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Jesse Eisinger: Prosecutors Are Too Chicken to Rein In Wall Street

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Acute fear of failure permeates the United States judicial system when it comes to prosecuting top-level corporate executives for malfeasance; ergo, they simply walk away without punishment. Case in point: No chieftains from the big banks went to jail for their wrongdoings in the financial crisis, and rich and powerful white-collar fraudsters in other major industries go unscathed too.

So says Pulitzer Prize-winning journalist Jesse Eisinger, author of “The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives” (Simon & Schuster), in an interview with ThinkAdvisor.

Prosecutors’ dread of losing such cases and failing to indict wrongdoers at the top is a national scandal, indeed one of America’s most profound problems, Eisinger argues.

(Related: ‘The Big Short’ Writer Finds Dark Humor in Financial Meltdown)

Vigorous prosecutions of Enron Corp. executives in 2004, and other CEOs at that time, triggered major corporate lobbying against what companies and the white-collar defense bar called “excessive prosecutions.” This resulted in a weakened DOJ fraud-fighting mechanism and rendered prosecutors frightened of losing trials, Eisinger says. Thus, a settlement culture arose in place of prosecuting high-level corporate individuals.

The Chickenshit Club is the name former FBI head James Comey gave prosecutors of the DOJ’s Southern District of New York when, in 2002, he was appointed U.S. attorney for the district, which oversees Wall Street.

In the interview, Eisinger, 46, offers solutions to reform the DOJ that he believes would bring top-level executives to justice.

Eisinger and Jake Bernstein won a Pulitzer for the independent nonprofit news site ProPublica for an exposé series on bad banker behavior related to collateralized debt obligations (CDOs) in the lead-up to the financial crisis. It was the first Pulitzer to be awarded to an online-only publication.

On the phone from his New York City office, Eisinger offered cogent advice for financial advisors on how to help clients invest prudently:  Never forget that corporate fraud is widespread and flourishing. Here are excerpts from our interview:

THINKADVISOR: What’s the main takeaway for financial advisors from your book?

JESSE EISINGER: In the back of their minds, there should be a fraud discount applied to everything. At this point, corporate culture is pretty rampant with fraud. So advisors need to be very skeptical and very conservative about their clients’ precious retirement and college-savings money.

Before the financial crisis, many brokers put clients into mortgage-backed securities without knowing what was in them. The clients lost money.

I hope they don’t repeat that [type of behavior]. Unfortunately, the stock market has been going up for seven or eight years straight, so people’s guard is coming down.

Please explain what “The Chickenshit Club” is.

When Jim Comey was U.S. attorney general for the Southern District of New York [with jurisdiction over Wall Street], he asked his criminal prosecutors, “Who here has never lost a trial?” A bunch of hands shot up because they thought of themselves as the best trial lawyers in the country. He said, “Well, we have a name for you guys – ‘The Chickenshit Club.’” If you’re not taking on ambitious cases and not willing to lose cases, then you’re not doing your job. It isn’t about winning; it’s about justice.

What’s the upshot of prosecutors’ cowardice?

There’s impunity for a certain class of people. The Justice Department has lost the will and ability to prosecute individuals at the highest levels of the most powerful corporations in America. It goes beyond the banks in the financial crisis. It affects pharmaceutical, industrial, technology, retailing [etc.] companies.

How much will President Trump and Attorney General Jeff Sessions help remedy this situation?

We have to wait and see. But I think the Sessions regime is going to be, on order of magnitude, probably the worst Department of Justice in our lifetime. When it comes to white-collar crime, he’s already signaled his priorities [low on list], and it bodes very ill for corporate law enforcement. In addition, the circuit courts and the Supreme Court have become much more business-friendly as well.

Why was the DOJ fearful of prosecuting individuals after the financial crisis?

In reaction to the Enron Corp. accounting fraud scandals and the many prosecutions of individuals, there was a corporate backlash [lobbying, for example]. Prosecutors lost cases and suffered fiascos. That eventually changed the way they approached law enforcement.


Through practice, they ended up deciding that they shouldn’t prosecute individuals but instead, settle with corporations. The settlement culture — paying money but not punishing the people responsible — has corroded the DOJ and the Securities and Exchange Commission.

How can this be rectified?

Prosecutors need to avoid feeling defeated by a loss and reluctant to go to trial, where sometimes they’re going to lose cases. There needs to be a whole different attitude: focusing on individuals and not settling with corporations. They need to investigate companies much differently and have a [more diverse] group of prosecutors.

Would that transform the culture that created The Chickenshit Club?

Well, I’m not being naive about it. It’s not very realistic that this is going to happen anytime soon. But I think [the system] isn’t in a permanent state of despair. You could change the culture if the will were there. But it would be very difficult; and of course, Jeff Sessions and Donald Trump aren’t going to lead the revolution.

What’s your take on how the DOJ is handling the Wells Fargo scandals?

They’ve had inadequate accountability. Some people have lost their jobs — but only under incredible public pressure. [Wells Fargo] didn’t do that of their own volition, and they didn’t claw back substantial amounts of their bonuses. There has been very little enforcement so far. The fine was quite low.

Bank of America Merrill Lynch was fined for violations during the financial crisis and beyond — through 2015. But they, and other banks that agree to settlements, just pass the fines on to their customers.

Fines are inadequate, and passing them on is one of the reasons. The other reason is that their shareholders pay for the fines. So it doesn’t come out of the pockets of the executives. They’re paying with other people’s money — and now [Bank of America] is making record profits. So fines are just “a cost of doing business.” We have to come up with a different way of punishing people.

Americans were outraged when the banks were bailed out post-financial crisis; and then, it seems, the bankers even resumed their pre-crisis ways.

The bailouts should have come with accountability; and probably the government should have taken equity stakes and voting rights, wiped out the shareholders and given haircuts to bondholders. People saw the lack of consequences for individuals and also saw the lack of accountability on a criminal and civil enforcement level. That was incredibly corrosive to the system.

How does Wall Street’s compensation structure figure into all this?

There isn’t enough ability for regulators to claw back compensation. On Wall Street, it’s “I.B.G.-Y.B.G.”—“I’ll be gone; you’ll be gone.” They’re short-timers and don’t have loyalty to their institutions. They’re just trying to get what’s good for them. [People] blew up the global financial system; their firms got trillions of dollars in bailouts from the federal government — and yet no banker suffered significantly. They didn’t get wiped out; they didn’t lose their bonuses; they didn’t get clawed back. Nobody went to prison.

Nor did they incur much social cost.

Right. Even their reputations weren’t particularly damaged. Lloyd Blankfein [Goldman Sachs chairman-CEO] kept his job. Jamie Dimon [JPMorgan Chase chair-president-CEO] kept his job.

What’s the biggest implication of lack of punishment for such individuals?

Well, looking at that risk-reward scenario, why wouldn’t they do it again?

Seems like no matter what wrongs Goldman Sachs commits, it remains highly respected. Its nickname is “Government Sachs” because many former executives become regulators and presidential cabinet appointees. Gary Cohn segued right from being Goldman COO to chief economic advisor to Trump. Why weren’t top Goldman individuals punished for marketing CDOs in the mortgage deal that became known as the financial crisis’s “big short”?

The SEC was intimidated by Goldman. Fundamentally, they don’t think of Goldman executives as people who could commit securities fraud. When the SEC was about to bring charges [against the firm], a top regulator wrote in an email, “Remember, these people are good people who have made one mistake.”

How could they be sure of that?

This attitude permeates the regulatory structure: Democrats, Republicans, the DOJ, the SEC. Who’s to say the people are fundamentally “good” or that they’ve “made one mistake?” Maybe they knew what they were doing. Maybe they consciously were trying to rip people off. So what’s needed is a change in attitude.

You write about Warren Buffett’s being interviewed in the case in which Maurice Greenberg, ex-chair-CEO of American International Group, allegedly wanted to disguise a loan to look like an insurance product. You said that Buffett was given “Queen for a day” treatment.  Why was that?

They handled Warren Buffett with kid gloves. He’s sailed through his career getting kid gloves treatment. I don’t think there’s scandal with Buffett that should have been investigated; he seems like a pretty clean guy. But in this country, if you’re rich, you’re equated with being smart and often, sort of, honest. That shouldn’t be the default assumption.

This brings to mind Bernie Madoff. You say that JPMorgan Chase, his main banker for more than 20 years, was an enabler in his committing massive fraud even after spotting red flags in his account.

They said things about it internally to protect themselves financially, but they didn’t tell anybody else about it except halfheartedly warn the regulators. The DOJ investigated it quite substantially, and a subcommittee under Sen. Carl Levin found a lot that was troubling – that Madoff was doing something very, very bad that looked like a Ponzi scheme. But they couldn’t figure out how to bring individuals [of JPMorgan] to justice for it. [DOJ] came up with a fairly punitive settlement with the bank itself but didn’t name, shame or charge any individuals.

So JPMorgan saw what was happening but just let it go — and Madoff kept on doing it.

Yes. It was willful blindness. They looked the other way because they were making money [off him].

Two of Bear Stearns’ subprime mortgage funds that invested in CDOs failed during the financial crisis. There was a trial of two executives, but they were acquitted.  Because the DOJ lost that case, the department became more cautious, you write.

The Bear Stearns trial is an example of where they rushed to trail, didn’t fully investigate and got beaten. The effect is that they want to avoid complex trials in the white-collar arena. They’re afraid of juries because they’re unpredictable.

What’s the SEC’s attitude about trials?

The SEC is more afraid of trials than the DOJ, which is fairly afraid of them. There needs to be a reform effort to focus on individuals, hear evidence against them in court and get them to plead guilty. The sanctions have to be serious, like lifetime bans in the securities business.

What’s happened when those in the system have spoken out to try to change things, such as Judge Jed Rakoff, who served as senior judge of the Southern District of New York? After the financial crisis, he called the outcome of  proceedings against Merrill Lynch “half baked-justice…”

They’re heroes because they stood up to the bureaucracy, corporations and wrongdoers. But they’re really defeated. They win incremental battles, as did Judge Rakoff with the SEC. He changed a policy, but it was so minor and haphazard and enforced so infrequently, that it really was a minor victory.

Lawyer James Kidney, who was with the Securities and Exchange Commission, said in his retirement speech: “For the powerful, we are at most a toll booth in the bankster turnpike. We are a cost, not a serious expense.”

It’s really sad. Prosecutors need to figure out how to approach their jobs differently. They need to investigate things more aggressively, focus on individuals, take them to trial to serve as evidence of what these people did — and not be afraid of trials.

Any other solution to reform the Justice Department?

The DOJ is a stepping stone to a job as a partner with a big law firm defending corporations. It shouldn’t be a stepping stone. Prosecutors should recruit plaintiff lawyers, consumer advocates and academics. And they should recruit people from law schools all around the country, not just from the coastal elite schools.

Anything more along the lines of diversity?  

They should focus on age diversity by recruiting attorneys from big law firms who are, say, in their mid-50s and want to do some public service. They’d be very savvy, wise and experienced and might be really good prosecutors.

What you’ve written about Southern District of New York prosecutors reminded me of the TV series “Billions,” about a U.S. attorney in the District vs. a hedge fund king.  Seems as though some scripts borrow from reality.

They [do]. But TV is very exaggerated. As critical as I am of  prosecutors, I don’t think they act nearly as unethically as the prosecutors on [“Billions”], who cut corners to try to take down the powerful. So, in some ways, that show does a slight disservice to reality.  

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