Remember the 80s? Big hair, Dynasty, Huey Lewis was popular for some reason. Well, Judge Jed Rakoff remembers the 80s, and he also remembers the way the federal government used to actually investigate and prosecute people who committed massive financial crimes — Mike Milken, Ivan Boesky, Charles Keating, a bevy of other savings and loans kingpins. Good times.
And Judge Rakoff wants to know what happened to prosecuting financial crimes, specifically the sort of fraud that crippled the economy. So he took to the pages of the New York Review of Books to ponder all the financial prosecutions that could have been. And he has some theories about what happened and how prosecutors could do a better job in the future.
It’s a fascinating look at a bunch of ideas that the government is going to totally ignore…
First of all, congratulations to Judge Rakoff on hearing the last financial crime case he’ll ever hear. The Second Circuit recently set forth its “Jesus, keep your mouth shut” standard for judges — removing judges sua sponte from cases if the judge expresses any public opinion that could be construed as a bias. A scathing essay calling out the government for failing to prosecute high-profile financial criminals is not appreciably different than saying, “I do think that I treat the government as only one more litigant” or “they have to prove their case like anybody else.” In fact, while Judge Rakoff reminds the reader that his general conclusions do not indicate that he prejudges any case, this essay is probably more provocative than Judge Scheindlin’s statements. David Lat thinks courts should not impede judicial transparency, but he’s not on the Second Circuit. Yet.
Anyway, back to the present essay. Judge Rakoff rejects the premise that there aren’t any prosecutions because the business practices that led to the financial crisis were entirely innocent upon closer scrutiny. If it walks like a duck and talks like a duck, it’s a multibillion-dollar, economy-crippling fraud. If you don’t feel like reading the Financial Crisis Inquiry Commission report that Judge Rakoff cites, this is pretty much everything you need to know about how we got cornholed by these guys:
And these folks have basically escaped all criminal liability for these actions as the statute of limitations on all the possible claims run out. Yet the bigwigs on Wall Street are feeling persecuted. So sensitive.
Judge Rakoff notes that the Department of Justice has provided three — really, really weaksauce — reasons for its reticence to prosecute anyone involved in this debacle. First, that it is difficult to prove intent, prompting Judge Rakoff to offer a refresher course on the concepts of “willful blindness” and “conscious disregard.” Second, the Judge cites Lanny Breuer, the former head of the Department of Justice’s Criminal Division who’s now back at Covington, for the proposition that prosecutors were gun-shy because they had to prove that the other side of the transaction, often sophisticated institutions, relied on misleading statements:
Actually, given the fact that these securities were bought and sold at lightning speed, it is by no means obvious that even a sophisticated counterparty would have detected the problems with the arcane, convoluted mortgage-backed derivatives they were being asked to purchase. But there is a more fundamental problem with the above-quoted statement from the former head of the Criminal Division, which is that it totally misstates the law. In actuality, in a criminal fraud case the government is never required to prove — ever — that one party to a transaction relied on the word of another.
Crackerjack legal insight from the Department of Justice. The average share of stock is held for a mere 22 seconds. In the 60s, we envisioned supercomputers guiding astronauts to Jupiter — and killing them. Fast forward to today and we’re building supercomputers to churn 10,000 shares of Toys Я Us in 2 seconds. Progress!
Putting aside whether all the local school boards and the like who bought these toxic assets are really “sophisticated” financial entities, Judge Rakoff seems to recognize, unlike the Department of Justice, this new lightspeed reality where sophisticated institutions consciously forfeit their considered judgment to make fast cash. A system that calls olly olly oxen free so long as the direct victims have in-house counsel isn’t really a justice system.
The DOJ doesn’t think it’s done anything wrong:
Brian Fallon, a Justice Department spokesman, said Judge Rakoff “does not identify a single case where a financial executive should have been charged, but wasn’t.”
“The department has criminally prosecuted thousands of defendants for financial fraud and other related crimes in the last five years, and there are a number of active investigations still ongoing,” he added. “Even in striking the nation’s largest-ever settlement with JPMorgan last month, the department preserved its ability to investigate and potentially charge individuals at the company if the evidence supports it.”
Right. Because Judge Rakoff repeatedly points out that he isn’t passing judgment on any individual cases. Trying to derail a broad policy discussion by appealing to “where’s the specific case” instead of actually responding to the warrants is just lazy.
The final DOJ excuse that Judge Rakoff swats down is the notion that bankers can be “too big to jail.” He notes that the infamous Eric Holder quote suggesting that prosecutions could “have a negative impact on the national economy, perhaps even the world economy,” referred to prosecuting institutions rather than the individuals who run them. And this gets to Judge Rakoff’s ultimate point — the DOJ is far too obsessed with prosecuting institutions instead of individuals:
In recent decades, however, prosecutors have been increasingly attracted to prosecuting companies, often even without indicting a single person. This shift has often been rationalized as part of an attempt to transform “corporate cultures,” so as to prevent future such crimes; and as a result, government policy has taken the form of “deferred prosecution agreements” or even “nonprosecution agreements,” in which the company, under threat of criminal prosecution, agrees to take various prophylactic measures to prevent future wrongdoing. Such agreements have become, in the words of Lanny Breuer, the former head of the Department of Justice’s Criminal Division, “a mainstay of white-collar criminal law enforcement,” with the department entering into 233 such agreements over the last decade. But in practice, I suggest, this approach has led to some lax and dubious behavior on the part of prosecutors, with deleterious results.
This is a tad unfair. In a world where the government has slashed resources for investigating financial crime and the SEC has more or less walked away from this kind of thing, getting the company to pony up for outside counsel to conduct an investigation is all but a practical necessity. Plus, since one half of the government is hell-bent on having no regulations at all, any policy that encourages prophylactic measures is probably worth it. However, Judge Rakoff is right that this “mainstay of white-collar criminal law enforcement” is regrettable. If the government were allowed to invest in expanding the FBI and the SEC wasn’t so afraid of its own shadow that it focuses on what Judge Rakoff calls “smaller, easily resolved cases,” we wouldn’t need internal investigations — but it’s not like the DOJ had a ton of choice in drifting toward this result.
Ultimately, Judge Rakoff appeals to the DOJ to refocus its efforts on investigating criminal cases against individuals committing financial crimes. Contrary to what Matt Kaiser posited last week, the reason the U.S. Attorney’s Office isn’t highlighting the number of people it lands in prison is because it’s doing a really bad job of it. The value in SIGTARP’s declaration that it’s securing longer prison sentences than anyone else is in telegraphing to Wall Street that at least one agency is not asleep at the switch.
Prison may be an overused response in the United States, especially for low-level, non-violent offenders. But the threat of prison is critically underemployed when it comes to the criminals capable of wrecking the most damage on the most Americans.
As Adam Liptak characterizes the Judge’s words, “The fear of prison concentrates the mind in a way the prospect of writing a check on a corporate account does not.”
 2014: A Wall Street Odyssey
 Not to mention, the U.S. Attorney’s Office does highlight the number of people it puts in prison and for how long, in the United States Attorneys’ Annual Statistical Report.
 The incarceration rate in the United States from 1920 through 2006:
The Financial Crisis: Why Have No High-Level Executives Been Prosecuted? [New York Review of Books]
Stern Words for Wall Street’s Watchdogs, From a Judge [New York Times]
Err on the Side of Allowing Speech [New York Times]