Lords of Misrule

How the legal profession became Wall Street’s helpmeet

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In 1937, future Supreme Court Justice Robert Jackson gave a toast at the New York State Bar Association on the civic responsibilities of the legal profession. “No other people have submitted so generally to lawyer leadership,” he said. Yet, he argued, “There is no constitutional protection for our lawyer monopoly.” Jackson was referring, in a tone of populist outrage, to the new wave of big law firms that were then vehemently opposing Franklin Roosevelt’s New Deal and its crackdown on Wall Street in the wake of the 1929 crash. “We must rely solely on the record of a trust well fulfilled to perpetuate lawyer control.” Jackson was the last Supreme Court Justice not to graduate from law school, and he hated the corruption of the craft of lawyering via the growth of corporate law, centered then in the American Bar Association. Jackson believed that the professionalization of the law and the resulting priority of financial over ethical considerations among lawyers have been toxic for American democracy.

What Jackson described is the core intellectual and political problem that Pulitzer prize-winning ProPublica reporter Jesse Eisinger chronicles in his sprawling book, The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives. Eisinger’s thesis is simple and emphatic: “Today’s Department of Justice has lost the will and indeed the ability to go after the highest-ranking corporate wrongdoers.” This problem didn’t start during the financial crisis. Rampant criminal and market-cornering impunity is now simply part of the corporate landscape, with wrongdoing by pharmaceutical, technology, industrial, and retail goliaths chronically unpunished. America is a land of companies that are too big to jail. Eisinger tries to explain why.

The Chickenshit Club is a chronological account of recent key white-collar prosecutions, along with a record of the Justice Department’s internal deliberations about how to approach them. The narrative begins with a Bush-era success story—federal prosecutors’ effective work going after Enron’s giant corporate fraud and putting its ringleaders in jail—and then descends through a series of disastrous prosecutions, until readers witness, in gruesome detail, the near-total collapse of any will to bring anyone to justice after the financial crisis. Eisinger blows through the hype surrounding today’s legal celebrities—figures such as James Comey, Michael Chertoff, Eric Holder, Mary Jo White, Lanny Breuer, Preet Bharara, and Sally Yates. Instead of rehashing their high-profile tours in the media spotlight, Eisinger takes the full measure of their legal careers and what they actually did to form policy and bring cases.

Eisinger starts his account with a story that gives the book its title. In the early 2000s, James Comey was the U.S. Attorney in charge of the most important local branch of the Department of Justice, the Southern District of New York, whose jurisdiction covers Wall Street. This is the perch from which Rudy Giuliani launched his political career in the 1980s and took down insider-trading junk-bond king Michael Milken—and from which Obama Securities and Exchange Commission Chair White and “sheriff of Wall Street” Bharara rocketed to fame. It’s the most prestigious prosecutorial position in the country.

At Comey’s first meeting with the prosecutors on his team, he asked who among them had never lost a case. Many proudly raised their hands. “My friends and I have a name for you guys,” he said. “You are members of what we like to call the Chickenshit Club.” Comey was challenging them to be aggressive, to risk losing. It was an inspiring speech, and the experience of the Enron prosecutions, which Eisinger recounts in detail here, suggested that this was the ethos of the Justice Department. The DOJ was able to flip Enron executive Andy Fastow as a critical witness for the prosecution and convicted Ken Lay and Jeff Skilling in Enron’s home town of Houston.

But as it turned out, the Enron case was the high point of the DOJ’s righteous crusade against corporate crime. Not long after prosecutors began targeting Enron’s corporate leaders, Michael Chertoff, then the head of the criminal division at the Department of Justice, spearheaded a case against Arthur Andersen, one of the biggest accounting firms in the world. Andersen had helped Enron commit fraud, and the idea was that the secondary players in such a big fraud should be penalized as a deterrent. The prosecution ultimately drove Andersen out of business. At that point, the white-collar defense bar began an aggressive lobbying campaign to denounce the Andersen prosecution as the latest in a series of government actions that unfairly targeted big business.

As Eisinger notes, prosecuting powerful corporate actors has never been easy or common in America. The concept of white-collar crime dates from the 1930s, when the federal government launched a number of high-profile investigations into the stock market crash and corporate scandals that led to the Great Depression. These probes, including the renowned investigation conducted by Senate Banking Committee counsel Ferdinand Pecora, unveiled mass criminal behavior among Wall Street elites. Sociologist Edwin Sutherland referred back to this era to define the term, writing in his classic study White Collar Crime that such crimes “were committed by a person or respectability and high social status in the course of his occupation.”

The Enforcers

There never was a Golden Age in which G-men took down these high-status malefactors en masse, but Eisinger does suggest that there was at least a postwar “Silver Age.” He dates it to 1961 and the appointment of Robert Morgenthau to head the Southern District. Morgenthau made a point of launching aggressive prosecutions of financial crimes, which helped create a reputation for the office that lasted several decades.

Meanwhile, down in Washington, the figure who turned the SEC into a serious enforcement arm of financial law was Stanley Sporkin—a “superstar bureaucrat” whose personal sloppiness belied the sharpness of his mind. Known for his “Falstaffian” midsection, Eisinger writes, he would eat jello with fruit in it and talk intensely with his mouth full, sending pieces flying everywhere. Corporate lawyers got to know the incredibly ugly couch in his office where Sporkin would sit and listen, eyes half-closed, to their arguments, luring them into revealing something incriminating. “Wedged deep in the ugly couch’s cushions,” Eisinger writes, “Sporkin gave birth to securities law enforcement.”

Sporkin was a Republican turned independent, and he saw tough enforcement of securities law as a “conservative, capitalist” value. With supporters in both parties in the Senate, he was untouchable; yet he was hated by the corporate defense bar. He also unwittingly created a key tool that’s now routinely used to avoid enforcement: the consent decree. The commission signed a deal with an offending corporation that allowed the company to use its vast corps of lawyers, accountants, and resources to police itself. The thinking was that the SEC had “too many companies to oversee and too many securities law violations to chase.”

In 1972, Sporkin and the SEC extended the reasoning behind this set of arrangements to create the “no-admit, no-deny” settlement. Under its terms, a corporation would pledge to set up compliance programs to change its practices but would not be compelled to admit—or dispute—any wrongdoing.

Rampant criminal and market-cornering impunity is now simply part of the corporate landscape.

Sporkin saw these mechanisms as a negotiating and enforcement tool for an under-resourced agency, but his successors seem to believe—contrary to their original conception—that they should be the primary mode of punishment for corporate white-collar crime.

Sporkin was creative in how he enforced the law, going after corporations for failure to disclose foreign bribes, illegal campaign contributions, and eventually helping Democratic Senator William Proxmire of Wisconsin to pass the Foreign Corrupt Practices Act in 1977. His SEC went after big names like George Steinbrenner of the New York Yankees and Bert Lance, the scandal-plagued director of the Office of Management and Budget in the Carter administration.

Sporkin serves as the moral conscience of The Chickenshit Club. In the early 1980s he was pushed out of Reagan’s SEC. But he remains a legend of white-collar prosecution, still held in awe among the diminishing ranks of aspiring Wall Street cops. His is the path we never went down after the 2008 meltdown—a calamity produced by a series of banking abuses that cried out for their own Pecora commission. Sporkin’s legacy was, however, carried on by a fierce young prosecutor with whom he worked in the 1970s, Jed Rakoff. Rakoff’s first love is corny musical comedy, closely followed by the law. He was the head of the Southern District’s fraud unit, where he worked with Sporkin, often using the mail fraud statute. Rakoff also had something of a poetic sensibility, at least by the standards of the D.C. regulator. In one law review article, he wrote, “To federal prosecutors of white-collar crime, the mail fraud statute is our Stradivarius, our Colt .45, our Louisville Slugger, our Cuisinart—and our true love. We may flirt with RICO, show off with 10b-5, and call the conspiracy law ‘darling,’ but we always come home to the virtues of 18 USC § 1341.” In the Silver age, such joyful zest for the independent powers of the law was infectious.

The Chickenshit Decades

By the mid-2000s, though, Sporkin’s Silver Age faded into brass—and got smeared with generous helpings of chickenshit. One of the chief villains here is Mary Jo White, who headed the Southern District before Jim Comey and trained Preet Bharara. When she was appointed to run the SEC in 2013, President Obama said that “You don’t want to mess with Mary Jo.” Like much of the pseudo-populist rhetoric of the Obama age, it was fake tough-guy talk; Mary Jo White was in fact a softie at the SEC, pulling back on the already fading agency’s disclosure rules. Before she took the reins, she had represented some of the key villains in the financial crisis. This in itself is not a disqualification; what is scandalous is that she was caught discussing a proposal to procure a private-sector job for the SEC official who was in charge of investigating one of her clients, then Morgan Stanley CEO John Mack. Sure enough, the official got his job at her law firm, and Mack was never charged. Everything about White, from Obama’s phony get-tough bluster, to White’s delusional sense of her own upstanding moral character in the face of rancid corruption, to the destruction of Sporkin’s legacy, is sickening beyond belief.

As White’s sorry regulatory career shows, the corporate defense bar was a key force in reversing the prosecutorial legacy of figures like Sporkin and Rakoff. In charting this glum saga, Eisinger cycles through a lot of key details, like a 2003 memo that Republican prosecutor Larry Thompson wrote and established as department policy to make it more difficult for corporate executives to evade prosecution. And there’s a remarkable scene featuring President George W. Bush that shows just how much the political culture surrounding Wall Street prosecution had changed. In the early 2000s, Bush’s advisers were frustrated that a Republican Justice Department was prosecuting people they knew, like Enron’s Ken Lay, and cracking down on corporate misbehavior. Bush summoned Thompson and FBI Director Robert Mueller to a meeting in the Roosevelt Room. They laid out the evidence for the president of how Bush’s friends had “made up numbers and lied to the public.” Bush, stunned, said “Bobby and L.T., continue what you are doing.” I’m a Democrat, so it’s hard to acknowledge that Bush showed so much more integrity on corporate malfeasance than Obama did. But when faced with the Enron crisis, he was willing to see his friends prosecuted.

In the mid-2000s, the American Bar Association organized a campaign to stop what the corporate defense bar considered an unjust crusade targeting big corporations. The U.S. Chamber of Commerce, the Business Roundtable, the Association of Corporate Counsel, the National Association of Criminal Defense Lawyers, and even the ACLU joined up. Together with the reliable business reactionaries at the Wall Street Journal editorial page, they attacked the Thompson memo as an “odious” document that threatened nothing less than a “corporate death sentence.” Corporate defense attorneys and conservative judges increasingly came to regard the Andersen case as the height of prosecutorial overreach rather than an effort to bring a corrupt accounting firm to justice. White, then back in private practice, used her influence to lobby against allowing easier prosecution of corporations. When Thompson in turn left for private practice, lawyers would approach him as a fellow member of the great corporate-defense fraternity. They knew he was a good guy, they’d say, and that he couldn’t have meant to be so harsh on big-firm executives. Thompson, an African-American, found the self-pitying performance of these corporate mouthpieces an exercise in deep cynicism, given how our legal system treats African-Americans and Latinos involved in street crimes.

In a similar vein, Eisinger traces a revealing class division among prosecutors, with the working-class types far more interested in going after big cases than the Ivy-League trained, incurably self-regarding partners at big corporate-defense firms. A heroic figure here is Paul Pelletier, a lawyer who came up from one of the lesser districts—Miami—and sought to build an aggressive culture in the DOJ mothership known as “main Justice.” Pelletier sought to have his prosecutors indict, investigate, and go to trial. He helped popularize a mantra in his lower-profile division: “Indict and good things will happen.” Losing was part of the job; being status-conscious or otherwise chickenshit was not.

But when he came to D.C. and tried to target insurance behemoth AIG for engaging in dubious transactions with a bank called PNC, he hit a wall of bureaucratic resistance. His chief antagonists were the Federal Reserve and the Office of the Comptroller of the Currency—together with career bank regulators more interested in protecting the entities they regulated from prosecution than stopping misbehavior in the markets.

Pelletier survived the case, but others—like prosecutor Justin Weddle—didn’t. Weddle was put in charge of prosecuting thirteen executives of KPMG, an accounting firm that had set up fraudulent tax shelters. At this point, Comey, who had been elevated to deputy attorney general, intervened and weakened the case. Weddle not only lost, but the editorialists at the Wall Street Journal (yes, them again) publicly shamed him for what they argued was coercion. In 2007, a Clinton-appointed judge, Lewis A. Kaplan, threw out the case and wrote that the prosecutors’ conduct “shock[ed] the conscience” because they’d had the temerity to try to keep KPMG from paying for the executives’ legal fees. Weddle’s career was destroyed, and he could not get another legal job. A culture of protecting the higher-up political appointees became pervasive. In 2010, a lower-level prosecutor was blamed for a botched prosecution of a high-profile Republican senator, Ted Stevens. Supervisors escaped scrutiny, and one of the lower-level prosecutors committed suicide. “The message was clear,” wrote Eisinger: losing a high-profile, politically sensitive case might “destroy your career and drive you to suicide.”

Laissez Faire Mal

Seeing the ethos of federal enforcement collapse under all these pressures, it’s hard not to be enraged at the entire legal profession, from self-satisfied judges like Kaplan to corporate defense attorneys like Mary Jo White who collect millions and construct an ethical system designed to help their friends steal from all of us. The second half of The Chickenshit Club is mostly devoted to exposing the slow political crisis that has taken root in our public life as a result of the fatally compromised ethical structure of the big-money legal industry. With the Bush administration appointment of Alberto Gonzales as U.S. attorney general, white-collar prosecutions essentially began falling apart. Warren Buffett is a subtle and constant presence in the book, having no idea what his companies were doing as they were being blamed for fraud. Pelletier prosecuted General Re, a Buffett company, and his prosecutors convicted four executives from the company. In 2011, judge Dennis Jacobs overturned the convictions, arguing once again that they were flagrant cases of prosecutorial overreach.

In this climate of resurgent corporate impunity, the Obama administration came to power. At first, the career prosecutors at the DOJ were overjoyed to see the end of the Bush administration and of the rampant incompetence and cronyism that plagued Gonzales’ DOJ. Eric Holder, a well-regarded former DOJ official, was greeted with jubilant shouts and claps by the people in the building. He had been at the Department. He was one of them.

But Holder was uninterested in white-collar crime and appointed Lanny Breuer, a micro-managing snob, to run the criminal division. Breuer and Holder were worse than useless; Breuer’s political cronies, nicknamed the “Breu Crew,” came from fancy law firms—and promptly went back to them after their tour in the Obama administration. They routinely meddled in the cases brought by career prosecutors, almost always undercutting them. Breuer refused to allow indictments of obvious crimes, as when HSBC was caught laundering money for drug cartels. After the financial crisis shattered the financial system, everyone expected criminal prosecutions for those responsible. But Breuer and Holder de-emphasized financial crimes, and Preet Bharara, who was until early this year in charge of the Southern District, played up penny-ante insider-trading cases that had nothing to do with the crisis. Breuer and Bharara were interested mostly in publicity, and Breuer especially feared losing cases and looking bad. The SEC was run by longtime industry-friendly regulator Mary Schapiro and then Mary Jo White, with former Deutsche Bank official Robert Khuzami as the head of enforcement. Khuzami engaged in borderline unethical behavior in refusing to recuse himself from at least one case in which he had been involved in private practice.

Breuer, Holder, and the SEC devoted no resources to investigating the financial crisis. The only significant investigation of the Lehman Brothers failure was the so-called Valukas report—an investigation conducted by a private law firm on behalf of Lehman’s creditors.

There never was a Golden Age in which G-men took down high-status malefactors en masse.

The Valukas report found fraud surrounding the company’s statements on liquidity and exposed a scheme by which the firm concealed its metastasizing debt obligations in overleveraged repurchasing deals. The firm’s investigators found that most of the people they talked to during their investigation hadn’t been interviewed by prosecutors. Breuer and Holder simply weren’t interested.

Aggressive attorneys like Pelletier were pushed out. Eisinger devotes a chapter to the fate of SEC trial attorney James Kidney, who sought to go after Goldman Sachs and hedge fund manager John Paulson for defrauding investors during the mortgage crisis. Paulson had made $15 billion by betting against the mortgage market. But Kidney couldn’t get Reid Muoio, the SEC official in charge of investigations, to do any real investigating or even interview most of the key people involved. Muoio was afraid that Wall Street would laugh at him for criticizing their business practices. He even wrote, in an internal deliberation, that “most of our civil defendants are good people who have done one bad thing.” It is a sickening moment, and it should make even liberal defenders of government want to burn down the SEC.

Muoio and Khuzami ultimately got Kidney to resign from the case. Khuzami, in an unbelievably disgusting email announcing his decision not to bring charges against anyone but a young trader, wrote that in “his heart of hearts,” he simply didn’t believe the evidence was there for a case against higher-ups. I was working in Congress at the time, and when this was going on, a key short-seller who was featured in The Big Short emailed me to say this case was the heart of the crisis. Khuzami’s decision not to go after the villains left Kidney relegated to a supporting role, and he resigned from the case. By this time, Rakoff, after having served in private practice as a defense attorney, had become a judge. And he refused to go along with the settlements that the SEC was reaching with large banks like Citigroup and Bank of America, taking the unprecedented step for a judge of refusing to sanction a settlement between the SEC and a corporation. Higher courts overruled him, and he began speaking out about the corruption of justice. He ends as a sort of folk hero in Eisinger’s narrative. But in the wider world of high-stakes legal prosecutions of white-collar crime, Rakoff’s ideas have been soundly defeated.

Eisinger completes his demoralizing study by discussing the many spheres in which corporate actors commit crimes with impunity, showing how the courts have narrowed and destroyed the legal tools the DOJ formerly used in bringing cases. This has happened not only in finance but across the economy. Major corporate criminal offenders such as BP, Volkswagen, Walmart, and the pharmaceutical industry occupy a rarefied plateau of our legal system, where the rapid recourse to consent degrees and no-admission plea agreements makes it difficult for prosecutors to bring cases to trial, and few want to try. Lanny Breuer and Eric Holder now make millions at the corporate law megafirm Covington and Burling, while whistleblowers and aggressive prosecutors continue to have their lives and careers destroyed.

Fools’ Names, Fools’ Faces

It’s a maddening story. The big villains here are people like White, Breuer, Bharara, and Holder—snobs who operate in the culture of big law firms and organize injustice using the social pressure of corporate colleagues. Such figures are always far more interested in publicity than in taking risks. They lobby judges, academics, and enforcement officials, and they live in a parallel universe where big business executives are put upon by an out-of-control Justice Department hell-bent on zealous over-prosecution—a universe that, needless to say, bears zero resemblance to the one in which the rest of us are condemned to live.

For all the gruesome abuses that Eisinger catalogues in his exhaustive chronicle, the one unlikely shortcoming of The Chickenshit Club is that he stops short of calling the bad actors here by their true names. He argues, for instance, that Lanny Breuer brought “professionalism and caution,” which proved to be skills ill-suited to the task of prosecuting criminals during the financial crisis. This is a puzzling assertion, since Eisinger documents routine unprofessional behavior by Breuer, such as meddling in cases and basing legal decisions on his own image rather than on questions of merit. Eisinger also observes that although the Obama Justice Department didn’t try all that hard to step up prosecution of white-collar crime cases, the White House was somehow hamstrung by an increasingly conservative judiciary.

Yet while courts can narrow laws, they can’t write them. And if Obama administration officials felt that there were problems with the law, they could have asked for changes from a Congress that Democrats controlled from 2009-2011. They didn’t, of course. Instead they threatened prosecutors like Neil Barofsky, who noted in his book Bailout that the Obama administration had someone offer him (first) a bribe and then a threat to get him to stop challenging the White House’s financial policies. Obama set up a fake financial crimes task force as a way to put a foreclosure fraud settlement to bed, and the Department of Justice was explicitly called out by its Inspector General for claiming, falsely, that its “top priority is mortgage fraud.”

It’s abundantly clear that the decision to refrain from prosecuting important actors in the corporate world was Obama White House policy.

The administration also didn’t listen to whistleblowers and buried key incriminating evidence against large banks. Jeff Connaughton, a former Democratic Senate aide, noted in his book The Payoff the rumor that Rahm Emanuel (then White House chief of staff) asked Christine Varney, the DOJ head of antitrust, to throttle back on antitrust activity. And when Obama did offer a public excoriation of AIG for paying out lavish executive bonuses with the firm’s federal bailout funds, he made a sarcastic joke to the reporters on hand that plainly showed he didn’t feel all that indignant.

It’s abundantly clear, in other words, that the decision to refrain from prosecuting important actors in the corporate world was Obama White House policy, and this policy was part of an overall ideological shift away from allegiance to democracy itself, to rule by the people. What the administration did was so profoundly cynical that in 2016, when Wells Fargo was shown to have opened millions of fraudulent accounts, Loretta Lynch brought no charges—and Rich Cordray, the vaunted Consumer Financial Protection Bureau chief, instituted no penalties against Wells Fargo executives. Indeed, Cordray—someone who, like White, you could mess with at will if you possessed the right C-suite title—wouldn’t even say whether he recommended criminal penalties. And the real scandal in all this was that no one even noticed: that’s how inured Democrats have grown to swallowing the lies of a leadership caste that has no professional or material interest in pursuing anything resembling justice.

The Chickenshit Club does place a lot of the blame where it justly belongs, squarely in the culture of the big Ivy-encrusted law firms themselves. They are what Robert Jackson feared: a professional trust that employs its skills and social position to undermine democracy. Toward the end of his speech on the problems with corporate lawyers, Justice Jackson described his fear of what happens when the ends of government become remote from the wishes of the people due to the meddling of the bar and its assertions of fake complexity. “When free government becomes too perplexing and futile,” he said, “the people turn to dictatorship. It is the simplest form of government.”

We are lucky that Donald Trump isn’t skilled or disciplined enough to run a true autocracy. But unless we can address the crisis of lawlessness that Comey, Mueller, Breuer, Holder, Obama, White, Bharara, Yates, and the rest of the failed Department of Justice have normalized in the heart of our political economy, we may not be so lucky next time.

Matt Stoller is a fellow at the Open Markets Program at New America.

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