Sunday, February 01, 2009

Corporate Pleadings

The weakening of many institutions such as our constitution has gone on for eight years, ending two weeks ago Tuesday. Some of the results are just now coming into view. One is the outbreak of salmonella resulting from voluntary compliance in food safety issues.

Another has of course been the corporate welfare of tax cuts and incentives to cheat the public. There have also been easing of laws that have been broken, turning to deferred prosecutions from actual law enforcement.

Prosecutors won a conviction against accounting giant Arthur Andersen for shredding Enron auditing documents, but within a few months, the disgraced firm surrendered its accounting licenses, laid off more than 20,000 American employees, and ceased to exist.

Whether Arthur Andersen's collapse was caused or merely hastened by its felony conviction is debatable. But the subsequent economic carnage led U.S. attorneys to seek a gentler way to snuff out corporate wrongdoing. Deferred prosecutions provided exactly that.

Internal Justice Department guidance encouraged prosecutors to use the agreements to leverage their authority. In a 2003 memo to U.S. attorneys, Deputy Attorney General Larry Thompson suggested that prosecutors could demand that a company waive its attorney-client privileges and cut off payment of its employees' legal fees. The policy didn't last: Thompson's successor declared the tactics off-limits after a federal judge found that prosecutors violated defendants' right to due process.

But that didn't address all the criticism of the use of deferrals. Business watchdogs like the Washington-based Corporate Crime Reporter have warned that treating companies as "too big to indict" makes them less respectful of the law. Corporate white-collar attorneys like Spivack argue, on the other hand, that it's sometimes the other way around—the threat of prosecution can result in fines and conditions beyond what a court would ever impose on a company if it were convicted. "Companies will go to great lengths to avoid the symbolic process of prosecution," says John Coffee, a securities-and-white-collar criminal-law professor at Columbia University.
In 1999, then-Deputy Attorney General Eric Holder issued a memo to U.S. attorneys suggesting that a company's cooperation and the well-being of its employees and shareholders were legitimate factors to consider when deciding whether to press charges. While it didn't make waves at the time, it provided a legal foundation for the Thompson memo and the subsequent boom in deferred prosecutions.

Even if the Obama Justice Department were inclined to end that boom, Coffee points out, the parlous state of the economy would prevent prosecutors from seeking convictions against companies snared by the financial crisis. No U.S. attorney wants to be remembered as the prosecutor who pushed an already ailing company off a cliff.

The FDA will soon receive a new director, and already there is talk of punishment for the Peanut Growers for releasing salmonella tainted products knowingly. That is a good beginning, but I have no doubt we will be hearing from the wingnuts that President Obama is ruining the business climate and stifling innovation. The kind of innovation that gave us bundles of toxic mortgages and AAA ratings for the worthless assets is something our Eat The Poor advocates think must exist for businesses to feel cozy enough to stay in the U.S.

When criminals are prosecuted, the public gains. Perhaps it's time for a renewed Department of Justice to put the public first, and not business climate building.

The entire government has been dedicated to snuffing out the public interest for eight years. Time for change has come, and the change received a majority of the public vote. That public is ready to be served.

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Anonymous Anonymous said...

Interesting that Andrew Weissmann, the former head of the Enron Task Force that sought corporate criminal convictions, has spun around years later and argued that the DOJ should cut deals rather than seek indictments. See

One of your statements about Arthur Andersen is incorrect. Andersen still exists. See It does not do any work in SEC-regulated areas, but it has not ceased to exist. Also, the statement "won a conviction," is only part of the story and is selectively slanted. The Andersen conviction was thrown out by the Supreme Court in a unanimous decision. All nine judges determined that the DOJ's conviction was wrong. Unfortunately it was way too late for Andersen to recover its audit client base, the heart of any audit firm.

I agree that criminals should be prosecuted, and there were many in the Andersen/Enron story that will be wearing orange jumpsuits for a long time. However, consider the fallout resulting from false criminal charges. The constitution that you feel is being weakened was based on English jurisprudence that includes the concept of innocent until proven guilty.

I don't know what the solution is. Corporations have a way of getting special treatment. Henry Paulson can explain that ad nauseum. Indict? Make a deal? I just hope that the people that are working on it are less confused than Andrew Weissmann.

2:02 PM  
Blogger Ruth said...

Thanks, I had seen the demise of Andersen as an accounting firm on Wall Street, and a major one, as complete, did not know it had any existence at all anymore. False criminal charges are very much not needed, it seems that the past maladministration used them to make political hay and defeat opponents, and I am celebrating today the return of a real DOJ. However, when criminal misfeasance appears to have taken place, I do think charges need to be brought. If they are disproved, then the corporate name will be cleared. It's not as if the corporation should be misrepresenting their activities which either do or don't serve the interests of investors/directors.

8:10 AM  

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