What Should We Do About White Collar Crime?

I was talking with someone about Aunt Becky from Full House going to jail for the college scandal, and this person told me that she doesn’t believe people should go to jail for white collar crime. People who commit fraud, embezzlement, forgery, or bribery should just be issued fines that are large enough to deter their behavior. She said that sending them to jail was a waste of space and resources.

This person is hardly alone in her beliefs. On not prosecuting the individuals who caused the financial crisis, Obama’s Secretary of the Treasury Timothy Geithner said, “We don’t want to do Old Testament justice.”

Geithner, like this person I was speaking to, clearly didn’t think of white-collar crime as equivalent with crime like robbery. But these are not victimless crimes. They can wipe out a family’s life savings. They can obliterate the national economy. They can cost investors millions of dollars.

What I have to keep reminding myself is that people who do these things know that what they’re doing is wrong. It’s not one big misunderstanding. People who racketeer know they’re extorting people. People who commit fraud know they’re deceiving people.

Still, I can understand the temptation to categorize it differently. It’s easy to look at someone who went to the same schools as you and your peers who speaks nice and has a high post at a big company and think, what they did couldn’t have been that bad. They seem reasonable. In the first millisecond that I think of them sitting in jail with rapists and robbers, I accidentally feel sympathy. But that’s when my judgment steps in. I understand that my background coming from a white-collar family is likely where my sympathy comes from. Within the crooks, I see people who I know. People who have been good to me.

Senior judge on the bench of the Southern District of New York Jed S. Rakoff put it this way: “I found that a person feared prison, and they feared it mightily. They would have paid any amount of money, done anything to avoid going to prison. So prison does have a major deterrent effect.”

But the college scandal was actually pretty unique. Separate from it, we already do not prosecute or imprison wealthy corporate executives anymore when they commit crimes. In the aftermath of the financial crisis of 2008, we prosecuted no top bankers from any institution. (We prosecuted one mid-level banker from Credit Suisse). Nobody from Bear Stearns, Washington Mutual, Merrill Lynch, Lehman Brothers, Countrywide, Citigroup—no one. For the financial crisis. Not a soul.

There was a time when we would have prosecuted them.

The 1929 market crash exposed a bunch of activities that were not technically criminal, and we had to invent a category of criminality for them. So we established the Securities and Exchange Commission and passed acts in 1933, 1934, and 1940 designed to codify what white collar crime was. Then, in the savings and loan crisis in the late 1980s, we prosecuted over 1,000 individual executives and got over 800 convictions. At the same time, we had the junk bond boom and bust, and we prosecuted who might have been the most powerful person on Wall Street at the time, Michael Milken. The DOJ also arrested a Wall Street trader around the same time. Then, in the wake of the accounting fraud pandemic of the late 1990s early 2000s, the government prosecuted almost all of the top executives involved: at Enron, WorldCom, Global Crossing, Delphia, and Tyco, not to mention at the accounting firm that cooked the books, Arthur Anderson.

But then we entered a dark age from which we have yet to emerge.

There’s a reason for that. What replaced prosecuting executives for corporate crimes in the 2000s? Settlements. They’re most commonly called Deferred Prosecution Agreements (DPAs). In DPAs, corporations who commit wrongdoing essentially get to investigate themselves. They go like this: instead of prosecution, the corporate law firms that represent the companies that committed crimes compile a series of facts and hand it over to the DOJ. The DOJ gets this series of facts, but very little access to the raw materials. The DOJ associate then goes to the client and says, ‘We’d like to interview the following people. If you say no, and the prosecutors ask us if we were impeded in any request that we made, we’ll have to say yes.’ But all they do is interview them. Then these DOJ associates produce a report for prosecutors.

Some prosecutors claim that the DPAs are merely starting points—but if you look at the DPAs, you find that they almost always say that the companies pledged full cooperation and they don’t lead to any follow-up prosecutions of individuals.

In the first decade of their existence, in the 1990s, the DOJ did 18 DPAs. In the next decade, from 2001 to 2010, they did over 420. What’s with the shift? Well, in the wake of the successful early 2000s prosecutions of firms like Enron and Arthur Anderson and WorldCom, there was a politically charged backlash by big corporations and the defense attorneys, who argued that the prosecutors had been aggressive cowboys. That they had gone too far. They launched a PR campaign where they shifted the focus from the people who had committed the crimes to the innocent people who were losing their jobs. That worked. They changed the conversation. The DOJ effectively took prosecuting a large corporation off the table after this. There were a few other things at play: after 9/11, the FBI shifted a lot of resources around and moved away from investigating white collar crimes. There were some losses at the DOJ: the Brooklyn US Attorney’s Office tried to prosecute some Bear Sterns executives and lost, which had a negative effect on things. But the PR campaign was key.

“When we’re talking about inequality in American society, we often talk about wealth or income inequality. But I think the greatest perquisite of being wealthy in America today is impunity to commit crimes.”

That quote comes from ProPublica journalist Jesse Eisinger, who wrote The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives. The title of the book is based on something James Comey said to federal prosecutors while he was head of the FBI. He rounded up prosecutors from the Southern District of New York, which is the place responsible for prosecuting crimes on Wall Street. It’s a place where only the cream of the crop works. The men and women who work for the Southern District in lower Manhattan have attended the best schools, have outperformed their peers, and have basically taken all the right steps for all of their lives. Comey asked, “How many of you have never lost a trial?” A gaggle of prosecutors raised their hands with pride. “Me and my friends have a name for you,” he said. “You’re the Chickenshit Club.” The hands slumped down.

Comey’s point was that prosecutors are supposed to take risks. They’re supposed to go after the bad guys even when the cards are stacked against them. But because of their backgrounds, many of the prosecutors at the Southern District are pleasers. And pleasers make lousy prosecutors.

Another reason DPAs are flawed is that the Southern District prosecutors are climbing the career ladder—and the turnover rate from the DOJ to corporate defense firms is huge. They see the corporate defense lawyers sitting across the table from them during DPA proceedings as future bosses or partners. They want to be seen as brilliant, fair, deft negotiators who are ultimately reasonable. Not as cowboys. Eisinger describes the prosecutors in DPA proceedings as “studiously incurious about culpability at the top.” They’re interviewing for a job.

We know about excessive punishment and mass incarceration, which happens especially to the poor and people of color. This is the other side of that coin. Wealthy, well-represented individuals who commit crimes and get protected by the DOJ.

In this era of fining companies rather than prosecuting executives, what we’re finding is that the companies often end up being recidivists—despite the fact that the size of corporate penalties that companies pay has grown almost every year since 2001. The U.S. Sentencing Commission found that more than half of the people who committed serious fraud offenses in the last few years were recidivists. The fines simply aren’t working.

Where do we go from here? For starts, we could push Congress to fund a serious corporate crimes unit. We could advocate for resources spent on low-level drug and immigration cases to be diverted to prosecuting white collar crime. And we could insist that more of these cases be brought as real criminal cases.

If you’re like me and you come from a background where you have known a number of high-ranking white-collar professionals, the change might start by intentionally reminding yourself and those around you that white collar crime is crime. And when you commit a crime, you’re supposed to go to jail.

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