IN SEPTEMBER 2002 A YOUNG lawyer named Michael Atkinson had just left a lucrative partnership at a comfortable law firm to join Main Justice, where he was thrown together with a senior prosecutor named Paul Pelletier to investigate PNC Bank. In 2001 PNC had conducted some complex deals to get soured assets off its balance sheet, arranged by a secretive division of the giant insurance company AIG called AIG Financial Products. The deals were shams. AIG Financial Products took no risk, parking the assets for a fee so that PNC could make its books look better for investors and regulators. The deals had unraveled, and now Atkinson and Pelletier were to begin their probe.
First they flew up to Pittsburgh and then took a cab to the FBI offices in a new and (by government standards) lavish building just outside the city. Atkinson was getting a chance to do what he wanted when he joined the government: dig into complex corporate crime and expose bad executives. He was meeting the FBI for the first time. He wouldn’t necessarily have admitted it, but yeah, he felt almost giddy.
The two men arrived in the lobby and signed in. Then they sat, waiting. A half hour passed. Pelletier, who had a raspy voice and an assertive South Boston accent, blond locks, and Ray-Bans often dangling from his Croakies, grew increasingly agitated. The senior prosecutor had a sprawling network throughout the Department of Justice. He’d been around. Now he had a sense of what was coming in Pittsburgh: a turf battle for the PNC case. An FBI agent had called down to a Justice colleague in Miami to get the book on Pelletier before the meeting. Unbeknownst to the FBI agent, the colleague happened to be a buddy of Pelletier’s and tipped him off. Pelletier shrugged it off. “Yeah, they said they’re gonna give me an ear douche about the case.” “Ear douche”? That was a new one for Atkinson, and he wasn’t sure what the hell it meant. Soon he would learn there were many Pelletierisms. “Don’t let them fugitate!” he’d say, warning his prosecutors not to let their targets get out from under their surveillance. When people didn’t want to hear what you were saying, for whatever reason, you had to give them an ear douche to break through that waxy buildup so that they would understand they had no choice but to do it Pelletier’s way.
After more than an hour of waiting, the agent came to bring Atkinson and Pelletier upstairs to a conference room. The two prosecutors figured out what had been going on as they waited. The FBI agent, an FBI supervisor, and a staff attorney for the Pittsburgh US Attorney’s Office had been sitting there talking this whole time! They were conspiring to keep Main Justice out of the case. PNC was a nice target for them, a chance to get on the Pittsburgh Post-Gazette’s front page—maybe even the Wall Street Journal—and they’d be damned if Washington was going to muscle in on them. His expectations confirmed, Pelletier sat listening to the FBI supervisor talk about the case, not bothering to hide his impatience and irritation. The supervisor explained that Pittsburgh—the local FBI and the US Attorney’s Office—would take the lead on the case. They weren’t even sure they needed Main Justice.
Pelletier could handle only about ten minutes. “There’s no fucking way you are taking the lead on the case,” he snarled. “You wouldn’t know where to fucking begin with this, but it doesn’t matter because you guys aren’t even going to be on the case. You guys have a conflict. You are going to be recused. It’s going to be our case! Not yours. Do you want to talk about how we can get this investigation going, or are you going to have us sit around for another hour? And by the way: fuck you!” Pelletier roared.
“No, fuck you!” the FBI supervisor screamed back.
Atkinson stared. This meeting had gone sideways faster and more completely than anything he’d ever seen in the private sector. Weren’t they all on the same team?
Sure enough, Pelletier was right. The Pittsburgh office was recused. The US attorney had a conflict of interest. It became Atkinson’s and Pelletier’s case. The investigation of PNC began a years-long quest for Pelletier to bring AIG to justice. AIG became his white whale. He would bring some charges and win some battles, but the Department of Justice did not succeed in changing AIG’s culture or deterring its aggressive and often lawless behavior. By 2008, AIG Financial Products had blown up due to its exposure to risky assets it had not disclosed adequately, helping to bring down the global financial system. Pelletier and his colleagues would investigate AIG all over again, probing the same people. That investigation would be thwarted, too, thanks, he was convinced, to his bosses at the Department of Justice rather than a lack of sufficent evidence against the AIG Financial Products executives.
Pelletier had just come up to Washington from the Miami US Attorney’s Office, where he had been the chief of the white-collar unit. Charming the secretaries, chatting with the security guards, scowling at the supervisors, inquiring after everyone’s family, Pelletier was, most said, a prosecutor’s prosecutor. “Paul came out of the womb divisive. Nobody has ever had ambivalent feelings about Paul,” says Guy Singer, a former colleague and admirer. To those who loved him, he possessed a romantic nobility, pure and apolitical. The head of the criminal division, Josh Hochberg, recruited him to solve a problem.
Main Justice had long been an also-ran to the Southern District of New York. The Southern District got the biggest, most important cases, especially corporate fraud matters. Main Justice supervisors tended to farm out their prosecutors to help other offices. These prosecutors didn’t have much trial experience themselves and therefore avoided taking their cases to court, compounding their weakness. Instead, they sought to settle cases—or failed to conclude them altogether. Hochberg wanted to change that by improving the quality and skills of his assistant prosecutors. He went around the country looking for trial dogs: lawyers who thrived in front of juries. He didn’t care about pedigree. He wasn’t out to create a collection of graduates from the best law schools. He saw that Miami’s US Attorney’s Office was successful. The office took a different approach than the Southern District, however. In Manhattan, they were deliberative and hierarchical. But down in Miami, the office hired street-smart lawyers and gave them freedom. Few of the attorneys had attended the most prestigious institutions in the country. The office motto was “If it’s a choice between perfect and fast, choose fast.” Paul embodied the Miami approach. Pelletier wasn’t rash, and he wasn’t thoughtless, but he is a creature of action. “Don’t fuck around. Make a goddamn decision and move forward,” he would say.
Hochberg had gotten to know Pelletier because he’d been sending prosecutors to work with him in Miami, to get litigation experience. Pelletier resisted Hochberg at first. No way he’d have his trials saddled with a bunch of useless clods from DC. “It was more of a pain in the ass than it was worth, and I’d be spending time training his prosecutors instead of working my cases,” Pelletier says. Hochberg took care to send down his brightest prospects, and, in the end, Pelletier came to think it hadn’t been as bad as he’d expected. They’d even been helpful occasionally.
Pelletier had been telling Hochberg for months that there was no way he was going to leave Miami. He was having too much fun. In one of their discussions, Hochberg told him the fraud section at Main Justice had fifty lawyers and fifteen indicted cases going on right then.
“Fifty indicted cases—five-oh? Or fifteen—one-five?” Pelletier asked. Fifteen, Hochberg repeated, or about one for every three lawyers. “Fifteen!?!? Get the fuck out of here.” Over the course of thirteen years in Miami, Pelletier had handled more than a hundred trials, about twenty of them white-collar, including health care and money-laundering cases.
If Pelletier was a true-blue, full-blooded prosecutor, he was an unlikely one. Born August 21, 1956, he’d grown up in Dighton, Massachusetts, a working-class town of 3,500 south of Boston, the fourth of eleven children. After the tenth child, his mother, Marge, had two miscarriages. Her doctor told her, “Your body is telling you ‘No more.’ ” But she thought she had a lot more love to give and adopted a child, choosing one from the Boston Globe’s weekly feature of an “unadoptable child.” Brian, the eleventh, had juvenile-onset Huntington’s disease and died young. Pelletier’s father was a manager of a Sears, first in Fall River, Massachusetts, and then in Newport, Rhode Island. After raising her children, Marge went back to school to become a registered nurse.
Paul worked from a young age and studied on a strictly voluntary basis. From age eleven, he worked at Bradshaw’s Food Products, a chicken farm that also distributed to the local bars. He and his brother Mike made pickled eggs. They’d boil them, peel them by rolling them up and down on a washboard, put them in the brine, and then deliver them. They’d do about two thousand eggs each day after school. They’d also pickle just about anything that could be pickled: Polish sausage, onions, pigs’ feet, ham hocks, lamb’s tongue, tripe. Paul started out earning $1 an hour.
One day in 1970, one of their sisters—Mike and Paul can no longer remember which one—was watching What’s My Line?, the popular TV game show where a panel of wisecracking B-list celebrities tried to guess the occupation of each guest. She said to Mike and Paul, “You guys have got a really stupid job. Why don’t you write in?” When they dismissed her, she wrote in on their behalf. They got on the show. To get to New York, they flew from Providence, making them the first members of the Pelletier family to fly. The show taped in the Ed Sullivan Theater. Mike was fifteen, and Paul was thirteen. They got to meet actress Sandy Duncan and comic Soupy Sales. When they got back, they told everyone, generating predictable skepticism from their classmates. Several months later, when the episode aired, they became local heroes for a moment. Officials made an announcement about the appearance over the school PA system. The local newspapers covered the episode.
Paul devoted much of his childhood to avoiding getting caught. He evaded the nuns; only the slower kids got caught by them. But the police managed to nail him a couple of times. One night, at age fifteen, Pelletier went to a party where his hockey coach had bought a beer keg for the players. Soon the keg ran out. Paul and a friend got into his VW Beetle to drive to a bar. Paul had bought it recently for $50 in anticipation of getting his learner’s permit. The car had no plates yet. Their plan, made in the haze of a few beers and with teenage logic, was to drive down back roads with the headlights turned off to avoid detection.
He and his buddy drove across the town line to Taunton to the bar. No one knew the name of it, but it had a big sign displaying the words “Open Hearth Inn.” (It would later burn down.) As Pelletier and his friend pulled into the bar’s parking lot, a cop was driving out. He looked at them skeptically and flashed his lights. The officer got out and wandered over, telling the boys that the vehicle had no license plates. Paul turned to his friend and exclaimed with a look of shock, “Someone must have stolen them!” Asked for his license and registration, Paul responded by saying that he must have left them on his bureau at home. The cop took the two down to the station, where they watched The Munsters on TV.
Meanwhile, back at home, Paul’s brother Mike was sneaking in past his curfew. He had just gotten to the top of the staircase when the phone rang, waking the household. Their father ambled out of bed to answer it. It was the Taunton police. Their dad looked at Mike and said, “Get your jacket on. We’re headed to police station, and I’ll deal with you later.”
“I was fuming,” Mike says. “To this day, I believe I would have made it to my bedroom past my curfew if the phone didn’t go off.”
Small-time justice being what it was, the cop was prepared to let Paul off, thanks in part to the teenager’s smooth talk. As they drove home, Mike, still furious, turned to their father and, with all the innocence he could muster, said, “Dad, I think I can smell alcohol. Do you think Paul has been drinking?”
A few years later, Pelletier would become an unlikely cop himself. He had attended Catholic schools, finishing by graduating from Providence College in 1978. During college, he developed a vague notion to go into public service. He figured becoming a lawyer might help. But he had no money for law school. His jobs pickling at Bradshaw’s and tending bar at the Rusty Scupper didn’t provide enough. One day all of Pelletier’s buddies came to the bar to announce that they were going to take the test to become local cops in Dighton. When he heard it paid well, he took the test with them.
Pelletier posted the highest score and got the sole position open. He wasn’t a full-time police officer but a “special” cop, assigned to scut work such as traffic and security details. For about a year and a half, he worked for the police at the Taunton dog track, his only collar coming when a guy tried to submit a phony trifecta ticket. When he held the shotgun to protect the accountants as they tallied up the track’s daily take, he got an extra dollar. Soon he’d had enough and saved enough. It was time to go to law school.
New England School of Law in Boston admitted him—not one of the more prestigious institutions in the city, much less in the country. But by the end of Pelletier’s first year, he was on law review. After two judicial clerkships, he managed to get hired into the tax division of Main Justice in 1984, working the southern region. Young prosecutors started in sleepy locales so that they couldn’t do much damage. If they showed promise, they could work up to a slightly less sleepy one. Pelletier started in Birmingham, Alabama, getting thrown into three jury trials in the first six months.
In 1989, after a few years of working his way up the bureaucracy, he landed in a genuine hot spot: Miami. These were the Miami Vice years, the stylized show that glamorized the world of cops and drug dealers. For a young prosecutor, the city provided a cornucopia of crime, and anyone with some brains couldn’t help being successful. After four and a half years of tax fraud cases, he moved over to the Miami US Attorney’s Office and soon was handling narcotics cases. “It was a beautiful time to become a federal prosecutor,” Pelletier recalls. In 1986 Congress passed a law criminalizing money laundering. The US Sentencing Commission put in new guidelines, and legislatures passed mandatory minimum punishments and new forfeiture laws. Prosecutors had new weapons. Previously, Miami prosecutors specialized in picking up what Pelletier called “roadkill”: small-time cases that could be tied up quickly. Now with the new tools, the Miami office started targeting more serious criminals. Pelletier and his colleagues started going after big drug organizations. Over the coming decades, prosecutors would abuse these tools, but in the early years, he says, “This leveled the playing field. I got fifty-year sentences on people who deserved fifty-year sentences.”
Pelletier’s flamboyant manner was suited to the place and time. He made the Guinness Book of World Records for a period for having pulled off the largest-ever illegal-drug-cash seizure: $200 million. Newly ambitious, prosecutors started to go after the drug lawyers; clearly, they assisted in the crimes. In the Miami office, there was a gentlemen’s agreement among the lawyers on the defense side and the older prosecutors. Prosecutors did not pursue their fellow attorneys. But the young firebrands, including Pelletier, threw out the old norms. They started pursuing defense lawyers for aiding and abetting money laundering. They prosecuted “Dirty Mel” Kessler, who once joked, “I have more cash than Burger King,” and who’d helped hide $9.5 million in drug money.1 Some of the first money Pelletier seized was an envelope of cash found on Kessler.
Pelletier got a tutorial on how to build a case against an enterprise. He learned how to move up the chain from the low-level dealers to the kingpin. He swept up everyone, including the lawyers. He used the new federal rules—such as the threats of the mandatory minimum sentences and pretrial detention—to force them to cooperate against their bosses. Ultimately, he could take out the whole organization.
Seeking a greater challenge, Pelletier wanted his office to go after bankers, lawyers, and corporate professionals, not just drug organizations and their shifty counsel. In 1997 Pelletier became the head of the white-collar unit. Five years later, he conducted a big Medicare fraud trial with a colleague, Kirk Ogrosky. On one side were three prosecutors. On the other were fifteen defense attorneys representing twelve defendants, including several physicians, pharmacists, and clinic owners. It was a nasty, hard-fought trial. The defense alleged misconduct and motioned for mistrial. Even as Pelletier and his colleagues pressed the case hard, Paul stayed affable. He cracked jokes and buoyed his fellow prosecutors and agents. The jury seemed to love him.
After months, the jury returned its verdict. The prosecutors won, convicting most of the defendants. After hearing the verdict, one of the now-felonious doctors walked over to the prosecutors’ table. He scowled at Ogrosky and then walked past him to Pelletier. The two of them looked at each other. Then the doctor gave Pelletier a big hug. “I hated what the guy did, so I just tortured him, and the jury brought him to justice. It was weird, but I think it was out of respect,” Pelletier explains.
His Miami superiors wanted Pelletier to clean up the division. The white-collar unit had too many, as Pelletier put it, “RIPs”: people “retired in place.” One time he began a campaign to get rid of a prosecutor who was, in Pelletier-ese, “vociferous in his incompetence.” Paul was belittling and public about it. Do your “J.O. Goddamn B.!” he’d cry.
But it was the government, and personnel decisions happened slowly. After the targeted prosecutor made such a serious mistake that it jeopardized a prosecution, Pelletier thought they had enough to get rid of him. The head of the unit called Pelletier and another supervisor into his office. He told Pelletier that he was prepared to move the young assistant out of the section. Then he told Pelletier to be more respectful toward him. The supervisor left the office. Pelletier, fuming that he’d been upbraided in front of another prosecutor—and for something about which he was right—walked to the door, shut it, and locked it. Then he exploded. “I will fucking kill you! Never fucking do that to me again in front of my charges!”
Pelletier developed a reputation as a good boss, an effective leader, and a savvy manager of investigations. “He never once talked about winning. There was never an ‘attaboy’ for getting a judge to do big sentence,” remembers Ogrosky. “It was always about doing the right thing.” Pelletier was teaching a crucial lesson to young prosecutors. When confronted with a tough case that they worried they couldn’t win, their inclination would be to cut a deal. But Pelletier told them to resist. If the prosecutor believed the person was guilty and if the evidence was sufficient, the government should bring the case—even if it might lose at trial. If evidence is insufficient, Pelletier would say, of course don’t indict that case. That happens. Witnesses disappear. They change their stories. But if you believe in the evidence and you lose at trial, well, that’s the justice system.
Josh Hochberg had been watching Pelletier for several years. The fraud section needed his talents and attitude. Hochberg prevailed on Pelletier to come up to Washington. When he left Miami, his supervisors joked that half the defense bar wanted him disbarred, while the other half feared him. In July 2002 Pelletier joined Main Justice with a fancy title: special counsel for litigation.
A few months later, Pelletier met Mike Atkinson. Pelletier came away impressed. Smart and serious, Atkinson had left a big-time law firm job to come work for the government. That put him on the right side of things, in Pelletier’s view.
After the turf battle with the Pittsburgh US attorneys, Pelletier and Atkinson settled into investigating PNC and its enablers. AIG Financial Products, a mysterious division of the insurer, sold the vehicles to the bank. Ernst & Young, the auditor, signed off on the deals. Financial deregulation was the watchword of the moment. Bank regulators, such as the Federal Reserve and the Office of the Comptroller of the Currency, freed banks of strictures. AIG was even less subject to government oversight than banks. States regulate insurance. They could not rein in a sprawling multinational like AIG. Maurice “Hank” Greenberg, the founder, CEO, and chairman of the insurer, reigned as one of the last of the Imperial CEOs, tightly controlling his behemoth organization. He had built AIG into the world’s largest insurer, obsessed with AIG’s daily stock price as a mark of his wealth and accomplishment. AIG Financial Products was a rogue within the rogue, a secretive skunkworks operation. AIG FP didn’t manage investments and it wasn’t a bank; it didn’t help companies with shares or mergers. It wasn’t subject to any regular regulation whatsoever.2 The operation pushed “innovative” products, a term that in financial markets tends to mean regulatory arbitrage, exploiting a loophole in government rules.
Pelletier and Atkinson knew they wanted to target culpable individuals. They would investigate the three companies involved, including Ernst & Young, but to investigate all three at once was to investigate none. So they started with PNC. The bank had done three such deals with AIG FP involving a total of $762 million in assets. PNC and AIG FP created a new entity, “off” PNC’s balance sheet, to hold on to the souring assets. The key element to make the deals acceptable to PNC’s auditors was that an independent third party—in this case, AIG FP—needed to invest in the newly created company. AIG FP was supposedly in control of the vehicle, not PNC. Ostensibly, the deal conformed to the rules about such vehicles at the time. But the deals had a slick element: AIG FP got fees that equaled its investment, plus a little bit, and PNC took all the risk. PNC wasn’t getting rid of the assets in any meaningful sense. If the value of the assets fell, PNC took the losses; if it rose, PNC retained the gains. AIG wasn’t taking any true risk, nor could it get any rewards. This arrangement violated the rules. When it revealed the vehicles and unwound them, PNC admitted that it had overstated earnings by 38 percent, or $155 million.3
The PNC executives who had carried out the deals told government investigators that they were not accounting experts. They all said they’d relied on Ernst & Young to clear the accounting for the transactions and relied on AIG Financial Products for the representations. In fact, PNC had shopped to find a law firm to give the okay. For one transaction, it went first to a New York law firm. When the attorneys there didn’t give the bank the answer it sought, it went to a hometown Pittsburgh firm, which it judged correctly as likely to be more amenable. Another time it went to a Washington law firm, which also wasn’t fooled. PNC jettisoned that firm’s unpleasant opinion and went back to the Pittsburgh firm.
The PNC chief financial officer was sophisticated. A former E&Y partner, he defended himself by saying that PNC and he had relied on the E&Y partner for advice on whether the deals were okay. So it was up to Pelletier and Atkinson to show that PNC had either misled the accountant, or that it had done something contrary to the advice from E&Y, or that E&Y knew they were sham transactions. The accountant was unflappable, however. He continued to maintain that PNC had transferred risk. That was true only in the most technical sense. But AIG wasn’t dumb enough to take even an unlikely risk of loss; its real risk of loss was somewhat akin to that of a meteor wiping out its headquarters.
PNC may have used the steroids, but AIG Financial Products was the doctor. It had been going around the country shopping the products to dozens of financial firms. Only PNC took the insurer up on the deals. Other financial firms raised concerns about whether the transactions would conform to accounting rules.4 AIG didn’t bother mentioning those doubts in any of its other sales pitches, including the ones it made to the Pittsburgh bank.
The head of AIG Financial Products was a little-known executive, Joseph Cassano, who displayed his scrappy working-class background ostentatiously. He did not attend an Ivy, but Brooklyn College with financial aid. He worked his way out of back offices at investment banks until he arrived at that emblem of Gordon Gekko–like 1980s ambition, Drexel Burnham Lambert. Cassano joined right at the beginning of the decade. In 1987 he moved to AIG Financial Products, becoming head of the unit in 2001.
With total control at AIG Financial Products, he blessed the PNC products. But Pelletier and Atkinson uncovered no clear evidence that Cassano or other top executives knew that they were sham transactions. Cassano and the top AIG executives had “advice of counsel” defenses. Lawyers and Ernst & Young had signed off on the deals. Having the professionals okay a deal doesn’t exonerate a fraudster, but it makes proving a case more difficult.
Throughout Pelletier and Atkinson’s investigation, the Federal Reserve and the Office of the Comptroller of the Currency—PNC’s regulators—were hostile. Financial regulators had embraced the deregulatory era as zealously as any government overseer, if not more so. In one video conference call, Fed officials tried to convince the prosecutors that there had been no fraud in the transactions. Again Pelletier shouted down government colleagues: “There is plenty of evidence of fraud here, and we are going to pursue it!”
What made the regulatory hostility particularly bizarre was that the prosecutors found evidence that PNC had misled them. The bank submitted to the regulators backdated accounting correspondence. When the regulators expressed concern about the first two deals, the bank accelerated the completion of the third one without telling them. The regulators tsk-tsked PNC, thinking that should be the end of it. They urged the Justice Department to overlook such blatant disregard, worried that if PNC were prosecuted, investors might panic. There might be a run on the bank, and the fear might spill over to other regional banks or even large institutions. Punitive action was too dangerous for the bank and the system. Herbert Biern, then a top banking supervision official at the Fed, requested a meeting with Justice Department officials. He sat down with Michael Chertoff, still head of the criminal division, as well as Pelletier and Atkinson, among others. Biern worried that PNC would lose its banking licenses if charged. He insisted that the Fed and the OCC had dealt with PNC adequately and, more important, quietly.
Chertoff had just come off of the successful Andersen prosecution. Though he was beginning to feel the backlash to his department’s aggressive treatment of the accounting firm, the Fed’s stance infuriated him. It stirred the same Andersen emotions. Now, however, the resistance came from inside the government, not a company’s paid advocates. Chertoff told Biern that if the Justice Department “can’t bring these cases because it may bring harm, then maybe these banks are too big.” It was a prescient warning.
In the end, the Department of Justice did not indict PNC. It wouldn’t risk going through Arthur Andersen again. Chertoff vented at Biern and the other regulators, but caution prevailed. In June 2003, about nine months into the investigation, PNC entered into a deferred prosecution agreement but continued to operate. Pelletier felt content with the DPA. He liked that Chertoff backed him and wanted to go after individual executives anyway. Neither man perceived the larger picture: the deferred prosecution era had arrived.
After embracing a more recalcitrant legal strategy, AIG FP signed its own DPA in November 2004. The company paid just over $126 million in fines and disgorgement of profits. Pelletier and Atkinson were satisfied. The department assigned AIG a monitor, James Cole of the law firm Bryan Cave.5 Cole would go on to become a deputy attorney general in the Obama administration Justice Department. AIG bore Cole’s costs. He communicated with the board of directors and produced regular reports, which weren’t made public. Cole was required to examine only narrow aspects of the financial firm’s business, and he expected initially to keep an eye on the firm for just a year. As deferred prosecution agreements went, it was strict. But it did not have an appreciable effect on the culture at AIG Financial Products. Nobody there was fired. “All show and no go,” they said in the Department of Justice. AIG periodically called Pelletier to complain about Cole’s high billings. Meanwhile, Cassano went on to consolidate his power and influence over the company.