I. Book Review: The Chickenshit Club

To my mind the most significant and important book that every Chief Compliance Officer (CCO), General Counsel (GC) and compliance practitioner needs to read is The Chickenshit Club by Pulitzer Prize winning journalist Jesse Eisinger. It puts together, for the first time, the story and timeline of how the Department of Justice (DOJ) devolved from the group of prosecutors who convicted felons from the late 90s and early 00s in financial scandal such as Enron, Adelphia and WorldCom, to the group which did not even bother to attempt to prosecute high ranking executives after the 2008 financial meltdown. 

Eisinger is a long time financial reporter. He began writing about the subprime crisis as far back as 2005. During the middle of last decade, he wrote about the looming financial crisis, culminating in the crash of 2008. Having followed the Enron case from the early to mid-part of the decade, Eisinger was familiar with the DOJ’s success in prosecuting financial crimes and wondered why there were not similar prosecutions after 2008. Such was the genesis of the book. 

Eisinger obviously did his homework by reading court documents, decisions, transcripts and accounts of the relevant events. Through interviews with literally hundreds of former and current DOJ prosecutors, other government officials and regulators, defense attorneys, corporate executives and a host of others, Eisenger demonstrates how a series of seemingly unrelated events from 2002 led to the scandal which saw no top executives prosecuted over the 2008 financial meltdown, since that time, continuing up to today. 

The thing that struck me about Eisinger’s story was the process the DOJ went through after the Enron prosecutions. There was pushback from the business community, the legal community, the US Chamber of Commerce and a host of others who saw the successful prosecutions as government over-reach. There were three parts of the story which were new to me and very much resonated with me as well. The first was the demise of Arthur Anderson, which I had attributed to, in large part, the guilty conviction. While this guilty conviction may have been a death knell, it turns out the accounting firm was on its last legs, from a series of professional and business miss-steps. I had also forgotten that the conviction of the firm, eventually overturned by the Supreme Court, was but a near thing at trial, with the trial judge’s erroneous instructive which led to the reversal the decisive factor to the jury. 

Moreover, it was a PR firm hired by Arthur Anderson before its trial, which came up with the narrative that it was the conviction which put the venerable firm out of business. The book shows this was very far from the truth. Yet the fallout was the “Arthur Anderson” effect, where company execs, defense lawyers and others would point to the dismantled firm and say that is what happens when the government prosecutes. From my own personal experience, Arthur Anderson was always on the mind of DOJ prosecutors as well. 

The second insight was the pushback against the Thompson Memo, particularly around two areas (1) waiver of the attorney-client privilege and (2) paying for the defenses of employees who were charged with crimes. These two disparate yet related strands came together in the district court’s opinion in US v. Stein, which involved prosecutions against members of KPMG for promoting certain tax shelters. The government had pressured KPMG into not paying or indemnifying the defendants for their legal expenses. The trial judge found this action violated the defendants Sixth Amendment rights and eventually dismissed the case against 13 of 16 defendants finding prosecutorial misconduct in preventing the defendants from having funds made available for their defense. The court’s decision in US v. Stein led to the release of the McNulty Memo which revised the Thompson Memo to decidedly less favorable for the government. 

The final nail for the DOJ was the Ted Stevens prosecution where conviction was thrown out by the trial judge for prosecutorial misconduct. The fallout was palpable in the DOJ around the misconduct but the effect on trial lawyers was even greater. It now seemed that if you went to trial and lost for any reason, it would be a career killer inside the DOJ. This made prosecutors largely afraid to take cases to trial. As I learned many years ago, if you call yourself a trial lawyer but are afraid to go to trial, you are very far from a trial lawyer. The collateral impact has been to largely stop providing top level trial training for DOJ prosecutors at Main Justice. It also takes away the very large threat against companies that the DOJ will successfully take them to trial, no matter how bad the facts might appear. 

There was one other factor which, when coupled with the first three, would seem to insulate any criticism of DOJ by the judiciary. Judge Jed S. Rakoff has lodged objections to the Securities and Exchange Commission (SEC) no-admit settlement with Citigroup, refusing to accept the agreed resolution with the SEC. However, Judge Rakoff was rebuked by the 2nd Circuit Court of Appeals, which sided with both Citigroup and the SEC in staying the trial court and requiring the trial court to enter the agreed upon settlement without any changes. As Judge Rakoff was quoted in the book, the court of appeals “obviously decided I was a dumbbell and wrote the opinion accordingly.” All of this meant that in addition to the wounds the DOJ inflicted upon itself, there was no judicial oversight for the outcome; which are the settlements entered into by the DOJ and SEC. 

Eisinger details the reasons which led to the DOJ failures to prosecute after 2008. Too big to fail and too big to jail are certainly convenient catch phrases but his book clearly lays out what happened and, more importantly, why it all went down the way it did. For ever compliance practitioner, corporate counsel and white collar practitioner, this book should be required reading. 

 II. The Interview

Eisinger and Pelletier Talk About The Chickenshit Club

In addition to my review of The Chickenshit Club; I also interviewed Eisinger and Paul Pelletier, a partner at Pepper Hamilton, who was a source in the book. The both had some interesting takes on the underlying causes which led to the lack of Department of Justice (DOJ) prosecutions in the wake of the 2008 financial meltdown and ensuing scandal. This piece highlights some key points they raised in the interview. To listen to the full interview, check out the FCPA Compliance Report-Episode 349.

I began by asking Eisinger what led him to write the book. He said that as a financial reporter he had been writing about the growing subprime crisis as early as 2005. He also wrote about the looming financial crisis and leveraged the investment banks, which of course blew up leading to the 2008 financial meltdown. In 2009, Eisinger began work on a series of stories, “The Wall Street Money Machine,” which were co-authored with Jake Bernstein. This series revealed how Wall Street’s morally questionable practices had led to the worst financial crisis since the Great Depression and was awarded the Pulitzer Prize for National Reporting in 2011. It was the first Pulitzer Prize awarded to a group of stories published in a digital-only format. Based upon the prosecutions from the earlier financial crisis in the late 90s and early 00s around companies such as Enron, WorldCom and Adelphia, Eisinger had expected criminal charges to be brought. They never were so he sought out to explore what had changed. 

One of the things that I found most interesting about the book was that it laid out the multiple steps which led the DOJ down the road where it did not prosecute any senior executive after the 2008. The steps were not planned and in many ways, were not dependent upon each other. Yet they led from the successful Enron prosecutions to something very different just a few years later. Pelletier noted, that one of the important things was how slowly this happened and that this was not one decision. He made clear, “This wasn't Timothy Geithner or calling up Eric Holder and saying don't prosecute bankers.” But it was a process, “institutional imperatives and incentives that had been building up for a long time that resulted in this and this was building for a long time.” 

One of the things Eisinger and Pelletier disagreed on was the role of Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs) in leading to fewer trials. Eisinger was unremitting in his criticism of these prosecutorial tools, saying “this is the new way that corporations are prosecuted in this country through settlements for money.” He was also very critical of the role of corporations and their counsel in performing internal investigations and turning them over to the government. 

Pelletier feels that both DPAs and NPAs have a place in the prosecutorial arsenal and when “used appropriately are effective ways to both change corporate culture and to punish criminal corporate conduct.” Pelletier did agree with Eisinger in criticizing the role of corporations in turning over their internal investigations which largely form the basis of an enforcement action going forward. He feels that under such a scheme, “the department has moved away from the hard work of investigating and prosecuting and taking the easy way out.” 

Also interesting was their differences in opinion on how to turn things around. Pelletier began by suggesting the DOJ take a deep dive retrospective look back and see what really happened that did not allow it to bring any significant cases. One might even say the DOJ should do a root cause analysis along the lines of the one laid out in the Evaluation of Corporate Compliance Programs and apply its findings going forward. His second suggestion was increased and enhanced training for DOJ prosecutors on how to try cases. He noted that he had previously taught at the National Trial Advocacy Center in South Carolina but the DOJ had dropped sending young prosecutors there for advanced trial advocacy training. Finally, he said there must be a change in the attitude about bringing cases at Main Justice. You simply cannot have even an information policy that if you lose a case it ends your career and have an effective trial team. 

Eisinger also had some interesting ideas. First, he suggested paying DOJ prosecutors quite a bit more so that the siren song of money in private practice is not always calling. He mentioned the figure of $400,000 for senior prosecutors who made careers with the Department. This would help keep down the number of prosecutors who leave after six years or so, going into private practice. 

This Human Resource (HR) type initiative would extend to hiring lawyers from a wide variety of law schools, backgrounds and experiences to create greater diversity in the talent pool. Eisinger believes that there should be more geographic diversity but the pool of talent should have “more plaintiffs’ lawyers, more consumer protection lawyers, and more academics.” He advocated there should be older people who are what he termed “refugees from white collar defense practices” and who do not want to return to it or made their money and are satisfied with their careers.

He next turned to the issue of corporate versus individual prosecutions. Eisinger feels that prosecutors should focus on prosecuting individuals first and “the prosecution of corporations should be as a last resort. And the last resort should be a settlement with the corporation”, which should also be rare. He believes that by focusing on individuals, the DOJ can change corporate behavior in a more focused manner. 

To my mind the most significant and important book that every Chief Compliance Officer, General Counsel and compliance practitioner needs to read is The Chickenshit Club. It should be on your ‘must read’ list. 

To purchase a copy of The Chickenshit Club, click here.