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The observation deck at JPMorgan Chase Towers in Houston. While many financial institutions have been sued, few executives have been prosecuted or convicted for corporate crimes. / Sarath Kuchi
Too Big to Jail
Brandon L. Garrett
Harvard University Press, $29.95 (cloth)
Random House, $27 (cloth)
Observing the U.S. criminal justice system in general, glaring disparities are impossible to ignore: between rich and poor, white and nonwhite, immigrant and native. Another disparity involves the ordinary and extraordinary. On the one hand, prosecutors pursue ordinary criminals, often black or Latino and charged with drug-related offenses, with such zeal that that the prison population has swelled to well over two million. On the other hand, extraordinary criminals, such as the white-collar frauds who cost taxpayers substantial money and contributed to the Great Recession, are untouchable.
The question is why. Why are prosecutors so hell-bent on tracking down and jailing individuals who possess drugs or enter the country without documentation yet seemingly helpless in the face of large-scale corporate crime? Is it because the justice system lacks the tools to prosecute corporate crime, or are resources less a factor than corruption? Is the justice system held in thrall by the banks it should be keeping in check while exercising systematic bias against the poor and minorities?
Two recent books provide their own responses. Both The Divide by Matt Taibbi and Too Big to Jail by Brandon Garrett focus on the seemingly unfathomable difference between the way the justice system treats the little guys and the big guys. Both agree that if criminal prosecutions are to mean something, bodies must be put in prison. But which bodies? When a company behaves criminally, who does the time? It is a fundamental question of fairness, not easily answered.
• • •
In Too Big to Jail, Garrett, a legal scholar who has written a previous book examining DNA exonerations, takes a data-driven approach to the criminal prosecutions of large corporations. By examining the outcomes of prosecutions—and instances in which warranted prosecutions never occur—he shows that current laws aren’t adequate to prosecute corporate offenders. Prosecutors don’t use the tools at their disposal in a way that effectively dispenses justice and deters future corporate crime.
Some of Garrett’s findings are contrary to the popular notion that corporations aren’t punished. In fact, his analysis shows that corporate fines have grown dramatically since 2008. But, he says, there is still a problem. It turns out that corporate fraud—the crime that resulted in the 2008 recession—is the least prosecuted of all crimes. Among the major fines levied between 2002 and 2012, the period Garrett studied, the bulk was for regulatory (pharmaceutical, environmental, etc.) and antitrust crimes. And, perhaps more to the point, in two-thirds of cases when corporations were prosecuted or entered into agreements with the Justice Department, no individuals were prosecuted.
Information on corporate prosecutions is exceptionally hard to come by. Most corporations, and almost all banks, enter into either deferred prosecutions (where prosecution is threatened if conditions are not met) or non-prosecution agreements (where no prosecution is brought). While deferred prosecutions are filed with the court, a non-prosecution agreement never sees a judge and may never be known to the public. To learn the details of these agreements, Garrett and his research team filed Freedom of Information Act requests, but only one agreement out of more than 250 was turned over in its entirety as of the book’s publication date. He was told the others are missing. If such agreements are intended as punishment, then they can’t be very effective. With no paperwork or publicity, there is nothing to deter future wrongdoers or hold corporations accountable to their customers.
One of Garrett’s conclusions, therefore, is that corporate settlements need to be more transparent. He believes there is some sound logic behind the notion that banks may be “too big to jail” or, at least, too big to be put out of business, but he argues that if the goal is to rehabilitate, there must be greater supervision to ensure that reforms are actually accomplished. Many non-prosecution and deferred prosecution agreements require companies to establish improved procedures for detecting and quashing wrongdoing before it becomes endemic, but, as Garrett points out, this is largely impossible to enforce if no judge or neutral arbitrator can ensure that the terms have teeth.
Though Garrett supports rehabilitation, he doesn’t think fines and oversight are adequate criminal penalties. Individuals must be punished with jail time in order to prevent wrongdoing. But, apart from a handful of high-profile bosses such as Bernard Madoff and former Tyco CEO Dennis Kozlowski, few top executives are prosecuted. Often it is not the people who make the greatest profits who end up in prison. As a lawyer who worked on white-collar criminal defense cases, I saw the fallout of these prosecutions. Prison tends to be reserved not for the architects of fraud, but for the laborers—the small cogs in a corporate machine, trying their best just to get through the workday.
Corporate fraud is the least prosecuted of all crimes.
One reason why executives usually get off while their underlings suffer is that corporate defendants frequently conduct their own internal investigations, which may implicate individual employees who testify to their company’s lawyers without realizing that their words could be turned over to law-enforcement as part of a settlement. These employees have no real legal recourse should prosecutors get their hands on testimony. Those prosecutors are then free to go after whomever the corporation has decided to finger.
Though Garrett notes several structural impediments to the prosecution and punishment of white-collar crime, he doesn’t argue that relative leniency toward corporate wrongdoers reflects bias in their favor. But Taibbi does. America, he writes in The Divide, seems to “hate the poor” and love the rich. Well known as the former Rolling Stone investigative journalist who called Goldman Sachs a “giant vampire squid wrapped around the face of humanity,” Taibbi revels in the juicy details—the “that’s fucked up” moments—which amount to staggering injustices in criminal justice and policing.
Taibbi’s Exhibit A is Abacus Federal Savings Bank, a family-owned bank that operated out of Chinatown in Manhattan. Abacus was successfully prosecuted by the New York District Attorney’s office for processing fraudulent mortgages, which were later sold to Fannie Mae. The problem: the bank didn’t make that much money off the practice, and the default rate was far below the national average. Here, Taibbi persuasively argues that prosecutors’ efforts were misplaced. A group of Chinese bank workers was hauled into court chain-gang style to create the illusion of catching someone committing banking fraud, even though the individuals caught didn’t measure up in terms of culpability.
Faced with the failure of prosecutors to convict high-level executives, Taibbi implicates collusion between Wall Street and the government. Much of this collusion, Taibbi thinks, aims to advance the interests of a small, interrelated group of people who’ve often worked at the same law firms. He makes an example of HSBC, which laundered billions of dollars on behalf of Mexican drug lords. Taibbi blames prosecutors for the fact that no one was put in prison despite the obvious crime and convincingly alleges conflicts of interest between the government and the bank. Garrett also discusses this case, pointing out that HSBC paid $1.92 billion in fines and laid off all of its top executives as part of a deferred prosecution agreement. But no one was sent to prison, a grave error according to Taibbi, though he doesn’t suggest who should be first to go.
Much like Garrett, Taibbi finds that there are no accurate statistics on who commits corporate crime. This is a vast gulf between individual crimes and corporate ones. There are rigorous statistics on individuals who commit and suffer crimes: we know how many people are robbed, stabbed, assaulted, etc., thanks to the Bureau of Justice Statistics, the FBI, and local crime tracking programs modeled on New York City’s CompStat. In contrast, we don’t really know who is committing corporate crimes.
• • •
If all this seems grossly unfair, that’s because it is, but the justice system is not primarily concerned with fairness. More important is procedure, which is meant to be a means of preserving rights in a society where everyone is on equal footing, but which often fails to produce outcomes that strike us as just.
The criminal justice system, as the late legal scholar William Stuntz argues in The Collapse of American Criminal Justice, tends to protect procedural rights over substantive ones. In other words, the justice system often doesn’t seem just at all because judges make rulings based on what the law allows rather than what the dictates of fairness might be. Therefore, in the case of a wrongful conviction, for example, an individual may remain in prison (or be executed) even if there is substantive evidence suggesting innocence—as long as the process of adjudication was carried out properly.
So defendants who can take advantage of procedure do better in court. Large corporations that can afford attorneys may be able to evade prosecution altogether through procedural machinations. They have time, money, and legal armies on their side. Individuals do not—they are often assigned overworked and underpaid attorneys, and time means waiting in a jail cell. The bulk of criminal defendants plead out to lesser crimes, regardless of guilt or innocence, because they can get out of jail faster.
The reality of corporate prosecutions, of the “too big to jail” phenomenon, is that companies can never be prosecuted or punished as people are. They aren’t legally presumed to operate with the same level of individual autonomy. Hobby Lobby notwithstanding, corporations aren’t people and don’t have a moral compass. Individuals are easy to punish, thanks, perhaps, to America’s long-held myths of autonomous choice and self-determination. But when it comes to corporations, there may not be a single person to hold responsible. On some level this makes sense. Corporations may break the law as a result of a plurality of decisions that gradually lead to an illegal effect.
The justice system is more concerned with procedure than fairness.
If flawed corporate culture is to blame, then building an honest company must require more oversight and independent monitoring, on top of incentives against cheating. This is what we do now, to great extent. In order to avoid prosecution, companies are allowed to promise that they will establish better procedures to detect wrongdoing before it happens and will institute firm-wide training to attempt to change their internal culture. Garrett seems skeptical of such an approach, and Taibbi is righteously indignant at the notion. Goldman Sachs will always be evil no matter how many seminars it requires of its employees.
It will be difficult to correct this state of affairs as long as the criminal justice system assigns culpability largely on the basis of individual choices made within a vacuum. If the criminal law is designed to respond to actions clearly linked to actors, then simple, small-time crimes will be much easier to prosecute than complex corporate schemes. In other words, the system is indeed unfair, but the problem lies, as Garrett has it, in the laws and procedures themselves rather than in a vaguer sort of conspiracy that Taibbi would like to insinuate. This unfairness is particularly hard to remedy because most people are more concerned about threats to their life and personal property than they are about lost corporate millions. That is why “tough on crime” legislation is generally popular, while little is done to dissuade corporate executives from illegal profit making. Executives can rely on public fears and an individualist system to evade taking personal responsibility.
To say that the differential rate of prosecution and conviction derives from the system’s focus on causal links between individuals and crimes is not to absolve it of racism, whether that racism is intentional or the byproduct of legislation pushed by money and lobbying power and passed by legislators who need not feel accountable to minorities disenfranchised through voting laws no longer unconstitutional. In a system where voter and donor affluence correlates strongly with representatives’ legislative priorities, it is worth noting that the CEOs of top investment banks are all white, and only 4 percent of CEOs in the Fortune 500 are minorities. Meanwhile, the population of prisons is more than 60 percent minority, and one in three black men will serve time in prison, during which time they are effectively disenfranchised. Even after release, many of them will be officially barred from voting—forever. The divide in justice outcomes follows the path of influence on the lawmaking process in large part because those influence peddlers rarely feel its downsides.
But as unsettling as this disparity is, and as much as it demands redress, the right course remains unclear so long as the law remains tethered to the notion that crime is mostly a function of individual decision making. In corporate cases, this individualist approach goes awry, as the example of David Duncan suggests. Duncan, Garrett relates, was the lead partner at Arthur Andersen responsible for its account with Enron and the only Arthur Andersen employee prosecuted for the Enron accounting fraud. Duncan confessed to the destruction of documents but protested his innocence of any criminal wrongdoing. It does seem odd that he alone would be blamed for a crime that nearly dissolved the multi-billion firm he worked for. He was trapped in the machine, too, a victim of circumstances that were largely outside his control, a victim of prosecutors who needed to make a case against somebody, a victim of a big corporation that needed someone to go to jail.
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