News Journal: Ending corporate arrogance toward the law

Better late than never. In a memo last week to federal prosecutors around the country, our new Attorney General, Loretta Lynch, told them the Department of Justice would now, instead of only levying fines on the corporation itself, prioritize the prosecution of individual employees in cases of corporate fraud or criminal activity.

More on that good news later. First some background.

When I became a senator in January 2009, I spent a lot of time looking into the causes of the financial meltdown we were then experiencing. It was obvious to me (along with many other people) that some of our banks had engaged in widespread fraudulent activity related to subprime mortgage lending.

It was also obvious to me that corporations commit crimes only when people who lead or work for them engage in criminal activity. In both the Enron and Savings and Loan scandals high-level banking executives went to jail for white-collar crimes. I expected the same thing would happen as a result of this far more damaging crisis.

I shared these expectations in meetings with the new Secretary of the Treasury, Tim Geithner, and Federal Reserve Chairman Ben Bernacke. In fairness, I had to agree with their immediate and more important goal – to avert a collapse of the banking system. Thanks to the much maligned but necessary “bank bailout” – the Troubled Asset Relief Program – they did so. Within a year, bank earnings and executive bonuses were soaring. But not one high-level banker had been indicted.

Throughout 2009, I worked with Senate Judiciary Chair Pat Leahy (D-VT) and Senator Chuck Grassley (R-IA) on what became known as the Fraud Enforcement and Recovery Act. FERA was designed to give additional resources to the Department of Justice so it could aggressively go after those on Wall Street whose criminal activity had helped bring down the economy. It passed quickly with bipartisan support, and $55 million was approved to finance the effort. I was put in charge of two Senate Judiciary Committee oversight hearings to monitor what DOJ was doing.

I’ll spare you the details of years of frustration, and cut to the chase. There was a lot of hemming and hawing by a lot of different people at DOJ, but that $55 million has still not resulted in the indictment of a single high-level banker.

Instead, DOJ negotiated with banks and levied fines against them that by now amount to tens of billions of dollars. When he left the department earlier this year, former Attorney General Eric Holder was quoted by the Financial Times as saying “prosecutors had been right to level record setting-penalties” against institutions rather than “trying to make examples of people.”

I’ll point out just one outrageous fallacy in that argument. Who actually pays those fines? The shareholders, of course. Not the banks’ executives. They just continue to take higher and higher bonuses. “So hit me with a fine. We can afford it.” According to Senator Elizabeth Warren (D-MA), that’s a direct quote from Jamie Dimon, CEO of JPMorgan Chase, in a 2013 meeting with her, when she suggested banks might be breaking the law. To my mind, it sums up just how ineffective all of those fine levied by DOJ have been in terms of discouraging illegal activity.

That’s why I welcome the new DOJ policy, although I am angry and deeply disappointed that, because of the statute of limitations, it comes too late to prosecute crimes that contributed to the financial crisis.

“Corporations can only commit crimes through flesh-and-blood people,” Sally Yates, deputy attorney general and the author of the memo, said in a New York Times interview on September 8. “It’s only fair that the people who are responsible for committing those crimes be held accountable. The public needs to have confidence that there is one system of justice and it applies equally regardless of whether that crime occurs on a street corner or in a boardroom.”

The Times article goes on to say, “the memo tells civil and criminal investigators to focus on individual employees from the beginning. In settlement negotiations, companies will not be able to obtain credit for cooperating with the government unless they identify employees and turn over evidence against them, ‘regardless of their position, status or seniority.’ Credit for cooperation can save companies billions of dollars in fines and mean the difference between a civil settlement and a criminal charge.”

This is a sea change in how the Department of Justice treats corporate misconduct of all kinds. I believe it will go a long way toward ending the “fine me, we can afford it” attitude in corporate boardrooms. And it just may make another financial meltdown caused by fraudulent banking activity less likely.

Ted Kaufman is a former U.S. Senator from Delaware.