Business Finance Regulations

Wharton: “Why Corrupt Executives Are Rarely Prosecuted”

Don’t miss a great Knowledge@Wharton interview with Jesse Eisinger on his new book, The Chickenshit Club. Some highlights:

Jesse Eisinger: The Justice Department has lost the will and ability to prosecute top corporate executives. They focus on settlements with corporations for money, and I think this undermines justice in America.

Knowledge@Wharton: They lost the will. That’s not exactly an excuse a lot of Americans will take to heart.

Eisinger: No, I don’t think it is a good enough excuse, but what happened was a series of aggressive prosecutions in the wake of the Enron-era scandals. Many will remember that energy trader fraud that went down. After that, there was a backlash against aggressive prosecutions. Prosecutors suffered fiascos and losses and lost tools, and gradually the skill set eroded. Now, I don’t think that they can prosecute top corporate executives.

Knowledge@Wharton: I get the sense that it is an old boy’s network in that some of these prosecutors had to be thinking ahead about when they were not in those positions anymore.

Eisinger: Yeah, there’s a big revolving door here. We talk about inequality in this country. We talk about things like mass incarceration where we disproportionately punish the poor and people of color. Well, the flipside is that we don’t punish the rich and powerful — and often white — men. One reason is a kind of elite affinity, class affinity. The prosecutors and these executives all come from the same milieu, and it’s just hard for them to see them as criminals.

As one Securities and Exchange Commission regulator put in an email that I uncovered in the book, “Well, these Goldman Sachs bankers are good people who have made one bad mistake.” This is what they think of executives. They don’t think of young black males on the streets dealing drugs as good people who have made one mistake.

Knowledge@Wharton: You mentioned the post-Enron period, but there had to be a couple of situations right after Enron where we saw wrongdoing by executives and no prosecution?

Eisinger: The Enron era is a turning point. Of course, there have been prosecutions that have failed and where we didn’t punish people in this country. It’s never been a golden age where the rich and powerful, if they committed crimes, were sure to go to prison. We’ve had silver ages. There was a silver age after the Enron prosecutions.

The government under President George W. Bush prosecuted some of the Enron executives who were closest politically to his administration, which was a remarkable thing. They assigned a task force, a team of prosecutors and FBI agents who had sole responsibility for that, and they succeeded. They prosecuted almost all of the top executives from Enron.

“The prosecutors and these executives all come from the same milieu, and it’s just hard for them to see them as criminals.”

But oddly enough, it came to be viewed as a bunch of cowboys who had made a bunch of mistakes and were overly aggressive. So what happened was the Department of Justice mislaid the lessons of the Enron task force. They thought that these guys had done the wrong thing instead of the right thing, and that has influenced the way that they enforce corporate law-breaking today.

Knowledge@Wharton: Are executives just not concerned about prosecution or worry that the DOJ is going to come after them?

Eisinger: It’s hard to look into their heads to really understand what they’re doing, but I don’t think that they feel any deterrents from committing crimes or exploiting their customers because they don’t see anybody going to prison. There’s a big argument about whether prison is effective or deters crime.

My argument is that in the white-collar arena with corporate executives, it absolutely deters crime because these people are well informed, they pay attention to the news, they have a stake in society, they have their reputations to preserve. If you put a CEO or two in prison, it will have a cascading effect throughout the financial system, throughout corporate America. I think these kind of prosecutions pay dividends.

By contrast, if you don’t prosecute, a banker looks around and says, “I got paid huge bonuses, we destroyed the financial system and nobody went to prison, nobody really paid a fine, nobody really had any reputational costs. Why shouldn’t I just do that again?”


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