By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She is currently writing a book about textile artisans.
On Friday, the Grey Lady reported: Jeffrey Skilling, Former Enron Chief, Released After 12 Years in Prison:
Jeffrey K. Skilling, the former chief executive of Enron whose lies contributed to the sudden collapse of the energy company in one of the country’s most high-profile cases of corporate fraud, was released from federal custody on Thursday after serving more than 12 years in prison, the federal authorities said.
Younger readers may be amazed to hear about a time not so very long ago and in a place much nearer than a galaxy far, far away, where the US Department of Justice (DoJ) – now openly derided by practicing lawyers as the Department of Jokes – prosecuted and jailed corporate officers who allowed criminal activity to occur on their watch.
Not only Skilling, but Enron’s founder and chairman, Kenneth Lay, and its CFO, Andrew Fastow, were sentenced to prison terms — although Lay died before he was able to serve his time.
And it wasn’t only Enron executives, who presided over what was until that time the largest corporate bankruptcy, that were prosecuted and did time. Adelphia officers were convicted and sent to jail, Likewise, for their WorldCom counterparts.
In 2002, in response to these scandals, the US adopted the Sarbanes-Oxley Act, which defined new and expanded responsibilities for the boards and management of US public companies, as well as public accounting firms. Congress passed legislation, and president George W. Bush signed that legislation into law.
What Changed? Hint: Trump Not Responsible
Then in 2009, things shifted.
Eric Holder became attorney general, and instituted a seminal shift in DoJ enforcement policy – the so-called “Holder Doctrine.” As I summarized in this September 2016 post, Law Enforcement Losing War on White Collar Crime, which described the policy undertaken during the Holder’s tenure:
During that time, the DoJ instead followed the “Holder doctrine” and eschewed criminal charges against companies and executives, instead opting for negotiated settlements (often imposing de minimis, slap-on-the wrist penalties that were significantly undersized compared to the magnitude of damage done, especially by TBTF banks and other financial predators, to name just a few).
This was tweaked by then-Deputy Attorney Sally Yates. To continue from the post cited above:
The DoJ under Obama’s second AG, Loretta Lynch, originally followed the Holder doctrine, until that was superseded when Deputy Attorney General Sally Quillian Yates authored a memo outlining a new approach in September 2015. Under this approach, the DoJ intended to increase accountability for corporate wrongdoing, and this included an increased focus on pursuing criminal charges against responsible individuals. The DoJ sought to drive a legal wedge between individuals and the corporations for whom they worked by only allowing corporations to receive “cooperation credit” that would reduce their potential exposure (including penalties) if the corporation cooperates in surrendering as early as possible comprehensive detailed information concerning the individual misconduct.
Yet the Yates memo failed to lead to any upsurge in corporate prosecutions, as I discussed further in The Obamamometer’s Toxic Legacy: The Rule of Lawlessness. These guidelines were then further weakened in 2018 by the Trump administration.
The bottom line: in contrast to how prosecutors proceeded during the tech collapse that occurred during the administration of George W. Bush – when corporate officers were prosecuted, and sentenced to jail terms – no major Wall Street executive faced any sort of legal reckoning for the activities that led to the 2008 financial crisis. I mean zilch. Zero. De nada.
I believe that the lack of any legal comeuppance for the behavior that caused that financial collapse is one reason that Trump is president. Perhaps the failure to punish the guilty is not nearly as important as the economic hardship many suffered. And it probably also dwarfed in significance by the foreclosure crisis that forced many people from their homes.
Instead, we saw a smoke and mirrors response, focusing on prosecuting systemically trivial insider trading violations under the much ballyhooed, certainly overrated establishment darling, former US attorney for the southern district of New York, Preet Bharara. Don’t take my word for this, see this Bill Black post, Bill Black: Why Did Preet Bharara Refuse to Drain the Wall Street Swamp? (as well as my take on the inflation if Bharara’s reputation that bore no meaningful reputation to his performance failures, Trump Fires Preet Bharara and 45 Other US Attorneys, Media Hysteria Ensues.)
Conclusion: the erosion of the rule of law didn’t start with under Trump. Indeed, the rot set in when a certain former constitutional law professor sat where the buck stops here.
What Is to Be Done? Restoring the Rule of Law
So, having now established that the system is broken, and this didn’t occur solely or even principally under Trump’s watch, I’m going to toss up a few preliminary thoughts on how we might restore the rule of law.
The technical issues of the plumbing of the legal system – who wins, and why – are generally not publicly discussed and debated, and certainly not outside the legal fraternity.
But they are important: how the rules are defined, and who decides who wins and who loses, are crucial to settling how disputes are resolved. In many cases, they lead to game over before it really begins, regardless of the underlying merits of a particular claim.
One point: We should eschew using the word ‘reform ‘when discussing necessary legal changes, as it’s been a tell – e.g ‘legal reform’, ‘tort reform’ – for measures that make it more difficult for ordinary people to sue and enforce their rights against corporations.
Instead, I would prefer the formulation: ‘Restoring the rule of law.’ I invite the many members of the commentariat, lawyers and non-lawyers alike, with an interest in legal issues, to weigh in here.
Warning: This is only a preliminary program, and is not only a first but indeed a very rough pass that attempts to highlight three crucial areas in which the current system has gone astray.
Statutory Reform. A necessary step step to restoring the rule of law is to consider what types of changes would be necessary for corporate executives to fear the DoJ and the Securities and Exchange Commission (SEC) again.
Equally, attention is overdue to issues of legal access – who can bring lawsuits, and how to pay for the cost of litigation. Too little regard has been paid to how specific statutory changes, e.g., the Public Securities Litigation Reform Act (1995) and the Class Action Fairness Act (2005), have made it more difficult for private plaintiffs to bring and prevail in filing lawsuits.
Enforcement Policy. These and other statutory changes have increased the relative importance of the DoJ and the Securities and Exchange Commission (SEC), which have lost the plot on what effective enforcement looks like – perhaps due to revolving door syndrome – and certainly exacerbated by a lack of resources.
Even more importantly, the whole Holder, Yates approach to enforcement policy is wrong. I encourage the same Democratic Resistance stalwarts who are running around agitating to impeach Trump – a fool’s errand on many levels, legal and political, which I will leave to a future post to discuss- to think about an alternative to the Holder/Yates dead-end, that serves as a get out of jail free card for those with resources. The Trump DoJ has merely continued on a path blazed during the tenure of his predecessor. How should enforcement policy change so that those who have committed crimes, or otherwise done wrong – I’m thinking about defendants in civil lawsuits here – are not able to thwart justice.
Selecting Judges. Hat’s off to the Trump administration for its stunning success in sitting federal judges, from the district level to the Supreme Court. These judges will continue to pursue conservative judicial priorities long after a new President is seated. Please don’t misunderstand me: I deplore many of these choices. But in order to oppose Republican success, one must first appreciate how it was achieved.
Seating judges is crucially important. But I would suggest that selecting the best candidates is an even more pressing priority. And here, Democrats and especially progressives must look beyond merely considering whether a justice would uphold Roe v. Wade – as vital as that consideration is – or where s/he stands on voting rights issues. How judges stand on the relative balance between ordinary people and corporate defendants is an issue that should move to the forefront of questions of judicial selection.
Republican judicial appointees don’t bear sole responsibility for the business-friendly drift of the federal courts in the last several decades. Many Democratic judicial appointees, from the Supreme Court down to the district courts, have also colluded on issues including limiting punitive damages award, restricting the ability to bring suits – e.g., establishing standing and pleading requirements – and upholding mandatory arbitration requirements.
In order to overturn these decisions, It may not be sufficient to seat new judges – at minimum, statutory changes may be required to reverse these precedents that skew the judicial system to upholding the interests of corporate defendants.
The Bottom Line
Progressives are putting forward exciting proposals to address long-neglected but pressing policy problems: Medicare for All, the Green New Deal.
Our legal system is similarly broken – and the problem isn’t limited solely to who holds a particular judgeship.
The main question: What needs to change for judges again to serve as neutral arbiters – and shift the balance away from the business-friendly bias we’ve seen during the last several decades?