White Collar Crime and the Trump Administration

Cross-posted by permission from the Columbia Blue Sky Blog.

The Obama administration had a mixed record on white collar crime. On one hand, it extracted $4 billion and a guilty plea from BP in the wake of the Deepwater Horizon spill. On the other hand, it allowed HSBC, then the fourth largest bank in the world, to sign a deferred prosecution agreement (DPA) over charges of laundering money for a Mexican drug cartel and serving as a banker for illicit regimes in Burma, Cuba, Iran, Libya, and Sudan. The bank paid $1.256 billion in penalties, but because it never admitted its crimes and controlled such vast amounts of money, the payment looked more like a cost of doing business than punishment. In fact, the Obama administration Department of Justice (DOJ) under the leadership of Attorney General Eric Holder and Criminal Division chief Lanny Breuer used DPAs more often than did any other administration. Holder and Breuer repeatedly explained such settlements as necessary to avoid putting corporations out of business and inflicting collateral damage on innocent employees and shareholders. Holder told senators who questioned the HSBC settlement that he thought some institutions were, in effect, too big to jail. When the statute of limitations ran out in 2015 for indictments arising out of the 2008 financial crisis, DOJ’s reputation as an even-handed prosecutor suffered major damage.

Holder’s successor, Loretta Lynch, and her deputy, Sally Yates, moved decisively to change these perceptions. “Stung by years of criticism that it has coddled Wall Street criminals, the Justice Department issued new policies on Wednesday September 9, 2015 that prioritize the prosecution of individual employees — not just their companies — and put pressure on corporations to turn over evidence against their executives,” the New York Times reported.

The Yates Memo set forth what some attacked as radical and unfair changes and others dismissed as business as usual. In a nutshell, Yates and a task force of career prosecutors mandated that corporations hoping to get credit for cooperating with the government in criminal cases turn over all the information available to them regarding illegal acts by individual employees. If prosecutors do not develop charges against individual corporate officials in any given case, they must justify the omission in the materials they forward up the DOJ decision-making chain for approval. The Yates Memo reasoned that “one of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing. Such accountability is important for several reasons: it deters future illegal activity, it incentivizes changes in corporate behavior, it ensures that the proper parties are held responsible for their actions, and it promotes the public’s confidence in our justice system.”

A handful of former prosecutors announced that the Yates Memo merely formalized long-standing practice. But it caused a small tsunami of alarm among many members of the defense bar, a handful of academics, and influential industry trade associations, including the Chamber of Commerce. They were still whinging when Donald Trump won the election and arrived in Washington, D.C. intent on shaking up the established order. Where did this commitment to change lead with respect to white-collar crime? Had they been asked, Trump voters would have expressed disgust that banks and other financial institutions ducked criminal liability for corralling, losing, and recouping hundreds of billions of dollars at the expense of the middle class. Regardless of his promises to “drain the swamp,” President Trump populated his cabinet with Wall Street veterans. Even the architect of his special brand of nationalistic populism, Steve Bannon, is an alumnus of Goldman Sacks.

The New York Times has reported that Trump son-in-law Jared Kushner, whose power is waxing, “has pushed to overhaul the criminal justice system, a goal that Mr. Trump embraced as a candidate near the end of the campaign when he tried to siphon black voters away from Hillary Clinton. But Mr. Kushner is running into opposition from Attorney General Jeff Sessions, who favors toughening, not relaxing, mandatory minimum sentences.” Like so many other issues undermining the Trump presidency, different factions are at war within the White House, making any predictions about the future of white-collar enforcement seem premature.

Sessions will engender substantial controversy if he focuses federal enforcement on street crime and neglects white-collar prosecutions. Mass incarceration has edged to the forefront of social and economic problems in the U.S. During the last Congress, an unusual right/left alliance pushed so-called “mass incarceration reform” quite far. A bill to modify mandatory minimum sentences was approved by the House of Representatives Judiciary Committee but the legislation stalled before it reached the House floor, in part because it increased the burden of proof for federal prosecutors in white-collar crime cases. In the Senate, a bipartisan group of seven senators (Cory Booker (D-N.J.), John Cornyn (R-Texas), Lindsey Graham (R-S.C.), Charles Grassley (R-IA), Patrick Leahy (D-Vt.), Mike Lee (R-Utah), Charles Schumer (D-N.Y.), and Sheldon Whitehouse (D-R.I.)) produced comparable legislation. It too never reached the floor because Senator Orrin Hatch (R-UT) demanded that the bill be amended to add tougher burdens on prosecutors.

The strange bedfellows nature of these coalitions is its greatest strength. Fiscal and libertarian conservatives (Koch Industries, Freedom Works, and Right on Crime) participate out of concern about prison spending, which is about $80 billion annually and unsustainable for many states. Liberals (the Leadership Conference Education Fund, the NAACP Legal Defense Fund, the ACLU, and the Center for American Progress) hope to rebuild communities by preventing lengthy prison terms that disproportionately punish people of color. Members of these groups may grow restless and push reform legislation without Trump administration support. Alternatively, despite the advice of Attorney General Sessions, the Trump administration may support these efforts. In either event, the Yates Memo is likely to remain on the DOJ website, if for no other reason than pulling it down would provoke a new round of criticism that the Trump administration is soft on white-collar crime.

If implemented aggressively, the Yates Memo represents a white collar reset of consequence. Observers who conclude that its content is nothing new may wish to curry favor with government prosecutors. Even discounting for the fact that they hope to strengthen client relations by railing against DOJ heavy-handedness, some of their criticisms are well-placed.

The most salient criticism of the Yates Memo is that compelling a company to help DOJ make cases against its individual managers will cause excessive stress within a corporation. Managers will turn on each other in a desperate effort to avoid identification as a potentially culpable party, and in the chaos, innocent employees may well have their constitutional rights trampled. Tying the outing of individual managers to the sweetness of the final deal may well lead defendants to try their cases rather than implicating top managers. According to federal prosecutors, by far the most secure safe harbor is a robust compliance assurance program that disciplines executives who resist its demands.

The dearth of criminal prosecutions in the financial services industry in the wake of the 2008 crash will continue to shadow federal prosecutors. The last time bankers organized a comparable scam—namely, the savings and loan crisis of the 1980s—the result was 1,000 felony convictions, including cases against 600 individuals and 300 institutions. Perceptions of unfairness exacerbate the anger that increasingly drives our national politics. Resentment of the yawning income gap between the richest 1 percent and the rest of the population, static wages, and the exodus of industrial jobs to poorer countries are themes that President Trump used quite effectively throughout the campaign.

Yet two additional realities challenge this analysis. Because most federal white-collar prosecutions involve the flouting of regulatory mandates, Trump’s pledge to “make America great again” by eliminating 75 percent of rules now on the books seems unlikely to generate much productive investigation from members of the career civil service, especially because he wants to cut their budgets severely.

Second, the president’s war on regulation may well produce the deconstruction of much of the government, as adviser Steve Bannon has claimed is a top priority. That commitment was whetted by early vetoes of a dozen or so major rules issued by the Obama administration.

Trump’s ally, Jeb Hensarling (D-TX), chair of the House Financial Services Committee, has pledged to repeal the Dodd-Frank Wall Street Reform and Consumer Protection Act even as some bankers protested such a drastic step. The Trump “skinny budget” (so named because it lacks the detail the president will provide when he has more time in office) would put the Environmental Protection Agency (EPA), the poster child for egregious regulatory activities, on a starvation diet of 31 percent fewer resources than it has today. If the president accomplishes even half of those cuts, EPA enforcement will slow to a crawl.

President Trump selected former Oklahoma Attorney General Scott Pruitt to serve as EPA administrator. Pruitt made his national reputation by suing the agency on behalf of business interests 14 times. To make sure that his beleaguered staff got the message, Pruitt invited representatives of the coal industry to the agency to celebrate the announcement that he planned to cancel Obama administration efforts to combat climate change.

Interestingly, a recent article published by the Bureau of National Affairs quoted several former prosecutors, most of whom have joined the defense bar. All agreed that Trump’s hostile attitude toward the EPA and other regulatory agencies would not have much of an effect on white-collar enforcement, because DOJ only prosecutes obviously aberrant and illegal behavior, and its approach to enforcement of environmental and worker safety laws has been consistent over several decades. Perhaps they are right. Or perhaps these confident predictions do not take the Trump administration at its word, a chronic problem in the Capitol these days

This post comes to us from Rena Steinzor, the Edward M. Robertson Professor at the University of Maryland Carey Law School. It is based on her recent article, “White Collar-Reset: The DOJ’s Yates Memo and Its Potential to Protect Health, Safety, and the Environment,” available here.