When's the last time you heard about an executive being prosecuted for corporate crime, instead of the nebulous company at large being levied a fine? It's probably been a while, because white-collar prosecution just doesn't happen like it used to.
In this episode of Industry Focus: Financials, host Dylan Lewis kicks off South by Southwest week by interviewing investigative reporter and author Jesse Eisinger, who wrote The Chickens*** Club: Why the Justice Department Fails to Prosecute Executives, about corporate crime and prosecution. Tune in to find out the surprising history behind today's lack of corporate justice, how a failure to prosecute individuals for corporate crimes creates recidivist companies, why a lack of accountability in upper-level management is bad for investors as well as consumers, why Eisinger refers to the Department of Justice as "The Chickens*** Club," and more.
A full transcript follows the video.
This video was recorded on March 12, 2018.
Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Monday, March 12th, and we're doing something a little different this week. I'm Friday host, Dylan Lewis. I'm at South by Southwest with some other Fools, attending sessions and meeting with folks to get great stuff for you, our listeners.
To kick things off for South by Southwest Week, we're going to air an interview with Jesse Eisinger. He's a senior reporter and editor at ProPublica, and the author of "The Chickens*** Club: Why the Justice Department Fails to Prosecute Executives." We talked about how the Justice Department handles white collar crime, the historical events that shaped that policy, and the lesson for investors in all of it, but we kick things off with Jesse explaining the curious title of his book, which we censored for the podcast.
Jesse Eisinger: It comes from a speech given by a guy named Jim Comey. Maybe rings a bell.
Lewis: Some people have heard of him.
Eisinger: Back in 2002, he became the U.S. Attorney in the Southern District of New York. The Southern District of New York is the most important office of the 94 offices of the Department of Justice around the country, including Washington D.C. The way you know that it's the most important is, you ask anybody who's come from there and they'll tell you. They're sort of the hot shots. He gives a speech to the criminal prosecutors there, and he says, "I want to know, how many of you guys have never lost a case?" A bunch of hands shoot up because they're so proud of their trial record and being undefeated. And he says, "Well, me and my buddies have a name for you guys. You're the Chickens*** Club." And everybody--
Lewis: There's a cringe, right?
Eisinger: Yeah. "What the hell is he talking about?" What he goes on to say is, "You're not about accumulating a winning record. Your job is to do justice. And justice requires ambitious cases." And what the argument of the book is is, the Justice Department writ large becomes the Chickens*** Club, that they do not know how to prosecute, and that we've lost the will and ability to prosecute top corporate executives from the biggest companies in America, and that this is a big problem for our justice system.
Lewis: And the stat that really frames all of that for me, and I think is the perfect lead-in to the book, where you use it, is The Wall Street Journal analysis of, I believe it's 146, maybe 156, cases, criminal and civil cases, involving the top 10 biggest banks of Wall Street. And they say it was 80-81%, there was no individual identified or charged. The remaining ones, save for one, they were all mid- and low-level employees.
Eisinger: Yeah. That's the jumping off point for the book. Most people know, there were no top bankers prosecuted in the wake of the financial crisis. The biggest financial crisis in generations, since the Great Depression, immiserating millions of people, people thrown out of their homes, they lost jobs, and the government said, "There were no crimes committed." Or, "There were no crimes committed by individuals, just these corporate entities, and they're going to write checks to make these things go away." There was only one guy, a slightly high-level CSFB, Credit Suisse First Boston, banker who was prosecuted criminally and went to prison for actions related to the financial crisis.
I was really outraged by this, and troubled and puzzled by it. I thought it was a complete mystery. I couldn't understand how this could be true, how this could be possible. Was is it really that there were no crimes committed? I believe there were crimes committed, and I think that they were not investigated properly and not prosecuted because of this drop in the will and ability.
But, it goes beyond the banks. It turns out, it was building before the financial crisis, and persists today, 10 years after. It doesn't just affect the banks, but it affects tops executives from industrial companies and tech companies, pharmaceutical companies, retailers. We do not know how to do this throughout large corporate America.
Lewis: And this isn't something that was always the case. You go back to the decades before the financial crisis, and as you lay out in the book, there are plenty of examples where this happened. Where does that failure come in?
Eisinger: This is something we used to know how to do, and it's not that hard to do, but we don't know how to do it anymore. It's never been a golden age. We've never really had perfect prosecution of very rich and powerful people. But, we have had waves where we've done it. The most recent one was in the wake of, right here in Texas, the Enron prosecutions, the wave of prosecutions in the wake of the late 1990s, early 2000s, pandemic of corporate fraud, accounting fraud. Enron, WorldCom, Adelphia, Global Crossing, Tyco, were prosecuted, almost all the top executives from almost all the big companies that were involved in those frauds.
And then there was a huge backlash. Then, there was a huge campaign to depict those prosecutions as excessive, that the prosecutors were cowboys, that they were criminalizing aggressive business tactics. That was led by the corporations themselves and led by the white-collar defense bar, and it was an incredibly effective campaign. And it was done on the political level, so it was below the radar. Efforts in Congress, and efforts to lobby the Department of Justice.
And then there were concerted efforts in the courts to roll back some of these prosecutions and give white collar defendants more rights. The courts have been extremely friendly to white collars defendants. Very punitive about street criminals. I think most of your listeners understand that there's a two-tier justice system in this country, that we excessively punish a certain class of people, disproportionately poor, disproportionately people of color, often for non-violent offenses. But, this is the flip side of that, which is that there is a class of wealthy and powerful people in this country who have impunity to commit crimes, and it's been given to them by the courts and been given to them by the white collar defense bar and by corporate lobbying, and acceded to by the Department of Justice, who have really rolled over.
Lewis: As a reader, that's one of the maddening things about reading the book. I'm following along the story of Enron, and DoJ's approach there. And you get to the point where they're examining Arthur Andersen very early on, and you think this is going to be a watershed moment, this is going to be a turning point in how these cases are handled. And in fact, the exact opposite happens. [laughs]
Eisinger: It is a turning point, it's just a turning point in the opposite direction. Exactly. What happens is, Arthur Andersen has to die so that other companies can live free without the threat of prosecution. Arthur Andersen is the handmaiden to Enron's accounting fraud. They prosecute the company and they succeed. But what happens is, there's an extraordinary PR victory, where they lobby on behalf of Andersen to depict it as this egregious case of prosecutorial excess, and that there were terrible collateral consequences from the Andersen prosecution because tens of thousands of workers were thrown out of work, innocent workers were thrown out of work.
And if there's one thing that I can do in my book, to succeed in my book, is to rehabilitate this prosecution and say, actually, this prosecution needed to happen, because Andersen was a corrupt entity that was abetting accounting fraud at multiple companies, and really deserved prosecution. And when the government tried to settle with them, they refused to admit any wrongdoing. They did not want the cop to having done anything wrong at all, even though they had done terrible things. So, the government had no choice but to prosecute them. But, the lesson that is learned from the Andersen case, from not just Republicans and not just defense bar attorneys, but from Democrats, people who Obama installs to head up the Justice Department, head up the SEC, the Securities and Exchange Commission, is that that was excessive, and you can't prosecute a large company anymore.
So, what happens is, over the last 16 years, we've taken off the table prosecuting a large company. Not through actually explicit policy, but effectively, we've done that. And they've turned away from prosecuting focusing on investigating and prosecuting individuals, especially the high-level individuals, at corporations. So, what's left is settlements with corporations, settlements where they write a check and make the charges go away. It's a broken regime. It just doesn't work.
Lewis: Yeah. There's this line in the book. I believe someone says, "These settlements are just a price of doing business."
Eisinger: Yeah, exactly. Actually, I ran into Michael Chertoff here at South by Southwest. He was the head of the Criminal Division under George W. Bush, under John Ashcroft. Somebody said that to him about the Arthur Andersen case. Chertoff said, "Why are you so worried about us, when we wanted to just have you admit wrongdoing, and you're not worried about the SEC and a fine from them?" And he says, "Well, that's just a cost of doing business."
That's what companies think of. They, in fact, think of it today. Even when JPMorgan or Goldman Sachs pay billions of dollars to settle for allegations that they did things wrong in the mortgage securities markets, which of course they did, and even when they sort of slightly admit it, they're just writing a check and the charges go away. They're happy to do that. They're paying with shareholder money, and often the stock goes up after that.
It's just a cost of doing business, and therefore it doesn't work. And what I mean by it doesn't work is, we see recidivist corporations. We see corporations paying fines or getting into trouble with regulators and then committing wrongdoing again and again and again. The list goes on and on. Pfizer, Wells Fargo, BP, Goldman Sachs, JPMorgan, you see these companies committing wrongdoing over and over again because they're recidivists, and we don't deter corporate crime with settlements.
Lewis: In your view, is the fix to have corporate crime be treated as a criminal offense and have people held accountable?
Eisinger: Yes. The fix is to focus on individuals, to do many fewer cases and focus on individual accountability. I think if you prosecute one CEO, that has the effect of 20, 25, 50 settlements with corporations for money. You can deter corporate crime, because CEOs have a big stake in society. They want to protect their reputations, they're wealthy, they have families, and they pay attention to the news. So, if one of their colleagues is getting prosecuted, they know about it. And you can send a message that way.
The first step is recognizing that they have a problem. The Department of Justice really needs to go to AA for corporate prosecutions and recognize they have a problem. And then they need to refocus on individual prosecutions and figure out how to do it. It's not easy. It's not an easy job. I don't envy corporate white-collar prosecutors. But, you know, they did sign up for this. I'm sorry that your job isn't easy, but that's what you need to do.
Lewis: Yeah. Your example here kind of reminds me of the approach that the music industry had when people were illegally downloading music, where it's like, if you make the example of one kid downloading a ton of stuff and really drag him through the mud, that's going to prevent a lot of people from doing that kind of stuff. It's that same type of press and notoriety that comes with all of that type of stuff, maybe discouraging people from doing it down the road.
Eisinger: Yeah. I mean, maybe that poor kid didn't deserve it, but I do think there are CEOs who do deserve this kind of focus.
Lewis: I imagine, in doing this type of reporting, there were probably a lot of people who weren't too thrilled that you were writing about this topic. Can you talk about some of the challenges in researching the topic and getting people to talk about it?
Eisinger: Sure. Well, lawyers like to talk, so this has not been the most difficult exercise in reporting that I've ever had. I'm an investigative reporter, so my job is basically getting people to talk about stuff either that they shouldn't talk about or that other people don't want them to talk about. I'm definitely not a popular guy at the Justice Department, and there are a lot of Obama officials who really don't like me. Preet Bharara, the U.S. Attorney of the Southern District, I think he's not a big fan of mine.
But I'm very lucky in that I am a reporter who is paid to not worry if I'm pissing people off. In fact, if you're an investigative reporter -- and, I'm modeling this behavior for Eric Holder and Lanny Breuer and Preet Bharara, I'm trying to hold them accountable, because I want people to hold individuals accountable. So, I do name names in the book. Fortunately, I'm lucky that it gets me invited to South by Southwest. There are a lot of corporate criminals also giving presentations at the same time that I'm giving my presentation, but it so far hasn't really hurt my career. We'll see.
Lewis: [laughs] So, you've written this book. For people that are interested in the topic, I think it's an amazing place to start.
Eisinger: It's a fascinating thing even for people who don't necessarily think they're interested in it. There's a lot of storytelling, characters.
Lewis: Yeah, I've been working my way through it and I love it.
Eisinger: Excellent, thank you.
Lewis: But, we have a lot of people who read company conference calls, go through company financials, and like doing their own research. If you're interested in learning more about what's going on in this space and really staying up-to-date, aside from reading your book, what would you recommend?
Eisinger: You mean, what kinds of prosecutions are going on now?
Eisinger: Obviously, you need to pay attention to what the SEC, the kinds of fines they're giving after, read that. And there are a lot of good reporters who report on the incremental developments, at Bloomberg and Reuters, for these kinds of things.
But there's very little that gets in-depth into these investigations that's not glorifying the prosecutors. Basically what happens is, the way this reporting works is, the defense bar leaks a lot of information about their clients. And obviously, that's to make the clients look good, and other people are targeted to look bad. Then, prosecutors orchestrate a lot of this stuff. So, when they do an arrest at 5 AM of some kind of hedge fund manager for inside trading, it just so happens that a Wall Street Journal reporter is going to be there right at the time. Amazing coincidence, that that reporter was walking down the street at that time. So, that's all orchestrated, and it makes the prosecutors look good, and then they get their stipple drawing on the front page of the Wall Street Journal, and then they get to parlay that into a nice partnership at a big law firm after their few years at the Department of Justice. That's unfortunately a corrupt system that the reporters are playing into, and we should be a lot more skeptical about these prosecutions and how valuable they are to society and what they're not looking at. So, we should get ahead of prosecutors, rather than taking their handouts.
Lewis: Looking out at everything that's out there that you could be working on, investigative reporting -- this book is done, I know it's something that you're very passionate about. What's the next thing for you? What's the next topic that you're really, really interested in?
Eisinger: There are a couple of things. One is, the press does a decent job in covering business banking and the tech stuff. There used to be terrible coverage of tech, which was all very adulatory and celebrating these guys as the most brilliant people since John D. Rockefeller.
Lewis: We might be partially guilty of that. [laughs]
Eisinger: The whole tech industry, tech media, is guilty of that. But they're waking up to this. People are waking up to Facebook's malign aspects, and the damage that comes to society from Facebook or Google, and concerns about corporate concentration. Look at Uber. Uber was running amok as a serial abuser of norms and regulations. I think the tech media is doing a better job of covering this now. Banking, certainly, the reporters are doing a better job since the financial crisis.
What's being totally forgotten is any kind of accountability of almost every other industry. That's a crisis that reporters need to rise to the occasion to cover what -- the coasts will derisively call some states the flyover states. The flyover industries -- retail and industrial companies, pharmaceutical companies, and the kinds of abuses there really need to be focused on. It's in the interest of investors. Shareholders need true information. This is not just liberal pie-in-the-sky thinking that we should expose wrongdoing for wrongdoing's sake. There's actually utility to it. In fact, in my book, you see Republicans, old law and order Republicans, really wanting to prosecute corporate criminals because that makes capitalism safer, and they really are offended by bad capitalists. Well, the media needs to focus on bad capitalists, because without that, the system is corroded.
Lewis: Bad capitalists compromise the trust that investors have in the system. Right?
Lewis: You can't safely put money into something that you're not sure is going to be there.
Eisinger: Yeah. So, without regulation, without enforcement, we're going to get an orgy of corporate crime, and that's going to end up being very bad for shareholders. And shareholders are extremely short-term oriented, so to the extent that they think about this now, they think maybe they'll benefit from a company that's really aggressive and cutting corners, and they're happy to look the other way if they're committing wrongdoing or crime. But, in fact, in the end, it's going to hurt them.
Lewis: To shoehorn a slight investing takeaway here, because I think that's something our listeners might be interested in, the recidivism element of things was what I really took away from reading the book. The idea that it's really hard to change culture when it's been instilled in a business. It's cutting corners or making numbers, and that's priority No. 1. You talk about how there's some other businesses, a lot of industries that need to be put on watch for this right now. Is there anyone that you're watching that's particularly interesting for you? Or any coverage that people should be looking out for over the next couple months?
Eisinger: I've actually been focused on regulatory rollback in the Trump Administration now for the last year or so, so I haven't been looking at businesses as much. But what I would say is, you look at a stock market that is pretty healthily priced, and you look at corporate profits that are at a high, this is kind of an economy and market that's priced for everything going right. The expansion is long in the tooth. The bull market is long in the tooth. At these points, this is when people get slightly desperate and start to cut corners. And investors don't care about this until they care.
So, if you're a smart investor, you have to be cognizant of this stuff, and look for the hallmarks of fraud. And pay attention. Short-sellers are few and far between because they've been crushed for so many years, and negative research into companies doesn't pay, so the researchers are few and far between, too. So, there's less good information out there. That's going to hurt investors at some point. You can never know when. But it's going to hurt them.
Lewis: I have one last question for you. This is a writing question. It's something that comes up in the book and I have to put it to you. You have two people in the book having this fierce debate about the split infinitive. What is your opinion on the split infinitive?
Eisinger: You definitely should split infinitives whenever you can. Anything that doesn't sound good to your ears should be eliminated, irrespective of whether it's supposedly good grammar or not.
Lewis: [laughs] That's awesome. That's some great economic advice, some great financial advice, and some great writing advice. Jesse Eisinger, thank you so much for joining me.
Eisinger: Thanks for having me.
Lewis: I appreciate it.
Listeners, I hope you enjoyed that chat. If you want to keep up-to-date with Jesse Eisinger's coverage, you can follow him on Twitter @EisingerJ. There's plenty more awesome South by Southwest coverage coming your way this week on Industry Focus, Market Foolery, and Motley Fool Money. Expect updates on healthcare, e-sports, media, smart home, and autonomous driving, just to name a few. As a reminder, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear on the show. Thanks to Dan Boyd for handling all the production on today's episode, and Fool on!