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Book Review: ‘Too Big to Jail: How Prosecutors Compromise With Corporations’

During the past few years, a plethora of headlines have proclaimed one “record fine” after another against the major banks at the heart of the 2008 financial crisis. After each settlement, Attorney General Eric Holder took a victory lap to show that, in America at least, no corporate misdeed would go unpunished.

But each of those compromises — from Citigroup’s $7 billion to JPM Chase’s $13 billion to Bank of America’s $16.65 billion settlements — left the public feeling increasingly shafted, not victorious. The question became not only whether certain offenders are too big to fail, but also whether they are too big, too complex, too powerful, and too expensively “lawyered up” to jail.

In Too Big to Jail, University of Virginia law professor Brandon L. Garrett explores this question with the sharp mind and attention to detail that exemplify his profession’s most positive attributes. Examining the intricacies of key federal cases and corporate bargains since the turn of the 21st century, Garrett considers Enron enabler and now nearly defunct accounting firm Arthur Andersen, international bribery convict Siemens, tax-shelter manufacturer KPMG, recidivist environmental and safety offender BP, drug-money-laundering colluder HSBC, tax-evader strategists Credit Suisse and BNP, and the Big Six U.S. banks at the heart of the recent financial crisis. Garrett paints a picture more disturbing than mere skepticism about the kid-gloves treatment these corporate villains have received. He portrays a justice system more likely to overlook a mega-billion-dollar crime (in return for tepid promises of reform) than a minor drug offense by a teenager.

Garrett characterizes corporate settlements as a game played between Goliath-sized corporations and David-sized prosecutors. The results aren’t Biblical. Rather, they are all-too-modern victories for the Goliaths. Fines are light when companies must pay them at all. When required as part of a settlement, even modest reforms are mostly ineffective or impossible to measure. Corporations can’t go to jail for their crimes, but lately, neither do their CEOs, who use techniques like the “ostrich” to bury their heads in the proverbial sand and are thus “blinded” to the misconduct of their employees. Notable exceptions to the successful ostrich defense include WorldCom’s former CEO Bernie Ebbers, who chose a trial over a settlement; Enron CEO Ken Lay and CFO Jeff Skilling; and Tyco’s Dennis Kozlowski. All of these men were convicted and sentenced in the early 2000s, though Lay died before serving prison time.

Garrett’s comprehensive and evidence-driven analysis probes widely held assumptions that federal prosecutors methodically coddle corporations and their executives with agreements that are not major deterrents against future crime. Often, he writes, they settle with these corporations because it’s better than nothing. However, to him, if there’s enough evidence to bring the cases to begin with, harsher penalties should be the result. In the past decade, as the number of cases against publicly traded companies has mounted, prosecutors have gone from extracting adequate punishment — recall the savings-and-loan crisis, when hundreds went to jail — to reforming companies as part of sweetheart deals. In the wake of this shift, Garrett questions whether prosecutors should or even can reform corporations, and how, given the rampant lack of corporate transparency, this effort could be practically tested. He concludes that if future settlements include reforms, they should be monitored much more effectively.

Another way prosecutors are increasingly letting companies slide is through deferred prosecution deals. If a company reforms itself by firing the relevant employees or implementing enhanced reporting or compliance mechanisms, it can soften its punishment or avoid a criminal conviction entirely. Another escape mechanism is the non-prosecution agreement, which is as slippery as it sounds. As Garrett says, such agreements “are far too important to avoid judicial review entirely.” Companies can also settle for fines, but even when they include restitution to victims, as in the case of the $1.7 billion JPM Chase forfeiture payment in the settlement surrounding Bernie Madoff’s Ponzi scheme, restitution doesn’t begin to equal the magnitude of the victims’ losses.

Garrett holds a soft spot for prosecutors and opts to address the larger issue of systemic weaknesses. His solutions include requiring prosecutors to pursue convictions except where collateral damage — for example, to innocent employees and shareholders — would be too severe. He would require judges to supervise deferred prosecution agreements, as too often they are not a part of the scrutinizing equation, though this may burden already overworked judges who may be unfamiliar with complex derivatives or pipeline safety measures. He suggests more detailed structural reforms when they are warranted; too often, settlements require none, or ill-conceived ones. He wants fines high enough to serve as deterrents, and harsher sentencing guidelines for repeat corporate offenders. Lastly, he believes the public and shareholders should know more about corporate crime. Prosecution agreements, detailed accountings of how fines are calculated, and progress reports describing compliance should be publicly available.

Garrett considers federal regulators as also contributing to the systemic problems and related recidivism arising from weak penalties. In July 2010, for instance, the SEC settled with Goldman Sachs on a $550 million fine for fraud charges related to one of its collateralized debt obligations. It also required Goldman Sachs to “reform its business practices” without eliciting any admission of wrongdoing. Six months later, Goldman completed an internal review of its policies and found only limited changes were necessary. The announcement preceded a series of lawsuits and settlements with five different regulators and a state attorney general. The charges included breaking securities laws, defrauding pension fund investors, and foreclosure abuses. Those settlements cost Goldman Sachs more than $4 billion, a fraction of the firm’s assets.

Garrett concludes that the problem of inadequate settlements usually comes down to size and might. The firms that receive the lightest federal treatment have grown so big — often because regulators approve their mergers — that holding them accountable for their crimes opens significant issues of collateral damage. And according to the federal government, because Wall Street banks are perceived to be so economically or systemically important to the country — a mantra propagated by Wall Street and accepted by the Washington elite — it is therefore risky to prosecute these firms too fervently.

This fear-steeped narrative is a critical piece of the legal compromise puzzle. How could the Department of Justice punish the very firms the government is subsidizing and protecting? This bias routinely benefits corporations at the expense of their victims. The CEOs go on to bigger bonuses or golden parachutes while the firms rack up new violations with impunity.

Garrett’s masterful book is as important as it is timely. Though he occasionally delves into legal history and jargon, he does so to deliver a more complete picture of indulgent settlements. Part of the rationale for weak settlements stems from various interpretations of the definitions of corporations and their constitutional rights, which he explains in detail. He balances this exposition with the specific elements of recent settlements, which usually leave the biggest corporations strong enough to commit new crimes. In the case of Siemens, the sole company that comes off as “reformed,” Garrett also discusses the positive role that corporate monitors can play to ensure compliance, though they often receive multi-million-dollar contracts in the process.

Garrett’s tone remains level throughout the book, as he lets the substantial facts and his legal analysis speak for themselves. As a result, his proposals for reform — stricter prosecution agreements, stronger and ongoing judicial review of compliance requirements, and greater corporate transparency — come off as evenhanded and eminently logical. Readers are left to experience their own emotions (mine tended toward anger) at the overly collaborative settlement process and whether there’s any hope for its redemption. I remain skeptical, especially after reading Garrett’s book.

We must be grateful to Garrett for compiling the most extensive database of corporate settlement information available today — the federal government’s own compilation is but a subset of Garrett’s — and for shining a light not only on the manner in which corporations skirt the law, but also on what must be done to curb them. Too Big to Jail is a cogent, exhaustively researched plea for saner and more equitable legal oversight. Garrett ends by noting that corporate crimes can overwhelm the limited resources of the justice system, but also that corporate prosecutions are themselves too big to fail.

Nomi Prins is the author of All the Presidents’ Bankers: The Hidden Alliances that Drive American Power. Her other books include It Takes a Pillage: An Epic Tale of Power, Deceit, and Untold Trillions (2009) and Other People’s Money: The Corporate Mugging of America (2004). She was a managing director at Goldman Sachs, a senior managing director at Bear Stearns, a strategist at Lehman Brothers, and an analyst at the Chase Manhattan Bank. She is currently a senior fellow at Demos, the public policy think tank.

Too Big To Punish

A few months ago, in a press conference about the felony conviction of Credit Suisse, Attorney General Eric Holder said, “This case shows that no financial institution, no matter its size or global reach, is above the law.”

Yet, earlier this month, the Obama administration announced its proposal to waive some of the possible sanctions against Credit Suisse. The little-noticed waiver, which was outlined in the Federal Register, comes amid criticism that the Obama administration has gone too easy on major financial institutions that break the law.

In its announcement outlining the waiver, the Department of Labor notes that Credit Suisse “operated an illegal cross-border banking business that knowingly and willfully aided and assisted thousands of U.S. clients in opening and maintaining undeclared accounts” and in “using sham entities” to hide money.

Under existing Department of Labor rules, the conviction could prevent Credit Suisse from being designated a Qualified Professional Asset Manager. That designation exempts firms from other federal laws, giving them the special status required to do business with many pension funds. The Obama administration’s is proposing to waive those anti-criminal sanctions against Credit Suisse, thereby allowing Credit Suisse to get the QPAM designation needed to continue its pension business.

The waiver proposal follows a larger pattern. In June, Bloomberg News reported that federal prosecutors have successfully pushed U.S. government agencies to allow Credit Suisse to avoid many regulatory sanctions that could have accompanied its criminal conviction.

“The New York Fed said last month that the bank can continue handling government securities as a so-called primary dealer,” reported the news service. “The SEC let the firm continue as an investment advisor while the agency considers a permanent waiver.”

Pensions and Investments magazine has reported that despite Department of Labor assurances of tough enforcement of its sanctions against convicted financial firms, the agency has “granted waivers for all 23 firms seeking individual waivers since 1997.”

Critics say that by using such maneuvers, the Obama administration is effectively cementing a “too big to punish” doctrine. That criticism intensified in 2012 and 2013, when top Justice Department officials defended the administration’s reluctance to prosecute banks by publicly declaring that the government considers the potential economic impact of such prosecutions. Those declarations echoed an earlier memo by Holder, which stated that officials could take into account “collateral consequences” when deciding whether to prosecute major corporations.

Why is the Obama administration reducing sanctions on Credit Suisse? The administration says it is a decision based on pragmatism, not favoritism.

The Federal Register announcement, for instance, notes that Credit Suisse has assets of nearly $1 trillion, and argues that if the anti-criminal provisions were enforced, the bank would lose its ability to offer investment products to pension funds. The announcement also argues that the Credit Suisse entities that specifically conduct pension business “are independent of” and “not influenced by Credit Suisse AG’s management and business activities.”

What the administration did not mention, of course, is that according to data compiled by the Sunlight Foundation, employees of Credit Suisse have given President Obama’s campaigns more than $376,000. That’s particularly relevant in light of an April study of SEC data from London Business School professor Maria M. Correia. That analysis showed that “politically connected firms are on average less likely to be involved in … enforcement action and face lower penalties if they are prosecuted.”

Whatever the reason for the proposed waiver, one thing is for sure: The move contradicts the claim that “no financial institution, no matter its size or global reach, is above the law.” Indeed, the Obama administration’s waiver proposal suggests exactly the opposite.

David Sirota is a senior writer at the International Business Times and the best-selling author of the books Hostile Takeover, The Uprising, and Back to Our Future. Email him at ds@davidsirota.com, follow him on Twitter @davidsirota or visit his website at www.davidsirota.com.

AFP Photo/Fabrice Coffrini

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Justice For All…Except Those Too Big For Jail

Fair warning: This book will make you angry.

The Divide: American Injustice in the Age of the Wealth Gap, by Matt Taibbi, is a volume of stories. Like the Vietnamese refugee and rape victim in San Diego who applied for public assistance, only to be visited by a “welfare inspector” who barged into her home and began yelling that he would take her children away if he found she was lying about being destitute and not having a man. All this as he’s rummaging through her belongings. Finally, he holds up a pair of sexy panties on the tip of a pencil, demanding with a triumphant smirk to know why she needs these if she has no boyfriend.

Then there’s Patrick Jewell, rolling a (tobacco) cigarette and smoking it outside a New York City subway station, only to be thrown against a wall by some guy who yelled “What the (expletive) do you think you’re doing here?” and when he tried to escape, having his head slammed against the concrete by a gang of men in black jackets. Jewell thought he was being robbed or kidnapped, but it turned out his assailants were cops: He was thrown into a van and charged with smoking marijuana and resisting arrest.

But it is not simply these stories that will make you angry. No, what will really spike your blood pressure is when Taibbi juxtaposes them with other stories: tales of the bankers, money men — and occasional women — who committed billions of dollars in fraud, laundered money for terrorist organizations and drug cartels, precipitated the worst economic catastrophe since the Great Depression, yet never spent a night in jail.

The author’s thesis: this country has evolved a two-tier justice system under which some of us are considered fair game for policing tactics so aggressive as to be downright fascistic, while others are regarded as “too big to jail” because of the supposed economic repercussions if they were held to answer for their crimes. Indeed, in an interview on The Daily Show with Jon Stewart, Taibbi spoke of a prosecutor who told him some people are simply not “appropriate” for jail.

“Appropriate.” You might want to let that one stew for a moment.

Taibbi argues that this represents a relatively new perversion of justice.

After all, Ken Lay of Enron infamy was facing a possible life sentence for that swindle when he died in 2006. Bernie Madoff is doing 150 years for his multibillion dollar fraud. But under Attorney General Eric Holder, one does not do time for big-money crime. Instead, it has become commonplace to levy fines — not even against individuals, mind you, but against their corporations — and tout that as victory.

The only thing it is a victory for is the idea that some of us are more equal than others.

Yet, there is no uproar. A nation that proclaims “liberty and justice for all,” and “all men are created equal,” somehow manages to sleep through the betrayal of those supposedly cherished ideals. We are, writes Taibbi, “numb to the idea that rights aren’t absolute but are enjoyed on a kind of sliding scale.” So big money criminals live to scam another day, but the government slams like a truck into the rest of us, those on the bottom end of the wealth gap who are deemed “appropriate” for being thrown to the ground, or having their panties held up on a pencil eraser or otherwise treated with contempt by a system that judges them guilty on sight.

Like Michelle Alexander in her book, The New Jim Crow: Mass Incarceration in the Age of Colorblindness, Taibbi doesn’t so much tell us something we didn’t already know as assemble it in such a way as to let us see what was right in front of us all the time: a system of justice that is separate and unequal and thus, broken. And if, indeed, that realization does make you angry?

Good.

(Leonard Pitts is a columnist for The Miami Herald, 1 Herald Plaza, Miami, Fla., 33132. Readers may contact him via email at lpitts@miamiherald.com.)

AFP Photo/Andrew Winning

U.S. Attorney General Talks Tax Evasion With Swiss Counterpart

Washington (AFP) – U.S. Attorney General Eric Holder met with his counterpart from Switzerland as investigators crack down on Swiss banks that help U.S. customers avoid paying taxes.

U.S. officials were tight-lipped about the content of the meeting between Holder and Eveline Widmer-Schlumpf, but told AFP that the U.S. probe into the Credit Suisse bank was discussed.

Credit Suisse has been in talks with the Justice Department to settle a probe over its role in enabling Americans evade taxes. U.S. prosecutors have reportedly pressed for a guilty plea from a bank subsidiary.

One possible outcome is that Credit Suisse will be fined. Press reports say the fine could exceed the $780 million that another Swiss bank, UBS, paid in 2009.

In early April Credit Suisse said it had set aside 425 million Swiss francs ($476 million) in provisions for a possible deal with U.S. tax authorities.

The Justice Department has described a decades-long conspiracy that resulted in secret accounts for U.S. customers.

“The conspiracy dates back to 1953 and involved two generations of U.S. tax evaders including U.S. customers who inherited secret accounts” at Credit Suisse, it said in a July 2011 news release.

Credit Suisse is one of 14 Swiss banks under U.S. investigation for allegedly accepting billions of undeclared dollars from U.S. citizens.

On Wednesday, the owner of a Swiss trust company pleaded guilty in New York to conspiring with Credit Suisse bankers to enable U.S. customers avoid taxes by hiding assets in secret Swiss bank accounts.

Josef Dorig admitted he engaged in a “wide-ranging” conspiracy between 1997 and 2011 to help U.S. citizens evade income taxes by concealing assets in Credit Suisse accounts held in the names of sham entities, the Justice Department said.

A U.S. Senate report out in February showed that at its peak, Credit Suisse sheltered between $10 billion and $12 billion in largely non-reported assets in the accounts of more than 22,000 U.S. customers.

The exact amount funds unreported to U.S. tax authorities is probably around $7 billion, Credit Suisse director Brady Dougan in late February.

AFP Photo/Andrew Winning