Has hunt for corporate criminals gone too far?
By Edward Iwata, USA TODAY
Posted 7/21/2003 11:03 PM
SAN FRANCISCO — As the war against corporate crime grinds on, prosecutors are gunning for more business entities — not just executives and accountants — and igniting outrage among defense attorneys.
In the six months since the Justice Department issued stronger guidelines for corporate prosecutions, prosecutors have brought cases against PNC Financial Services, health care giant HCA, Tyson Foods, Banco Popular De Puerto Rico, Tenet Healthcare and medical device maker Guidant, among others. (Chart: Companies charged with crimes)
Justice Department spokesman Bryan Sierra says prosecutors have opened 200 investigations nationwide into corporations. It's unknown how many of the probes will lead to charges against businesses, but legal experts predict that more companies than usual will be nailed in the coming months.
"Clearly we're seeing a stepped-up effort to go after corporate offenders who traditionally got slaps on the wrist," says Sandra Jordan, a University of Pittsburgh law professor and a former federal prosecutor.
The campaign against corporate fraud has set off legal brawls between the Justice Department and defense attorneys, who accuse gung-ho prosecutors of overreaching when they charge businesses — rather than people — with crimes.
At a recent American Bar Association forum here, a grim former prosecutor and a venerable defense attorney sparred over the issue in a banquet hall packed with legal luminaries.
Months earlier, the two had clashed during the Justice Department's prosecution of "Big Five" accounting firm Arthur Andersen — the most dramatic knockout of a business in years.
"It's dangerous," warned Michael Chertoff, the Justice Department's former criminal chief, "for any institution to believe they are so big as to be above the law."
Robert Fiske, a partner at Davis Polk & Wardwell and a former prosecutor, countered that an entire firm should not be punished when only a few people may have committed a crime. "If prosecutors send individuals to jail, that's a far greater deterrent," he said.
Defense attorneys argue that prosecutors impose a "corporate death penalty" when they file charges against businesses.
When that happens, they contend, a firm and its reputation can be damaged beyond repair. Customers abandon it. Investors slam its stock price. And innocent employees suffer, losing their jobs.
Government prosecutors are treating corporations like "the new Mafia," says Jan Handzlik, a defense attorney at Kirkland & Ellis.
Prosecutors say they're sending a message that they won't coddle crooked corporations — what Justice Department official Joshua Hochberg calls "bad actors who allow corruption to thrive."
For too long, shady businesses have skipped away with light penalties, when they should be punished like street thugs, prosecutors argue. They add that investors and employees, who've lost many billions of dollars, deserve restitution.
"Our goal is not to take down Corporate America," says Debra Yang, the U.S. Attorney in Los Angeles. "We want corporations to thrive. But to do that, we need to ferret out creative accounting."
In recent years, prosecutors have jailed thousands of executives, stockbrokers and other white-collar crooks. In contrast, only 200 to 300 organizations — mostly corporations — have been sentenced annually since the late 1990s, according to the U.S. Sentencing Commission.
Prosecutors charged fewer businesses than individuals partly because financial investigations are expensive and drag on for years. Plus, corporations are hard to convict. Their accounting is murky. They can afford elite lawyers. And it is tough to prove criminal intent — that executives acted with "a guilty mind," Jordan says.
Meanwhile, defense lawyers grew frustrated over the erratic prosecutions of companies, from mom and pop stores to Fortune 500 giants. Prosecutors were using widely varying criteria to decide whether to charge a corporation.
"There was not as much consistency as we would have liked," said former deputy attorney general Eric Holder, now with law firm Covington & Burling.
So five years ago, the Justice Department drew up the so-called Holder guidelines. Under the guidelines, prosecutors must weigh several factors before charging businesses: Is the company a repeat offender? How serious is the crime? Is the firm cooperating with prosecutors?
The stakes grew huge when the recent wave of financial scandals started breaking, bringing infamy to high-profile companies such as Enron, Tyco, WorldCom and ImClone Systems.
Last January, Deputy Attorney General Larry Thompson, head of President Bush's Corporate Fraud Task Force, fortified the Holder guidelines in a memo, giving prosecutors the marching orders to hunt down more companies.
Corporations fit the definition of "legal persons" that can be held accountable for committing crimes, Thompson wrote. And an indictment of one, he added, "often provides a unique opportunity for deterrence on a massive scale."
While investors and consumers hail the new tough-on-corporate-crime era, defense attorneys fear that even minor white-collar fraud cases are treated as organized-crime cases.
"It's the criminalization of securities fraud," says Robert Friese, an attorney at Shartsis Friese & Ginsburg. "There's a hang-'em-high attitude toward anything that smells remotely of illegal activity."
The most combative issue centers on the potential loss of a company's attorney-client privilege, a constitutional right that guards the confidentiality between lawyers and their clients.
In talks with companies under investigation, some prosecutors demand that defense lawyers waive that privilege and other protections. If businesses decline to hand over confidential records, they risk being indicted, just as executives would.
That amounts to coercion and holding companies hostage, defense attorneys charge.
The biggest fear of companies in waiving privilege? It might expose them to civil lawsuits by investors. If defense attorneys turn over confidential papers to prosecutors, shareholders' attorneys likely will pounce on the materials.
Defense lawyers have complained repeatedly about the waiver issue and some of the Holder guidelines to Justice Department officials, who stand by their prosecution of companies.
"It's well-thought-out, well-considered policy," says Justice's Sierra. "Are there revisions needed? No."
U.S. Attorney Yang says the controversy over waiving privileges is overblown. A recent, informal survey of U.S. attorneys nationwide found that few prosecutors are asking companies to give up attorney-client confidentiality.
Prosecutors contend that corporate and defense lawyers pretend to cooperate, only to stall or thwart federal investigations.
Companies, for instance, will hire outside law firms to represent all employees, then quickly claim attorney-client privilege for them. The move blocks prosecutors from interviewing key employees, including potential whistle-blowers.
In the end, the best way for a company to show good faith with prosecutors is to waive the privilege, argues Assistant U.S. Attorney Matthew Jacobs in San Francisco.
"It encourages companies to identify wrongdoing at an early stage and come clean with the government," Jacobs says.
Jacobs prosecuted Guidant, whose subsidiary EndoVascular Technologies agreed to pay $92 million in penalties last month and pleaded guilty of failing to report a faulty surgical device involved in the deaths of 12 patients.
While Guidant made front-page news, the Andersen case set the tone for the Justice Department's hard-charging prosecution of fraud-ridden businesses. As public outrage grew in early 2002 over the vast financial scandal involving Enron and its longtime auditor Andersen, government officials looked for a corporate trophy to bag. Andersen was the closest target.
After Andersen was indicted for obstruction of justice, Andersen's lawyers suggested a "deferred prosecution," a settlement of sorts, during settlement talks with prosecutors. If Andersen behaved well and helped the Justice Department, the indictment could be dropped.
But Chertoff, who oversaw the case when he was at the Justice Department, spurned the idea, calling Andersen a recidivist, says an attorney close to the talks. The talks fell apart. Three months later, a jury convicted Andersen, and the firm collapsed. Defense attorneys and corporate counsel were infuriated.
"There's an atmosphere of hysteria now," says Rusty Hardin, a former Texas prosecutor who defended Andersen during the trial. "People's lives were ruined when they didn't commit a crime."
Since the Andersen case, the Justice Department seems to be softening a bit, legal experts say. Rather than forcing firms to waive all their privileges, some prosecutors are negotiating partial waivers in which defense attorneys turn over some of their materials.
Prosecutors also seem to be more open to corporate probation. Last month, the Justice Department agreed to defer prosecution of PNC for a year if the firm honors its plea deal, which includes $115 million in penalties and restitution.
Although relations may be thawing a bit between prosecutors and defense lawyers, some defense attorneys remain wary.
"Certainly vigorous enforcement is important," says former SEC official Mark Radke, a defense attorney at Howrey Simon Arnold & White. "But you always worry that the pendulum is swinging too far." |
