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.
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.