Ex-lawyer turned relationship coach

Why Corrupt Executives Are Rarely Prosecuted

After the Wall Street crash of ‘29, public outrage led the US government to toss the head of the New York Stock Exchange in jail. After the savings and loan crisis of the ‘80s, 1,100 people were prosecuted, including several of the most prominent bankers. In the wake of the dot-com bubble, fraudulent execs from the largest accounting firms got sent to prison.

The global crisis of 2008 made those busts feel like a walk in the park. So one could only imagine the wrath the Justice Department would bring down upon the crooked bankers.

But the wrath never came.

Instead, the Department gave Wall Street a slap on the wrist: a mix of fines and settlements that came to about $200 billion. Which seems like a big number, but the money was paid by shareholders, not the bankers who played us. Plus, the damage of the crisis was likely in the trillions.

The punishment hardly fit the crime. 

How we got to a place where you could cripple the global economy and get off lightly is fuzzy. Many believe that the American feds lacked the nerve to go after the mighty bankers of Wall Street, but that’s only part of the story.

The larger part behind the Justice Department’s restraint lies in its damaged reputation and the ambitions of its prosecutors.

Following the Enron scandal, the Arthur Andersen accounting firm was found guilty of obstruction of justice for shredding documents related to its activities with Enron. The man who was leading the prosecution, Micheal Chertoff, was convinced that the best way to fight corruption was to crush the entire organisation.

So within months after the conviction, Arthur Andersen closed down, leaving tens of thousands of innocent people without a job.

The world was shocked. Many felt Chertoff had crossed the line. Feeling the eyes of disapproval upon them, future federal prosecutors worked to come back into favour and made deferred non prosecution agreements the norm.

Which meant fraudulent bankers could skip jail if they agreed to pay large fines, carry out corporate reforms, and cooperate with the investigation. 

Such deals used to be rare. But from 2004 to 2012, the Justice Department made 242 similar agreements, compared with only 26 in the previous in the 12 years before.

But collateral damage wasn’t the only concern when taking down the top dogs of Wall Street. Many prosecutors put on their kids gloves out of ulterior motives.

Top governmental lawyers rarely want to work in the public sector forever. Most enter the Justice Department to earn their stripes and eventually leave for cushy corporate jobs with salaries that would make Scrooge McDuck faint.

But to join the upper corporate echelon, prosecutors must have a near flawless track record. So those who dreamt of joining the big leagues were terrified of losing cases and never took a case to court that wasn’t a sure win.

Which cases were the hardest to win? Those arising from the financial crisis. If a big business executive fell under suspicion, he’d hire the nation’s best law firms to slow or derail any inquiry and claim innocence, or if all else failed, throw a mid-level employee under the bus.

While winnable, these cases were far from a slam dunk. So prosecutors turned their eyes to easier prey, insider-traders. While catching insider-traders wouldn’t change the world, it was an easy route to a spotless record.

In the aftermath of the largest man-made economic catastrophe, only one man went to jail for the sole reason that he pled guilty. A case even the wimpiest prosecutor could win.

It’s not just reckless bankers who are safe from the criminal justice system. It’s top executives from all large corporations. 

And not without reason. 

The size of some of these institutions are so large that putting a CEO or two in prison will negatively impact an entire nation, perhaps the globe. 

But if you don’t prosecute, an executive will return to his buddies and go, “I destroyed the system and only got fined a few billion. The best thing? I didn’t even pay a dime, it was the shareholders! Let’s continue where we left off.”

And that’s no shot in the dark. Seven years after 8 million Americans lost their jobs to the crisis, several banks began trading in ‘bespoke tranche opportunities.’ Which is eerily similar to the type of investment that caused the financial catastrophe in the first place.

If the Americans don’t root out corporate crime, we will experience another crash.

By Jeroen Elsing
Ex-lawyer turned relationship coach