Earlier this month, Goldman Sachs, the banking behemoth, agreed to pay $5 billion in civil penalties to resolve claims arising from the marketing and selling of faulty mortgage securities to investors that helped fuel the Great Recession.
Goldman said the settlement with federal prosecutors and regulators would reduce its fourth-quarter earnings by approximately $1.5 billion on an after-tax basis. For a Wall Street bank with assets valued at $861 billion, the fine is a drop in the bucket and likely will be partially written off its taxes.
Most notably, the Justice Department didn’t bring criminal charges against individual officials of the bank, and no one will be going to the slammer.
The Justice Department’s high water mark in prosecuting financial industry misdeeds came in June 2002 during the Bush administration with Michael Chertoff’ heading the criminal division. That’s when Arthur Andersen, Enron’s auditing firm, was convicted by a jury, which led to the firm closing, costing tens of thousands of jobs.
A backlash by a shocked corporate world and even some prosecutors who thought Chertoff had gone too far led to a pullback in government prosecutions of corporate officials, according to an analysis by ProPublica and The New York Times. From then on, the Justice Department sharply increased the number of deferred and non-prosecution agreements and pursued fewer criminal prosecutions.
A similar pattern emerged under President Obama, when Lanny Breuer, the new head of the criminal division, came on board with a mandate for aggressive investigation and prosecution of criminal activity on Wall Street. But after a series of early setbacks, including the loss of a case against Bear Stearns executives accused of misleading investors, as well as a cutback in investigative resources and funding, the Justice Department pulled back and focused more on settlements.
The recurring complaints from Sens. Bernie Sanders of Vermont, Elizabeth Warren of Massachusetts and other prominent liberal lawmakers is that the Justice Department, the Securities and Exchange Commission and other federal regulators have treated Wall Street executives with kid gloves in the aftermath of the financial meltdown and never sought to punish top executives with prison time.
On Thursday, Sanders’ Democratic presidential campaign released a new ad in Iowa criticizing Goldman Sachs for its role in the 2008 financial crisis. Many viewed the ad as an implicit attack on former Secretary of State Hillary Rodham Clinton for being too cozy with Wall Street and accepting $2.2 million in speaking fees from Goldman over the past decade.
"How does Wall Street get away with it? Millions in campaign contributions and speaking fees," the narrator of the ad declares. "Our economy works for Wall Street because it’s rigged by Wall Street. And that’s the problem. As long as Washington is bought and paid for, we can’t build an economy that works for people."
Warren was turning up the heat as well with an op-ed in The New York Times criticizing the Obama administration for weak-kneed enforcement policies on Wall Street.
“The failure to adequately punish corporations or their executives when they break the law undermines the foundation of this great country,” Warren wrote. “Justice cannot mean a prison sentence for a teenager who steals a car, but nothing more than a sideways glance at a CEO who quietly engineers the theft of billions of dollars.”
With Congress and the administration considering proposals for reforming the criminal justice system this year, Warren‘s office on Friday issue a 13-page report, “Rigged Justice: How Weak Enforcement Lets Corporate Offenders off Easy.”
The study charges that the justice system is tilted in favor of corporations and executives who commit crimes, and it highlights 20 high profile cases that back up Warren’s assertions. The administration insisted it was making important progress by pursuing civil actions against white-collar scofflaws.
“People tend to undervalue what we did with the banks,” former Attorney General Eric Holder told the Financial Times. “Given the nature of the penalties that were extracted, given the interactions that we had with people at the banks, with those attorneys who represented the banks, I think the cultures have changed.”
The Justice Department announced in September that it would place more emphasis on taking to court individuals responsible for corporate crime. With so much blatant wrongdoing to choose from on Wall Street, within the energy production and auto industries and elsewhere, it’s hard to imagine federal prosecutors would have trouble finding likely targets.
However, one challenge frequently facing federal authorities in these matters is proving criminal intent. Some experts say it is often much easier to get corporate executives to fess up to mistakes under a civil proceeding than to meet federal standards for proving criminal intent.
Moreover, some influential Republicans currently are attempting to amend a bill designed to reduce mandatory sentences for low-level drug offenders to make it harder for federal prosecutors to prove criminal intent – or mens rea – in cases involving suspected white-collar criminals.
Senate Judiciary Committee Chair Orrin Hatch (R-UT) said it was necessary to protect citizens from being prosecuted for crimes they did not realize they were committing. But Warren and other Democrats argue that such a change would make it even more unlikely that the Justice Department would ever go after corporate executives on criminal charges.
“If adopted, this amendment would severely weaken the already anemic enforcement of federal white-collar criminal laws,” Warren said in her report.
Here are ten examples of what Warren contends constitute “rigged justice”:
Standard & Poor’s dishonest rating. In February 2015, S&P agreed to pay a $1.3 billion civil settlement on charges that it engaged in a scheme to defraud investors in the mortgage market by misrepresenting the true credit risks of residential mortgages.
Conspiracy of Citigroup, JPMorgan Chase & Co, Barclays, UBS AG, and Royal Bank of Scotland. In May 2015, those banks agreed to pay a combined $5.6 billion settlement for conspiring to manipulate exchange rates in a way that made the banks billions of dollars in profits at the expense of clients and investors.
Deutsche Bank’s rigging of LIBOR. In April 2015, the wholly owned subsidiary of Deutsche Bank agreed to pay a $775 million settlement in response to charges that it rigged the London Interbank Offer Rate – a worldwide benchmark for roughly $10 trillion in loans.
Citigroup’s shady marketing. Two affiliates of Citigroup agreed in August 2015 to pay almost $180 million to the SEC to settle allegations that they defrauded investors with risky, highly leveraged bonds in the run-up to the 2008 financial crisis. The shady tactics cost investors an estimated $2 billion – or more than ten times the amount of the settlement.
JP Morgan Conflicts of Interest. The major bank agreed in December 2015 to pay more than $300 million to settle charges that it was involved in “numerous conflicts of interest in how it managed customers’ money over a half decade.”
The Ripoff by Education Management Corporation. The second largest for-profit education company in the country illegally paid recruiters to use high-pressure tactics to enroll students in programs financed with federal student loans and grants. EDMC settled for $95 million with the Justice Department in November 2015.
Navient and Student Loan Servicers’ scheme. The company, formerly known as Sallie Mae, agreed to pay nearly $100 million in May 2014 for intentionally and willfully violating military service members’ rights under the Service members Civil Relief Act.
General Motors’s deadly coverup. The auto giant engaged in a years-long cover-up of an ignition switch problem in many of its vehicles that resulted in at least 124 deaths and 275 injuries. Yet in September 2015, the Justice Department deferred prosecution and settled for a $900 million fine that amounted to less than one percent of GM’s annual revenue.
Honda’s Airbag Settlement. The Japanese automobile manufacturer was fined $70 million by the National Highway Traffic Safety Administration in January 2015 for failing to reveal more than 1,700 reports of deaths, injuries and other “early warning” information to NHTSA.
BP Deepwater Horizon’s massive oil spill. In the wake of one of the worst environmental disasters in U.S. history, BP in October 2015 settled with the Justice Department and five states for the pollution of water and beaches arising from the 2010 Gulf of Mexico Deepwater Horizon oil spill. The settlement required the company to pay $20.8 billion, but “it was structured in a way that allowed BP to deduct $15 billion of the payments from the company’s income for tax purposes, reducing the impact of the civil penalty.”