The Divide: American Injustice in the Age of the Wealth Gap Read online

  What Judge White was calling “extraneous matters” was the nebulous concept of context: Why did some people go to jail, while others committed the same crime and walked? Judge White wasn’t much interested in the question—and legally, maybe, she was right not to be—but I was.

  By the time of the Abacus hearing, in fact, I’d spent years crisscrossing America in search of answers to that question of why some criminals went free, while others committing the same crimes felt the full weight of the state’s power.

  To say that the rich go free while the poor go to jail turns out to be a gross oversimplification. It’s far more complicated than that, and in a way more horrible.

  We’re creating a dystopia, where the mania of the state isn’t secrecy or censorship but unfairness. Obsessed with success and wealth and despising failure and poverty, our society is systematically dividing the population into winners and losers, using institutions like the courts to speed the process. Winners get rich and get off. Losers go broke and go to jail. It isn’t just that some clever crook on Wall Street can steal a billion dollars and never see the inside of a courtroom; it’s that, plus the fact that some black teenager a few miles away can go to jail just for standing on a street corner, that makes the whole picture complete.

  The great nonprosecutions of Wall Street in the years since 2008, I would learn, were just symbols of this dystopian sorting process to which we’d already begun committing ourselves. The cleaving of the country into two completely different states—one a small archipelago of hyperacquisitive untouchables, the other a vast ghetto of expendables with only theoretical rights—has been in the works a long time.

  The Divide is a terrible story, and a crazy one. And it goes back a long, long way.

  On June 16, 1999, a little-known official from Bill Clinton’s White House named Eric Holder published a memorandum entitled “Bringing Criminal Charges Against Corporations.”

  Few people in America knew who Eric Holder was back then. At the time, the young African-American lawyer was a former U.S. attorney best known for prosecuting the lurid corruption case of Congressman Dan Rostenkowski. The esteemed congressman had been charged, among other things, with using congressional funds to buy ashtrays for friends and for trading in officially purchased stamps for cash at the House post office.

  Like most revolutionary manifestos, the Holder memo, as it’s now known, was barely read at all when first published. Back in 1999, there seemed to be little need for a drastic change in American policy with regard to the prosecution of white-collar crime. Though the Department of Justice at the time was still woefully underpowered to take on certain types of crime—health care fraud went on almost completely unchecked in the 1980s and 1990s—Holder’s memo was nonetheless written in the wake of years of fairly vigorous prosecutions of companies that had committed crimes like theft, fraud, and market manipulation.

  From the Drexel Burnham Lambert insider trading case in 1988 (which led to the demise of one of the biggest houses on Wall Street) to the Daiwa Bank case in 1996 (in which the Japanese powerhouse was caught hiding billions of losses and was ultimately fined a record $340 million by Janet Reno’s Justice Department) to the infamous Bankers Trust case in 1999 (in which the bank was caught diverting unclaimed customer funds in order to boost its profits), federal prosecutors for more than a decade had put together a not-entirely-unimpressive record of busting high-level white-collar offenders.

  Ivan Boesky, Michael Milken, and Charles Keating were sixteen-point bucks on the Justice Department wall, and there was quantity as well as quality in the prosecutorial record, with more than a thousand defendants put in the dock and more than eight hundred actually sent to jail for crimes that had led to the country’s last serious financial crisis, the savings and loan disaster.

  At first blush, the Holder memo actually appeared to be a get-tough-on-white-collar-crime memo. In fact, during the Bush era, it would be spoken of derisively as an antibusiness document. It reads that way a little bit, too, opening with a sort of approving legalistic coda, sung in praise of the whole idea of criminal prosecution of the white-collar criminal.

  “Corporations should not be treated leniently because of their artificial nature,” Holder wrote. “… Vigorous enforcement of the criminal laws against corporate wrongdoers, where appropriate, results in great benefits for law enforcement and the public, particularly in the area of white collar crime.”

  Then the young attorney laid out a whole series of “factors” that the state might consider when deciding whether to charge a company. Among them were two entries that would prove extremely controversial:

  One factor the prosecutor may weigh in assessing the adequacy of a corporation’s cooperation is the completeness of its disclosure including, if necessary, a waiver of the attorney-client and work product protections.…

  Another factor to be weighed by the prosecutor is whether the corporation appears to be protecting its culpable employees and agents. Thus, while cases will differ depending on the circumstances, a corporation’s promise of support to culpable employees and agents, … through the advancing of attorneys fees … may be considered by the prosecutor in weighing the extent and value of a corporation’s cooperation.

  Translated into English, what this meant was that a company could push the Justice Department into a charge-filing mood just by refusing to waive attorney-client privilege or by paying its employees’ legal fees. This concept would give prosecutors powerful weapons in their negotiations with companies, essentially forcing them to lay down their shields even before the battle started.

  As is often the case with Holder, these passages represented an incoherent mix of inspired book-smart innovation and grossly impractical real-world cluelessness. The idea of going after companies that hid behind attorney-client privilege was an aggressive, solid concept. Law enforcement officials had long complained about companies that hid behind their lawyers. If, say, a company had suffered a loss thanks to a rogue employee, it might come to the state begging for an embezzlement investigation, and in such a case the company seldom had any problem opening its entire kimono for the state, waiving privilege immediately if it had any chance of getting its money back.

  But if the company itself was in trouble, and the state came sniffing around, a firm’s leaders would typically pull a kind of damsel-in-distress routine. They would say they wanted to cooperate, absolutely, but simply couldn’t show the state everything, because so much of its internal communications were privileged.

  Holder’s memo called BS on that. Essentially, it told companies: if you want us to really be convinced you’re cooperating, that you’re committed enough to fixing your problems that we don’t have to throw all of you in jail, you should waive privilege and show us everything.

  This was a bold stroke, real on-the-edge lawyering, the kind of thing every white-collar prosecutor had to love. It was like giving cops bigger guns or faster cars. More weapons to fight bad guys is what every law enforcement officer wants. And this weapon was a powerful one.

  But the next idea—dinging companies for paying the legal fees of its employees—that was something else. That would prove to be a design error on the order of the flammable fuel tank in 1970s-era Ford Pinto hatchbacks. Years later it would blow up in the face of the federal government in spectacular fashion (more on that later).

  At the time, however, the Holder memo seemed like a powerful get-tough weapon to shove in the federal investigator’s holster. Thus the idea that it would someday be seen as the genesis of a revolutionary leniency policy crafted on behalf of America’s rich would have seemed preposterous to anyone reading the document at the time. Holder himself probably would have been stunned. (In fact, he would later be stunned by interpretations of many different parts of his memo.)

  “It’s funny, looking back now, the way the Holder memo was originally thought of as this very aggressive thing,” says one former federal prosecutor. “The talk was that he’d gone too far in the other
direction.”

  But that’s only because people were focusing on the wrong part of the memo. Farther down, under the heading “Charging the Corporation: Collateral Consequences,” Holder began to trace the first outlines of what would become his accidental revolution. Again, he was writing about factors the government might consider in deciding whether to file charges:

  “Prosecutors,” he wrote, “may consider the collateral consequences of a corporate criminal conviction in determining whether to charge the corporation with a criminal offense.”

  Collateral consequences.

  What did that mean? Holder went on to explain:

  One of the factors in determining whether to charge a natural person or a corporation is whether the likely punishment is appropriate given the nature and seriousness of the crime. In the corporate context, prosecutors may take into account the possibly substantial consequences to a corporation’s officers, directors, employees, and shareholders, many of whom may, depending on the size and nature (e.g., publicly vs. closely held) of the corporation and their role in its operations, have played no role in the criminal conduct, have been completely unaware of it, or have been wholly unable to prevent it.

  This was a dully written but entirely reasonable-sounding proposition. All Holder was saying was that when prosecutors were looking at a big company that might be guilty of criminal conduct, it was okay for them to look at the innocents as well. The shareholders who would lose their shirts when a stock plummeted, the innocent line employees who would lose their jobs, the lawyers and executives whose careers would wrongly be tainted—all these people, Holder said, should figure into the prosecutor’s calculations.

  To charge or not to charge? For any prosecutor, federal or state, that had always been the eternal question. It had always been difficult to justify not filing criminal charges, when crimes had been committed, even if many people would be harmed in the process.

  But Holder’s memo proposed a new out. Consider the collateral consequences, it said, and if the math isn’t there, hold the charges. Seek other forms of justice instead. Fines. Civil sanctions. Cease and desist orders. Deferred prosecutions. There are other ways, Holder wrote, to get the job done.

  Like a scientific paper on fractal theory or gene mapping, the Holder memo was an insider’s take on a cutting-edge problem. Dealing with corporate crime in the new century would require a new set of prosecutorial and regulatory tools. Increasingly, companies were growing, in size, beyond the old regulatory parameters.

  One reason was globalization, in which advances in communications technology and production efficiency incentivized big companies to become essentially stateless entities, with operations spread all over the world. Where once you had a Boeing or a Hershey’s keep its factories and headquarters snuggled decade after decade in the same state or company town, you now had huge multinational firms peppering China and India with factories, and banking havens like Antigua and Jersey with corporate offices, as they raced around the earth in search of tax, labor, and other advantages. The whole world with its myriad sets of laws and rules presented endless opportunities for regulatory arbitrage. It would be harder for the cop on the beat to chase an offender that simultaneously existed everywhere and nowhere.

  Moreover, even within the United States there had been intentional, lobbied-for changes in corporate structure: the repeal of the Glass-Steagall Act, which had prevented the mergers of commercial banks, investment banks, and insurance companies (this repeal led to the creation of megafirms like Citigroup), and Supreme Court decisions rolling back bans on interstate banking (which led to a string of mergers, resulting in the formation of giant national banks like Wachovia and Bank of America). In the finance sector at least, these changes allowed companies to be more enormous and difficult to regulate than they ever had been before.

  Maybe Holder foresaw what was coming, or maybe it was just an incredible coincidence, but by the time he returned to the Justice Department under Barack Obama eight-plus years later, the business world would be dominated by companies whose potential collapse would not merely cost a few jobs here and there but would threaten the stability of the entire world economy. Holder couldn’t have known it at the time, but through his 1999 Collateral Consequences memo, he had designed a get-out-of-jail-free policy for a kind of company that hadn’t existed yet: the too-big-to-fail megafirm that simply couldn’t be reined in with conventional criminal laws.

  But all that was in the future. For a time, after Holder left the Clinton White House, it looked as if none of this would ever matter at all.

  After Bill Clinton and Janet Reno stepped down and George Bush and John Ashcroft took their places, it seemed for a while like Collateral Consequences was destined to become a historical footnote. The first few years of Bush’s presidency were marked by a series of high-handed white-collar criminal prosecutions of executives at companies like WorldCom, Enron, Rite-Aid, and Tyco, and those investigations were notable for the state’s relative indifference to their collateral consequences.

  The Bush administration and the Republican Party would definitely earn a reputation for being in the pocket of big business, and not only through legislation like the Medicare Modernization Act (a grotesque and shameless handout to the pharmaceutical industry), the Bankruptcy Abuse Act (a similarly shameless handout to the consumer credit industry), and the Clear Skies Act (a huge, and hugely Orwellian, handout to the energy industry). There were also horrific regulatory surrenders like the Securities and Exchange Commission’s 2004 decision to lower capital reserve standards for the top five investment banks, a move that eventually helped three of those banks (Merrill Lynch, Bear Stearns, and Lehman Brothers) to borrow themselves out of existence.

  And the accounting scandals of the 2000s did involve a lot of current and former Bush cronies, to the extent that a number of key regulators (including Ashcroft himself) faced calls to recuse themselves from investigations.

  But the Bush Justice Department without a doubt also aggressively pursued a handful of symbolically important criminal investigations of big companies, apparently motivated by more than just the desire to score points on an issue that, thanks to Bush and Cheney’s relationships to some of the defendants, threatened that White House politically. The scandals seemed genuinely to take the state by surprise, and emotions like anger and a sense of betrayal could be detected as the Bush Justice Department in some cases went all Walking Tall on some of the corporate targets.

  The most shocking moment in the counteroffensive came on July 24, 2002, when federal agents stormed the Manhattan town-house of seventy-eight-year-old Adelphia cable CEO John Rigas—who along with his sons had used his company as a personal piggy bank for years, embezzling billions—and dragged him out on the street to be perp-walked before the cameras. The same day Adelphia itself was charged with fraud by the SEC. The company, meanwhile, had been pushed into bankruptcy a month before the arrest. Nobody shed much of a tear for any of these firms. A historical note that gives lie to later suggestions that the markets would panic in the face of criminal investigations of Wall Street: when Rigas was busted, the stock market actually rallied to its second-biggest one-day gain ever, thanks to the widespread perception that the state was taking out corporate America’s garbage.

  Stories like these made the Collateral Consequences idea seem irrelevant, a minor notion floated by a minor Clinton lawyer, now gathering dust in the Bush White House.

  Then came Arthur Andersen.

  The venerable accounting firm was swept up in the Enron scandal and charged criminally by the Bush Justice Department for destroying files and perhaps collaborating in Enron’s accounting schemes. The government offered the company a deferred prosecution agreement, one that would have required an admission of wrongdoing.

  Arthur Andersen wanted no part of that. It essentially told the government to blow itself. In a scathing letter sent to prosecutors in March 2002, the accounting firm’s lawyers blasted the government for what it cla
imed were high-handed tactics.

  “The department proposes an action that could destroy the firm, taking the livelihoods of thousands of innocent Andersen employees and retirees,” the letter read. The letter further argued that in an industry where trust and a reputation for honesty were essential, asking Arthur Andersen to admit to its guilt was tantamount, in the business world, to a criminal conviction.

  This letter spoke directly to the Collateral Consequences memo. Here was a major company, an employer of thousands, using its innocent employees as a kind of human shield in a desperate last-ditch attempt to stave off a criminal prosecution. It was a high-stakes stare-down in which Andersen’s lawyers all but dared the government to pull a My Lai and machine-gun its innocent employees into a ditch.

  But instead of blinking, the Bush Justice Department doubled down. It charged the firm, criminally, on a single felony count. A jury convicted. Almost immediately afterward, the firm collapsed. And 28,000 jobs were lost.

  Instead of blaming the lost jobs on the leadership of a ninety-year-old accounting firm that had been too stupid to realize that its only salable product in the financial marketplace was honesty, government officials over the next few years quietly began to recoil from their own decision to press forward with charges against a clearly guilty company.

  The first sign of change came with a Supreme Court decision in early 2005. The high court, led by infamous blowhard William Rehnquist, overturned the Arthur Andersen conviction, ruling that the jury instructions had been so broad that the firm could have been found guilty even if high officials in the company had not intended to break the law.