This article appears in the Summer 2015 issue of The American Prospect magazine. Subscribe here.
By Rena Steinzor
192 pp. Cambridge University Press $32.99
By Brandon L. Garrett
290 pp. Belknap Press $29.95
In these partisan times, here’s an assertion that cuts across party lines: The United States faces a problem of “overcriminalization,” an explosion of statutes that give the government extraordinary powers to make felons of us all.
In 2013, the House Judiciary Committee formed a special task force to address this problem, with Democrats and Republicans signing on. The right-leaning Heritage Foundation has made it one of its signature issues. The Supreme Court has referred to it.
But while Democrats and progressives mainly have in mind the excesses of mass incarceration, the right more often has a different concern: that business is drowning in regulatory rules that transform everyday business decisions into transgressions. Further, the argument goes, these transgressions are being punished with greater fervor than ever before. Last year, I attended a securities law conference where the chairman of Paul, Weiss—one of the most respected white-collar defense law firms in the country—decried regulators and prosecutors competing to outdo each other with the most “draconian” punishments conceivable.
There is something wrong here. While it’s true that the United States is throwing many people in prison—disproportionately African American males for nonviolent offenses—corporate criminals are getting away with their crimes. There may be plenty of laws on the books, but they aren’t being put to effect for the one percent. Almost everyone knows that no top executive from a major financial firm went to prison in the wake of the 2008 financial crisis. But it goes beyond that. No officials at the highest levels from BP were convicted in the wake of the Deepwater Horizon disaster. In June, a jury acquitted a BP executive for lying about the spill.
Two new books explore what is happening with white-collar justice in America, how we got here, and what might be done about it. Instead of prosecuting top individuals and indicting corporations, the Department of Justice has perfected the art of settling with corporations. It is this development that Brandon L. Garrett, a University of Virginia law professor, explores in his new book, Too Big To Jail: How Prosecutors Compromise with Corporations.
Prosecutors don’t call them settlements. Instead, they are known either as a “deferred prosecution agreement” (DPA) or its poor cousin, the “non--prosecution agreement” (NPA). Instead of being indicted, these companies reach an agreement, offering payment of a fine and some pledges to behave better. Big companies, especially, enter into these settlements. Since 2001, more than 250 federal prosecutions have involved large corporations. These include some of the biggest names in corporate America, among them AIG, Google, JPMorgan, and Pfizer.
In her book Why Not Jail?: Industrial Catastrophes, Corporate Malfeasance, and Government Inaction, Rena Steinzor, a law professor at University of Maryland, goes further. She lays out a case for using existing laws to criminally prosecute top corporate officers—or to push for statutes that would expand prosecutors’ powers.
Garrett’s is the more scholarly of the two. A civil rights specialist, Garrett noticed prosecutors had become preoccupied with changing the cultures of corporations, often at the expense of punishing them. How did prosecutors become interested in changing institutions? Is this their role? And are they successful, even on their own terms?
His book is the first systematic accounting of how many corporate prosecutions and settlements there have been in the last decade and how they work, powered by a proprietary data project that is available online. Thankfully, given the data-heavy nature of his work, Garrett writes lucidly and with passion. His account is devastating.
Ever since a 1909 Supreme Court ruling, New York Central & Hudson River Railroad Co. v. United States, prosecutors have had the power to prosecute a corporation if a single employee is found guilty of committing a crime in the course of his or her job duties. What this means in practice has evolved.
Prosecutors have long been caught between two competing notions. The first is that they should focus on going after individuals, rather than institutions. Human beings commit crimes, after all, not corporations. Corporations are merely a legal concept, and have “no body to kick, no soul to damn,” a paraphrase of the famous quote from Edward, First Baron Thurlow. And you can’t throw a concept in jail.
On the other hand, corporations can become rotten. The culture can corrupt otherwise law-abiding employees. So it may not be enough to simply go after individuals, but to focus on the institution as a whole. Still, laws are broken by executives, not fictitious persons.
Garrett finds this Justice Department push is not working well. “Prosecutions should hold individuals and corporations accountable for serious crimes. Far too often, both are let off the hook,” he writes.
He convincingly demonstrates that the Justice Department is scared to indict the biggest companies in America. One major reason for this is the Arthur Andersen case. The Justice Department of the George W. Bush administration indicted Andersen, then one of the top accounting firms, in 2002 for destroying documents relating to its audit of the books of Enron, the notorious energy fraud. Andersen, plainly, had been an enabler of Enron’s deceptions. A jury found Andersen guilty of obstruction of justice and it went out of business, throwing tens of thousands of people out of work. A unanimous Supreme Court threw out the conviction a few years later on the grounds that the jury instructions were faulty.
Prosecutors have since been so concerned with the “collateral consequences” of putting companies out of business that they have largely avoided even trying in the years since. And there’s a second problem. In 2013, then–Attorney General Eric Holder told Congress that he was concerned some financial firms had become so large that it makes it “difficult for us to prosecute them.” This tacit admission of Justice Department policy and inequity was met with universal outrage. Holder quickly rowed his comments back. But the problem persists. Andersen had to die so that other giant corporations could continue living, even when committing the baldest and most egregious crimes.
Instead of trying to indict and convict companies or the individuals responsible for criminal corporate wrongdoing, prosecutors fine the companies. Fines for corporate misbehavior are skyrocketing, but usually these are paid by shareholders and have little effect on corporate executives. Garrett contends that these penalties are often too lenient. Nearly half of the agreements Garrett studied didn’t have a criminal fine at all.
While prosecutors had reached the occasional deferred prosecution in the past with corporations, in the wake of Arthur Andersen they started turning to them in force. Nothing about such agreements precludes prosecutions of individual executives, but the reality is that prosecutors don’t follow through with many such investigations. Usually with a DPA, no one goes to prison. Garrett’s data show that in two-thirds of cases involving deferred or non-prosecutions of public corporations between 2001 and 2012, the company was punished but no employees were prosecuted.
Of the 31 publicly listed firms that were convicted in that same time period, Garrett crunched the numbers on individuals at those companies’ top echelons who went to prison. Here goes (I hope you are sitting down): four CEOs, one chairman, one president, and one CFO.
I have termed this the rise of corporate impunity. The reasons for this development are debated. Perhaps there were fewer crimes by top executives, though it strains credulity that there were none in the run-up to the financial crisis. After the accounting scandals of the early 2000s, boards of directors for corporations in crisis ordered up sweeping internal investigations. There were fewer such internal investigations after the financial crisis.Prosecutors often turn to such probes to build cases against individuals.
And in addition to the Arthur Andersen case, there were other debacles. During the case against the accounting firm KPMG, prosecutors overreached, pushing the company to cut off the legal fees for indicted executives. A judge harshly slapped the government down and threw out most of the indictments. After that, prosecutors were less able to press companies to turn over evidence that might implicate their executives. The financial crisis stands in lamentable contrast with previous eras. After the accounting scandals of the late 1990s and early 2000s, top executives from Enron, WorldCom, Tyco, and Adelphia all went to prison. After the savings-and-loan scandals of the late 1980s, 1,100 people were prosecuted, including top executives at many of the largest failed banks.
Instead of trying to put away executives, prosecutors have turned to efforts to reform business cultures. Many of the Justice Department agreements make the corporation promise to stay straight. Garrett finds these are largely not enforced—and little attempt is made to do so.
The Department of Justice isn’t set up to monitor compliance, but it can appoint someone to oversee the agreement. A quarter of DPAs and NPAs called for a corporate monitor. Garrett rightly asks, Why not the other three-quarters? But corporate monitors are no panacea. Prosecutors sometimes hire their buddies—former prosecutors—to do the monitoring, opening them up to charges of cronyism.
Little of the work the monitors do is made public. Sometimes these agreements are even kept secret, though the reasons for secrecy aren’t clear. As Garrett points out, the deterrent effect is lost when such a punishment is kept from the public eye.
Moreover, the Justice Department is quick to move on. The average time of probation for these corporate agreements is just over two years. This isn’t enough time to change something as entrenched as a rotten culture. If the company is merged into another or somehow has a successor or assignee of its assets, as is often the case, the prosecution disappears.
And what rotten cultures there are. “Over 50 percent of the most serious fraud and larceny culprits were recidivists,” Garrett writes, a rate “about the same as robbery and firearms offenders and far higher than drug traffickers.” The list is shocking. There’s BP, which before the Deepwater Horizon accident had the Texas City refinery disaster. ExxonMobil has been convicted four times since 2001 of environmental crimes. Pfizer, the pharmaceutical behemoth, has scored a pu-pu platter of non-prosecutions. Pfizer and subsidiaries have had two convictions, two deferred prosecution agreements, and a non-prosecution agreement. What’s a company gotta do around here to face some actual consequences?
Oddly, Garrett rejects some intuitively obvious explanations for this problem. He says “there is no evidence corporations have ‘captured’ or influenced prosecutions.” But his book has laid out clearly and definitively how corporations have influenced their own punishments and how inadequate they are. If that’s not capture, what is it?
He also dismisses revolving-door concerns, making a common argument echoed by every prosecutor in the land: Prosecutors have incentives to show how tough they are so they can get those plum white-collar defense jobs. Here, again, Garrett’s own book cuts against this conclusion. If these settlements aren’t tough and lack transparency, if we also don’t have basic information on which cases prosecutors never take up in the first place, then how do we know how tough they are really? Yet prosecutors are managing to score those lavishly salaried white-collar jobs anyway.
Since the book was published, some things have shifted ever so slightly. Prosecutors, responding to criticism from Garrett, the media, lawmakers, and activists, have moved to make companies admit wrongdoing and plead guilty. Monitors seem more frequently assigned; the practice is now almost de rigueur. But this is really a semantic change. Prosecutors have bent over backwards to make sure the regulatory consequences to any guilty plea are minimized. So the guilty pleas really only have symbolic, semantic value.
Garrett ends with a series of recommendations that would go further. Corporations should be convicted more often and there should be fewer of these DPAs. Judges should oversee these agreements. There should be “carefully audited compliance and structural reforms.” Fines should be “more serious.” And there should be greater transparency and public information about corporate prosecutions.
That’s all well and good, but what about throwing bad corporate executives in prison? Garrett’s book doesn’t address what can be done to solve that problem.
This, however, is the issue Steinzor takes up in Why Not Jail? Yes, throw the bums in prison. But how? Steinzor has an activist and political background. She has just stepped down as president of the Center for Progressive Reform, which describes itself as a think tank of academics who write on public health and worker and consumer safety issues. The CPR serves as the main scholarly research group pushing for stronger regulation. Steinzor also worked on Capitol Hill.
Her book is a series of case studies, many familiar from press coverage, attached to an argument that prosecutors should be less timid about bringing criminal charges, especially when it comes to public health and environmental and workplace safety.
Steinzor begins by arguing that federal regulators are no longer up to the task of overseeing their industries. Companies and the right decry the proliferation of rules and how bureaucracy stifles free enterprise, but it’s hard to discern these effects in what has come to be called the reality-based world.
For one, regulatory resources have been curtailed. Food and Drug Administration inspectors were only able to visit 6 percent of domestic food producers and 0.4 percent of foreign ones in 2011. The FDA estimates that to do what it views as necessary to protect the country’s food supply, it would need a quadrupling of its $1 billion food safety budget. Steinzor points out the shocking statistic that neither the Environmental Protection Agency nor the Occupational Safety and Health Administration have had a significant budget increase since the mid-1980s, measured in constant dollars. This is not because their duties have lessened.
She contends, convincingly, that regulators have been hampered by political harassment and legal assaults by corporations. OSHA did not produce a single new rule during the first four years of the Obama administration.
Her answer is for prosecutors to fill the gap, to police the worst offenders. She calls for “an unprecedented expansion of the criminal law to cover the conduct that results from institutional failure when it becomes acute enough to cause death, injury, and severe environmental degradation.” In one of her greater understatements, Steinzor terms this a “heavy lift.”
Steinzor would like prosecutors to charge corporate officers with crimes when their products hurt people or their facilities hurt their workers. The problem is that it’s difficult to make the law cooperate. To establish guilt beyond a reasonable doubt, the standard for a criminal charge, a prosecutor has to prove mens rea, meaning they must show a “guilty mind.” That can take a variety of forms, but generally it means showing that the executive both knew about the crime and that it was, in fact, criminal. Often, it’s no easy task to tie a mine collapse that killed workers to the CEO, even if the CEO is a reckless greed-head who has relished thumbing his nose at safety regulations for years.
A good portion of Steinzor’s book is taken up with a description of various statutes that aggressive and imaginative prosecutors could use to criminally charge executives. She argues that prosecutors could turn to various forms of negligence and recklessness.
But sometimes prosecutors have been aggressive in charging white-collar malefactors. U.S. Attorneys made creative use of a 1989 statute, the Financial Institutions Reform, Recovery, and Enforcement Act, both in the savings-and-loan prosecutions of the early 1990s and in the mortgage fraud charges against banks in the wake of the 2008 financial crisis. Those were civil charges, not criminal, and therefore came with a lower burden of proof.
In other areas, creativity and aggressiveness have burned federal prosecutors. Prosecutors transferred a charge generally used against corrupt public officials, charging Jeffrey Skilling, the head of Enron, with having deprived his shareholders of his “honest services.” The Supreme Court overturned that portion of the sentence, forcing the Department of Justice to drop other prosecutions of corporate officers that were using that charge. Most recently, the Second Circuit Court of Appeals rejected one of the Manhattan U.S. attorney’s aggressive insider-trading cases. The result is that the law surrounding insider trading has been thrown into chaos. One likely result is that it will become significantly harder to charge people with insider trading in the future.
Steinzor acknowledges all of this by arguing that legislatures will have to expand prosecutorial powers and give them new or expanded statutes. Is it really likely that Congress will grant new prosecutorial powers if they already resist giving regulators more authority and resources?
So thanks to these two books, we have solutions to the lack of serious enforcement of corporate crime: We need higher fines of corporations, more indictments, and stronger post-settlement enforcement and monitoring. We’ll need more aggressive and imaginative prosecutors who have been granted more tools and powers. This is all supposed to happen amid a huge backlash against recent prosecutorial efforts, with corporations and conservatives decrying even the modest law enforcement the government has accomplished in recent years.
Oh, and then, perhaps through magic incantations, the courts will have to become less friendly to corporations and their highly paid, brilliant lawyers. OK, then! Problem solved. On to the Middle East and global warming.
All of this is, indeed, a heavy lift. It has to start with a shift in public consciousness. For that, we can thank these two authors.