Journalism in the Public Interest


The Rise of Corporate Impunity

Meet the only Wall St. executive prosecuted as a result of the financial crisis. Has justice been served?

(Javier Jaén for ProPublica)

This story was co-published with The New York Times Magazine. It is not subject to our Creative Commons license.

On the evening of Jan. 27, Kareem Serageldin walked out of his Times Square apartment with his brother and an old Yale roommate and took off on the four-hour drive to Philipsburg, a small town smack in the middle of Pennsylvania. Despite once earning nearly $7 million a year as an executive at Credit Suisse, Serageldin, who is 41, had always lived fairly modestly. A previous apartment, overlooking Victoria Station in London, struck his friends as a grown-up dorm room; Serageldin lived with bachelor-pad furniture and little of it — his central piece was a night stand overflowing with economics books, prospectuses and earnings reports. In the years since, his apartments served as places where he would log five or six hours of sleep before going back to work, creating and trading complex financial instruments. One friend called him an "investment-banking monk."

Serageldin's life was about to become more ascetic. Two months earlier, he sat in a Lower Manhattan courtroom adjusting and readjusting his tie as he waited for a judge to deliver his prison sentence. During the worst of the financial crisis, according to prosecutors, Serageldin had approved the concealment of hundreds of millions in losses in Credit Suisse's mortgage-backed securities portfolio. But on that November morning, the judge seemed almost torn. Serageldin lied about the value of his bank's securities — that was a crime, of course — but other bankers behaved far worse. Serageldin's former employer, for one, had revised its past financial statements to account for $2.7 billion that should have been reported. Lehman Brothers, AIG, Citigroup, Countrywide and many others had also admitted that they were in much worse shape than they initially allowed. Merrill Lynch, in particular, announced a loss of nearly $8 billion three weeks after claiming it was $4.5 billion. Serageldin's conduct was, in the judge's words, "a small piece of an overall evil climate within the bank and with many other banks." Nevertheless, after a brief pause, he eased down his gavel and sentenced Serageldin, an Egyptian-born trader who grew up in the barren pinelands of Michigan's Upper Peninsula, to 30 months in jail. Serageldin would begin serving his time at Moshannon Valley Correctional Center, in Philipsburg, where he would earn the distinction of being the only Wall Street executive sent to jail for his part in the financial crisis.

Fiascos, Mistakes, Adverse Rulings and Other Notable Recent Developments in White-Collar Investigations and Prosecutions

(Doug Mills/AP Photo)

JUNE 16, 1999: Justice Department memo, "Bringing Charges Against Corporations," known as "The Holder Memo"

JUNE 13, 2002: Arthur Andersen found guilty

(Tim Sloan/AFP/Getty Images)

JANUARY 20, 2003: Principles of Federal Prosecution of Business Organizations, known as "The Thompson Memo"

(Bebeto Matthews/AP Photo)

JULY 8, 2004: Adelphia's John and Timothy Rigas found guilty

JANUARY 12, 2005: In Booker ruling, Supreme Court restores judges' discretion over sentencing, raising the possibility white-collar defendants might face lower sentences

(Stephen Chernin/Getty Images)

MARCH 16, 2005: WorldCom's Bernard Ebbers convicted

JUNE 1, 2005: Arthur Andersen conviction overturned by Supreme Court

(David J. Phillip/AP Photo)

MAY 25, 2006: Enron heads Jeffrey Skilling and Kenneth Lay found guilty

(Mark Renders/Getty Images)

JUNE 27, 2006: District Court Judge Lewis Kaplan rules against Department of Justice in KPMG case

SUMMER 2008: Guilty pleas obtained by U.S. Attorney in Manhattan from New York Stock Exchange specialist traders thrown out

(Douglas Graham/Roll Call/Getty Images)

DECEMBER 12, 2006: Department of Justice issues a new memo on corporate prosecutions, called the "McNulty Memo," vacating the "Thompson Memo"

(Gerald Herbert/AP Photo)

APRIL 7, 2009: Conviction of Sen. Ted Stevens set aside, an embarrassment for the Department of Justice

(Louis Lanzano/AP Photo)

NOVEMBER 11, 2009: In case brought by the U.S. Attorney's office in Brooklyn, Bear Stearns hedge fund managers found not guilty at trial

(Damian Dovarganes/AP Photo)

JANUARY 29, 2010: Federal case against Broadcom founder Henry Nicholas thrown out, one of several black eyes for the Feds in the stock-option backdating scandal

(Jacquelyn Martin/AP Photo)

MAY 22, 2010: Federal prosecutors in Washington D.C. drop case against Joseph Cassano, the chief executive of AIG Financial Products

JUNE 24, 2010: Supreme Court rules in favor of Jeffrey Skilling, limits use of "honest services" law

(Susan Walsh/AP Photo)

FEBRUARY 19, 2011: Federal prosecutors in Los Angeles drop investigation against Angelo R. Mozilo, former chief executive of Countrywide

(Nicholas Roberts/AFP/Getty Images)

MAY 24, 2012 Securities and Exchange Commission: drops probe against Lehman Brothers

American financial history has generally unfolded as a series of booms followed by busts followed by crackdowns. After the crash of 1929, the Pecora Hearings seized upon public outrage, and the head of the New York Stock Exchange landed in prison. After the savings-and-loan scandals of the 1980s, 1,100 people were prosecuted, including top executives at many of the largest failed banks. In the '90s and early aughts, when the bursting of the Nasdaq bubble revealed widespread corporate accounting scandals, top executives from WorldCom, Enron, Qwest and Tyco, among others, went to prison.

The credit crisis of 2008 dwarfed those busts, and it was only to be expected that a similar round of crackdowns would ensue. In 2009, the Obama administration appointed Lanny Breuer to lead the Justice Department's criminal division. Breuer quickly focused on professionalizing the operation, introducing the rigor of a prestigious firm like Covington & Burling, where he had spent much of his career. He recruited elite lawyers from corporate firms and the Breu Crew, as they would later be known, were repeatedly urged by Breuer to "take it to the next level."

But the crackdown never happened. Over the past year, I've interviewed Wall Street traders, bank executives, defense lawyers and dozens of current and former prosecutors to understand why the largest man-made economic catastrophe since the Depression resulted in the jailing of a single investment banker — one who happened to be several rungs from the corporate suite at a second-tier financial institution. Many assume that the federal authorities simply lacked the guts to go after powerful Wall Street bankers, but that obscures a far more complicated dynamic. During the past decade, the Justice Department suffered a series of corporate prosecutorial fiascos, which led to critical changes in how it approached white-collar crime. The department began to focus on reaching settlements rather than seeking prison sentences, which over time unintentionally deprived its ranks of the experience needed to win trials against the most formidable law firms. By the time Serageldin committed his crime, Justice Department leadership, as well as prosecutors in integral United States attorney's offices, were de-emphasizing complicated financial cases — even neglecting clues that suggested that Lehman executives knew more than they were letting on about their bank's liquidity problem. In the mid-'90s, white-collar prosecutions represented an average of 17.6 percent of all federal cases. In the three years ending in 2012, the share was 9.4 percent. (Read the Department of Justice's response to ProPublica's inquiries.)

After the evening drive to Philipsburg, Serageldin checked into a motel. He didn't need to report to Moshannon Valley until 2 p.m. the next day, but he was advised to show up early to get a head start on his processing. Moshannon is a low-security facility, with controlled prisoner movements, a bit tougher than the one portrayed on "Orange Is the New Black." Friends of Serageldin's worried about the violence; he was counseled to keep his head down and never change the channel on the TV no matter who seemed to be watching. Serageldin, who is tall and thin with a regal bearing, was largely preoccupied with how, after a decade of 18-hour trading days, he would pass the time. He was planning on doing math-problem sets and studying economics. He had delayed marrying his longtime girlfriend, a private-equity executive in London, but the plan was for her to visit him frequently.

Other bankers have spoken out about feeling unfairly maligned by the financial crisis, pegged as "banksters" by politicians and commentators. But Serageldin was contrite. "I don't feel angry," he told me in early winter. "I made a mistake. I take responsibility. I'm ready to pay my debt to society." Still, the fact that the only top banker to go to jail for his role in the crisis was neither a mortgage executive (who created toxic products) nor the C.E.O. of a bank (who peddled them) is something of a paradox, but it's one that reflects the many paradoxes that got us here in the first place.

Part of the Justice Department's futility can be traced to the rise of its own ambition. Until the 1980s, government prosecutors generally focused on going after individual corporate criminals. But after watching their fellow prosecutors successfully take down entire mafia families, like the Gambino and Bonanno clans, many felt that they should also be going after more high-profile convictions and that the best way to root out corruption was to take on the whole organization. A long-ignored Supreme Court ruling, from 1909, conveniently opened the door for criminal charges against entire corporations. And in 2001, Michael Chertoff, George W. Bush's new criminal division chief, arrived at the Justice Department ready to put it to use.

Chertoff, who worked at the U.S. Attorney's office under Rudolph W. Giuliani, the godfather of the Wall Street perp walk, seemed like just the guy to jump-start the initiative — and he arrived at an opportune moment. Prosecutors were beginning their investigation of Enron and probe into Arthur Andersen, the accounting firm that had blessed the energy-trading giant's phony balance sheets and shredded documents shortly after it detonated. Early in his tenure, Chertoff found himself sitting in a conference room at Justice Department headquarters on Pennsylvania Avenue, listening with growing irritation as lawyers for Arthur Andersen tried to dispose of the Enron case with yet another settlement. The company previously oversaw the fraudulent books of Waste Management and Sunbeam, and it dealt with those previous scrapes by reaching settlements and a consent decree with regulators, vowing never to commit such a crime again. For its Waste Management infractions, the firm paid $7 million. Then, it was the largest civil penalty ever paid.

Andersen was expecting the same kind of wrist-slap. As Chertoff recalls, one high-ranking executive noted brazenly that such settlements were merely "a cost of doing business" — the routine surcharges applied to the nation's largest corporations. That comment enraged Chertoff, and soon after, his prosecutors indicted the firm. "Destroy documents?" he told me. "It's hard to view that as a stumble outside of its core business." In June 2002, Arthur Andersen was convicted by a jury, and within months, the firm closed down, costing tens of thousands of people their jobs.

The Andersen case was supposed to embolden the Justice Department, but it quickly backfired. Chertoff's chutzpah shocked much of the corporate world and even many prosecutors, who thought the department had abused its powers at the cost of thousands of innocent workers. Almost immediately, the Andersen verdict resulted not in more boldness but in more caution on the part of federal prosecutors, including Chertoff himself. In 2003, his investigators were digging into questionable off-balance-sheet deals between the Pittsburgh-based PNC Bank and AIG Financial Products. They contemplated indicting the bank, which spurred Herbert Biern, at the time a top banking-supervision official at the Fed, to demand a meeting with Chertoff to warn him against it. Chertoff told Biern, according to attendees, that if the Justice Department "can't bring these cases because it may bring harm, then maybe these banks are too big." In the end, though, Chertoff and the Justice Department blinked. They didn't indict, and PNC entered into a deferred prosecution agreement. No bank executives were prosecuted. Two years later, the Supreme Court overturned the Arthur Andersen conviction.


Why Are Big Companies Rarely Ever Punished?

Ask Jesse Eisinger your questions about corporate impunity on May 1 on Reddit, or tweet with #AskProPub

From 2004 to 2012, the Justice Department reached 242 deferred and nonprosecution agreements with corporations, compared with 26 in the previous 12 years, according to a study by David M. Uhlmann, a former prosecutor and law professor at the University of Michigan. And while companies paid large sums in the settlements — the days of $7 million cost-of-doing-business fees were over — several veteran Justice Department officials told me that these settlements emboldened defense lawyers. More crucial, they allowed the Justice Department's lawyers to "succeed" without learning how to develop important prosecutorial skills. Investigations of individuals are more time-consuming and require a different approach than those of a corporation. Indeed, the department now effectively outsources many of its investigations of corporate executives to outside firms, which invariably produce reports that exculpate those at the top. Jed Rakoff, the U.S. District Court judge and former federal prosecutor who has become the most prominent legal critic of the Justice Department, explained the process to me this way: "The report says: 'Mistakes were made. We are here to take our lumps'" — in other words, settlements and, if the transgressions are particularly bad, further oversight. "Lost in that whole thing," Rakoff said, "was anyone trying to investigate whether the individuals did something wrong."

The Bush administration may have earned a reputation as being friendly to business interests, but it wasn't always that way. Around the time of the Andersen investigation, Larry Thompson, the deputy attorney general, was summoned to the White House to defend his department. He and Robert Mueller, the director of the F.B.I., met with the president in the Roosevelt Room of the White House, where they decided not to present legal theory but to show evidence that prosecutors had amassed in matters like the Enron case, demonstrating that executives had made up numbers and lied to the public. Bush seemed stunned. He turned to Mueller and Thompson and said, "Bobby and L.T., continue what you are doing."

If Chertoff had signaled a green light for going after entire companies, Thompson drafted a memo in 2003 that offered a post-Andersen playbook that went right at the heart of how large corporations protected themselves. For years, big businesses, like tobacco companies, shielded questionable conduct by invoking attorney-client privilege, which could render details of troubling executive dealings inadmissible in court. If a company came under federal scrutiny, it typically paid its executives' legal bills, hiring some of the nation's best firms, those who could slow or derail any inquiries. And when multiple executives fell under suspicion, their lawyers would often sign joint defense agreements allowing them to share with one another what they learned about the feds' case.

Thompson's memo declared that prosecutors could, in essence, offer a deal, but it wasn't a very generous one. Companies could win Brownie points for being cooperative only if they eschewed privileges like joint defense agreements. Almost immediately, members of the white-collar bar asserted that this overreach eroded a fundamental right, but they didn't have to argue incessantly; once again, the Justice Department's ambition backfired. In the summer of 2006, the government's once-promising prosecution of executives from KPMG, an accounting and consulting firm suspected of selling illegal tax shelters to wealthy clients, started going bad. (The U.S. attorney's office in Manhattan felt so confident that it indicted 17 KPMG executives.) The case fell apart when the judge ruled that those prosecutors had violated constitutional rights by pressuring the firm to waive attorney-client privilege and stop paying employees' legal fees; the government's zeal, he noted, had gotten "in the way of its judgment." With the "greatest reluctance," he threw out the cases against 13 of the executives. (Two others were convicted.)

Soon after, the counteroffensive to the Justice Department's overreach peaked, led by the white-collar bar and corporate lobbies and aided by The Wall Street Journal's editorial page, the U.S. Chamber of Commerce and even the American Civil Liberties Union. Senator Patrick Leahy, Democrat of Vermont, contended that the department was abusing corporations; his colleague Arlen Specter, then a Republican from Pennsylvania, readied a bill to prevent the Justice Department from receiving attorney-client privilege waivers. To cut that off, Paul McNulty, the deputy attorney general, released a revised set of rules stating, among other things, that no federal prosecutor could ask a company to waive attorney-client privilege without permission from higher-ups.

Over the years, the KPMG debacle and the corporate revolt would lead the Justice Department to roll back the Thompson memo to nearly the point of reversal. Today prosecutors are prohibited from even asking companies to waive their attorney-client privilege. They are also prohibited from pushing a company to cut off the legal fees for indicted executives or pressuring it to forgo joint defense agreements. "It was very much a game-changer in the business of investigating and defending in those cases," says Michael Bromwich, a top white-collar lawyer and former inspector general of the Department of Justice.

In the decade since, the courts dulled other prosecutorial tools. A Supreme Court ruling allowed sentences to be set below previously determined mandatory minimums (which made executives less likely to "flip"). Another narrowed an often-used legal theory that said employees were guilty of fraud if they deprived their companies of "honest services" (which helped nab Enron's former C.E.O., Jeffrey Skilling, among others). No change was momentous on its own — and some may have legitimately restored the rights of defendants — but taken together they marked a significant, if almost unnoted, shift toward the defense. After Lanny Breuer entered the Department of Justice, he testified in front of Congress to restore the honest-services charge for corrupt government officials. But he didn't even try to broach the topic of a private-sector fix.

Life on Wall Street is often portrayed as hours of kinetic fury with billions on the line, but the work is more often suited to wonks who are comfortable digesting Excel spreadsheets. Serageldin, who joined Credit Suisse's information-technology department right out of Yale in 1994, was assigned the late-night job of "cracking tapes" — transferring magnetic tape reels of data, decoding them and running analyses. Senior bankers quickly identified his talent and brought him over to the moneymaking side, where he was soon working in the bank's catastrophe-bonds business, or securities that transfer the risk of earthquakes and hurricanes from seller to investor. It required mastering geology, fault lines and property-damage projections. In order to achieve the kind of informational advantages that Wall Street requires to make money, Serageldin had to put the statistical runs on a personal computer, waking up in the middle of the night for days at a time to reset it. By 2007, he oversaw about 70 people and generated $1.3 billion in trading revenue.

Serageldin's group made so much money that some colleagues believed his bosses gave him a pass on risk controls. But by disposition, and by practice, he was anything but a swashbuckler. When the value of mortgage securities began to crater, on what became known as the Valentine's Day Massacre of February 2007, most traders kept trading, pumping out securities, boosting their personal earnings while endangering — and in some cases destroying — their institutions. Serageldin, however, began ordering his traders to get out of their riskiest positions. The bank's head of fixed income at the time, James Healy, would later note that Serageldin's decisions "took courage and personal conviction, in the face of immense pressure" from the sales force.

Yet Serageldin's caution failed him in one crucial moment. Later that summer, traders in one of his portfolios began to avoid taking the necessary losses on their mortgage-backed securities. Traders are required to hold securities at their current value, known as marking to market, determining how much the portfolio made or lost that day. At one desperate point, one of Serageldin's traders approached a friend at a small regional bank to give him a so-called independent price that happened to be nearly identical to the prices in the portfolio, enabling them to conceal the size of the losses. In early December, that spreadsheet tallying the losses made its way to Serageldin, who would later admit to recognizing that the prices should have been lower. He had assumed the positions were hedged, a friend of his told me, but instead of saying anything, he tried to protect his reputation. By early 2008, he was out at Credit Suisse. The bank reported him to the U.S. attorney's office in the Southern District of New York.

In a matter of months, the markets plummeted in a financial crisis that made Enron look like small-time pilfering. And as tens of millions of Americans lost their jobs or homes, an inchoate but palpable demand for justice — for a crackdown — emerged. Breuer may have come with the right pedigree, but he now faced troubles that hurt as much as the debacles of Arthur Andersen and KPMG, or the retreat from the Thompson memo: austerity. The department faced periodic hiring freezes. The F.B.I., which assigned dozens of agents to Enron, had shifted resources to terrorism. The Postal Service wound down an elite unit that had specialized in complex financial investigations. President Obama's Fraud Enforcement and Recovery Act, which was designed to give hundreds of millions to prosecute financial criminals, was able to deliver only $65 million in 2010 and 2011. Prosecutors reporting to Breuer proposed setting up a mortgage-fraud initiative, a "Prosecutorial Strike Force," as one July 2009 memo put it, but the Justice Department dithered. Finally it set up the Financial Fraud Enforcement Task Force, an enormous coordinating committee with essentially no investigative operation. One former Justice Department official derided it as "the turtle."

Resources aside, the erosion of the department's actual trial skills would soon become apparent. In November 2009, the U.S. attorney's office in Brooklyn lost the first criminal case of the crisis against two Bear Stearns executives accused of misleading investors. The prosecutors rushed into trial, failing to prepare for the exculpatory emails uncovered by the defense team. After two days, the jury acquitted the two money managers. "For sure," one former federal prosecutor told me, "it put a chill" on investigations. "Politicos care about winning and losing."

The fear first wrought by the Andersen case, meanwhile, ossified around financial firms. In early 2009, the Obama administration deliberated over serious tax misconduct by UBS, the Swiss bank, but top Treasury and Justice department officials worried about the effects criminal charges could have on the financial system. UBS settled with the government. Breuer had another shot, in 2012, when the department was moving toward a resolution of a six-year investigation into HSBC, which had become the preferred bank for Mexican and Colombian drug cartels and conducted transactions with countries under American sanctions, including Iran and Libya. Breuer surveyed Washington and London regulators and policy hands and sought assurance that the system could weather an indictment. A top Treasury Department official told Breuer, in carefully couched language, that an indictment could cause broader problems in the financial system. Breuer even went as far as discussing whether banks were too big to indict with H. Rodgin Cohen, a partner at Sullivan & Cromwell, who was representing HSBC in his very own case. Cohen told Breuer that while the Justice Department can't have a rule not to indict a large bank, prosecutors should, well, take into account how the target has cooperated and what changes it has made to fix the problems. Of course, HSBC happened to have taken those very measures. The Justice Department blinked again. That December, the bank was fined $650 million and forfeited almost $1.3 billion in profits. No one went to jail.

It would be easy to blame the Justice Department's ineptitude on past mistakes alone. But again, the very ambitions of its prosecutors played a prominent role. Top governmental lawyers generally don't want to spend their entire careers in the public sector. Many want to score marquee victories and avoid mistakes and eventually leave for prominent corporate firms with starting salaries at 10 times what they make at the Department of Justice. According to numerous former criminal-division employees, Breuer almost immediately signaled his interest in bigger things. In October 2009, Steven Fagell, his deputy chief of staff and former Covington colleague, sent an email to the division. "Do you like giving toasts? Do you think it should have been you accepting the writing Emmy for '30 Rock?'" Fagell wrote. "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." Prosecutors developing cases against Mexican drug cartels and Al Qaeda members found it more than a little tone deaf. (Fagell says the email request was intended "both to foster internal morale and to send a message of deterrence to the public.")

According to numerous sources from the Justice Department, the Breu Crew instilled a careerist culture that was fearful of sullying its reputation by losing cases. Kathy Ruemmler, who worked on the Enron task force and later became Obama's counsel, would needle Breuer: "How many cases are you dismissing this week?" Later Ruemmler was upset when the Justice Department decided against retrying a case against Merrill Lynch executives who helped Enron boost its earnings with an infamous transaction involving a Nigerian barge. (Breuer was recused from the barge case.) A former prosecutor at the Justice Department in Washington concurred that Breuer's staff didn't "want to pursue cases where they feel the person is 100 percent guilty but they are only 70 percent sure they can win at trial." Prosecutors contrasted that with previous eras, some fondly recalling a line favored by James Comey, who served as one of George W. Bush's deputy attorneys general and emphasized the need for "real-time" white-collar prosecutions. "We have a name for prosecutors who have never lost — the 'Chickenshit Club.'" (In a statement, Breuer said he had a strong record of white-collar enforcement: "Where there were cases to bring, we brought them, and where there were not, we took a pass.")

But given that Washington rejected a unified national task force, these career motivations would prove particularly relevant. When Preet Bharara, former chief counsel for Senator Charles E. Schumer, arrived in the Southern District of New York in 2009, he had a decision to make. There were cases arising from the financial crisis, which could take years to investigate and, after all that, never make it to a jury. Or there were insider-trading cases, which were far more straightforward. Someone improperly learns nonpublic details about a company and makes a killing on the stock market. "You do have a tough choice," one former Southern District prosecutor says. "Am I going to chase after crimes I don't know were committed and don't know who by, or do we go after crimes we do know were committed and by whom?"

Bharara focused on insider trading, and his office has amassed a stunning 80-0 record of prosecutions, locking up the hedge-fund titan Raj Rajaratnam and Rajat Gupta, the former managing director of McKinsey & Company and a director at Goldman Sachs. They took down eight former employees of Steven A. Cohen's notorious SAC Capital hedge fund. (Notably, however, they haven't been able to bring charges against the man himself.) Time magazine put Bharara on its cover, with the bold headline: "This Man Is Busting Wall Street." Yet Bharara didn't touch Wall Street's real players — top bankers. The former prosecutor was almost sheepish about the insider-trading cases when I spoke to him: "They made our careers, but they don't change the world." In fact, several former prosecutors in the office told me that going after bankers was never a real priority. "The government failed," another former prosecutor said. "We didn't do what we needed to do."

As a result, Bharara and his team neglected seemingly winnable cases in their own backyard, including one particularly big one. After Lehman imploded, the Justice Department's Washington headquarters split responsibility investigating what the bank's executives knew among three U.S. attorney's offices: the Southern and Eastern districts of New York and the New Jersey operation. But for all of that manpower, to those closest to the Lehman probe, the government's case was seemingly conducted by one lawyer, Bonnie Jonas, an assistant U.S. attorney for the Southern District. She would make pilgrimages to the offices of Jenner & Block, a prestigious law firm that had been assigned to investigate the Lehman bankruptcy. Jonas would pore over the 40 million-odd pages of Lehman documents the firm assembled. (The Southern District says it devoted multiple people and ample resources to the investigation.)

Nonetheless, the Justice Department never aggressively pursued what may have been the most promising angle. On Sept. 10, 2008, the chief financial officer of Lehman Brothers, Ian Lowitt, told shareholders and the public that the bank had $42 billion of available cash, or liquidity. The bank's position, Lowitt reassured, "remains very strong." Lehman would file for bankruptcy five days later. "What they were saying was not just wrong but materially wrong," Robert Byman, a Jenner & Block partner, told me.

Over 14 months, Jenner & Block would put about 130 lawyers on the case to prepare a report on the collapse. At one point, recalls Stephen Ascher, a partner, one of them discovered "this wonderful chart" breaking down the liquidity figure into three categories: high, moderate and low. Of those billions, $15 billion was in the "low" category, generally because it had been pledged as collateral to other banks. One former Lehman executive told me that several other company managers understood that they could not tap much, if any, of that encumbered money. And at least two executives objected to how the bank was representing its liquidity, including its international treasurer, Carlo Pellerani, according to the Jenner & Block report. The law firm found that regulators, credit-rating agencies and Lehman's outside lawyer had no idea that the liquidity pool wasn't, in fact, all that liquid. When Lowitt came to talk to Jenner & Block, he explained that he had not fully understood the issues when he assured investors of its liquid assets. That may be a reasonable defense, but it does not appear that prosecutors and federal investigators made a serious attempt to test how much Lehman's chief financial officer knew about his own books. Three Lehman executives and one regulator at the Federal Reserve, all of whom were involved in the bank's desperate attempts to keep itself liquid, told me they were never even interviewed by any federal-government officials.

When Wall Street bankers are arrested, they often do what is known in finance as an expected-value analysis: They weigh the cost of fighting, how long it would take and the chances of the best and worst outcomes. Serageldin was a Wall Street banker with a foreign name who helped make securities that played a role in blowing up the global economy. He seemed to reach a logical conclusion: Plead guilty and take his chances with a judge's sentence. Other bankers made the opposite choice. After ignoring the risks of the housing and credit bubbles, they took the high-risk-high-reward gamble again, hiring top lawyers and claiming that they never intended to deceive. As it turned out, they benefited from a decade of subtle changes that favored corporate executives under investigation. Serageldin took the sucker's bet. Prosecutors simply got their man by default.

In his first months in prison, Serageldin has tried to remain upbeat. The investment-banking monk is now spending his nights in a basketball-court-size room with about 70 others. If the problem sets don't occupy him, he is allowed five books at a time. After explaining that he had lived abroad, Serageldin became known as London. The extent of his crime, meanwhile, has been revised. Initially prosecutors implied that the trader had been part of a conspiracy to hide $540 million worth of losses. By the time he was sentenced, the government was down to accusing him of conspiring to hide about $100 million. An internal Credit Suisse analysis put the misstatement at $37 million. "There's not a moment's doubt on my part" that such mismarking happened elsewhere during the crisis, Fiachra O'Driscoll, a friend and former colleague of Serageldin's, who has been an expert witness in private litigation, told me. "I have seen evidence along the way that similar things happened dozens of times."

Federal prosecutors have their own explanation for how only one Wall Street executive landed in jail in the wake of the financial crisis. The cases were complex to investigate and would have been infernally difficult to explain to juries, some told me. Much of the crisis and banker transgressions stemmed from recklessness, not criminality. They also suggest that deferred prosecutions — with their billions in settlements and additional oversights — can be stricter punishments than indictments. Still, while the Department of Justice has not been without its successes — it won a guilty plea from BP in the Deepwater Horizon spill, and it's currently going after traders in the wake of the JPMorgan Chase London Whale trading loss — these remain exceptions even beyond the financial sector. Federal prosecutors almost never bring criminal charges against top executives of large corporations, from banking to pharmaceuticals to technology. In March, the Justice Department entered into a deferred prosecution against Toyota but did not indict the company or any top executives. As the economy limps back from the Great Recession, compensation has recovered, corporate profits are at record levels and executives see that few, if any, of their peers ever go to prison anymore. Perhaps one reason Americans have come to begrudge the wealthy is a resentment of their culture of impunity.

Larry Thompson became known for his memo, but back in the Clinton administration, the deputy attorney general Eric Holder laid out his own memo for strengthening corporate prosecutions. But he undermined his own words by also explaining that prosecutors needed to take into account the collateral economic consequences. In testimony in front of the Senate in March, Holder, who is now the U.S. attorney general, seemed to lament the position government enforcers had found themselves in. "I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute — if we do bring a criminal charge — it will have a negative impact on the national economy, perhaps even the world economy." Holder quickly walked back the remarks. Soon after, Lanny Breuer returned to Covington & Burling as a vice chairman.

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