In the New York Review of Books, Jed S. Rakoff, U.S. District Judge for the Southern District of New York, wonders why the high-level executives who brought us to the brink of collapse in the recent financial crisis have escaped prosecution.
He doesn’t mince words. As the clock ticks down on the statute of limitations for charges related to the recent financial crisis it appears there will not be one prosecution of a top executive involved in the fiasco.
It was not always this way. People like Jeffrey Skilling and Charles Keating, Jr., went to jail for their roles in the fraud perpetrated by their companies, while serving as chief executives of Enron and Lincoln Savings & Loan, respectively.
Judge Rakoff argues that the Justice Department has failed in its basic responsibilities, its officials offering excuses to explain an over-reliance on deferred and non-prosecution agreements. He refers to reasoning articulated by Attorney General Eric Holder that some prosecutions should be approached with caution because they could ‘have a negative impact on the national economy, perhaps even the world economy.’
Judge Rakoff calls this the ‘too big to jail’ excuse, and says it shows the department’s ‘apparent disregard for equality under the law.’
Judge Rakoff is careful to point out that he does not know if high-level executives committed crimes while they headed up the companies that participated in the market for mortgage-based securities. Instead, he reminds us that the Financial Crisis Inquiry Commission found terrible inconsistencies, mendacity and fraud throughout their investigations of these matters and interviews of executives.
So why all the attention on just corporations?
What Judge Rakoff believes is really happening is three-fold. First, he says the department has had other priorities in the past four years, including terrorism, handling the Madoff matter and zeroing in on insider-trading cases.
Second, he believes the government’s own role in the financial crisis made the situation murky. The prosecutor could honestly listen to a CEO explain that ‘he was only doing what he fairly believed the government wanted him to do.’ And it could keep a prosecutor from feeling like an indictment was appropriate, since the government was indeed sending mixed signals about its regulatory priorities during years of bustling mortgage-based securities buying and selling.
Finally, Judge Rakoff believes there has been an institutional shift toward prosecuting companies in lieu of individuals to produce large dollar-value settlements. The downside of these settlements, he says, is that it has ‘led to some lax and dubious behavior on the part of prosecutors, with deleterious results.’
The deterrence effect, Judge Rakoff reminds us, cannot be understated. The fear of prison resonates far more than the writing of a check on a corporate ledger. It’s one of the main reasons he thinks the focus on corporations rather than individuals is not helpful in the long run.
But he goes back to his equality argument — that ‘too big to jail’ shows disdain for treating those who flout our criminal laws unequally — by bringing up ethics. ‘Punishing a company and its many innocent employees and shareholders fro the crimes committed by some unprosecuted individuals seems contrary to elementary notions of moral responsibility.’
Julie DiMauro is the executive editor of the FCPA Blog and can be reached here.