--:-- Sean Rameswaram: Support for the show today comes from Tom's. Tom's has brick and mortar stores in several American cities, Los Angeles, Chicago, Austin, Portland, and they're going to open one in Brooklyn this fall. But also, they're on the internet. And you can find shoes at toms.com slash explained that come with a 15% discount if it's your first purchase at that website.
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--:-- Sean Rameswaram: Paul Manafort's second trial was supposed to begin this week in Washington, D.C., but it's not because Paul Manafort flipped. We found out Friday he's now cooperating with Robert Mueller's Russia investigation. If that investigation has made one thing clear to the entire country, it is this. It is very easy to get away with white-collar crime in the United States of America.
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--:-- Sean Rameswaram: All Mueller had to do was open up the books, et voila. President Trump, his fixer, agreeing to plead guilty to eight counts of financial crimes. He could now face up to 63 months in jail. Failing to file a foreign bank account. Tax evasion. Underreported his income. Bank fraud. Bank fraud. Just double checking here.
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--:-- Sean Rameswaram: And that's where there could be trouble, right? Yep. Two. Okay. So that's it. Was it always this easy to flagrantly commit white-collar crime? Jesse Eisinger from ProPublica says no. There's never been a golden age where we prosecuted white-collar criminals very well, but there have been silver ages where we did it a lot better than that.
--:-- Jesse Eisinger: I wrote a book called The Chicken Shit Club, Why the Justice Department Fails to Prosecute Executives. Most recently, after the NASDAQ bubble burst, the stock market bubble, in the late 1990s, we prosecuted almost all the top executives from almost all the major companies that were implicated in the accounting fraud pandemic, most notably Enron.
--:-- Sean Rameswaram: But there was also Tyco, Global Crossing, WorldCom. Your listeners may harken back to some of those names. Yeah. Enron was the big one, right? Enron was the very biggest.
--:-- Jesse Eisinger: Yes, exactly. So remind everyone what Enron did. What exactly did the company get in trouble for? Yeah. What didn't they get in trouble for? It was a giant energy trader. It was very close to the Republican Party, close to the Bush family. And it had reached the top of the Fortune 500, top five or 10, if I recall correctly, and then spectacularly collapsed.
--:-- Sean Rameswaram: And it turned out that it had been faking pretty much everything, lying about having a huge amount of debt in off balance sheet vehicles and inventing revenue that it didn't really have. It was a house of cards, the kind of classic case of hiding your debts and not really producing any profits.
--:-- Jesse Eisinger: And once people started exposing it, those things are just not sustainable. And so the house of cards starts to fall apart. When exactly does the federal government get involved to prosecute? So the stock market starts crashing in March of 2000. That's another reason why Enron collapses, because the euphoria starts to dissipate.
--:-- Sean Rameswaram: And the old saying from Warren Buffett is when the tide goes out, you get to see who's swimming naked. So people are starting to see the shoulders and the pectorals and the skinny ribs of Enron and starting to see things that they don't want to see. And that's why they start abandoning the stock price.
--:-- Jesse Eisinger: And the key to Enron was having a high stock price. When the stock prices unravels, all the off-balance sheet debt vehicles start to be called in and that unravels as well. The Department of Justice is looking at this, and in January of 2001, they create a task force, the Enron Task Force.
--:-- Sean Rameswaram: The task force will function as a financial crimes SWAT team, overseeing the investigation of corporate abusers and bringing them to account. This is the deputy attorney general at the time at the DOJ, a guy named Larry Thompson. As you know, our prosecutors and investigators have been working hard at running down the vast array of allegations of criminal conduct related to the collapse of the Enron Corporation.
--:-- Jesse Eisinger: And he pairs up with the guy that you may have heard of named Robert Mueller. Executives who deceive the investing public will be held accountable. Who is the head of the FBI at the time. The FBI investigates and gives the investigative findings to prosecutors at the DOJ.
--:-- Sean Rameswaram: And there's some political pushback within the Bush White House because business executives are screaming to their friends in the White House that the Bush administration DOJ is being too aggressive. And so Mueller and Larry Thompson go to a meeting with George Bush.
--:-- Jesse Eisinger: And instead of speaking in generalities, they decide, well, let's show Bush the specifics of what we have uncovered about Enron and all these other accounting fraudsters We going to lay out the evidence for him And they spend a meeting and they lay out the evidence And at the end of the meeting he says LT Bob you go and get him and gives them a lot of political cover.
--:-- Sean Rameswaram: My administration will do everything in our power to end the days of cooking the books, shading the truth and breaking our laws. Okay. So what happens to Enron and its executives? So the SWAT team is essentially locked in a room and they start to put cases together.
--:-- Jesse Eisinger: They initially focus on Arthur Anderson, the accounting firm that was the handmaiden to Enron's fraud. And the prosecutors are negotiating with Anderson to admit guilt. What Anderson had done is when they got wind that the feds were starting to investigate Enron, they destroyed literally tons and tons of documents related to the audit of Enron.
--:-- Sean Rameswaram: Did you give an order to destroy documents in an attempt to subvert governmental investigations into Enron's financial collapse? And if so, did you do so at the direction or suggestion of anyone at Anderson or at Enron? Mr. Chairman, I would like to answer the committee's questions, but on the advice of my counsel, I respectfully decline to answer the question based on the protection afforded me under the Constitution of the United States.
--:-- Jesse Eisinger: And the government, after uncovering this, decided they had to prosecute for obstruction of justice. They bring the company to trial and they win. And Anderson is found guilty. In this country, if merely one executive in the course of his or her job duties commits a crime, you can find the corporation liable, criminally liable.
--:-- Sean Rameswaram: And all sorts of things happen after criminal liability. You can't get bank loans. Sometimes you can't get government contracts. You can't get licenses from the government. So Anderson ends up going out of business.
--:-- Jesse Eisinger: So what happens after they take down this accounting firm? Well, so the Enron prosecutors go on to prosecute all the top executives from Enron. They lose some cases. They weren't afraid of losing. But they ended up prosecuting the CFO, Andy Fastow, the CEO, Jeff Skilling. Jeff, do you think you'll ever be able to admit to yourself that you may have committed crimes? No. Why not? I didn't. And the founder and chair and one-time CEO, Ken Lay. I firmly believe I'm innocent of the charges against me. As I have said from day one, I still firmly believe that as of this day.
--:-- Sean Rameswaram: All were found guilty at trial. They went straight to the top. And what is the way that this particular case of corporate crime was prosecuted have to do with how white collar crime works now, you know, almost 20 years later?
--:-- Jesse Eisinger: Well, there was a backlash. The backlash was against the Arthur Anderson prosecution. They kind of used that as the focal point for a lobbying effort. Corporations and the White Collar Bar and the Wall Street Journal editorial page ended up depicting the Arthur Anderson prosecution as a terrible miscarriage of justice.
--:-- Sean Rameswaram: They changed the narrative. They changed the narrative away from accounting fraud and instead started talking about the innocent employee victims, tens of thousands of them. And they rallied these people on the streets. And no longer were people talking about Anderson as an accounting fraudster but as a victim of these prosecutions.
--:-- Jesse Eisinger: And that was incredibly successful and changed the narrative. And because of that, the Department of Justice went through a decade where they lost a bunch of tools, prosecutorial tools in the courts, but also through policy changes that they implemented.
--:-- Sean Rameswaram: And by the end of the decade, by the time the financial crisis hits in 2008, they really have lost the will and ability to prosecute top corporate executives.
--:-- Jesse Eisinger: If a white-collar crime is committed in a city and no one cares to prosecute it, is it even a crime? I'm Sean Rameswaram for him. That's next on Today Explained. Vanderplug. Yeah. You listened to the show yesterday. Oh, yeah. You hear the ads? Um, Tom's. And that's why I have you here right now, is to talk about Tom's with me, because as you can see. You got a big box. I got a big box.
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--:-- Sean Rameswaram: Honestly, a box that size, it could be anything. How many shoes do you think are in here? Honestly, it could be hundreds. I mean, hundreds of baby shoes, maybe. I'm sorry, are baby shoes not shoes anymore? Let's find out together.
--:-- Sean Rameswaram: Oh, there's another box in there. This is like Inception. There's boxes within boxes. Oh, you've got to be kidding me. What else is in there? Whoa. Count them. That's two boxes. Three boxes Four boxes Oh my God They fallen over You got so many boxes We got shoes Vanderplug We got some work to do Do we? To be continued.
--:-- Sean Rameswaram: Alright. Can we wear these shoes? We'll see where we're at. In the meantime, you can find your shoes at toms.com slash explained, where you can get 15% off your first purchase of Tom's shoes. Uh-huh. Hey, while you're here, you listen to podcasts? Uh, duh. Have you heard about the Last Seen podcast from WBUR? No, not at all. Have you seen Oceans 8? Yes. Oceans 11? Yes. Oceans 12? Yes. Oceans 13? Yes. I lied. I haven't seen Oceans 8. Okay, so it sounds like you half like heist movies. You know, I can dabble with a heist movie. Okay, well, Last Scene's a heist podcast. Oh, wait, what do they heist? Art. They do? Like a billion dollars worth. They steal art? WBUR investigates the largest unsolved art heist in history in the podcast. Last scene. Find it wherever you find your podcasts.
--:-- Sean Rameswaram: What happens to white collar crime prosecutions after Enron? Is this backlash so profound that it changes the way we do this sort of prosecution? Yeah, it entirely changes. So prosecutions do drop. There's a big resource shift after 9-11. So the FBI takes away white-collar agents and puts them on terrorism and terrorism financing. So there's a shift in priorities.
--:-- Jesse Eisinger: And then the Department of Justice really no longer prosecutes large companies. They're afraid of the too-big-to-fail problem, the too-big-to-jail problem. They think that if they prosecute corporations that it will lead to systemic problems in the markets and they want to avoid that.
--:-- Sean Rameswaram: And so instead of prosecuting individuals and instead of prosecuting corporations, they settle with them for money. And how does that play out during the Great Recession where you've got this mix of deregulation and financial crimes driving the crisis?
--:-- Jesse Eisinger: After the financial crisis, the Obama DOJ does not make it a priority to investigate these crimes. And that's the first mistake. Unlike Enron, where Larry Thompson and Michael Chertoff and Bob Mueller really focused on these bringing these malefactors to justice.
--:-- Sean Rameswaram: What you had was Eric Holder who was not particularly aggressive about this and Lanny Brewer who was the head of his criminal division who also dithered. And then up in New York in the heart of the financial crisis, you had Preet Bharara take over the Southern District of New York.
--:-- Jesse Eisinger: And the Southern District of New York is the most important office of the Department of Justice. The banks had collapsed in Preet Bharara's backyard. But instead of prosecuting financial crisis era crimes, he focused on insider trading at hedge funds, which is really a kind of – I think of it as a kind of misdemeanor two-bit crime that really undeniably is irrelevant to the financial crisis.
--:-- Sean Rameswaram: It had nothing to do with the financial crisis. And he got an enormous amount of credit for this and was elevated to become something of a celebrity on the back of what I consider to be a myth.
--:-- Jesse Eisinger: So what was going on? Was the Obama administration actually fearful that pursuing these white-collar crimes in a punitive way could further hurt the economy at this very fragile time? Yeah, I think there was a lot of fear.
--:-- Sean Rameswaram: Timothy Geithner chastised people who were calling for prosecutions by saying, we're not going to do Old Testament justice. Right, he got a famous line. In the fires of the panic, you know, with the country facing a collapse, a run and the risk of a Great Depression, our first obligation was to try to land that plane safely for people.
--:-- Jesse Eisinger: So they didn't want to capitulate to the mob. And I think that they saw prosecutions as kind of picking out a few rotten apples and stringing them up from lampposts. And what they wanted to do is be much more sophisticated about these things.
--:-- Sean Rameswaram: They were ruled by kind of technocrats and a technocratic kind of ethos. And what they wanted to do was address this systemically by reforming the financial system and the financial regulatory system. So they ended up focusing a lot of energy on Dodd-Frank.
--:-- Jesse Eisinger: They focused a lot of energies on that and almost no energy and focus on actual prosecutions, which they see as, I think, a little bit barbaric and simple and ineffective. Right. Barbaric and simple and ineffective unless it's for something like assault or robbery or murder, let's say.
--:-- Sean Rameswaram: So what does their refusal to do like Old Testament justice, as Tim Geithner called it, in this massive financial collapse do for the way we approach white collar crime in the country? Well, I mean I think one is it has a profound effect on the way people see the justice system.
--:-- Jesse Eisinger: And it highlights that we have a two-tier justice system in this country which as you allude to where we prosecute street crime aggressively, disproportionately the poor, disproportionately people of color. And we allow a certain class, disproportionately white male and wealthy, impunity to commit crimes.
--:-- Sean Rameswaram: And I think people saw that and saw the injustice of that. If people are asked one fact from the financial crisis, you know, if you stop them on the street, they'll probably be able to tell you that no bankers were put in prison after it. And I think that they understand that it's basically an outrage, a scandal.
--:-- Jesse Eisinger: I think it's the largest scandal of the Obama administration. And so where does that leave us? You say that now it's just, you know, pay a fine, have a settlement. Is that how white collar crime is police now It hey how much money can we get from Time Warner for that thing that they did
--:-- Sean Rameswaram: Yeah, I think it actually much worse than that. And the reason why it worse is that we have outsourced and privatized corporate law enforcement and we outsourced and privatized it to the companies themselves.
--:-- Jesse Eisinger: So what happens in America today is that large companies investigate themselves. They hire big law firms and the law firms conduct internal investigations. And then they deliver these reports to the government, to the prosecutors. And the prosecutors then essentially leaf through the report and determine what the price that the companies will have to pay for it.
--:-- Sean Rameswaram: You can imagine that these internal investigations that the law firms produce for their clients are studiously incurious about culpability. I mean, this is akin to Donald Trump being asked to investigate whether he colluded with the Russians to win the election in 2016 and he hires Rudy Giuliani to investigate the matter.
--:-- Jesse Eisinger: That's not a system that's going to work. And it's even worse than that because the prosecutors who are making these determinations, The vast majority of them, 80, 90 percent of them, are going to become corporate defense lawyers. They're going to become partners at the very firms that defend the corporations from their successor generation of prosecutors.
--:-- Sean Rameswaram: What kinds of companies are allowed to hire their own internal investigators to figure out what kind of malfeasance they are committing? Every large company in America, Pfizer and BP and J.P. Morgan and Uber and Google, the list goes on and on.
--:-- Jesse Eisinger: There isn't a company in America that doesn't hire its law firm to do an internal investigation. The problem is the learned helplessness by prosecutors. They have decided that they lack the ability and resources and time to put into investigating corporate malfeasance.
--:-- Sean Rameswaram: So they let the companies investigate themselves. Is that the reason we now see in the Mueller investigation that he's finding all of these instances of white-collar crime and we've got Cohen going down and Manafort going down and all these other guys going down. And it's not even what he was asked to investigate. It's baffling.
--:-- Jesse Eisinger: Yeah, I think that something else is going on. You know, I wrote a book about corporate malfeasance and I thought that this was a terrible problem in American society. And it turns out that I underestimated the problem.
--:-- Sean Rameswaram: And what Mueller is revealing is that there are whole swaths of the economy that are rife with fraud, not just corporate America but high-end real estate and campaign finance and lobbying for despots and oligarchs in Washington, D.C.
--:-- Jesse Eisinger: And it turns out experts have been telling me that there are probably thousands and thousands of Manaforts out there and Coens out there. But the feds, the FBI and the IRS don't really have the capacity or interest in trying to uncover who they are.
--:-- Sean Rameswaram: So that's one big thing that we are learning from Mueller is that he is exposing our white collar prosecution crisis and the fact that we have let these sectors of the economy run amok.
--:-- Jesse Eisinger: I mean, what do you think it would take to really shift the way the country treats white-collar crime right now? Well, I'm stunned that the Great Recession and the global financial crisis did not cause more fundamental reckoning with our society and more reforms.
--:-- Sean Rameswaram: I think the Obama administration really blew it. I think you can draw a direct line from the financial crisis to the Donald Trump presidency. And I think the lack of prosecutions contributed to his rise, contributed to the anger that people saw that people were not held accountable for these colossal mistakes and their frauds.
--:-- Jesse Eisinger: Meanwhile, the Trump administration is essentially on a regulatory strike. They're not bringing cases against individuals. The number of cases against white-collar individuals is well over a 20-year low. And they're not bringing corporate fines. Corporate fines are down 90% in the first year of the Trump administration compared to the last year of the Obama administration.
--:-- Sean Rameswaram: It turns out that the SEC is issuing fewer press releases about sanctions and fines against hedge funds and banks than it did under the last administration.
--:-- Jesse Eisinger: So regulators have decided to voluntarily walk off the job in the Trump years. The Federal Reserve's Daniel Tarullo, top regulator of Wall Street banks, is stepping down. The head of the Consumer Financial Protection Bureau is resigning.
--:-- Sean Rameswaram: And I don't know if it's going to be tomorrow or in five years or 10 years. I would never predict when, but there's going to be a financial crisis because of it.
--:-- Jesse Eisinger: Jesse Eisinger is a senior reporter and editor at ProPublica. His book about white-collar crime is called The Chicken Shit Club, why the Justice Department fails to prosecute executives.
--:-- Sean Rameswaram: I'm Sean Rameswaram for him. This is Today Explained. Summer's officially over in just four days. Maybe you're thinking ahead to autumn, thinking about your fall fashions. Think about Tom's Shoes. You can get 15% off your first purchase right now when you go to toms.com slash explained.
