The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives

ISBN-13: 9781501121371

Media Type: Paperback(Reprint)

Publisher: Simon & Schuster

Publication Date: 07-17-2018

Pages: 400

Product Dimensions: 5.40(w) x 8.30(h) x 1.00(d)

Jesse Eisinger is a Pulitzer Prize–winning senior reporter at ProPublica. His work has appeared in The New York Times, The Atlantic, and The Washington Post. Previously, he was the Wall Street Editor of Conde Nast Portfolio and a columnist for The Wall Street Journal, covering markets and finance. He lives in Brooklyn with his wife and their daughters.

Read an Excerpt

The Chickenshit Club “THERE IS NO CHRISTMAS”
ON A GRIM DAY IN september 2003, with hurricane Isabel brewing off the East Coast, federal prosecutor Kathy Ruemmler prepared for the government’s third interview with an Enron witness. The investigation into the top officers at the collapsed energy giant was stalled. Ruemmler knew the prosecutors had to flip someone.

She had just joined as the youngest member of the Enron Task Force, the special SWAT team the Justice Department had assembled to dig into what had been one of the richest and most admired companies in the world. Now it had been revealed to be one of the biggest frauds in American business history. At a passing glance, the thirty-two-year-old assistant US attorney looked fresh faced and friendly, with her shoulder-length blond hair and clothing that was a step up from the typical government servant’s. But she had a steeliness that she could wield at will. Her warm blue eyes hardened when she was deposing a witness.

Her teammate in those days was Sam Buell. Before joining the task force, Buell, thirty-nine, had prosecuted Boston mob cases. He was tall and clean cut. His short, reddish hair framed a wide, gentle face that sat above broad shoulders. Buell, the son of schoolteachers, had grown up in Milton, Massachusetts, outside of Boston. Self-deprecating and easygoing, he looked like a favorite high school math teacher. Witnesses liked him in spite of themselves. Buell and the task force had been laboring over the case for months now. They were going after Jeff Skilling and Ken Lay, Enron’s top officers. Ruemmler and Buell spent most of their time shuttling from DC to Houston, where the two of them would drive from their dingy government-rate hotel rooms to an abandoned space at the top of Houston’s run-down federal courthouse, a 1960s-era squat white cube in the middle of downtown Houston.

They passed through building security unencumbered. Here it was already 2003, and they still didn’t even have BlackBerrys. Upstairs, their clunky computers balanced on cardboard boxes atop chipped metal desks. The whole place was so run-down that it was fodder for jokes. A defense attorney bringing a tony client for an interview once cracked, “It looks like an OSHA violation in here!” During the first winter, most of them had come down with miserable respiratory infections. Were the offices infecting them? Or was it just the pressure of their task? They had no document management system and no way even to email the FBI agents assigned to the investigation, who were just a few blocks away. With this pathetic setup, they were taking on an infernally complex company in the most important corporate fraud case in memory, against a legion of defense lawyers from the best firms in the world.

The country had invaded Iraq six months earlier. Madonna kissed Britney Spears and Christina Aguilera on the MTV Video Music Awards show. The American tennis star Andy Roddick won what would be the only major tournament of his career: the US Open championship. But Ruemmler barely noted outside events, significant or trivial. She had no time for anything but the case. During these eighteen-hour days, when she could only sneak in a frozen pizza and a shower, Ruemmler would sometimes marvel that she had ended up here. She had grown up in Richland, Washington, a rural corner of the Northwest, where both of her parents worked at the giant Hanford nuclear facility on the Columbia River, her father as a computer engineer and her mother in a toxicology lab. Unlike most of her Justice Department colleagues, Ruemmler hadn’t gone to an elite eastern college. She’d been thrilled to get into the local University of Washington, and before she left to attend Georgetown University Law Center, she had been out of the Northwest only three times.

Yet Ruemmler had landed a plum job: assistant US attorney; a federal prosecutor in the DC office. She’d been handling violent crime and narcotics cases when Leslie Caldwell, head of the Enron Task Force, reached out. Ruemmler hadn’t had much experience prosecuting financial fraud. She’d been reading the papers and coming across the same phrase: if normal financial fraud was “algebra,” the articles intoned, Enron was “advanced calculus.” She felt intimidated. But Caldwell assured her the Enron Task Force would be only a six-month detail.

• • •

Twice, the Enron prosecutors had brought in one of their most promising witnesses, Dave Delainey, the head of Enron’s energy trading division. He’d stuck with his story, brushing aside questions from the prosecutors and the FBI agent assigned to this part of the investigation. They weren’t giving up, though, and that morning they felt certain they had discovered a dangling thread that might help them unravel his story.

As Ruemmler and Buell went through the many emails Delainey had sent to his head trader, they found a huge gain the company had made trading in California’s energy markets in the late 1990s. Enron didn’t want to tell shareholders it was a volatile trading shop. Instead, the company line for Wall Street had been that Enron was a stable, fast-growing operation. CEO Jeff Skilling had downplayed Enron’s trading, once saying on CNBC that it was “just a small portion” of its business.1 Enron was just a “logistics” business, he’d say, meaning that Enron helped speculators but wasn’t one itself. A big trading gain, such as the one Ruemmler and Buell discovered, hinted at the reality. Speculation dominated the company’s culture and contributed an outsized portion of its profits. Once, after a trader had lost close to a half billion in one day, Skilling came down to the trading floor and exhorted the traders to “man up.” Get back out there and make more trades. Win it back.

Instead of having Enron disclose those trading profits, Delainey and his executives hid them. They stashed the millions of dollars of earnings and created a cover story: it was setting aside those profits for a possible legal settlement.

Ruemmler and Buell had figured out that this reserve, this “cookie jar,” was a lie. Poring over the company’s intentionally complicated and messy financial statements one more time, they’d noticed that a year after creating the reserve, Enron had lost millions in another division and dipped into that money—reserved for legal costs—to cover the losses and make it look like it had made money that quarter. That accounting hocus-pocus was illegal, and Delainey and his top trader had emailed about it. But they’d used a lot of trader jargon, and the emails were vague enough that a jury would need them decoded. The prosecutors understood how the scam had been pulled off but believed they couldn’t prove it yet.

Delainey could explain that little scam, but that’s not why they needed to flip him. Complex white-collar investigations required finding “rabbis” to guide you through the transactions. Even the smartest outsiders couldn’t rely on the documents. They were conducting an old-fashioned investigation. They needed someone on the inside. If they could flip Delainey, they could take the prosecution all the way to the top. They could begin to build a case that Jeff Skilling had lied to investors and the public.

That led them, in the middle of the hurricane, to haul Dave Delainey and his expensive lawyers into a windowless conference room in the Bond Building in Washington, DC, for a third time.

Buell and Ruemmler and their expert FBI agent had new verve; they took command of the interview from the start. Buell had a hunch Delainey wanted to cooperate. Getting him over to their side, however, required breaking down his instinct to deny and minimize his culpability. Delainey had long been an Enron true believer. A clean-cut Canadian, he’d been awed by the testosterone-flooded Enron trading culture. Hard-charging, sure, but they weren’t—couldn’t be—criminals.

Few corporate white-collar fraudsters—not egregious Ponzi schemers or boiler room operators but perpetrators at large, respectable companies—start out thinking they will commit a crime. As one academic study, “Why Do They Do It?: The Motives, Mores, and Character of White Collar Criminals” put it, most white-collar criminals are “individuals who find themselves involved in schemes that are initially small in scale, but over which they quickly lose control.”2

They tell themselves, “I’ll just do it this quarter so we don’t miss the number, and then I’ll stop it and undo what I’ve done.” They don’t think of themselves as crooks. It’s just a short-term fix. Then they use the device again and again until they have no choice but to keep up the charade. They start rationalizing what they’re doing. It may be aggressive, but it’s not wrong. It’s not theft. The bad guys aren’t lying just to prosecutors. They are lying to their shareholders, their colleagues, and their families. And they are lying to themselves.

The prosecutor’s job is to crack through that self-justification and self-delusion. That’s what Ruemmler and Buell were going to do that morning, in that room, with Delainey.

The two stuck with their plan to stay calm, to both be the good cops, and keep asking questions about the emails. They would reason with him, confronting him with the evidence, though selectively, to test his credibility. Their advantage was that Delainey didn’t know exactly which documents interested the prosecutors, as well as who else from Enron was talking and what they were saying. As Ruemmler and Buell ground him down on the emails, his story began to collapse. A couple hours into the conversation, it happened: Delainey glanced over and signaled a silent plea for help to his lawyers: John Dowd of Akin Gump and a promising young associate named Savannah Guthrie, who would later coanchor the Today show.

Dowd was a legend, one of the premier defense lawyers in the country. Big and aggressive, he’d vow to fight the government from every rampart in Washington. He had some quirks. Using just two fingers, he’d bang out his emails in twenty-eight-point purple Comic Sans font. “Who He?” he’d email-bellow to his associates. He toned it down for Buell, who saw a familiar character in Dowd, a brash and street-smart working-class Bostonian. They would chat about the Red Sox. Dowd was no intellectual, but he was savvy and knew how to help his clients. Buell and Ruemmler made it clear where the email evidence was taking Dowd’s client. The attorney understood it perfectly.

Dowd asked if he and Guthrie could confer with their client and then left the room.

They were gone for about fifteen minutes. When they came back in, Ruemmler noticed that Delainey’s demeanor had changed. He now slumped in his chair. A moment passed in silence. He then spoke—mumbled, really: “It was all bullshit.”

As Kathy Ruemmler snuck a quick a look at her partner, she saw the smallest of smiles on his face.

When Enron filed for bankruptcy in December 2001, the implosion devastated a major US city, Houston, both economically and psychologically. Fortune magazine had named Enron “America’s most innovative company” six years straight for having changed the way that gas and electricity moved around the country. The magazine CEO had named Enron’s board one of the top five in America.3 Former secretaries of state Henry Kissinger and James Baker had lobbied for the company. Nelson Mandela had come to Houston to receive the Enron Prize for Distinguished Public Service.

The Enron scandal reached all the way to the president and vice president of the United States. George W. Bush and Dick Cheney had run in the same business and social circles as the Enron executives. Bush’s family had made its money in Texas energy; Cheney, only a few years earlier, had been the CEO of the energy services giant the Halliburton Company, then based in Dallas. Ken Lay, Enron’s founder, was a longtime Bush family friend and major Republican donor. Bush, as is his way with intimates, had given Lay a nickname: “Kenny Boy.” Lay had once hosted a fund-raiser for Senator John Ashcroft, a Republican from Missouri, who was expected to make a bid for the 2000 presidency. Now Ashcroft was Bush’s attorney general, the top law enforcement officer in the United States.4

The country fell into recession in late 2000. It was reeling from the bursting of the biggest stock market bubble the world had seen, which had inflated through most of the 1990s before collapsing mercilessly in March 2000. Over the next few years, new companies reported accounting problems with alarming regularity: Tyco, Adelphia, HealthSouth, WorldCom. But Enron’s collapse was the most spectacular. The pandemic of corporate greed and criminality felt so consequential that it wasn’t outlandish to think that Enron’s failure might be the seminal financial event of a generation.

Enron’s significance would recede, however, and the lessons it holds for white-collar enforcement would be forgotten. Despite Enron’s political might, the US government aggressively investigated the fraud at the energy trading company and prosecuted dozens of individuals, including the top officers of the company. Lay, Skilling, and Andrew Fastow, the chief financial officer, were all found guilty. Skilling and Fastow went to prison; Lay would have gone, too, but he died of a massive heart attack in 2006, just three months before his sentencing. In all, the government charged thirty-two people associated with the Enron frauds, including Wall Street bankers who’d facilitated the deceptions.5 The government did indeed take down rogue executives not that long ago.

Many people look at the crimes at Enron, WorldCom, Adelphia, Tyco, and the generation of post-stock-market-bubble-bursting prosecutions and think the crimes were so egregious that the prosecutions must have been easy. But that’s only with the benefit of hindsight. What Kathy Ruemmler, Sam Buell, and the rest of the Enron Task Force did was not simple and never inevitable. If the task force hadn’t had resources, time, intelligence, and patience, Lay and Skilling may not have been prosecuted at all or could have easily been acquitted. The prosecutorial team went up against the best defense lawyers in the country. The public brayed for faster action. The team had its share of stumbles, blowing some of its trials. Lay didn’t use email; Skilling rarely did. So the government lacked direct, incriminatory evidence of their guilt. But in the big cases, the task force prevailed. These were not accidents. The Enron prosecution team made smart strategic decisions, secured necessary resources, learned from their mistakes, used aggressive tactics, and ran the major trials well.

Despite this success, the Justice Department took the wrong lesson from Enron. Over the next decade, the task force’s legacy, at least for the subsequent leaders of the Justice Department, lay more in its mistakes than its successes. Courts reversed the government in key cases. The defense bar and Justice Department officials came to view the Enron prosecutors as reckless and abusive rather than sufficiently aggressive to meet the prosecutorial challenge. Today it’s an open question whether the Justice Department would be capable of taking on Enron the same way the task force did.

In the early years of the George W. Bush administration, its Department of Justice compiled a sterling record of corporate prosecutions. Larry Thompson, Bush’s first deputy attorney general, understood that the DOJ had to respond assertively to the unfolding crisis. Thompson joined the administration in 2001, just as the corporate accounting scandals were breaking. Stock markets were collapsing. The public was furious. By the end of its run, the early Bush-era Department of Justice had prosecuted almost every major accounting fraud from the early 2000s. Not just Enron but also WorldCom, Adelphia, Global Crossing, and Qwest Communications among them. At the state level, the Manhattan district attorney prevailed in cases against the top corporate officers of Tyco.6

Prosecutors took losses, too. They weren’t taking on the easiest cases and juicing their stats with easy victories. One of the more unfathomable losses was the acquittal of Richard Scrushy, the head of hospital and rehab clinic operator HealthSouth. Prosecutors charged him with thirty-six counts, including securities fraud and conspiracy in connection with a $2.7 billion accounting fraud. They flipped multiple former employees against Scrushy, including the HealthSouth CFO, but a hometown jury found him not guilty.7 A year later, in a separate case, a federal jury found Scrushy guilty of bribery.8 Thompson understood the risks and tolerated losses. In his view, they were the price of ambition.

A fair and lifetime law-and-order man, Thompson conferred with Michael Chertoff, the head of the criminal division at “Main Justice,” as the Washington headquarters of the Department of Justice is known. They both emphasized the public need for “real-time” prosecution for white-collar cases. They believed the public deserved action and defendants deserved speedy resolutions. But the strategy was also practical. White-collar cases could languish for years, a poor way of conducting any investigation. The evidence trail grows cold, memories fade, and defense lawyers have time to formulate their client’s stories and tactics. Prosecutors needed to maintain momentum. Thompson and Chertoff understood that with the Enron debacle, the public would be bothered with slow justice. That there might be no justice—no prosecutions at all—never even occurred to anyone.

In early 2002 Thompson and Chertoff feared that the Enron case was already a mess. Several US Attorney’s Offices had separate pieces of the investigation. Main Justice oversees the other offices but does not direct each about its investigations. The criminal division in Washington also conducts its own investigations into securities fraud, antitrust violations, public corruption, and civil rights. Prosecutors coordinate probes but do not conduct them. Every investigation has agents, usually from the FBI. Often other government regulators, including the SEC, have only civil enforcement powers. For criminal matters, they work with the Justice Department. Since the Southern District of New York took on most of the corporate and securities fraud matters, it had the closest relationship with the SEC. In early 2002 the Southern District vied to take all the Enron cases for itself, but Thompson and Chertoff wouldn’t allow that. The Southern District, in a pique, removed itself entirely.

With the Southern District out of Enron, nobody seemed to know who was in charge of what. The government’s document requests deluged the company. Robert Bennett, the Washington power lawyer, then with Skadden, Arps, Slate, Meagher & Flom, which represented Enron, called up Larry Thompson’s office and told them he wanted to cooperate but didn’t know with whom he should deal.9

Main Justice realized that the Houston office of the Justice Department had too many professional and personal conflicts of interest and had to recuse itself from prosecuting the company. Thompson, FBI Director Robert Mueller, and Chertoff mulled the problem. Should they assign a special prosecutor to head up all the cases? Do nothing and let the US Attorney’s Offices work the cases on their own? Chertoff had been a US attorney in New Jersey and had worked under Rudolph Giuliani when Giuliani was the US attorney in Manhattan. Chertoff likened US attorneys to ship captains: they mapped their own courses. Chertoff knew that US attorneys felt free to heed or ignore distress flags from shore. He’d done it himself. They were not autonomous, but they took direction from Main Justice reluctantly. Top Justice Department officials in Washington were political appointees. The responsible ones took care in offering direction in order to not be seen as meddling politically in investigations.

Chertoff argued to Thompson that these cases were too important for Main Justice to leave them up to individual US attorneys. When he was the US attorney in Atlanta, Thompson had overseen a drug task force with another US attorney, the future Alabama Republican senator Jeff Sessions, who would become the US attorney general in 2017. He believed task forces worked, though not by magic. They shared information and investigative techniques. A task force focused prosecutors and gave them clear priorities. After that, it was pick-and-shovel work on the case, flipping low-level soldiers to get to the capos.

All the officials in the conversation understood that a task force with prosecutorial powers had some inherent weaknesses. It faces enormous pressure to emerge with some kind of charge, leading to abuses. (Similar problems plague independent prosecutors.) The public has made up its mind. Prosecutors need courage not to bring cases as the spotlight shines. The more cases a task force can bring, the better. It’s difficult to wind up the operation. Worse, a task force has few checks and balances. A US Attorney’s Office has institutional knowledge and a decision-making structure; a task force operates in a vacuum.

But Thompson thought he might ward off those bad outcomes with his gentle persistence. The top officials created the President’s Corporate Fraud Task Force to supervise the efforts of the various offices around the country. They identified approximately ten big cases for it to oversee. Thompson made weekly calls to the heads of the offices to make sure prosecutors were working them and to make it clear that he cared. Thompson had a soft and inviting disposition. He didn’t direct anything. He just let them know he wanted to hear the status. His bedside manner was deceptive. He would “stay on their asses,” as one Department of Justice official put it.

Main Justice also created the elite operation to go after Enron specifically. In early 2002 Chertoff got to work on forming the Enron SWAT team. Mueller recommended the stoic Leslie Caldwell to head the team. He had worked with her in the San Francisco US Attorney’s Office, where she led the securities fraud unit. Caldwell, then in her early forties, maintained a soothing calm. She carried an air of someone who’d had years of practice cracking jokes that only she might hear or get. Her formative prosecutorial experience had been in the US Attorney’s Office in Brooklyn, the Eastern District of New York, where she had overseen mob prosecutions. She liked to say that back then the rooftops of Brooklyn were for stashing bodies, not kale gardens.10 Eastern District prosecutors liked to think they were scrappier than those in the Southern District in Manhattan. Eastern District “mafia”—prosecutors loved to identify themselves as mafiosi from certain offices—dominated the Enron investigative team. Caldwell brought in Andrew Weissmann as her deputy. In many ways, he was her opposite: loud, aggressive, flamboyant. “Your client is a lying sack of shit!” he’d yell at defense lawyers. Caldwell, who had worked with Weissmann in Brooklyn, admired his trial brilliance.

Caldwell then turned to Sam Buell, with whom she’d worked in the Eastern District. Buell was then working up in Boston, having spent three grueling years on the Whitey Bulger case, the notorious Boston mobster wanted in connection with nineteen murders, among other crimes. He’d been on the lam for sixteen years before being captured in 2011. Caldwell had attended Buell’s wedding. When she called about the task force job in early 2002, Buell didn’t have to think about it. He knew he was in. His wife, a corporate lawyer who had left the workplace to raise their children, encouraged him. Buell had little white-collar experience. He’d done only some low-level corporate fraud work—a money-laundering case or two. But he understood that prosecutors couldn’t shy from difficult cases. After attending law school at New York University, he had clerked for Jack Weinstein, a legendary federal district court judge famous for resolving mass tort cases involving Agent Orange and asbestos. From Judge Weinstein, Buell drew the lesson that nothing is too complex or too big. These people committing the crimes weren’t smarter than you; they, too, had to learn it all at some point.11

But it always helped to have some expertise on hand. So Caldwell recruited Tom Hanusik from Main Justice. Hanusik, an SEC enforcement lawyer in the mid-1990s, had a knack for financial investigation. He loved combing through complicated documents and identifying dodgy deals. With the addition of one other prosecutor, the team—smart, young, ambitious, and energetic—was set. They were all intimidated to take on a fraud so sprawling and complex. Eventually the Enron Task Force would have about forty FBI agents and an average of ten prosecutors assigned to it full-time, bringing cases over the next half decade.

At least to the public, the task force didn’t get going fast enough. The prosecutors anticipated that Enron’s defense lawyers would argue the company may have been aggressive but had technically adhered to the law. The defense would point out that lawyers and accountants blessed the company’s actions. Indeed, that was true. Prosecutors needed to move cautiously. They had to sift through the complexities to find the potential crimes. However, the public and the press did not understand or sympathize.12 The press assailed the government for moving too slowly and letting the perpetrators walk. CNN’s Lou Dobbs, then one of the most influential business journalists, started running an Iran-hostage-like daily count noting there hadn’t been Enron indictments. The CNBC show Kudlow & Cramer would ask, Who is in the pokey? Buell saw cohost Larry Kudlow spout some nonsense about how this case should be as easy as locking up someone for dealing drugs on a street corner. Jeffrey Toobin, CNN’s legal analyst, swung the other way. Explaining how difficult it was to make white-collar cases, he predicted that neither Skilling nor Lay would go to prison.13 Tom Daschle, the Senate majority leader, called on the Justice Department to explain why it hadn’t indicted anyone.14

When prosecutors turned lower-level executives or pressed seemingly tangential cases, the media would report as if the investigations into Skilling and Lay had stalled. But the talking heads misunderstood what was going on. The prosecution team was moving deliberately, moving the lower-level cases to build the evidence to go after the top Enron officers. Privately, team members wondered, Would they get there?

They would. Though the trials were long, arduous, but full of good breaks, prosecutors won guilty verdicts against the key architects of the Enron fraud through working three main witnesses: Delainey, Fastow, and company treasurer Ben Glisan Jr. They were the government’s best witnesses, its Virgils through the labyrinthine off-balance-sheet deals and accounting shenanigans. The investigators and prosecutors would rely on dozens of executives, victims, experts, witnesses, and countless documents to prove their cases beyond a reasonable doubt. But the government needed Glisan, Delainey, and Fastow. Without all three, the Enron Task Force likely would have failed.

Prosecutors took a different path to work each of the three: Delainey cooperated in a traditional fashion, in exchange for leniency; Fastow reached a nontraditional agreement in which he cooperated without receiving a reduced sentence; Glisan cooperated reluctantly but voluntarily while serving time.

The outside world was helping the government, providing a road map for the prosecutors. Journalists were breaking stories. The Enron board of directors had ordered an internal investigation into what had caused the collapse. The three-person panel of independent directors, headed up by William Powers Jr., the dean of the University of Texas Law School, came out with its report on February 1, 2002, only two months after the bankruptcy. The report detailed the self-dealing at Enron, the dubious transactions, and the lax oversight, blistering top management.

The first big case the Enron Task Force brought, in March 2002, was against Arthur Andersen, Enron’s accounting firm, for obstruction of justice. The case consumed Caldwell, Weissmann, and Buell. Meanwhile, Tom Hanusik could work in relative peace to start building Enron cases. In the Powers report, Hanusik saw an intriguing reference to how a British investment bank, NatWest (National Westminster), had helped in a suspicious Enron transaction. He retrieved the emails behind the deal and saw right off how damning they were. They outlined NatWest’s effort to help Fastow and Michael Kopper, his young right-hand man, create an off-balance-sheet entity to hide Enron debt.

By the summer of 2002, he had charged three NatWest bankers with wire fraud in the first of many Enron cases, seeking their extradition. To outside observers, it seemed tangential. But Hanusik understood he was essentially