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Justice Department and SEC Privatize Investigation of Corporate Misdeeds

You are not alone if you have wondered why no one has been prosecuted for the corporate misdeeds that brought down the economy in 2008 and nearly thrust the United States into another Great Depression. The reason no corporate executive has had to pay for corporate malfeasance is the government's adoption of a new, soft-on-corporate-crime approach that rewards corporations that hire investigators to discover and report their own misdeeds after they are initially approached by the government. This then leads to a "deferred prosecution agreement" in which, in exchange for a fine and a promise to clean up its act, the corporation is let off the hook--usually with neither the corporation nor any of its executives being prosecuted.

The Department of Justice (DOJ) began pulling back from aggressive prosecution of corporate crime in 2005 after the Supreme Court overturned a hard-won conviction against Enron's accounting firm Authur Andersen. Fueled by this litigation success, business leaders began complaining that DOJ prosecutions had been overzealous and were hurting American businesses. According to participants, in a May 2005 meeting of DOJ officials that preceded a session of the inter-agency Corporate Fraud Task Force, Deputy Attorney General James B. Comey asked whether American businesses were being harmed by the DOJ investigations. He then urged colleagues to act responsibly.

"It was a total retrenchment," one of the participants said. "It was like we were going backwards."

The DOJ's response to this retrenchment was to ramp up the process of deferred prosecutions, which the DOJ made an official alternative to prosecution in 2008. In 2010, the Securities and Exchange Commission (SEC) officially embraced deferred prosecution as well.

Business leaders rejoiced over the newly popular process. The prominent Wall Street law firm of Sullivan & Cromwell said it represented "an important step away from the more aggressive prosecutorial practices seen in some cases under their predecessors." Critics were not so happy.

"If you do not punish crimes, there's really no reason they won't happen again," noted Washburn University School of Law professor Mary Ramirez, who is a former Assistant United States Attorney (AUSA). "I worry, and so do a lot of economists, that we have created no disincentives for committing fraud or white-collar crime, in particular in the financial space."

DOJ spokeswoman Alisa Finelli, said that, under deferred prosecution agreements, the corporations are punished by having to pay restitution and fines as well as cease their criminal activities. They also allow the DOJ to make the best use of limited resources by "outsourcing" the investigation and its costs to the corporation. Furthermore, they "achieve these results without causing the loss of jobs, the loss of pensions and other significant negative consequences to innocent parties who played no role in the criminal conduct, were unaware of it or were unable to prevent it," said Finelli.

Some lawyers agree with the DOJ.

"Given the scanty resources that have been committed to corporate crime enforcement, I think the government's leveraging of its prosecution power from corporations and their lawyers has been critically important," said Columbia University law professor Daniel C. Richman, a former AUSA in New York.

The government's use of deferred prosecutions has an even longer history with banks. But that has its problems as well.

"Traditionally, a bank would tell the DOJ when an employee engaged in crimes, but what do you do when the bank itself is run by a criminal enterprise?" asked Solomom L. Wisenberg, who in the 1990s was chief of the financial institutions fraud unit for the U.S. Attorney in the Western District of Texas. "You have to be able to investigate without just waiting for the bank to give you the referral. The people running the institutions are not going to come to the D.O.J. and tell them about themselves."

Even when applied to corporations, deferred prosecution can cause complications between the various government agencies. Such was the case in 2007 when the Department of Housing and Urban Development (HUD) began investigating claims of mortgage fraud against Beazer Homes, one of the nations's ten largest home builders. The investigators discovered that Beazer had been offering a lower mortgage rate for an extra fee, then not delivering on the lower rate. It has also been offering down payment assistance then raising the price of the house by the same amount without telling the homebuyers. These fraudulent practices had resulted in losses to the Federal Housing Administration's insurance fund when the buyers defaulted.

Beazer's board of directors hired Alston & Bird, a law firm, to investigate the allegations and entered into a deferred prosecution agreement with the DOJ in April 2009. The agreement required Beazer to pay $55 million in fines and restitution and about the same amount to Alston & Bird for conducting the investigation. The only Beazer executive criminally indicted was Michael T. Rand, its former chief financial officer.

The DOJ told the HUD to stop investigating Beazer executives so the deferred prosecution deal could be made. This disturbed Kenneth M. Donohue, who was HUD's inspector general at that time.

"As a law enforcement officials for over 40 years, I have never witnessed a like action in any of my varied dealings," Donohue wrote to U.S. Attorney General Eric Bolder complaining of the DOJ's interference.

Deferred prosecution also tends to find less media play than hard prosecutions. Enron, WorldCom, Tyco, Adelphia, Rite Aid and ImClone are well-known for their hardball prosecutions. But who knows that American International Group paid $126 million in 2004 for allowing clients to falsify financial statements or that Computer Associates International entered into a deferred prosecution agreement that same year? And who would guess that Bristol-Meyers Squibb and Prudential Financial were parties to deferred prosecution agreements is 2005 and 2006, respectively? The DOJ is reported to be planning a deferred prosecution agreement for Goldman Sachs, which recently was forced by the SEC to pay a $550 million settlement for claims of mortgage securities fraud.

Another advantage to the corporations is their sharing of information regarding the deferred prosecution process. Lawyers for Goldman & Sachs, Morgan Stanley, JP Morgan Chase and others regularly discuss the information they have on what the government is doing and how it negotiates agreements and settlements.

"The corporate crime defense bar has this down to a science," according to Russell Mokhiber, editor of the Corporate Crime Reporter. "I interview them all the time, and they boast about how they've gamed the system."

One Assistant Attorney General said that many inquiries into corporations' activities have been tabled because their lawyers were so well prepared and had such good answers. Their presentations can be very persuasive.

Of course, this is just another example of the government kowtowing to corporate interests. If you don't agree, try imagining a felony criminal defendant being allowed to fund his own investigation and avoid prosecution by paying a fine and promising riot to commit the same crime again.

Source: New York Times

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