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U.S. Department of Justice Soft on Corporate Crime
If you’ve wondered why no one has been prosecuted for the corporate misdeeds that devastated the economy in 2008 and nearly thrust the United States into another Great Depression, you’re not alone.
The reason no Wall Street executives have faced charges for malfeasance is due to the federal government’s recent adoption of a soft-on-corporate-crime approach that rewards companies that hire investigators to uncover and report their own misdeeds. Such self-policing leads to “deferred prosecution agreements,” under 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 company nor any of its executives facing prosecution.
According to a July 7, 2011 article in the New York Times, the Department of Justice (DOJ) began pulling back from aggressive prosecution of corporate crimes in 2005 after the U.S. Supreme Court overturned a hard-won conviction against Arthur Andersen LLP, Enron’s accounting firm. See: Arthur Anderson LLP v. United States, 544 U.S. 696 (2005).
Fueled by this litigation success, corporate leaders began complaining that DOJ prosecutions had been overzealous and were hurting U.S. businesses. According to participants at a May 2005 meeting of DOJ officials that preceded a session of the Corporate Fraud Task Force, Deputy Attorney General James B. Comey reportedly questioned whether American companies were being harmed by DOJ investigations. He then urged his colleagues to act responsibly.
“It was a total retrenchment,” said one of the participants, who did not want to be identified. “It was like we were going backwards.”
The DOJ’s response to this relaxation of investigations into corporate crime was to ramp up deferred prosecution agreements, which the DOJ made an official alternative to prosecution in 2008. Additionally, on November 19, 2008, the DOJ’s Antitrust Division issued new guidelines for its leniency program, under which companies and corporate officials could avoid prosecution by confessing criminal activity and fully cooperating with the DOJ.
“Wherever possible, the Division has construed or interpreted its program in favor of accepting an applicant into the leniency program in order to provide the maximum amount of incentives and opportunities for companies to come forward and report their illegal activity,” the guidelines stated.
In 2010, the Securities and Exchange Commission (SEC) officially embraced deferred prosecution agreements as well. The SEC also increasingly began issuing reports on corporate misconduct without seeking sanctions, and filing civil actions rather than encouraging criminal prosecutions.
Business leaders rejoiced over the new soft-on-corporate-crime approach. The prominent Wall Street law firm of Sullivan & Cromwell said the shift by the DOJ represented “an important step away from the more aggressive prosecutorial practices seen in some cases under their predecessors.”
Critics of such leniency, however, were not 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 U.S. 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.”
Indeed, there is no similar analogue in the government’s fight against street crime – in which, for example, federal prosecutors zealously pursue cases against low-level drug offenders and seek lengthy prison terms. Apparently, white-collar crimes that involve powerful corporate defendants represented by equally powerful law firms require a different and more conciliatory approach.
DOJ spokeswoman Alisa Finelli said that under deferred prosecution agreements, corporations are punished by having to pay restitution and fines as well as cease their criminal conduct. The agreements also allow the DOJ to make the best use of its limited resources by “outsourcing” the investigation and its costs to the corporation. Further, 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,” Finelli stated.
As former Attorney General John Ashcroft explained during a congressional hearing in March 2008, “Prosecutors understand that a corporate indictment can be a corporate death sentence. A deferred prosecution can avoid the catastrophic collateral consequences and costs that are associated with corporate conviction.”
Some agree with the DOJ’s laxer approach to corporate wrongdoing.
“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, who formerly served as an AUSA in New York.
However, deferred prosecutions can cause complications among government agencies. Such was the case in 2007 when the Department of Housing and Urban Development (HUD) began investigating claims of mortgage fraud involving Beazer Homes USA, one of the nation’s largest home builders. Federal investigators discovered that Beazer had been offering a lower mortgage rate for an extra fee, then not delivering on the lower rate.
The company had also been offering down payment assistance and then raising the price of the house by the same amount without telling the homebuyers. Those fraudulent practices resulted in losses to the Federal Housing Administration’s insurance fund when the buyers defaulted.
Beazer’s board of directors hired the law firm of Alston & Bird to investigate the allegations, and entered into a deferred prosecution agreement with the DOJ in April 2009. The agreement required Beazer to pay up to $55 million in fines and restitution, and about the same amount to Alston & Bird for conducting the investigation. The company also shut down Beazer Mortgage Corporation.
The only Beazer executive criminally indicted was Michael T. Rand, 48, the company’s former chief accounting officer. Why? The DOJ told HUD to stop investigating Beazer officials 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 official 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 Holder, complaining about the DOJ’s interference.
“The most important point of this whole thing is the fact that they threatened the HUD office of the inspector general that we would not be allowed to go forward with our investigation of executives if we didn’t agree to their settlement,” Donohue stated.
Rand, one of very few corporate officials to face criminal prosecution, was accused of manipulating records and colluding with another company to boost Beazer’s revenue. He was found guilty of seven counts following a jury trial in October 2011, and has not been sentenced. See: United States v. Rand, U.S.D.C. (W.D. NC), Case No. 3:10-cr-00182-RJC-DSC.
Deferred prosecution agreements also tend to result in less media play, which means corporate misdeeds can slip under the public’s radar. Companies such as Enron, WorldCom, Adelphia, Rite Aid and ImClone are widely known to have faced criminal prosecution due to their wrongdoing.
But who knows that American International Group (AIG) paid $126 million in 2004 for allowing clients to falsify financial statements, or that Computer Associates International entered into a deferred prosecution agreement the same year? Or that in 2005, Monsanto was able to avoid prosecution by paying $1 million and entering into a monitoring agreement with the DOJ, to resolve allegations of overseas bribery? And who would guess that Bristol-Meyers Squibb and Prudential Financial were parties to deferred prosecution agreements in 2005 and 2006, respectively, or that American Express Bank International avoided prosecution and paid a $65 million fine in 2007?
The collapse of Lehman Brothers in 2008, which led to the largest bankruptcy in U.S. history with losses of hundreds of billions of dollars, was central to the financial crisis and the resultant economic downturn. An investigation by former U.S. Attorney Anton Valukas, ordered by the U.S. bankruptcy court, found sufficient evidence to bring fraud charges against corporate executives as well as Lehman’s accounting firm, Ernst and Young. Yet no company officials have been prosecuted or otherwise held accountable. Lehman Brothers was one of the major backers of the private prison industry. [See: PLN, Nov. 2008, p.16].
The DOJ is reportedly planning a deferred prosecution agreement with Goldman Sachs & Co., which in July 2010 was forced by the SEC to pay a $550 million settlement related to civil claims of fraud involving mortgage securities.
“If an alleged violation is identified during a Goldman investigation, we expect a reasoned response from the Justice Department,” opined Brad Hintz, an analyst with Sanford C. Bernstein & Co., an investment firm. “In a worst case environment, we would expect a ‘too big to fail’ bank such as Goldman to be offered a deferred prosecution agreement, pay a significant fine and submit to a federal monitor in lieu of a criminal charge.”
Incidentally, Goldman Sachs and another investment firm, Veritas Capital, recently purchased Global Tel*Link Corp., the nation’s largest prison phone service company, which profits by charging exorbitant rates for phone calls made by prisoners. [See: PLN, Feb. 2012, p.23; April 2011, p.1].
According to Hintz, a 2003 DOJ memo from Deputy Attorney General Larry D. Thompson stated “that prosecutors can reward cooperation by offering a negotiated settlement to a targeted company that can range from immunity from criminal indictment to a deferred prosecution agreement.... Ultimately, the targeted company is treated not as a hardened criminal but as the equivalent of a juvenile offender that can be reformed.”
Another DOJ memo, issued by Deputy Attorney General Paul J. McNulty in 2006, noted that “The most significant result of this enforcement initiative is that corporations increasingly recognize the need for self-policing, self-reporting, and cooperation with law enforcement. Through their self-regulation efforts, fraud undoubtedly is being prevented, sparing shareholders from the financial harm accompanying corporate corruption. The Department must continue to encourage these efforts.”
Of course such practices, as well as the DOJ and SEC’s use of deferred prosecution agreements, are examples of the government kowtowing to corporate interests. If that’s difficult to fathom, try imagining a felony criminal defendant, such as a bank robber, being allowed to fund his own private investigation, self-report the results, then avoid prosecution by paying a fine and promising not to commit the same crime again. That simply does not happen in the world of crime-in-the-streets, but is an increasingly common occurrence for crime-in-the-suites.
The federal government’s approach to corporate misconduct is an affirmation that in the U.S. justice system, you get only as much justice as you can afford. And huge multinational companies can afford a great deal. How much? As just one example, data from the Center for Responsive Politics indicates that in 2010 and 2011 combined, the financial industry spent almost $1 billion on lobbying expenses on the federal level alone.
According to the Transactional Records Access Clearinghouse at Syracuse University, during the first 11 months of fiscal year 2011 the DOJ initiated 1,251 new criminal prosecutions for financial institution fraud – down 28.6% since 2006, and the lowest number of such prosecutions in two decades.
“I wouldn’t blame anyone who believes they’re part of the 99 percent of Americans who has to follow the law, while 1 percent of the country doesn’t,” said Jeffrey Connaughton, former chief of staff to U.S. Senator Ted Kaufman, who chaired the Congressional Oversight Panel that reviewed the Troubled Assets Relief Program (TARP – the federal bailout program). “And a big part of the reason for that is lawyers and accountants are failing in their role as gatekeepers, and the Justice Department is too often deferring to these lawyers and accountants, which is like outsourcing the interpretation of the fraud laws.”
In January 2012, President Obama announced the formation of a DOJ task force to investigate corporate misconduct that contributed to the financial crisis and current economic downturn. The task force, composed of the DOJ, SEC, FBI and HUD, is reportedly considering the use of a federal statute called the Financial Institutions Reform, Recovery and Enforcement Act of 1989, which requires a lower burden of proof, has a longer statute of limitations and can result in the imposition of large fines.
Whether the task force’s investigation culminates in criminal prosecutions, as opposed to civil litigation, fines and deferred prosecution agreements, remains to be seen.
Sources: New York Times, Wall Street Journal, CBS News, www.jonesday.com, Huffington Post, www.marketwatch.com, www.thefiscaltimes.com
The reason no Wall Street executives have faced charges for malfeasance is due to the federal government’s recent adoption of a soft-on-corporate-crime approach that rewards companies that hire investigators to uncover and report their own misdeeds. Such self-policing leads to “deferred prosecution agreements,” under 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 company nor any of its executives facing prosecution.
According to a July 7, 2011 article in the New York Times, the Department of Justice (DOJ) began pulling back from aggressive prosecution of corporate crimes in 2005 after the U.S. Supreme Court overturned a hard-won conviction against Arthur Andersen LLP, Enron’s accounting firm. See: Arthur Anderson LLP v. United States, 544 U.S. 696 (2005).
Fueled by this litigation success, corporate leaders began complaining that DOJ prosecutions had been overzealous and were hurting U.S. businesses. According to participants at a May 2005 meeting of DOJ officials that preceded a session of the Corporate Fraud Task Force, Deputy Attorney General James B. Comey reportedly questioned whether American companies were being harmed by DOJ investigations. He then urged his colleagues to act responsibly.
“It was a total retrenchment,” said one of the participants, who did not want to be identified. “It was like we were going backwards.”
The DOJ’s response to this relaxation of investigations into corporate crime was to ramp up deferred prosecution agreements, which the DOJ made an official alternative to prosecution in 2008. Additionally, on November 19, 2008, the DOJ’s Antitrust Division issued new guidelines for its leniency program, under which companies and corporate officials could avoid prosecution by confessing criminal activity and fully cooperating with the DOJ.
“Wherever possible, the Division has construed or interpreted its program in favor of accepting an applicant into the leniency program in order to provide the maximum amount of incentives and opportunities for companies to come forward and report their illegal activity,” the guidelines stated.
In 2010, the Securities and Exchange Commission (SEC) officially embraced deferred prosecution agreements as well. The SEC also increasingly began issuing reports on corporate misconduct without seeking sanctions, and filing civil actions rather than encouraging criminal prosecutions.
Business leaders rejoiced over the new soft-on-corporate-crime approach. The prominent Wall Street law firm of Sullivan & Cromwell said the shift by the DOJ represented “an important step away from the more aggressive prosecutorial practices seen in some cases under their predecessors.”
Critics of such leniency, however, were not 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 U.S. 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.”
Indeed, there is no similar analogue in the government’s fight against street crime – in which, for example, federal prosecutors zealously pursue cases against low-level drug offenders and seek lengthy prison terms. Apparently, white-collar crimes that involve powerful corporate defendants represented by equally powerful law firms require a different and more conciliatory approach.
DOJ spokeswoman Alisa Finelli said that under deferred prosecution agreements, corporations are punished by having to pay restitution and fines as well as cease their criminal conduct. The agreements also allow the DOJ to make the best use of its limited resources by “outsourcing” the investigation and its costs to the corporation. Further, 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,” Finelli stated.
As former Attorney General John Ashcroft explained during a congressional hearing in March 2008, “Prosecutors understand that a corporate indictment can be a corporate death sentence. A deferred prosecution can avoid the catastrophic collateral consequences and costs that are associated with corporate conviction.”
Some agree with the DOJ’s laxer approach to corporate wrongdoing.
“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, who formerly served as an AUSA in New York.
However, deferred prosecutions can cause complications among government agencies. Such was the case in 2007 when the Department of Housing and Urban Development (HUD) began investigating claims of mortgage fraud involving Beazer Homes USA, one of the nation’s largest home builders. Federal investigators discovered that Beazer had been offering a lower mortgage rate for an extra fee, then not delivering on the lower rate.
The company had also been offering down payment assistance and then raising the price of the house by the same amount without telling the homebuyers. Those fraudulent practices resulted in losses to the Federal Housing Administration’s insurance fund when the buyers defaulted.
Beazer’s board of directors hired the law firm of Alston & Bird to investigate the allegations, and entered into a deferred prosecution agreement with the DOJ in April 2009. The agreement required Beazer to pay up to $55 million in fines and restitution, and about the same amount to Alston & Bird for conducting the investigation. The company also shut down Beazer Mortgage Corporation.
The only Beazer executive criminally indicted was Michael T. Rand, 48, the company’s former chief accounting officer. Why? The DOJ told HUD to stop investigating Beazer officials 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 official 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 Holder, complaining about the DOJ’s interference.
“The most important point of this whole thing is the fact that they threatened the HUD office of the inspector general that we would not be allowed to go forward with our investigation of executives if we didn’t agree to their settlement,” Donohue stated.
Rand, one of very few corporate officials to face criminal prosecution, was accused of manipulating records and colluding with another company to boost Beazer’s revenue. He was found guilty of seven counts following a jury trial in October 2011, and has not been sentenced. See: United States v. Rand, U.S.D.C. (W.D. NC), Case No. 3:10-cr-00182-RJC-DSC.
Deferred prosecution agreements also tend to result in less media play, which means corporate misdeeds can slip under the public’s radar. Companies such as Enron, WorldCom, Adelphia, Rite Aid and ImClone are widely known to have faced criminal prosecution due to their wrongdoing.
But who knows that American International Group (AIG) paid $126 million in 2004 for allowing clients to falsify financial statements, or that Computer Associates International entered into a deferred prosecution agreement the same year? Or that in 2005, Monsanto was able to avoid prosecution by paying $1 million and entering into a monitoring agreement with the DOJ, to resolve allegations of overseas bribery? And who would guess that Bristol-Meyers Squibb and Prudential Financial were parties to deferred prosecution agreements in 2005 and 2006, respectively, or that American Express Bank International avoided prosecution and paid a $65 million fine in 2007?
The collapse of Lehman Brothers in 2008, which led to the largest bankruptcy in U.S. history with losses of hundreds of billions of dollars, was central to the financial crisis and the resultant economic downturn. An investigation by former U.S. Attorney Anton Valukas, ordered by the U.S. bankruptcy court, found sufficient evidence to bring fraud charges against corporate executives as well as Lehman’s accounting firm, Ernst and Young. Yet no company officials have been prosecuted or otherwise held accountable. Lehman Brothers was one of the major backers of the private prison industry. [See: PLN, Nov. 2008, p.16].
The DOJ is reportedly planning a deferred prosecution agreement with Goldman Sachs & Co., which in July 2010 was forced by the SEC to pay a $550 million settlement related to civil claims of fraud involving mortgage securities.
“If an alleged violation is identified during a Goldman investigation, we expect a reasoned response from the Justice Department,” opined Brad Hintz, an analyst with Sanford C. Bernstein & Co., an investment firm. “In a worst case environment, we would expect a ‘too big to fail’ bank such as Goldman to be offered a deferred prosecution agreement, pay a significant fine and submit to a federal monitor in lieu of a criminal charge.”
Incidentally, Goldman Sachs and another investment firm, Veritas Capital, recently purchased Global Tel*Link Corp., the nation’s largest prison phone service company, which profits by charging exorbitant rates for phone calls made by prisoners. [See: PLN, Feb. 2012, p.23; April 2011, p.1].
According to Hintz, a 2003 DOJ memo from Deputy Attorney General Larry D. Thompson stated “that prosecutors can reward cooperation by offering a negotiated settlement to a targeted company that can range from immunity from criminal indictment to a deferred prosecution agreement.... Ultimately, the targeted company is treated not as a hardened criminal but as the equivalent of a juvenile offender that can be reformed.”
Another DOJ memo, issued by Deputy Attorney General Paul J. McNulty in 2006, noted that “The most significant result of this enforcement initiative is that corporations increasingly recognize the need for self-policing, self-reporting, and cooperation with law enforcement. Through their self-regulation efforts, fraud undoubtedly is being prevented, sparing shareholders from the financial harm accompanying corporate corruption. The Department must continue to encourage these efforts.”
Of course such practices, as well as the DOJ and SEC’s use of deferred prosecution agreements, are examples of the government kowtowing to corporate interests. If that’s difficult to fathom, try imagining a felony criminal defendant, such as a bank robber, being allowed to fund his own private investigation, self-report the results, then avoid prosecution by paying a fine and promising not to commit the same crime again. That simply does not happen in the world of crime-in-the-streets, but is an increasingly common occurrence for crime-in-the-suites.
The federal government’s approach to corporate misconduct is an affirmation that in the U.S. justice system, you get only as much justice as you can afford. And huge multinational companies can afford a great deal. How much? As just one example, data from the Center for Responsive Politics indicates that in 2010 and 2011 combined, the financial industry spent almost $1 billion on lobbying expenses on the federal level alone.
According to the Transactional Records Access Clearinghouse at Syracuse University, during the first 11 months of fiscal year 2011 the DOJ initiated 1,251 new criminal prosecutions for financial institution fraud – down 28.6% since 2006, and the lowest number of such prosecutions in two decades.
“I wouldn’t blame anyone who believes they’re part of the 99 percent of Americans who has to follow the law, while 1 percent of the country doesn’t,” said Jeffrey Connaughton, former chief of staff to U.S. Senator Ted Kaufman, who chaired the Congressional Oversight Panel that reviewed the Troubled Assets Relief Program (TARP – the federal bailout program). “And a big part of the reason for that is lawyers and accountants are failing in their role as gatekeepers, and the Justice Department is too often deferring to these lawyers and accountants, which is like outsourcing the interpretation of the fraud laws.”
In January 2012, President Obama announced the formation of a DOJ task force to investigate corporate misconduct that contributed to the financial crisis and current economic downturn. The task force, composed of the DOJ, SEC, FBI and HUD, is reportedly considering the use of a federal statute called the Financial Institutions Reform, Recovery and Enforcement Act of 1989, which requires a lower burden of proof, has a longer statute of limitations and can result in the imposition of large fines.
Whether the task force’s investigation culminates in criminal prosecutions, as opposed to civil litigation, fines and deferred prosecution agreements, remains to be seen.
Sources: New York Times, Wall Street Journal, CBS News, www.jonesday.com, Huffington Post, www.marketwatch.com, www.thefiscaltimes.com
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