THE TWO FACED JUSTICE SYSTEM

THE TWO-FACED JUSTICE SYSTEM: THE UNITED STATESAND ELITES IN

CORPORATEAMERICA

Introduction

NURAN SERCAN | RUTGERS - NEW BRUNSWICK

Multiple financial crises and the pandemic have shifted many Americans' views on the importance of ethical decision-making and the function of justice in the corporate world. The legal system surrounding and dictating large corporations in the United States is heavily reliant on the roles of the Securities Exchange Commission (SEC) and the Department of Justice (DOJ).1 The SEC was founded in 1934 to provide accurate financial information to protect investors and regulate the securities markets to create a more equitable economy. 2 In congruence, the Department of Justice (DOJ) was established as the regulator and enforcer of federal laws instituted by the SEC to prevent white-collar crime.3 While these crimes are not violent, they can cause harm that negatively affects millions of people through the loss of millions of dollars in savings. They can destroy a company, cost investors, and erode the public's trust in government and corporate institutions.4 In recent years, more attention has been directed toward the rulings made by the DOJ regarding white-collar crimes and the future of corporate America. As a result, the public has found disparities between the sentences of corporations and individuals with less economic power and standing.5

A Background on the Corporate System in America

As a capitalist society, the United States relies on the success of its corporate system to continue its domination as the number one economy in the world.6 Many successful corporations in the American economy have led the United States to its global success– they have been coined as “Too Big to Fail” businesses. Brandon Garret, a professor of law and leading scholar in legal justice, has introduced the “Too Big to Jail” theory for the famously known “Too Big to Fail”

1 “The Department of Justice and the Securities and Exchange Commission Release FCPAResource Guide. ” The United States Department of Justice, October 9, 2014. https://www.justice.gov/opa/pr/department-justice-and-securities-and-exchange-commission-release-fcpa-resource-guide. 2 “What We Do. ” SEC, February 19, 2020. https://www.sec.gov/about/what-we-do. 3 White, Mary Jo. “Speech: Three Key Pressure Points in the Current Enforcement Environment. ” SEC , May 19, 2014. https://www.sec.gov/news/speech/2014-spch051914mjw. 4 “White-Collar Crime. ” FBI, May 3, 2016. https://www.fbi.gov/investigate/white-collar-crime. 5 Inman, Shasta. “Racial Disparities in Criminal Justice. ”Americanbar.org.Accessed December 14, 2022. https://www.americanbar.org/groups/young_ lawyers/publications/after-the-bar/public-service/racial-disparities-criminal-justice-how-lawyers-canhelp/. 6 Boushey, Heather, and Helen Knudsen. “The Importance of Competition for theAmerican Economy. ” The White House. The United States Government, July 11, 2022. https://www.whitehouse.gov/cea/written-materials/2021/07/09/the-importance-of-competition-for-the-american-economy/.

corporations in the United States. In Too Big to Jail: How Prosecutors Compromise with Corporations, Garrett explores how harsh sentences given to minorities and low-income individuals are not provided to large corporations or even the Chief Executive Officers (CEOs) and individuals responsible for crimes in these organizations because they are challenging to identify. 7 As a result, the DOJ often resorts to a Deferred Prosecution Agreement, a negotiated criminal procedure that allows corporations and individuals to avoid criminal convictions by reaching an agreement with the prosecutor to acknowledge responsibility for their acts and make the appropriate payment in the form of fines, in return, for which criminal charges are either dropped or are not brought at all.8 The failure of the U.S. justice system to identify and convict individuals guilty of white-collar crimes on behalf of these large corporations has further enabled white-collar crimes and failed to deter large companies from committing illegal acts. The government must enforce laws that convict all individuals guilty of these crimes to successfully prevent the “Too Big to Fail” corporations9 .

Prosecutions on Wall Street Throughout History

Due to prosecutorial discretion, convictions on Wall Street work differently than convictions of most American citizens, which some argue is unethical. Prosecutors sometimes work to benefit big businesses, protecting the stakeholders in large corporations. The 2008 Financial Crisis is an excellent example of understanding the consequences of white-collar crime and how convictions work in the financial world. There were many players responsible for the 2008 Financial Crisis: Wall Street banks such as Goldman Sachs, Morgan Stanley, and the Lehman Brothers and their CEOs had critical roles in instigating the devastating crisis.10 Even though these banks were known to be hugely involved and at least partially responsible, in the crisis, it was complicated to pinpoint which bank and Chief-level executives should be held accountable because the critical decisions made by these executives were often enforced and supported by their equals and inferiors. As a result of these joint decisions, the consequences these banks faced were in the form of fines, and only one person was given jail time. Kareem Serageldin, a banker at Credit Suisse, was sentenced to 30 months in jail and returned $24.6

7 Garrett, Brandon L. "Too Big to Jail: How Prosecutors Compromise with Corporations. " In Too Big to Jail. Harvard University Press, 2014.

8 Gosanko,Alexander N.

“Judicial Review of Deferred ProsecutionAgreements:AComparative Study. ” Columbia Journal of Transnational Law. Columbia Journal of Transnational Law, May 29, 2022. https://www.jtl.columbia.edu/volume-60/judicial-review-of-deferred-prosecution-agreements-a-comparative-study-ag4ar. 9 Ibid.

10 Marquit, Miranda.

“Major Players in the 2008 Financial Crisis: WhereAre They Now?” Investopedia. Investopedia, December 5, 2022. https://www.investopedia.com/insights/major-players-2008-financial-crisis-and-where-they-are-now/.

million in compensation for manipulating bond prices to hide $1 billion of losses.11 Following Serageldin’s indictment, many tried to understand the reasoning behind his imprisonment as he was not the CEO of a bank, nor was he the mortgage executive that contributed to the housing bubble.12 To this day, the reasoning behind his conviction remains ambiguous— some say the DOJ wanted to set a precedent and deter bankers from committing such fraud again, while others argue the DOJ found that Deferred Prosecution Agreements (DPAs) were more effective and chose to resort to those instead.13 A DPA is a “contractual arrangement between a US government agency (such as the DOJ or the SEC) and a company or an individual facing a criminal or civil investigation.”14 Nonetheless, the 2008 Financial Crisis not only caused significant losses to the economy of the United States, but it also served as a precedent for the rulings that would be made regarding unethical decisions in the corporate world. Following the 2008 Crisis, many approaches were brought to the public's attention to recover from the crisis and get the current economic state back to its norm. In the face of a national emergency, the executive branch has a role to play, in addition to the DOJ and SEC. The president serving the country is expected to introduce new approaches to face the problem for the nation to recover financially. Following the 2008 recession, the Obama Administration implored a strict agenda to improve the current state of the economy and deter corporations from committing the same crimes. More specifically, Obama signed into law many changes, such as the American Recovery and Reinvestment Act of 2009.15 He also established the Consumer Financial Protection Bureau (CFPB) to “hold financial institutions accountable and protect consumers from the types of abuses that preceded the crisis.”16 As President Obama’s term ended, President Trump became the next president responsible for alleviating the repercussions of the crisis. However, the Trump Administration took a completely different and less strict approach that, in turn, helped corporations and boosted the economy. For example, many rules and regulations, such as the Volcker Rule and Fiduciary Rule during the Obama Administration, were reversed to benefit many Wall Street bankers. More specifically, the

11 Eisinger, Jesse.

“Why Only One Top Banker Went to Jail for the Financial Crisis. ” The New York Times. The New York Times,April 30, 2014. https://www.nytimes.com/2014/05/04/magazine/only-one-top-banker-jail-financial-crisis.html. 12 Ibid. 13 Ibid. 14 Deferred Prosecution Agreement (DPA) | Practical Law. https://content.next.westlaw.com/practical-law/document/I8b0f218c102b11e598db8b09b4f043e0/Deferred-Prosecution-Agreement-DPA?viewTy pe=FullText&contextData=(sc.Default). 15 “Economic Rescue, Recovery, and Rebuilding on a New Foundation. ” NationalArchives and RecordsAdministration. NationalArchives and RecordsAdministration.Accessed December 14, 2022. https://obamawhitehouse.archives.gov/the-record/economy. 16 Ibid.

Volcker rule “generally prohibits banking entities from engaging in proprietary trading or investing in or sponsoring hedge funds or private equity funds.”17 The fiduciary rule was enacted so bankers “must act prudently and must diversify the plan's investments to minimize the risk of large losses.”18 Although this approach aided the work of bankers in the short run, it introduced the potential and increased chances for another financial crisis because businesses have fewer restrictions and more opportunities to make decisions that could cost them millions without a legal penalty. Congressman Don Beyer stated, “President Donald Trump claims credit for the strong economy, saying that he inherited a ‘disaster’ from President Barack Obama and that he ‘accomplished an economic turnaround of historic proportions.’However, the truth is that by the time he became president, the economy had largely recovered from the Great Recession and was nearing full strength.”19 Both politicians and economists are widely debating the agendas and their effects on the economy of presidents; in addition, the past two administrations have shown that the Department of Justice continues to serve a vital role in maintaining justice as the policies instituted by the presidencies have not agreed.

Comparison of Prosecutions: Elites vs. Minorities

Deferred Prosecution Agreements (DPAs) open a door for many CEOs and elites in the United States that lower-income individuals and minorities do not have access to– solving their problems with money. The most similar option minorities and lower-income individuals have for the court process is a bond in federal cases. Essentially, the bond serves as a contract that guarantees the person on trial will show up to their next court appearance, or they will have to pay the total amount of the bond20. Even though a bond is a temporary option, many marginalized individuals spend years in prison because they do not have access to the funds the elites do to sign a bond or co-signers that will sign a bond21. In addition, elites also have greater access to better quality lawyers that can help defend them in their court cases and reduce the time they have to serve in prison or the amount they have to pay to bail out.22 There is a significant

17 “Volcker Rule. ” Board of governors of the Federal Reserve System.Accessed December 14, 2022. https://www.federalreserve.gov/supervisionreg/volcker-rule.htm. 18 “Fiduciary Responsibilities. ” United States Department of Labor.Accessed December 14, 2022. https://www.dol.gov/general/topic/retirement/fiduciaryresp. 19 United States Joint Economic Committee. “Measuring the Economy's Pulse since 1946. ” United States Joint Economic Committee.Accessed December 14, 2022. https://www.jec.senate.gov/public/. 20 “Glossary of Terms - Washington State Courts Washington Courts. ”Accessed December 15, 2022. https://www.courts.wa.gov/subsite/mjc/docs/GlossaryofTerms.pdf. 21 Schwinn, Steven. “The Bail Bond System and Rule of Law. ”Americanbar.org.Accessed December 14, 2022. https://www.americanbar.org/groups/public _ education/publications/insights-on-law-and-society/volume-21/issue-3/the-bail-bond-system-and-rule -of-law/. 22 Ibid.

disparity between the eligibility of a citizen of lower socioeconomic standing and an individual of high socioeconomic status to sign a bond. Such differences pave the way for further inequality in jurisdictions in the United States.

Deterrence and its Role in the Corporate World

To identify whether or not DPAs have been an effective solution implemented by the Department of Justice, many explore the changes in white-collar crime rates. The general notion is that a decrease in rates would show the successful deterrence of crime, while a similar or increased rate would depict the failure of deterrence. More specifically, the deterrence theory explores individuals' choices when balancing the benefits and costs of crime. If the costs of a crime outweigh the benefits, the threat of punishment deters an individual from committing the crime. However, a critical player is missing in observance of this theory–the rate of prosecution of white-collar crimes. Based on the presidential administration in control, the white-collar crime prosecution rate fluctuates wildly. For example, during the Trump Administration, prosecutions fell, while Wall Street anticipates prosecutions to increase with the Biden Administration.23 The partisan attitudes toward banking and business rights have greatly influenced the political agendas of each administration. As a result, crimes listed in records are only found when prosecutions occur, meaning that crime rates cannot be relied on to the extent they currently are to determine if DPAs are effectively a deterrent. If the DOJ plans on establishing DPAs as the norm, the prosecution rates would need to remain stable to decide whether they are a successful deterrent.

Conclusion

Although it is difficult to measure a Deferred Prosecution Agreement's effectiveness in deterring white-collar crimes, specific trends have been identified throughout this paper. First, there is a clear difference between how elites such as presidents and CEOs of big companies have been prosecuted and how minorities and individuals from marginalized communities have been prosecuted. Lower-class individuals do not have the funds or resources to escape the consequences of their crimes. In contrast, more powerful individuals have a vast array of resources, such as additional funds, better access to legal guidance, and individuals who will do their bidding. Secondly, the administration in power has an essential role in the convictions of

23 Williams-Alvarez, Jennifer.

“U.S. Likely to Step up White-Collar Crime Enforcement. ” The Wall Street Journal. Dow Jones & Company, May 10, 2022. https://www.wsj.com/articles/u-s-likely-to-step-up-white-collar-crime-enforcement-11652220113.

white-collar crimes, just as much as the Securities Exchange Commission and the Department of Justice. Lastly, the presiding administration can bring in new restrictions/laws or even remove the previous administration's practices. Taking these trends into account, to bring justice to the current system, the government must provide disadvantaged individuals with additional support to ensure that the law does not work in favor of the rich. This extra support can be in the form of fewer requirements for a bond, access to better quality lawyers, or even less use of Deferred Prosecution Agreements.