After years of coddling corporate criminals, is Barack Obama’s Justice Department, under the leadership of new Attorney General Loretta Lynch, now serious about prosecuting corrupt individual bankers, executives and traders?
Will the disreputable practice of imposing big fines, which end up being paid by shareholders, be replaced by criminal charges against those who abused their positions?
The White House certainly wanted to create that impression last week when it gave a scoop to The New York Times, headlined “Justice Department sets sights on Wall Street executives,” based on a new memo by Deputy Attorney General Sally Yates.
The Times story was much more nuanced than the headline, but many other news organizations ran with the simplistic version, as so often happens. And hardly any reports noted, as my column did a few weeks ago, that federal prosecution of white-collar crime is at a 20-year low.
Sadly, don’t expect much to change, despite the alleged new policy. But don’t miss the real story here either: Bluster and magical thinking is supplanting the hard work of governing in America. Creating the appearance of tough law enforcement is the goal here, not justice.
An admission of failure
There’s nothing much new in Yates’ seven-page memo on “individual accountability for corporate wrongdoing.”
It mostly restated a long-standing policy that withered under previous Attorney General Eric Holder, a corporate lawyer at Covington & Burling both before and after his six years as America’s chief law enforcement officer.
To his credit, Holder did a superb job on civil rights and abuses of power by local law enforcement. But he was a complete failure on high level white-collar crime.
Under Holder, the DOJ eschewed individual indictments in favor of deferred prosecution agreements. This had the consequence of protecting potentially guilty individuals while transferring the costs of wrongdoing onto shareholders. Holder even misled the public for 10 months when he mentioned bringing criminal charges in more than 500 major bank fraud cases. Most were nonexistent, and the rest were mostly peanuts, and Holder knew it, an inspector general report showed.
Finding people on the inside who knew just how a few got very rich stuffing their pockets — and saved the documentation — wasn’t as difficult as Holder and Obama claimed. Journalist Martin Smith of PBS’ “Frontline” found many of them, even without subpoena power.
The single most important word in the Yates memo is “any,” and it is in her first point: “For a company to receive any consideration for cooperation” that would reduce penalties, it “must completely disclose to the department all relevant facts about individual misconduct.”
The new policy is a “tacit admission by the Justice Department that its experiment in refusing to prosecute senior bankers in the fraud epidemics that caused our economic crisis failed,” said William K. Black, who as a banking regulator was responsible for more than 3,000 felony convictions and 800 prison sentences in the savings and loan scandal of the 1980s and ’90s.
Dishonest dealings tend to drive honest dealings out of the market.
The Justice Department knows what it takes to deter corporate crimes. In a 2009 speech that its lawyer Belinda A. Barnett gave in Australia, she quoted a corporate executive as saying that when prosecutors are “only talking about money, the company can, at the end of the day, take care of me … but once you begin talking about taking away my liberty, there is nothing that the company can do for me.”
In short, the risk of prison deters. Fines do not.
A lack of resources
Failing to deter corporate crime harms honest businesses. As Nobel laureate economist George Akerlof (who is married to Federal Reserve Board Chairwoman Janet Yellen) wrote in 1970:
Dishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.
This is especially true of accounting frauds. When the long-distance telephone company WorldCom reported skyrocketing profits even though it was slashing long distance calling rates in the late 1990s, the head of AT&T asked his staff how the competition achieved this. The internal report to AT&T’s C. Michael Armstrong concluded there was only one explanation: accounting fraud. In 2005 WorldCom CEO Bernie Ebbers was convicted of overseeing a vast fraud that caused serious damage to honest competitors.
As welcome as the “new” DOJ policy is, without tougher laws and more money for law enforcement, convicting individual corporate criminals can never truly become what Yates called “a top priority.”
Corrupt business people know — and their lawyers know — that the Justice Department doesn’t have the resources to go after much crime in corporate suites. The calculus for the criminally inclined CEO is easy: The risk of detection is small, the resources of the company to complicate any investigation are huge, and the Justice Department is too strapped for staff and cash to prosecute fully.
While the basic elements of proving many corporate crimes are simple — faked documents, transfers of money and financial documents by wire or mail and insiders willing to testify about how they tried to stop wrongdoing — actually making a case is costly and difficult.
Yates acknowledged this in her memo, citing “many substantial challenges unique to pursuing individuals for corporate misdeeds,” including “determining the culpability of high-level executives, who may be insulated from the day-to-day activity in which the misconduct occurs.” She noted that companies may bury evidence, requiring “a painstaking review of corporate documents, which can number in the millions, and which may be difficult to collect due to legal restrictions.”
Reining in corporate crime would help the economy, consumers, investors, taxpayers and especially, as Akerlof taught, honest businesses. It would produce benefits many times the cost of prosecutions, including deterring many crimes.
Congress could tighten the rules on corporate conduct, making it easier to establish responsibility for actions as well as inactions. This is a prime example of where increasing government spending would be smart, though in addition, it needs to engage in rigorous, serious and factual oversight.
We know how to deter corporate crimes. The problem is how to motivate Congress to give the Justice Department the tools and the marching orders to go after individual corporate criminals. Under our current campaign finance laws, the incentive is not to pursue but to look the other way.
When Lynch or Yates start making speeches about how budget constraints help white-collar criminals, costing society far more than any savings to taxpayers, I’ll buy into the notion that the revived policy is more than simply PR.