Here's Why White-Collar Criminals Often Go Free

Jesse Eisinger's The Chickenshit Club on crime and no punishment.

Illustration: Cynthia Kittler

I don’t know quite how to characterize The Chickenshit Club (Simon & Schuster), by Jesse Eisinger. It’s an absorbing financial history, a monumental work of journalism, a not entirely ­persuasive polemic. It’s a first-rate study of the federal bureaucracy. It’s also an expansive parable: of righteousness and compromise, overreach and underreach, excess, deceit, greed—the whole American show. It’s fun to read but a real downer to think about.

The book offers an edifying tour of a century of white-collar crime—what Al Capone called “the legitimate rackets.” A recurrent theme is that the government is terrible at prosecuting it and always has been. “There has never been a golden age of white-collar prosecutions,” Eisinger writes. “The rich and powerful have always been rich and powerful.”

There are various plausible explanations for this. Edwin Sutherland, the sociologist who coined the phrase “white-­collar crime,” argued in 1940 that such criminals “are oriented ­basically to legitimate and respectable careers,” and their social class molds the law’s administration “to its own interests.” One result is that white-collar malefactors are often just on the right side of the law, however outrageous their behavior. “The inventive geniuses for many kinds of white-collar crime are generally lawyers,” Sutherland wrote. This is a central tension of Eisinger’s account, which is primarily concerned with why so few people went to jail after the financial crisis. The federal bureaucracy—chiefly the U.S. Securities and Exchange Commission and the U.S. Department of Justice—are perpetually outgunned: Laws are ambiguous, proving crimes is hard, defense attorneys are skillful, the criminal mind is endlessly inventive.

On occasion, though, ambitious and charismatic bureaucrats have tilted this cat-and-mouse game in favor of the government, in what Eisinger calls “silver ages” of prosecution. He profiles several of these crusaders—Robert Morgenthau, the former U.S. attorney and New York County district attorney; Stanley Sporkin of the SEC; Judge Jed Rakoff—who pioneer new interpretations of law, think of novel ways to rein in corporate wrongdoing, and wrangle other bureaucrats to their ends.

The dissolution of Enron Corp. in 2001 provided an apoth­eosis of sorts. The DOJ went all-out. It indicted Arthur Andersen LLP. It assembled a federal task force—with some 40 FBI agents and 10 prosecutors—to go after top executives and the accountants and bankers who enabled them. Hoping to get erstwhile Chief Financial Officer Andrew Fastow to flip on his former colleagues, prosecutors indicted his wife. More than two dozen people were eventually prosecuted in connection with the scandal. Ken Lay, the former chairman, died of a heart attack before he could appeal. Andersen’s conviction hastened its demise.

It was, from a certain perspective, a golden age. And then, the backlash. The Supreme Court unanimously overturned the Andersen verdict in 2005. Crucial Enron convictions were likewise reversed. After other blunders and a blitz of corporate and media pressure, the DOJ revised its policies on convicting companies. Courts across the country became skeptical of prosecutorial power, as did many in Congress. In the years that followed, Eisinger says, the DOJ grew systematically cowardly, fearful of bringing tough cases and all too willing to settle with companies for cash and quasi-­contrition. He delineates several reasons for this—the book is a stunning work of research—but his main argument is that by the time the financial crisis hit, the department lacked the guts and wherewithal to go after executives.

In his famous study of bureaucracies, political scientist James Wilson wrote that “agencies, much more than business firms, are likely to have general, vague, or inconsistent goals about which clarity and agreement can only occasionally be maintained. Often any effort to clarify them will result either in the production of meaningless verbiage or the exposure of deep disagreements.” The DOJ, post-crisis, became a font of both. Objectives clashed, political rancor intensified, and energy dissipated.

The results, by Eisinger’s reckoning, were devastating: “One by one, the financial crisis criminal investigations fell to the decisions not to take the risk: Countrywide, Washington Mutual, CDO wrongdoing, mortgage-backed securities transgressions, Lehman Brothers, Citigroup, AIG, valuation games, Bank of America, Merrill Lynch, Morgan Stanley. There were no indictments.”

The very breadth of that litany ought to give one pause. Eisinger quotes an email from an SEC official named Reid Muoio to his troops, referring to the crisis: “I suggest that we keep in mind that the vast majority of the losses suffered had nothing to do with fraud and the like, and are more fairly attributable to lesser human failings of greed, arrogance, and stupidity.”

Eisinger doesn’t much like this sentiment. He argues that prosecutors should stop being chickenshits and start putting more bankers in the pen. But the environment he describes seems to call for something like the opposite: The courts, the legislature, and even the SEC and DOJ—under successive ­presidencies—have lately concluded that prosecutors have often been too harsh in this regard. Both political parties have belatedly realized that the criminal justice system puts far too many people away for far too long for nonviolent offenses. This doesn’t sound like a social consensus to offer up more people to the whims of a jury for putative financial crimes. In a weird way, it sounds like something very close to progress.

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