PAUL PELLETIER WAS THRILLED WHEN the Obama people came in to the Department of Justice. Though he was a Massachusetts liberal Democrat to his core, it wasn’t political. He despised incompetence and was only too happy to bid good-bye to late-era Bush “clowns.” Department of Justice offices are split between the “front office” people and the line prosecutors. The front office is composed of political appointees and the staff (those whom Pelletier derided as “tourists”). In most Justice Department district offices, the distinction between the front office and the staff attorneys is thin. Those offices are smaller than Main Justice. The US attorney and his staff typically have a hand in the details and major decisions. By dint of their physical distance from the capital, they are less vulnerable to Washington meddling. In DC, by contrast, the dividing line between the front office and the career staff is, by tradition, thicker. Good political appointees cross it rarely to get into the particulars of investigations.
The tourists all came and went, using Pelletier’s beloved department to move on to positions of greater prominence. But that did not mean they were all equal. Some were competent and some were not. The last batch from the Bush administration was among the worst. He expected the Obama lot to be vastly superior.
The financial crisis had hit its peak in September 2008, with Lehman Brothers collapsing, AIG requiring a bailout, and Bank of America taking over Merrill Lynch. Bush Treasury secretary Henry Paulson, the former chief executive of Goldman Sachs, worked with Federal Reserve Chairman Ben Bernanke and the head of the Federal Reserve Bank of New York, Timothy Geithner. By October, they’d injected hundreds of billions of dollars into the major commercial and investment banks, to shore up their capital.
Barack Obama had campaigned on hope and change, but when he took office, fear and anger convulsed the country. His administration had to first deal with a collapsing global financial system and an economy plunged into the worst recession since the Great Depression. He strove for continuity, appointing Geithner as his Treasury secretary. Bernanke was a holdover at the Fed, with a year left on his first term. In February 2009, with the president’s push, Congress passed its stimulus plan, which would total over $800 billion.
Markets bottomed in the spring of 2009 but then began to settle down. The crisis subsided, though the economy plunged into a severe recession. Gross domestic product (GDP) fell 6.3 percent in the fourth quarter of 2008. Unemployment peaked at 10 percent in October 2009. Wall Street appeared to be changed forever. Bear Stearns had been taken over by JPMorgan Chase. Lehman Brothers had evaporated. Mortgage banks such as Washington Mutual failed. Countrywide Financial Corporation, a mortgage bank, had cratered and, like Merrill, been taken over by Bank of America. AIG was a ward of the federal government, as were Fannie Mae and Freddie Mac.
Everyone—government officials, bankers themselves, investors, regulators, prosecutors, defense lawyers—expected a serious postcrisis crackdown. What shape would it take? There would be regulatory reform of the financial system, but there would also be prosecutions, certainly. What were the crimes? Who would go to prison?
President Obama appointed Eric Holder attorney general. He had been the deputy attorney general under Clinton’s attorney general, Janet Reno. Holder had spent the last eight years at Covington & Burling, the quiet Washington power broker law firm. When Holder returned to the building in early February 2009, there was jubilation. People streamed out of their offices and peered down the stairwells. They clapped and shouted. Alberto Gonzales had been a fiasco. Michael Mukasey, Bush’s last attorney general, had been better, but he was seen as a short-timer—an older judge who never had the pulse of the organization. Holder was respected from his time as deputy attorney general under Reno. He had a reputation within the building for professionalism. He was straightforward.
But the new Obama people got off to a slow start. The Senate did not confirm David Ogden, the deputy attorney general, until March. Lanny Breuer did not take his position as the head of the criminal division until April. Up in New York, Preet Bharara wasn’t sworn in as US attorney for the Southern District until mid-August. Surprisingly, given the historic financial collapse, Obama’s top Main Justice appointees and their staffers had little to no experience with complex white-collar fraud. Breuer had never been a federal prosecutor. Ogden was not a seasoned criminal prosecutor like Larry Thompson, but a partner from the powerful Washington law firm WilmerHale. Although cerebral and respected, he had little criminal prosecution experience. Staff prosecutors grumbled that the front office appointees were clueless about how to make complicated corporate criminal cases.
The Obama administration’s front office would not adhere to the hands-off tradition. The political appointees wanted specifics on Main Justice’s important cases. They lived in the weeds of the criminal investigations, following each development and questioning each decision. For as much as they obsessed about the minutiae of Main Justice’s cases, they neglected the activities of other US Attorney’s Offices, letting them find their own way.
Meanwhile, the administration and the newly installed Democratic Congress set about reforming the financial system to prevent future crises. Dodd-Frank, eventually passed in July 2010, provided technocratic solutions to calamitous economic and social upheaval. Democrats had helped push financial deregulation through the 1990s. Now they set about fixing it, in an effort they viewed as without distracting ideology, consciously rejecting appeals to populist fevers. What use was it to seek “Old Testament vengeance,” in Timothy Geithner’s phrase?1
Instead of doling out punishments, the Democrats engineered preventive measures to stave off similar future crises. In Dodd-Frank, the Obama administration and the Democratic Congress created the ultimate exercise in precision legislation. Sprawling through every corner of the financial world, the law did the opposite of similar legislation from the early twentieth century that reined in business and finance. The Securities Act of 1933 and 1934 had simple language and simple concepts but overweening ambition and structural overhaul. The law made manipulation of securities illegal—while leaving the definition of manipulation unspecified. Now, however, the world seemed more complex. Democrats, especially those with elite educations, thought they needed to solve problems in more sophisticated fashion. They wrote a law that tried to imagine any and all financial problems and apply a solution. It called for the regulatory agencies to craft hundreds of arcane rules to define the parameters of the new laws.
K. Sabeel Raman, a scholar at Brooklyn Law School, writes:
Successive waves of liberal governance reform—from the Clinton administration’s “reinventing government” initiative, to the Obama administration’s emphasis on cost-benefit analysis and transparency—share a common problem: they prioritize “good” government over “democratic” government. This liberal vision of governance reform does not address the root challenge raised by critics on both the left and right today: the fear that government is ineffective, unresponsive, or unduly influenced by business and economic elites.”2
Dodd-Frank was the emblem of such a flawed approach. In this context, prosecuting individuals seemed like a blunt and crude response. It fed the populist mob, as Geithner had suggested in his famous quote. But it solved nothing. When it came to punishment, the Obama administration’s approach seemed to take cues from truth-and-reconciliation movements. The financial crisis had been dealt with quickly and aggressively, from the administration’s point of view. But the public didn’t get truth—not in any satisfying fashion. The public saw a corrupt bargain: bailouts and exonerations of bankers for unexplained and unspecified crimes. Reform without prosecution undermined the credibility of the reform. Paul Pelletier rued the day the Obamanauts came.
Like Eric Holder, Lanny Arthur Breuer joined the Justice Department from Covington & Burling. There had been some talk that Breuer might be appointed White House counsel to the president, a role he’d had under President Clinton. When Breuer was passed over, White House Chief of Staff Rahm Emanuel, who had gotten to know Breuer during the Clinton years, pushed to make him head of the Justice Department’s criminal division.
Breuer was the sort to be referred to by his first name, by friends, enemies, and people who didn’t know him alike. “Lanny” was used in affection and to deprecate and infantilize. Breuer is garrulous and open, with a nasally voice that exudes earnestness. He could be warm. But in his role, he carried the air of a man who couldn’t decide if he preferred to be loved or respected and was trying too hard to be both. He hated direct confrontations. If a subordinate got angry with him, he’d pretend not to notice, patting the person’s arm and saying, “Everything’s all right.” Then he’d walk away as quickly as he could.
Born in 1958, Breuer grew up in Elmhurst, Queens. His parents were both only children. His mother lost her parents and extended family in the Holocaust. She fled Germany for Holland on September 1, 1939, the day the Nazis invaded neighboring Poland, igniting World War II. Because Lanny was born fourteen years after his brother, a family joke held that he was conceived on the night of his brother’s bar mitzvah. A wiry kid, Breuer played rugby at Columbia College. He stayed to attend Columbia Law and then took a job at the Manhattan district attorney’s office under Robert Morgenthau for four years in the late 1980s. He liked to tell the story of what his mother said when he told her he was taking a job at the DA’s office. After he mentioned the famous sons in the office—Andrew Cuomo, Dan Rather Jr., Cyrus Vance Jr.—she replied, “Them? They should go to the DA’s office. You? You should go to a firm.” His brother, who became a doctor, countered the advice: “You’ve never had any money. You won’t know what you are missing.”
From the DA’s office, Breuer went to Covington & Burling, spending about a decade at the prestigious firm. In one of his higher-profile cases, he represented a gay marine, Justin Elzie, who was suing the Clinton administration. The military had discharged the marine without benefits after he’d come out on national television. Impressed with Breuer, White House lawyers brought him on board as special counsel to the president. “I’m the only one to get a job at the White House by suing the administration,” he liked to say.
He joined in the second Clinton term, when partisan battles over myriad scandals and pseudoscandals were bringing the president low. Breuer was regarded as a sharp and capable lawyer bent on adhering to the law. Charles Burson, who served as Vice President Al Gore’s counsel and had been the Tennessee attorney general, recalled being impressed with the group’s firepower. “I thought to myself, ‘These are really good lawyers,’ specifically Lanny,” he says.
In one incident, the White House was going to send Congress material. To prevent it from being leaked, the team negotiated a protective order. The parties signed the protective order, and the White House delivered the first set of documents. No sooner had they reached Capitol Hill than the documents started being leaked to the press. All of them realized then, Burson says, that “it may look like there’s a lot of law here, but it’s all about politics.”
During his time at the White House, Breuer met the other of the “Two Lannies,” as they would come to be known: Lanny Davis, the bulldog lawyer and public relations man who lived on cable television in those years defending Clinton. In their first meeting, in the Oval Office, Davis and Breuer realized they had both been named after the same Upton Sinclair character, the Lanny Budd, a dashing sophisticate who popped up in moments of historical significance in a series of popular novels now largely forgotten. Davis remembers the day after their introduction, their mothers met to have lunch in Miami Beach. He and Breuer got along, though they could clash about public relations strategy. Davis was an advocate of getting more information to the media. He remembers Breuer holding back.
Breuer returned to Covington, and George W. Bush became president. He spent the next years working for several famous clients, including Sandy Berger, the former national security advisor who pleaded guilty to a misdemeanor for having taken and destroyed copies of classified documents from the National Archives, and counseled Roger Clemens, the former all-star pitcher, during his congressional hearing about his alleged use of performance-enhancing drugs.
Before taking his position as the head of the criminal division of the Justice Department, Breuer engaged in a clever round of coalition building and personal public relations, a classic element of the Washington game. He canvassed as many people as he could for advice about how to improve the criminal division. He spoke with every living head of the criminal division, deputy attorneys general and attorneys general—at least those who would take his calls. Most did. The message he heard from these worthies, the majority of whom were now in private practice on the defense side, was that the criminal division could be rolled in a negotiation. Obama’s appointees saw the amateurism, scandal, mismanagement, and politicization that had riddled the Bush Justice Department. The criminal division needed an overhaul. He would remake it.
In his canvassing, Breuer had been told repeatedly that the criminal division’s fraud section, which handles crimes such as securities and health care frauds, didn’t have elite attorneys. They didn’t do enough trials. Breuer discounted the trial expertise that was there, thanks to Hochberg and the Miami “mafia,” led by Pelletier. Instead, he saw an office in chaos. “Indict and good things will happen.” Breuer had heard that saying, and it soured his stomach. Bad things could happen, too. They had happened in the Ted Stevens case. The motto was cowboy talk—dangerous and ineffective bravado that got prosecutors into trouble. In their rush to indict first and ask questions later, they were prone to abuse their position or overlook holes that would destroy cases. Breuer and his crowd of precise and buttoned-down lawyers thought they could improve matters through importing the private bar’s professionalism.
Throughout 2009, it started to become clearer that the financial crisis wasn’t just a paroxysm of capitalism, some kind of unforeseeable hundred-year flood. Fraud, it appeared, was rampant. The SEC and the Department of Justice began dozens of investigations. They covered Wall Street investment banks, commercial banks, regional banks, mortgage banks, giant insurance companies, small specialty mortgage insurers, credit rating agencies, hedge funds, and money managers. Every region of the country had potential targets. The probes covered mortgages and structured financial instruments but did not stop there. Did companies lie about the valuation of their assets? Did they misrepresent their books? As their firms were dying, did executives tell the public one thing but tell themselves another in private? Bankers had been reckless and stupid. Doubtless, some of the activities would prove merely aggressive business tactics but not illegal. As the government had done with Enron, prosecutors would now be required to sift through the actions. The job of investigating all the potential wrongdoing was too big, too broad, and too complex for any one US Attorney’s Office or one SEC field office or for Main Justice alone.
One answer would be for the Justice Department to create a national task force. The Corporate Fraud Task Force that Larry Thompson helped start had become moribund—a body that held meetings and delivered statistics-dense reports no one read. A new national task force to tackle the financial crisis investigations might mobilize resources, make clear that such cases were a priority, and hand people responsibility for the prosecutions to come. Coordination problems plagued law enforcement, a perennial bugaboo.
The Obama administration inherited the Bush administration’s decision about financial crisis investigations. Mukasey, Bush’s last attorney general, and his deputy, Mark Filip, decided against creating a national task force for the crisis. They believed them to be slow moving and bureaucratic. Task forces can have flaws. Prosecutors are incentivized to bring cases, perhaps overreaching, to appear that they are doing something. Since the responsibility for assigning cases and adjudicating jurisdictional disputes falls to the deputy attorney general, Filip divided up the cases. He disbursed financial crisis cases around the country, often sending them to the local offices. The prosecutors in these offices often lacked corporate fraud expertise. A probe into mortgage bank Countrywide Financial went to Los Angeles and Sacramento, California. Washington Mutual (WaMu), a regional mortgage bank that collapsed in the fall of 2008, went to the Seattle office. When the probes weren’t being conducted by inexperienced offices, turf battles delayed them. At least four Department of Justice offices—the District of New Jersey, the Eastern District of Virginia, the Eastern District of New York, in Brooklyn, and the vaunted Southern District of New York—opened investigations into the failure of Lehman Brothers, which had sparked the most acute phase of the financial crisis in September 2008.
Holder’s Justice Department did not change the course Mukasey had set. David Ogden, Holder’s first deputy attorney general, viewed the nation’s law enforcement and regulatory structure as dysfunctional. Instead of cooperating, state and federal regulators competed, racing to be first to the press conference. It was a waste of resources and made for shoddy work. The Holder administration did not come close to fixing these problems. In its first year, the department was cautious and overwhelmed by political infighting. One former top official at Justice likened it to a soccer game with six-year-olds, where everyone clusters around the ball, and it never advances.
Breuer and Ogden squabbled. Political maneuvering between the deputy and the powerful criminal division head is common, and the two of them fell into the pattern. Typically, the deputy attorney general, not the head of the criminal division, articulates national goals and adjudicates jurisdictional disputes. But Breuer wanted to play a bigger role. Meanwhile, Ogden was having his own difficulties.
John Podesta, the Democratic power broker who headed up Obama’s transition team, had pushed for Ogden to be hired. Holder resented him and in turn angered White House officials with his unmanageable streak. Holder had a middle-class upbringing in East Elmhurst, Queens. His father was a Barbados-born real estate broker, and his mother was a New Jersey native who worked as a telephone operator.3 Some attorneys general serve a more political and ceremonial role, with the DAGs, as they are known inside the building, acting as chief operating officers. Holder wanted to be more active. He showed passion when it came to civil rights and national security, but he never evinced much interest in the financial crisis. When he suggested in a February 2009 meeting that financial fraud should be a priority of his Justice Department, he assigned Ogden to address the crisis by revamping the Bush-era Corporate Fraud Task Force.
A March 16 discussion draft memo outlined the “Proposed President’s Financial Fraud Enforcement Council,” with a to-be-named director reporting to Ogden, Breuer, and US attorneys around the country. A sprawling and unformed plan, it called for setting up groups to prosecute four categories: “Mortgage Fraud,” “TARP/Rescue Fraud” (referring to the government’s bailout efforts, known as the Troubled Asset Relief Program), “Securities Fraud,” and “Commodities Fraud.” Fraud by top executives at the large institutions would have fallen under the “Securities” umbrella, but was not emphasized. The category was listed third in the memo, and the “types of offenses” included Ponzi schemes and insider trading, crimes that had nothing to do with the calamity.
Through 2009, department officials volleyed different proposals and maneuvered for influence. Breuer supported the creation of a task force, housed in his criminal division, to address the financial crisis. He hoped to make it operational, to run investigations and take cases to trial. Ogden’s office reacted suspiciously. They saw the ambitious Breuer’s proposals as power grabs and attempts to hog the spotlight. Breuer’s vision was that US Attorney’s Offices would report to him, not to the deputy. The deputy’s office scoffed that in his aspiration, Breuer had misunderstood the odd structure of the US attorney network. US attorneys didn’t—and wouldn’t—report to the head of the criminal division. While the criminal division has some national powers relating to investigations, US attorneys are a willful and ambitious bunch. Prosecutors had gained even more autonomy after the Bush administration’s US attorney firing scandal. Breuer, new to the building, didn’t grasp the complicated politics.
A more promising proposal came from within the fraud section. On July 13, 2009, Steven Tyrrell, the chief of the section who had gotten the role over Pelletier, and his assistant, Jay Lerner, recommended creating a Mortgage Fraud Strike Force to prosecute mortgage frauds. Mortgage losses were huge and impossible to ignore. Their memo noted the rise of “mortgage lending businesses” that “were not regulated, supervised, or audited by any of the primary financial regulators.” Previous efforts had gone after borrowers who’d bilked banks. But Tyrrell and Lerner recommended going after the “most common suspect occupations associated with mortgage fraud,” listing accountants, mortgage brokers, and lenders as the top targets. The memo outlined a plan for a specialized team of prosecutors, headed by a supervisor in the fraud section, to travel the country prosecuting mortgage fraud. The idea had promise. It would not have targeted Wall Street bankers or high-level executives initially. But such a team could have generated a body of evidence about the Wall Street money machine. It might have helped prosecutors to work from the ground-level mortgages up to the Wall Street banks, which purchased mortgages, bundled them into securities, and sold them around the world. By the middle of the 2000s, these Wall Street creations were rife with fraud and misrepresentations.
On July 16, attorneys general and representatives from eight states, representatives from the Department of the Treasury and the Department of Housing and Urban Development (HUD), Breuer, Ogden, Tyrrell, Pelletier, and seventeen other Department of Justice representatives met in Washington to discuss financial crisis prosecutions. Breuer did nothing with Tyrrell’s proposal. People in the fraud section thought he was unenthusiastic about ideas that were not his. In the end, the Justice Department prosecuted fraudsters for mortgage-related crimes, but almost all of them were small-timers. The department did not prosecute any top executives from a major mortgage lender.
Under public and congressional pressure, the Justice Department recognized it had to do something. Finally, in November 2009 President Obama announced his Financial Fraud Enforcement Task Force. On Friday, December 11, after an optional dinner the night before at Forlini’s, a red-sauce staple in New York’s Little Italy, top Justice Department officials from around the country met to outline the new task force’s strategy. After Preet Bharara, the US attorney for the Southern District, and Ogden spoke, Breuer opined about “Real Time Investigations in Securities Fraud Cases.” Staffers back at Main Justice rolled their eyes. At a quarter to three, the meeting was scheduled to finish. The agenda ended with a little touristy flourish: “Trip to the New York Stock Exchange (Potential)” as the last activity.
If the aim of the meeting was to help the Southern District get along better with Main Justice, it failed. After a promising start, the FFETF fizzled. Ogden left his post after less than a year, nudged out by Holder.4 The task force had no operational powers to bring cases. The Justice Department struggled to staff it. It was just a coordinating committee to check in with offices around the country on their progress, with representatives from at least twenty-six federal agencies and departments, including the Department of Labor, the Social Security Administration, as well as state attorneys general, district attorneys, and “other state, local, tribal and territorial representatives.” It would meet once a month, often with staffers calling into conference calls in their principals’ steads.
If Main Justice was not going to create a serious task force, its responsibility to monitor the various cases that had been farmed out to far-flung offices became that much greater. Yet, the Holder administration did little. Just a few years earlier, Larry Thompson and Michael Chertoff understood the need to coordinate the cases, to move forward with investigations and prosecutions, to take regular stock of the progress of cases, and to administer the cattle prod when necessary.
Within the department, its new task force became the butt of jokes, called the “turtle,” or derided with the vaguely Yiddish-sounding “Fuh-tuf-teh.” Because of the failure, no one at Justice oversaw the entirety of the investigative effort. No one person was responsible. Every case was discrete. Any national push to combat the financial crisis died.
Breuer wanted big cases and made those aspirations clear. But he didn’t know how to bring them to fruition. His critics saw him chasing the issue of the day. If it was Southwest border control or foreign bribery, Breuer jumped on it. In April 2009, just as he got to the Justice Department, he testified in front of the US Senate Judiciary Subcommittee on Crime and Drugs about the disparity in sentencing for crack cocaine compared with the pure powder. (Dealing crack, a drug associated with urban African Americans, carried higher sentences than dealing cocaine, which was ubiquitous in affluent white circles.) Some staffers saw him as a glory hound.
Breuer saw it differently. He had so much to do. He changed the criminal division’s human rights section. He set about revitalizing the public corruption department. He sped up wiretap approvals. He overhauled the organized crime section.
In his zeal to overhaul the place, Breuer alienated factions in the building. His critics claimed he surrounded himself with loyalists, including young lawyers steeped in corporate white-collar defense work, with limited experience in prosecuting criminals. Main Justice staffers dubbed his recruits the “Breu Crew.” In October 2009 Steven Fagell, his deputy chief of staff, who also came from Covington, sent an email on behalf of his boss to the attorneys in the criminal division:
Do you like giving toasts? Do you think it should have been you accepting the writing Emmy for 30 Rock? Do you itch to work with the raucous crowd in the front office? If so, we need your wit, smarts, and gift for the written word! We’re putting together a speechwriting team for the assistant attorney general, and we are looking for a small group of clever wordsmiths and humorists to assist the [assistant attorney general] in drafting his speeches across a wide range of topical areas.5
The building regarded the email with disdain. One former Justice Department official says, “You can’t send that out to people doing serious work, trying to break up Los Zetas [a formidable Mexican drug cartel]. The reaction was: Are you fucking kidding me?” The notion that prosecutors longed to write speeches for the politicos? Laughable. Breuer also instituted a practice of conducting moot courts and had assistant US attorneys practice opening arguments and witness examinations. Many staffers felt patronized.
The experienced prosecutors bristled at Breuer’s vision and notion that the place needed overhauling. When he met with Steven Tyrrell, the chief of the fraud section, Breuer told Tyrrell he wanted to compete with the Southern District of New York. Tyrrell was skeptical. Ultimately, he understood that Breuer had no use for him and decided to leave for private practice. Breuer told the National Law Journal he wanted to hire a “rock star” to replace him. Staffers got it. One former prosecutor from the office says, “The message was: you suck.”
The Breu Crew looked to hire elites. They wanted graduates from the best law schools, who had clerked for prestigious judges and had worked at prominent firms. The Miami Mafia represented what was wrong with Main Justice; the résumés there were just not high-toned enough. Steve Fagell gathered people to a meeting to change how Main Justice recruited: “We all were on the hiring committee at Covington,” he told the supervisors. “We know how to hire litigators.” Most big law firms recruit from the Justice Department to get lawyers with litigation experience; the Breu Crew did the opposite.
Breuer admonished his prosecutors that “there’s no way we can lose this.” The sense was that even if he and his crew believed that a possible defendant was 100 percent guilty, but they had only a 70 percent shot to win at trial, they didn’t want to pursue the case.6 (Breuer rejected the notion that he was trepidatious. He believed he took on tough cases and maintained he had a strong record of white-collar enforcement, saying, “Where there were cases to bring, we brought them, and where there were not, we took a pass.”) Gary Grindler, Breuer’s first deputy, would emphasize to prosecutors that losing cases would reflect poorly on the front office. Grindler told Pelletier one day, “You know, if you lose this case, Lanny will have egg on his face.”7
“I don’t give a shit about that!” Pelletier yelled. The sentiment jolted him. He was apoplectic. “Nobody had ever said anything like that to me in more than twenty-five years of prosecuting federal cases. Whether someone might look bad in the event of a loss had never come up ever, ever, ever,” Pelletier said.
Cases were not supposed to be about advancing the career prospects of the front office tourists in charge. Department of Justice leaders seek personal glory. The good ones win it through good cases, and by supporting and protecting their troops, rather than having their troops protect and support them.
Breuer recruited two men with big reputations: Denis McInerney, a partner with white-shoe firm Davis Polk, to replace Tyrrell as the chief of the fraud unit; and Greg Andres, who had been the chief of the criminal division in the US Attorney’s Office for the Eastern District of New York, a top office. Andres joined as the deputy assistant attorney general overseeing the fraud section. As with Breuer’s appointment, the question was whether these two men were right for the moment. Both had been involved in corporate white-collar cases that had helped to alter the culture of the Justice Department for the worse.
• • •
In the 1970s, McInerney had been a respected prosecutor in the Southern District. But he had spent the bulk of his career since then defending companies, including Arthur Andersen. The architect of that defense could hardly be expected to be an aggressive advocate of corporate indictments. He made it clear to the staff attorneys that he considered Andersen a major injustice that put the company out of business, throwing people on the streets needlessly.
Personable and gracious, McInerney urged his charges to pursue ambitious cases, but he was so cautious and deliberative that people wondered if he was setting a bizarrely high bar, requiring a level of proof and certainty that no one could ever reach. The joke was that McInerney would make a great line attorney if only someone could switch places with him. No one questioned how hard the guy worked. He left his family in New York and came down to DC, often putting in sixteen hours a day. He’d buy his meals in the CVS across the street and exercise on a stationary bike set up in his little apartment in the “Fraud Dorm,” the building near the fraud section’s offices. His office was a mess. He’d wander the halls disheveled, his shirt untucked, food stains on his clothing.
McInerney prepared cases like no one else. He memorized countless emails. The staff attorneys all had to prepare their binders for him. “It’s Binders for Denis Day,” one would say to another, preparing for an agonizingly late night. He ran the group like a giant law firm. Many staff prosecutors gloried in their entrepreneurial jobs and had sacrificed law firm pay for the freedom that comes with a Justice Department role. McInerney had them acting like associates, researching obscure lines of argument and precedents. Pelletier and his Miami mafia chafed under him. It was no way to manage a bunch of willful and accomplished prosecutors.
McInerney had been a career number two—more of a chief of staff than a chief of a Justice Department section. He had served Robert Fiske for years, both at Davis Polk and during Fiske’s stint in 1994 as the Bill Clinton–era Whitewater scandal special prosecutor. Now he served Breuer. He often said he wanted to make Breuer look good. Breuer shared this desire.
Breuer’s office was in the Main Justice building, on Pennsylvania and Ninth Street. The fraud section’s offices were about a half mile away, on New York and Fourteenth Street. McInerney would spend his day yo-yoing back and forth between the buildings, attending meetings and carrying messages back from the front office. With each mile logged, the career prosecutors lost a little bit more respect. One time McInerney emailed an assistant prosecutor to ask him if he’d make the trek to Main Justice to escort Breuer over to a Justice Department training conference. Such requests got the pocket veto they deserved.
McInerney seemed to treat decision making like an experiment on a new and unknown virus—to be undertaken only with caution. Staffers reported he said, “Why make a decision today you can put off to tomorrow?” Or, preferably, why not punt and have someone senior make the decision? McInerney liked people to argue with him. In another supervisor, this quality might be admirable, indicating a willingness to hear differing points of view. With McInerney, colleagues felt, it was something different. He seemed to seek out nuances, complexities, and opposing arguments. They would paralyze him further, relieving him of the need to make a final call. Scarred by the Arthur Andersen indictment, he appeared to feel that prosecutors could too easily be precipitous and trigger happy. In 2013, when the office was considering resolving the case against the Royal Bank of Scotland (RBS), the British bank, over charges that employees had manipulated the key interest rate benchmark, LIBOR (an acronym for London Interbank Offered Rates), McInerney would ask prosecutors on the case, “What about the collateral consequences?”
Greg Andres also came with a tough reputation. When he was prosecuting the Mafia, the Bonanno crime family ordered a hit on him. (The assassination wasn’t attempted.) But Andres, too, had been involved in a recent, headline-grabbing Department of Justice humiliation: the first major trial stemming from the financial crisis. The Eastern District of New York, where Andres was the chief of the criminal division, brought the case against two Bear Stearns executives who had run internal hedge funds at the investment bank.
The financial crisis, percolating since early 2007, accelerated with the collapse of two Bear Stearns funds that summer. Bear Stearns never recovered and was on the brink of collapse when JPMorgan acquired it in a fire-sale merger midwifed by a generous loan from the Federal Reserve. The trial of the executives, Ralph Cioffi and Matthew Tannin, started in Brooklyn in October 2009. It generated worldwide media attention. The trial lasted three weeks. After two days of deliberation, the jury acquitted the two managers.
The Department of Justice reeled. The prosecution team had been sloppy and hasty. It had built its case on a collection of seemingly damning emails, but overlooked others that complicated the executives’ actions and motives. The judge in the case barred some of the most damaging messages from the trial. As had the Arthur Andersen and KPMG cases, the Bear Stearns trial loss had seismic reverberations. It eroded the department’s confidence. The loss “was very damaging nationwide,” says a top financial regulator. “It scared everyone.” A former federal prosecutor says, “I felt it. You can’t suffer a loss like that. It was a huge setback. People at the DOJ don’t want to lose. The FBI became more cautious. The DOJ became more cautious. Yes, it put a chill on those cases.”
Nevertheless, Breuer recruited Andres down to Washington only a few months after the loss. With that appointment, Breuer now had two top officials with indelible marks from two of the biggest corporate white-collar Justice Department fiascos of the past decade.
Timidity coursed through the Holder Justice Department. It was not isolated to Breuer’s criminal division. In September 2010, a half dozen years after the trial, the Holder administration walked away from one of Kathy Ruemmler’s top Enron victories. The prosecution carried significant symbolic importance: it was the only criminal case brought against Wall Street executives involved in the Enron fraud. That month, just days before a retrial had been scheduled, the Justice Department moved to drop charges against James Brown, a Merrill Lynch executive involved in the Nigerian barge case. In 1999 Enron had sold an interest in three energy-producing barges off the coast of the African country to Merrill, booking a profit. Enron promised Merrill that it would buy back the stock within six months at a predetermined profit. The reality was that it wasn’t a sale at all but a loan. Merrill executives had described it internally as a “relationship loan.”8
The case fell, a victim of one of the many rulings from appellate courts in recent years that have raised the bar on white-collar corporate prosecutions. In 2004 a jury found four bankers guilty and they went to prison. In 2006 the Fifth Circuit overturned the fraud and conspiracy charges against four of the five Merrill executives who had been found guilty at trial. (The fifth did not appeal his conviction.)9 The Fifth Circuit had taken issue with the honest-services charge against the Merrill executives.
The appeals court ruled that the prosecutors had not demonstrated that the Merrill executives had been motivated solely to profit personally, as the indictment had alleged. Instead, the bankers and the Enron executives were worried, the lead judge on the decision wrote, that if the two parties did not close the deal, Enron would suffer. They were working in the best interests of the company, he determined. The “only personal benefit or incentive” for the executives “originated with Enron itself—not from a third party, as in the case of bribery or kickbacks.” The judge, a Reagan appointee, contended that since top Enron executives had helped engineer the scheme, the company itself wasn’t defrauded. Fortune dubbed the court decision the “too-crooked-to-defraud rule.”10
When Ruemmler was principal associate deputy attorney general, she found Breuer serially reluctant to put up a fight. Any setback, and his criminal division would retreat, dropping the case. She would needle him, “How many cases are you dismissing this week?”
When the Justice Department dropped the remaining Nigerian barge charges, Ruemmler had already moved to the White House to be deputy counsel (later counsel) to President Obama. She was livid. Breuer was not the only timid Justice Department official. Nobody had even shown her the courtesy of telling her in advance that it was dropping the case. She had to read about it online. And it made little sense. The government had made the decision to pull the case on the eve of trial. Why had it waited so long and done so much preparation only to back out at the last moment?
She called Lisa Monaco, her replacement at the Justice Department.
“What the hell is this?”
Monaco stammered. She pleaded that the department was resource constrained. Then there was the kicker, a refrain that the criminal division sang frequently: the case was going to be difficult to win—maybe a fifty-fifty chance at best.
The jurors had no problem with the case originally, concluding that the conduct had been egregious and fraudulent. They hadn’t been caught up in some anticorporate, anti-Enron fervor. The members had been thoughtful, carefully distinguishing between the defendants. They had voted to convict five of the six charged, while acquitting a woman executive in accounting who hadn’t been implicated in any of the copious documentation that was so damning for the other executives.
The decision about the case came at a bad moment. The Supreme Court had just stung the Justice Department. In a June 24, 2010, ruling in Skilling v. United States, the court struck down aspects of the fraud convictions of Enron’s Jeff Skilling and the newspaper tycoon Conrad Black, who had been convicted of looting his company, Hollinger International. Skilling and Black had been found guilty of depriving their shareholders of their honest services and were serving time. The high court narrowed the honest-services charge, assailing it as overly vague. Justice Ruth Bader Ginsburg wrote the unanimous decision. Justices Antonin Scalia, Clarence Thomas, and Anthony Kennedy wrote that they would have gone further and struck down the law entirely.11
But the Supreme Court ruling was no excuse to Ruemmler. The Justice Department could have brought the case with more basic fraud charges. Sometimes you have to bring a case and risk losing to make a point, she thought. These guys were too scared to do that.
No doubt, resource constraints saddled the Obama Justice Department, too. Supervisors had to work around periodic hiring freezes, preventing managers from filling positions when people departed. The cutbacks affected the entire national network of US Attorney’s Offices. Breuer complained about the constraints to Congress. Efforts to ameliorate the problem failed. In May 2009 President Obama signed the Fraud Enforcement and Recovery Act, designed to give $165 million to investigators and prosecutors to target financial fraud. Then-senator Ted Kaufman of Delaware, who had coauthored the law, intended it to bolster resources to go after crimes at the highest levels of the nation’s financial firmament. In the end, Senator Barbara Mikulski, Democrat of Maryland, who chaired the Senate Appropriations Committee, allocated only $30 million. It was all the budget could spare, her office told Kaufman’s staff.12
The Department of Justice exacerbated its problems by fighting with other bureaucracies. The era of the Southern District’s cooperation with Stanley Sporkin was long over. In late 2010 Lorin Reisner, the deputy director of enforcement at the SEC, pressed the Justice Department for access to grand jury information and to wiretap info. Because grand jury information is confidential, the Justice Department cannot share it with regulatory agencies such as the SEC. This confidentiality damages investigations on multiple levels. It doesn’t help the SEC learn new information and advance its own probes, which could end up helping federal prosecutors. In recent years, federal prosecutors have grown wary of using grand juries as evidence-gathering tools in corporate investigations. The Southern District, especially, uses grand juries less and less. Prosecutors don’t like having witnesses under oath. They worry that the witnesses will change their stories, allowing defense lawyers to impugn their credibility. When Reisner made his request on behalf of the SEC, the Department of Justice perceived a threat, thinking the SEC wanted to horn in on its investigations. Top officials opposed it.
The Obama Justice Department did not seem to grasp how losing one tool after another—from the Thompson memo rollback to the honest-services clause—harmed its investigative and prosecutorial abilities. The courts increasingly found fault with white-collar prosecutions. The corporate lobby and defense bar had mobilized. Yet there was little analysis of the problem. Top Justice Department officials hardly discussed it publicly.
When the department did respond, it did so in blinkered fashion. On September 28, 2010, a few months after the Supreme Court ruling, Breuer testified in front of Congress to advocate for a statutory fix to the honest-services clause. At Main Justice, officials debated what had a better chance with Congress: asking for a restoration for public or private sector corruption, or both. Breuer took the more modest path. He recommended a fix only for public corruption cases. In neglecting to address the private sector aspects of the charge, the administration had absorbed the defense bar’s view. As a defense attorney, Breuer heard the charge ridiculed when used in the corporate setting. He did not ask Congress to expand the statute to include private sector corruption. The administration believed there was no appetite in Congress for a private sector fix. But Breuer went so far as to offer an argument against it, telling the senators that it would be too hard to write a law covering private sector honest-services violations. Breuer told Congress, “Crafting appropriate language concerning undisclosed self-dealing in the private sector is more difficult than with respect to the public sector.”13
Perhaps the Obama administration misread the political moment, for it remained preoccupied with limitations and constraints with every setback. But anger at the banks after the financial crisis reached an apex. Bailouts and bonuses infuriated the public. In 2009 the Democrats controlled both houses of Congress. They may have found an argument that prosecutors needed more weaponry hard to resist. Statutory reform to help prosecutors with corporate crime investigations might well have passed.