By Matt Taibbi / Substack
On November 27, 2011, a federal judge named Jed Rakoff threw out a $285 million regulatory settlement between Citigroup and the Securities and Exchange Commission, blasting it as “neither fair, nor reasonable, nor adequate, nor in the public interest.” The S.E.C. and Citigroup were stunned. Expecting to see their malodorous deal wrapped up, the parties were instead directed “to be ready to try this case” the following summer.
Try a case? Was the judge kidding? A pattern had long ago been established in which mega-companies like Citigroup that were implicated in serious offenses would be let off with slaps on the wrist, by soft-touch regulators who expected judges to play ball. These officials in many cases were private sector hotshots doing temporary tours as regulators, denizens of the revolving door biding time before parachuting back into lucrative corporate defense jobs. A judge who refused to sign the settlements such folks engineered was derailing everyone’s gravy train.
Citigroup had replicated a scheme employed by numerous big banks of the era, helping construct a “born to lose” portfolio of rotten mortgage securities to be unloaded on customer-dupes, who were unaware the bank intended to bet against them. A similar case involving a Goldman, Sachs deal called “Abacus” had concluded the previous year with a hefty fine, but, infamously, no admission of wrongdoing.
In the Citigroup version, the bank earned $160 million in profits, customers lost $700 million, and the S.E.C. wanted to impose a $285 million fine. As noted by papers like the Washington Post at the time, the S.E.C.’s logic was to ask the bank to return the money ($160 million plus interest equaled $190 million) and pay a $95 million civil penalty on top.
Citigroup that quarter alone earned $3.8 billion in profits, which meant the S.E.C. proposed to charge the bank — which had been functionally bankrupt in 2008 and was booming again thanks to a massive public bailout, engineered in part by former Citi officials by the way — a fee of 2.5% of its quarterly profits. In a country where an ordinary schlub could get multiple years in prison for something like third-degree attempted theft of a car, seeking no individual penalties and asking shareholders to forego a tiny fraction of earnings as restitution for stealing $160 million was a joke.
The fine was “pocket change to any entity as large as Citigroup,” noted Rakoff, in a blistering 15-page opinion. Objecting to the practice of allowing corporate crooks to walk away without admission of wrongdoing, he noted that Citigroup had already begun asserting its right to deny the allegations, both in litigation and to the media. This, he said, left the public despairing “of ever knowing the truth in a matter of obvious public importance.”
Such a policy, he concluded, would reduce the court to “a mere handmaiden to a settlement privately negotiated on the basis of unknown facts.” And, well, screw that.
There was cheering in the legal community and even in the press (“Judge Jed Rakoff Courageously Rejects SEC-Citigroup Settlement” was the Post headline) for a few minutes. Then came the inevitable plot twist. Citigroup and the S.E.C., robber and cop, joined together to appeal the decision, forcing Rakoff to retain counsel. Before long, Rakoff was overturned. An appeals court judge ruled he had stepped out of bounds by demanding the “truth” behind allegations, saying “consent decrees are primarily about pragmatism.”
The original dirty deal was re-routed back to Rakoff, who was then forced by the appeals court to approve it. “That court has now fixed the menu, leaving this court with nothing but sour grapes,” Rakoff wrote in a succinct but seething opinion, adding one parting warning:
This court fears that, as a result of the Court of Appeal’s decision, the settlements reached by governmental regulatory bodies and enforced by the judiciary’s contempt powers will in practice be subject to no meaningful oversight whatsoever.
The symbolism of the Rakoff episode was striking. Citigroup had been created by something like the ultimate insider deal. The merger of Citicorp and the insurance conglomerate Travelers had been struck in the late nineties despite apparently conflicting with several laws, including the Glass-Steagall Act and the Bank Holding Company Act of 1956.
The merger to create the first American “supermarket bank” only happened because a temporary waiver was granted by Alan Greenspan’s Federal Reserve. This held up in time for Bill Clinton to sign a bipartisan piece of legislation called the Gramm-Leach-Bliley Act, sanctifying the deal after the fact. Former Clinton Treasury Secretary Bob Rubin then skedaddled to a job at the new super-bank that Citi itself described as having “no line responsibilities,” but nonetheless would go on to earn Rubin $115 million, a transaction that grossed out even the Wall Street Journal.
Thus the way the S.E.C. and the Appellate Courts essentially joined hands with this particular firm to strike down Rakoff’s ruling was a graphic demonstration of the self-defense capability of what one former Senate aide I know calls “The Blob,” i.e. the matrix of interconnected (and, not infrequently, intermarried) lawyers, lobbyists, politicians, and executives who run the country from the Washington-New York corridor. I don’t think it’s an accident that politicians in both parties, ranging from Bernie Sanders to Donald Trump, began scoring political points by talking about the “rigged game” just after Rakoff’s Capra-esque gesture was overturned. What did Rakoff himself think?
Beginning in 2013, Rakoff began writing a series of articles for the New York Review of Books that outlined problems in the criminal justice system, ranging from mass incarceration to corporate invulnerability to the abuse of deferred prosecution agreements (more on that in a moment). This series of articles eventually became the inspiration for a book released last year called Why The Innocent Plead Guilty and Why The Guilty Go Free. The opening passage is worth quoting in full:
A sense of justice is central to human endurance. No matter what wrongs we suffer or misfortunes we withstand, the belief that justice will ultimately prevail is part of what keeps us going. Nowhere is this belief more deeply felt than in the United States, and with good reason, for over the decades we have made progress, however haltingly and imperfectly, in dealing with poverty, racism, sexism, homophobia, and many other challenges.
Rakoff identifies the core political problem of America in the 21st century: the decline not only in the performance of government but in the perception of its performance. We’re a society whose population is used to believing that it’s headed in the right direction, but that belief is waning fast, creating mass instability. He goes on to talk about some of the reasons for this, and while readers may be familiar with some themes, the specifics of what’s broken in the machinery will surprise many.
Even people who think they’ve got a handle on how rarely cases go to court usually underestimate the reality. In 2018, while 8% of federal charges were dismissed, “97 percent of the remainder were resolved through plea bargains, and fewer than 3 percent went to trial.” Long mandatory sentences for certain types of crimes (particularly drug crimes) added to an easily manipulated bail system give prosecutors huge leverage to extract pleas from ordinary criminal defendants.
As I wrote about in The Divide, there are also games prosecutors can play to end-around speedy trial rules and work the calendar to make what Rakoff describes as the core promise of the justice system — “that before we deprive a person of his liberty, he will have his day in court” — seem hopelessly remote. Add a plea-negotiation system that’s largely conducted in secret, and far more people than most would guess end up pleading to crimes they didn’t commit.
A generation raised on CSI-type shows will be disinclined to believe it, but the whole system of forensic evidence is deeply flawed. As Rakoff notes, with the exception of DNA, it’s too easy to thumb the scale with techniques like “microscopic hair matching, bite-mark matching, fiber matching, handwriting comparisons, tool-mark analysis, shoe-print and tire track analysis, and bloodstain analysis.” He adds that “of the more than 2,400 proven false convictions since 1989 recorded by the National Registry of Exonerations, nearly 600, or 25 percent, involved false or misleading forensic evidence.”
Moreover, those are just the cases we know about: the public still only occasionally busts through and discovers that a supposedly august law enforcement agency has been using junk science, as in the case of the FBI having to admit its infamous “bullet lead analysis” was bunk.
For me, the most interesting part of the book had to do with white-collar investigations. Rakoff has seen this world from all sides, as a judge, a prosecutor, and a defense attorney, and describes in detail all the bizarre advantages cooked into the system for so-called systemically important companies. Despite the fact that the law gives prosecutors significant leverage to pursue individuals guilty of white-collar crime — if they’re willing to gather evidence — the more common pattern involves outsourcing investigations to third-party law firms before instituting “We promise, never again” settlements that are often repeatedly violated.
His extreme case is Pfizer, which entered into three consecutive deferred prosecution deals for everything from bribing managed care companies to illegally promoting off-label medications, only to be busted a fourth time for, among other things, bribing doctors and medical journals. The government then imposed a “historic” $2.3 billion fine and boasted that it really had the firm where it wanted, this time.
“Pfizer has agreed to enter into an expansive corporate integrity agreement,” the government wrote, that “provides for procedures and reviews to be put in place to avoid and promptly detect conduct similar to that which gave rise to this matter.” As Rakoff wrote:
In view of Pfizer’s record, this seemed an astonishing act of faith. And, indeed, in 2012, Pfizer was found to have committed still further crimes—this time, illegal foreign bribes—and entered into yet another deferred prosecution agreement.
He could have gone on and noted the firm later got busted again for an illegal kickback scheme that targeted Medicare. Remember that a single drug conviction can make an ordinary individual ineligible to receive anything from public housing to food stamps to federal grants, but Pfizer could be a five- or six-time serious offender and still be on speed-dial for a huge range of no-bid federal contracts.
Today only some would complain about this, given Pfizer’s role in vaccine production, but it’s noteworthy nonetheless how few consequences are attached either to individuals or to companies caught up in repeat huge-scale offenses, compared to the Scarlet Letter that hangs around ordinary street criminals.
Rakoff’s book is a reminder that an enormous disappointment of our current situation is the fixable nature of so many of our problems. We could clean things up but just don’t, perhaps because neither party has shown much inclination to stand up to important donors. The increasingly public nature of this dysfunction has surely contributed to the spiraling levels of distrust in the system in recent years.
I recently caught up with His Honor — always an affable, funny, thoughtful interview — to ask about his book, and the legacy of his effort to take on the system a decade ago:
Matt Taibbi: Why is it so hard for regulators to go after individuals at companies? If they have evidence, shouldn’t a prosecutor be able to walk into a CEO’s office and say something like, “You have five days to hand over the guiltiest executives”?
Judge Rakoff: One problem is, the way it works now is the government doesn’t do that much of its own investigation. They turn it over to the outside counsel for the company. They give various rationales for this, but the real reason is because it uses up fewer resources. Say an article in the press comes out that a company, Wells Fargo, committed serious crimes, creating false bank accounts. Instead of doing the painful long-term investigation that used to be done, what they do now in all these cases is call in the outside counsel. They call in the company, who immediately hires, usually a former federal prosecutor, to conduct the review.
It’s a big moneymaker for many of these firms. And that person comes in, and has instant credibility with the people he had dealt with this as colleagues for many years, and says, “Okay, we’re going to do an investigation, and find out everything, and we’ll report back to you, say, in six months.” And when they report back in six months, they almost always say, “Oh, we did find some bad guys. They were low-level, maybe occasionally mid-level, and we fired them, and if you want to go after them, you can. But we don’t think there was anything going on at the higher level.”
MT: What would be a more effective way to go about investigating?
Rakoff: I’m still old-fashioned in this regard. The way we used to make these cases is, we started with the people we knew had committed a crime, we flipped them and just went up the ladder. The problem with that is, of course, it takes three, four years. You never know at the beginning, whether it’s going to pan out or not. It requires a lot of resources, but it was the typical way of proceeding for many decades. And then, around 2005, 2006, or so, they discovered, “Oh, we can go down this deferred prosecution route instead… and we’ll still get a great big headline.” It will say, “Company X pled guilty today, and paid a fine of $2 billion, and instituted compliance measures.” Then we can just go back to doing other stuff, and it won’t cost us a lot of time and resources that we may not have. So that’s sort of the thinking among both Democrats and Republicans right now.
MT: Have you thought about the legacy of your Citigroup case? It was shortly after that we started to hear politicians on both sides talking about the “rigged game.” Do you think that there’s been a political consequence to these settlements, and is the public paying attention to them in a way that maybe they didn’t before?
Rakoff: Well, I think in the short run, that was clearly so, after my decision, and after a number of other judges made similar decisions, all of which [laughs] got reversed by the way. In the Court of Appeals, they basically said, “Don’t bother us with this. Whatever the S.E.C. or the U.S. Attorney says is right, is good enough.” But there was some political backlash.
MT: Is there a worry with these settlements that they encourage corporate culture to change in the wrong direction? In other words, they get away with stealing so easily, that sooner or later, they’re not just stealing, but doing something worse?
Rakoff: I have two views of that. The first is that the most fundamental problem here, in my view, is that you are allowing people who orchestrated major, major crimes to get away with it, while at the same time, we’re sending 2 million people to jail or prison for much more minor crimes for the most part. It’s really stark, the contrast. This is partly what my book’s about. We have mass incarceration for the poor, and it’s totally hands-off for the rich, and that’s pretty hard to stomach.
In the more narrow perspective that you’re raising… It’s not like maybe someone says, consciously, “Oh, let’s commit a big giant crime, and we’ll get away with it.” But what it does mean is they will take highly aggressive positions, because they know that in the end, they can buy their way out of it, and still make a profit. And that, surely, does send a message over time.
