merrill Lynch merger and the accompanying government bailout explains how a determined judge can make a serious difference in puncturing a charade of law enforcement. Presented with a proposed deal that had been blessed by the government and the parties, Rakoff was abashed that the deal defrauded shareholders and absolved executives. He refused to sign off on it. A much-improved resolution followed.

THE PROVOCATIVE TITLE of Eisinger’s book comes from a speech that then–U.S. attorney in New York City James Comey gave to his staff. If you haven’t lost a case, Comey told his hotshot lawyers, you are a member of the Chickenshit Club and you need to ask yourself if you are subconsciously staying away from tough cases for fear of losing, when seeking justice should be your exclusive standard. Comey’s rule has not been followed in recent years, Eisinger points out in exemplary stories (including an instance where Comey himself failed to meet his own test), demonstrating how top lawyers, accountants, and corporate executives often have avoided personal responsibility for corporate frauds.

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In Eisinger's view, “[t]oday's Department of Justice has lost its will and indeed the ability to go after the highest-ranking corporate wrongdoers … from pharmaceuticals, to technology, and large industrial operations, to retail giants.” Even the Justice Department of liberal darling President Obama “took little concrete action on the prosecution of white-collar crime.” For fear of driving corporations out of business, the emphasis has shifted to “settlements over charges”—deferred prosecution agreements (DPAs), they are called.

Tough, aggressive litigation in complex cases has often been replaced by those negotiated settlements.

The first DPA in 1994 became a model for requiring corporate actions to police themselves, rather than prosecuting any individuals for their misconduct.

Currently, the Department of Justice prefers using DPAs requiring corporations to correct their past misconduct and submit to being monitored, rather than prosecuting and imprisoning individuals for their corporate misbehavior.

An interesting PBS Frontline episode, wryly titled “Abacus: Small Enough to Jail,” told the story of the one mortgage bank whose leadership was indicted, and acquitted after five years and $10 million in legal fees. Abacus was a bank in New York's Chinatown that catered to the local ethnic population. Some mid-level employees engaged in fraudulent dealings, but Fannie Mae testified that the bank's foreclosure record was better than most others, that few mortgages failed, and that the owners were not part of the fraudulent loans. They were not offered a DPA. Cultural bias by prosecutors, not fraud by the owner, the documentary suggested, was at the crux of the case. None of the big banks were indicted.

The idea behind DPAs is that public prosecutions are expensive, time--consuming, and uncertain, and they can cause collateral damages that wreak havoc on capital markets by prejudicing creditors and innocent employees and shareholders. Thus, it is considered preferable for companies to be rehabilitated and their cultures and policies reformed than for individual offenders to be imprisoned. The DPA provides a “middle ground between dropping charges and a draconian sanction,” Eisinger explains. There have been multimillion-dollar mega-fines, to be sure, from which the public profits indirectly; but that course prejudices the corporate stockholders and creditors, and does not deter the individual wrongdoers.

There have been more than 250 such agreements in the last decade, according to Garrett's study. In two-thirds of these deferred prosecutions, the company was fined, but no employees were prosecuted. In 25 percent of these cases of deferred prosecutions, monitors were employed. The remaining 75 percent lacked any form of monitoring by courts or their designees, a key requirement if reforms are to be assured. The result is that the shareholders are harmed by the misconduct of their agents who themselves were shielded from consequences for their wrongdoing. There have been “a handful” of cases where high-level officials were convicted, “but not many,” according to Garrett, leaving the wrongdoers in business while the public and shareholders suffered. Eisinger quotes a cynical SEC insider critic who complained that the agency “polices the broken windows on the street level and rarely goes to the penthouse floors.”

Eisinger's explanation of this current culture shift is fascinating. Transactional lawyers began to replace activist litigators, and the government began “not simply to punish individuals” but rather to attempt to “change corporate culture.” It was easier to obtain corporate pleas than convictions of individuals. The prosecutorial saying was “Big cases, big problems. Little cases, little problems. No cases, no problems.” As a result, deferred prosecutions, while sounding reformist, “became stage-managed, rather than punitive.” Major fines became a cost of doing business. Prosecutions of top executives decreased, “and most of these covered small-time white-collar crime and criminals.” As “Abacus: Small Enough to Jail” noted about the big banks, “cut a check and it will all go away.”

Eisinger speculates that, possibly, “young prosecutors want their adversaries to imagine them as future partners.” Prosecutors and defense attorneys speak a common language and negotiate for a living. Big law firms' partners sometimes serve temporarily in high government offices where their clients' cases may come before their agencies. Even those cases where monitors were appointed (and paid very well) created a further money--making specialty for the big law firms (which government attorneys aspire to join).

“Executives make more money than ever. Corporate profits are at record highs … injustice threatens American democracy,” Eisinger concludes. He offers persuasive examples, intriguing trial stories, and anecdotes; he names names and suggests that under modern corporate law enforcement, for the most part, the rule of law corrodes, prosecutors have become lazy, and the public suffers as a result.