Skilling Released from Prison After A Decade of Doing Time: A Reminder of a Not So Distant Past, When the Rule of Law Applied to Corporate CEOs

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?

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21 comments

  1. Poster Child for No Rule of Law

    “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.”

    And some of the “younger readers” might be surprised if and when any regulator eventually does something more about the poster child for free money and no rule of law – Tesla.

    If you’re surprised about that, this is a good place to start to learn more: https://tslaq.org

  2. Arizona Slim

    Yours Truly was just called to federal jury duty. I doubt that I will be selected to serve — and this is due to my being a recent crime victim — but I’m going to go to the courthouse anyway. Why? Because I have to.

    Wishing that some of the perps of the 2008 meltdown had some “have-to-dos” in their lives.

    1. cjonsson1

      Hey Arizona Slim, get on that jury. So many people have been victims of crime now that there would be no one to serve. Who could be better than someone who knows the criminal justice system from the outside in.
      The preps and their enablers have to be heard and go through the justice system like everyone else.

  3. thesaucymugwump

    This was a fantastic op-ed. My only complaint is that the author neglected to mention Timothy Geithner and his toothless Making Home Affordable Act (but then again, that would have been slightly off-topic). The Obama administration set the standard for incompetence and favoritism with respect to Wall Street regulation. The author is correct that part of the reason Trump was elected was outrage against this behavior, not that Trump is any real friend of the working man.

    At the time the outrageous policy was noted even by liberals. David Cay Johnston’s “Where’s the fraud, Mr. President?” of 2011 is worth reading (I’d include the link, but then my comment would be removed).

    1. human

      Just the mention of his makes me want to scream. Timmy is a poster child for those who failed/broke laws and were rewarded by falling upwards. GRRRRRR

  4. notabanker

    Anti-trust is a joke. I tried to pursue this line of defense with our corporate attorney’s against the tech giants and it was nearly impossible to establish, and even if you could no one internally would take it on because it was a sure loser. And we actually had highly competent resources that could do this. Further, reaching out to competitors with like interests would have brought on a wrath of legal problems on us that no attorney would even consider.

    Class action has also been crushed. The thresholds, automatic appeals processes guarantee that only the lawyers will ever get paid anything meaningful. There are entire industries constructed that are blatantly illegal but straddle the civil / criminal boundry just enough to stay off of prosecutor’s radar with no effective recourse for civil litigation unless you have legal resources bigger than theirs. And they make sure they choose clients that never will. You can contact me via email if you want specifics on this.

  5. Code Name D

    Corruption isn’t just a Federal issue.

    A friend of mine recently had a contractor redo her roof after a recent windstorm. The contractor extremely poor, doing such a bad job that rain water is actually funneled into the house.

    She refused to play, instead demanding the contractor redo the roof, and to do it right this time, as well as pay for further repairs to the house.

    The contractor instead took her to court to force payment, because the county inspector has already signed off on the job as “abiding by the current building codes”. This was all the judge cared about. The actual quality of the work, including weather the job actually complied with existing codes wasn’t even entertained and not allowed into the record. She was instead given 60 days to make payments or allow the contractor to foreclose the property.

    Taking the mater to the local press has also proven futile because the press receives advertising revenue from the very contractor she has issues with.

    Right now, she is attempting to take the mater to Topeka. Still waiting for word on how that turns out. Most of the Reps in town however are Democrats, whom you would think might take issue with this, given this is what Republican “pro-business” looks like. But I am not holding my breath.

  6. ChrisPacific

    How sad is it that GW Bush was the last president to enforce meaningful penalties for corporate fraud?

    One point: leading with Statutory Reform just a few sentences after arguing for avoiding that term jars a bit. Perhaps you could find a different term?

    1. disillusionist

      George W. Bush did a big part in weakening torts in Texas. That meant consumers would have very little recourse when cheated or harmed by a company or service. Things went downhill from there. Malpractice cases were impossible to win. Contractors had no responsibility for shoddy workmanship or lack of delivery of a service after the sale, thanks to GWB and the GOP. Corporations now rule supreme. Buyer beware is an understatement.

  7. BCD

    I agree with the premise of your article. OTOH, there was no reason to include your opinion about the legal basis for Impeachment, it distracts from your point and adds nothing.

    Ending the reign of terror that is ALEC and also better containing Originalism are greatly needed too.

  8. Chauncey Gardiner

    As notabanker noted above, it’s not just control fraud. Appears that Anti-Trust will be part of a congressional initiative to enforce the rule of law, including pressuring the DOJ and FTC to take major corporations to court for violations of antitrust law and to push regulators to assess and prevent anti-competitive behavior and concentrations of private power. This Congressional staff appointment looks encouraging in this regard: https://www.thedailybeast.com/lina-khan-a-top-anti-trust-thinker-joins-democratic-staff-in-the-house-putting-silicon-valley-on-alert

    Appreciated the conclusions in the post regarding specific areas that need reform. The selection of judges is deserving of special attention IMO.

  9. The Rev Kev

    I still remember the Savings & Loans scandal back in the 80s when as a result, there were over 1,000 felony convictions in cases designated as “major” by the Department of Justice. The pity was that the Keating Five never went to the slammer which would have included John McCain. By the era of the Enron scandal only a few people went to prison and now there are none. If you have political protection, you need never fear prison though if you fall foul of some groups, the opposite can happen as showed by the Mueller investigations. So, you are either on the in with those running the country or you are part of everybody else who must suffer an extremist judicial and imprisonment regime. Not for nothing is there such a thing as the term ‘lawfare’.

  10. McWatt

    My 39 year old business has yet to recover from the 2008 crash. Now going on 11 years.

    Forget about the corporations and none of those scambolonio’s going to jail, as far as I can see in local village government, county government and state government no one, and I mean no one, appears to be following the law. They have re-written the laws so everything that was illegal in my father’s day, is now legal.

    It is very often the case that on this site we all feel for the pensioners losing their pensions. That is proper. However, in my state, the pensions that teachers, state and local government workers have written for themselves are so rich that each level of government is now dead broke and starving. Double and triple dipping is rampant. If we can’t take a stand on local theft how are we going correct national?

    1. CitizenSissy

      Don’t know what state you’re in, but I suspect those pension benefits were negotiated in lieu of salary increases, and then inadequately funded by the employer.

  11. VietnamVet

    The predatory exploitation of the uncredentialed will continue until there is revolt or until the rule of law is restored. If an honest movie were filmed of the Trump Administration, it would combine “Gone with the Wind” and “The Godfather”, degenerate generations later. The incompetence exhibited by the USA, UK and France is due to a mob war between national and global oligarchs splitting apart the western ruling class. Before nuclear weapons, this conflict would have inevitably started a world war.

  12. David in Santa Cruz

    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.

    Read JP Stevens’ scathing dissent to Ruth Bader Ginsburg’s trampling of state regulation of mortgage-lending in Watters v Wachovia Bank. Ginsburg created the ability of Holder and Breuer to run “Too Big to Jail” out of whole cloth, just as Lehman and AIG were about to implode from all the unregulated garbage that was being generated due to the failure of the federal government to supervise lending while allowing the TBTF’s to assert federal pre-emption against state regulators.

    I could vomit every time I hear “RBG” being lionized by self-styled “liberals” while the justice system impoverishes and incarcerates people of color and working people in general. Reagan and Bush allowed fraudsters — many of them their donors and friends — to be prosecuted and jailed. Not so Obama.

    We must restore the rule of law.

  13. Basil Pesto

    I finished reading ‘The Chickenshit Club’ last week and this was a nice lil epilogue to it (just got around to reading this article). It’s worth a read for the portayal of the heartening decency of Rakoff and some others, although it’s a bit bittersweet since they haven’t exactly wound up on the winning side here.

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