Regulatory Policy

Rethinking Lifetime Bans for White-Collar Criminals

The New York Stock Exchange building in New York City. (Mike Segar/Reuters)
Prolonged bans are excessive and counterproductive.

Few people have much sympathy for white-collar criminals, and rightly so. As a general rule, if you wear a suit to work, were employed in financial services, and were involved in some sort of rule-breaking, you will make a very easy target for the envy and resentment of working-class America, together with any number of other groups able to find some rare common ground in their disdain for white collar culprits.

And, indeed, white-collar criminals are as objectionable as any others. From the overt and victim-identifiable crimes of theft, embezzlement, and fraud, to the more nebulous but still problematic areas of insider trading and regulatory infractions, bad deeds warrant punishment — often significant punishment including imprisonment, fines, and restitution. The guilty parties are often contemptible, and while envy never strikes me as a valid reason for looking down upon criminals, for them to reap what they have sown is an entirely appropriate (and, indeed, biblical) concept, even in the world of non-violent crime.

We should do a better job confirming that infractions in our penal code involve a victim before determining whether that action should be considered a matter for either the criminal law or a breach of regulations. Furthermore, the way ambitious prosecutors from Rudy Giuliani to Eliot Spitzer to Preet Bharara have abused insider-trading accusations for political advantage would warrant a rereading of Milton Friedman’s cautions about laws against insider trading. But for the purposes of this article, I won’t try to minimize the violation of any law currently on our books, or rationalize the misbehavior of anyone caught crossing the line. Wrongdoing necessitates punishment, and increased severity in wrongdoing ought to result in increased severity in punishment.

However, there is one common punishment for wrongdoings in finance, securities, and capital markets that is at least unproductive, and in many cases severely counterproductive: prolonged bans from the industry.

An abundance of caveats and reaffirmations are needed here to stave off the inevitable suspicion that I am looking to see white-collar offenders receive less punishment and less consequence than their less privileged counterparts. This is far from the case: If jail sentences are warranted where a crime is both committed and successfully prosecuted, they should be served, and served in full. Where restitution is warranted, and here I do mean to actual victims of actual crimes (rather than as is so often the case, the state or regulators taking a cut), it should be paid, and paid in full. If one believes jail sentences have been too light, or fines and penalties assessed with too much mercy, let’s talk about stricter criminal enforcement. No part of my agenda is seeking to lighten the burden where a debt is due to society.

Rather, I am focused on the other side of the coin. If punishment is a way of repaying a debt to society, what should we do after an appropriate sentence has been levied and fulfilled?  With one caveat, I’d argue that bans from working in financial services after the time has been served or fine paid (or both) are cruel, contrary to both biblical and American concepts of justice, and equally important, harmful to the economic well-being of society as a whole. The caveat? It’s important to note that under certain circumstances, regulators such as FINRA will impose a period of suspension (which may be accompanied by a fine) for a limited period on a broker who has broken their rules. There, the suspension is either the punishment or the principal punishment, and that is appropriate. Suspensions that operate after the wrongdoer has paid the price under criminal law, however, are a different matter.

  1. It would be tough to think of a clearer example of “cruel and unusual” punishment than stripping someone of their existential purpose and calling in life. If, say, two years of jail is warranted, or a $2 million penalty, fine. But to then pile on a ban (that can last decades or even a lifetime) on working in the field someone loves, the field they know, the field that animates them, is a pile-on that defies basic standards of justice and mercy. It is inherently excessive, for if the goal is to “take them off the field” during the course of a jail sentence, the jail sentence should be the punishment. If the debt has been paid to society, telling someone after they have paid that debt that the punishment shall be prolonged, whether by statute (or regulation) is excessive, and in certain cases even cruel and unusual. This is not to say that an employer owes the guilty party a second chance. If a wrongdoer at, say, JP Morgan pays their debt to society for some form of violation, I would never suggest that Goldman Sachs owes them a second chance once he or she emerges from jail or pays off their fine. Market forces will and should affect their ability to regain professional opportunity, and their own creativity, tenacity, and persistence will have to overcome these challenges, which are considerable — not least because their offense will be a matter of public record and, in the case of brokers and many investment managers, will be visible on a database maintained specifically to tell prospective employers or clients.
  2. There also is a violation of a fundamental tenet of law and order involved in the very concept of bans that extend beyond the original penalty (and the longer the ban, the greater the violation), because it tramples on the principle of redemption. Wrongdoing should be punished, but wrongdoers should also be given the chance to earn and experience restoration and redemption. This is a distinctly Christian notion, but also one rooted in the traditions and norms that undergird our social contract. The possibility of rehabilitation is meant to be built into the justice system. Redemption is a worthy, even if all too frequently forgotten, aspiration. There is also a practical matter at play here (and Americans once had a reputation as a practical people): Rehabilitation is made infinitely more difficult when former offenders are denied, by operation of law or regulation, their best chance of earning something akin to a good livelihood.
  3. This article is about white-collar criminals who have worked in the financial sector, but I should stress that the point I am making here is not reserved for them. Up and down the food chain of criminality, people who have paid their debt to society are denied the opportunity to get themselves back on their feet again, by being blocked, as a matter of law or regulation, from countless jobs and professions. While employers should not be coerced into lending a helping hand, the state should not be in the business of holding former criminals down. Of course, some crimes warrant “lifetime punishments” — terrorism, murder, and the like. But a lifetime ban from labor, vocation, calling, from one’s area of professional expertise, skill, and passion, turns the Judeo-Christian ethic and traditional American jurisprudence on its head.
  4. Finally, and perhaps most notably (returning to the topic of the financial sector), in a number of cases, prolonged or even lifetime bans have taken some of our very best players off the field, not just in excess of what their punishment warranted, but to the detriment of the U.S. economy. Put differently, why would we not want our best financial minds engaged in financial markets, once they have paid their debt to society?

To underline this point, I start with a specific example and reasonably rhetorical question: It’s not hard to believe that American capital markets would have benefited from the intellectual and economic contributions of Michael Milken in the run-up to the financial crisis. Would the smartest mind in corporate credit risk of the past 75 years have had anything to teach Wall Street banks about balance-sheet risk during the leveraged-mortgage craze? If the allegedly prescient voices of the prophets in The Big Short were not taken seriously, could Milken’s voice possibly have been?

Boyd Jefferies may not be as familiar a name as Milken, but consider the fate of the founder of the prominent investment bank Jefferies and Co. Banned for life from the industry in his mid-50s after pleading guilty to the victimless crime of parking stock for a third party (which was a crime and did warrant punishment), he died in 2001. Had he lived, I wonder if the country would have been better or worse off by allowing the pioneer behind third-party block trading to re-enter the game, just in time for a couple of decades of revolutionary changes and innovations in equity trading to play out. To take the hypothetical further, could Jefferies’s talent and presence just possibly have enhanced our efforts for safer and more efficient markets?

Another example from the 1980s: convicted insider-trader Dennis Levine. An investment banker known for pioneering work in mergers and acquisitions, Levine paid dearly for his crime in both imprisonment and financial restitution. Did we help society by removing someone of Levine’s analytical and deal-making skills from Wall Street, or did we merely turn his multi-year sentence into a multi-decade sentence?

I purposely chose three examples from ancient history to avoid the sensitivities aroused by more recent cases. But to take a theoretical example, should a pioneering health-care executive and research professional who strayed (to use a mild word) into insider trading have been sidelined while the world searched for a vaccine for COVID-19? How many executives banned from serving in the C-suite of publicly traded companies are repentant, redeemed people whose talents and contributions are being denied to a society that would benefit from them? The list is long, and it is tragic — not just for them and their families, but for us and our families. And for what? Not for justice. Not for fairness. Not for equity. For bloodsport. It has to stop.

It’s possible to believe that violations of financial statutes and rules should be punished — and punished, where appropriate, severely — while at the same time believing that justice is not justice without the possibility of redemption. We correctly spent much of 2020 pushing back against the cruelty of a culture that seeks to “cancel” people for unwise tweets and decades-old lapses in judgment. While we are at work fighting that fight, let’s limit the abusive overreach of a system that can add 30-40 years to a relatively short term of incarceration or even a fine, modest or otherwise. If we restore some sanity and, indeed, some humanity to this process, we may be helping our own capital markets even more than we help the convicted themselves. We will also be doing the right thing.


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