Corporate Deferred Prosecution Agreements

The NY Times has an interesting article today -- In Justice Shift, Corporate Deals Replace Trials :

In a major shift of policy, the Justice Department, once known for taking down giant corporations, including the accounting firm Arthur Andersen, has put off prosecuting more than 50 companies suspected of wrongdoing over the last three years.
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Legal experts say the tactic may have sent the wrong signal to corporations — the promise, in effect, of a get-out-of-jail-free card. The growing use of deferred prosecutions also suggests one road map the Justice Department might follow in the subprime mortgage investigations.
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Defenders of deferred prosecutions say that they have been too harshly criticized lately and that they play a crucial role in allowing the government to secure the cooperation of a company while avoiding the time, expense and uncertainty of a trial. The agreements, government officials say, also avoid the type of companywide havoc seen most acutely in the case of Arthur Andersen, the accounting firm that was shuttered in 2002 after being indicted in the Enron scandal. The firm’s collapse threw 28,000 employees out of work.

Consider me slightly encouraged if this is true, but a little skeptical of the fine print. It is my understanding that these agreements usually require full "cooperation" on the part of the company, which usually means offering up selected employees as "sacrificial lambs."

Consider what Tom Kirkendall says about the fall-out from Enron:

As with the Lay-Skilling case, the Nigerian Barge case has long represented much of what is wrong with the Department of Justice's regulation of business-through-criminalization approach in the post-Enron era. After prosecuting Arthur Andersen out of business in the intensely anti-business, post-Enron climate, the Enron Task Force threatened to do the same to Merrill Lynch unless the firm served up some sacrificial lambs, which it did with Mr. Brown, Daniel Bayly, Robert Furst and William Fuhs.

Through a deferred prosecution agreement with Merrill, the Task Force then proceeded to hamstring the defendants' defense by limiting access to other Merrill Lynch executives involved in the barge transaction. Moreover, the Task Force intimidated other potentially exculpatory witnesses by threatening to indict them if they cooperated with the defense. After bludgeoning a couple of plea deals from former key witnesses Ben Glisan and Michael Kopper, the Task Force proceeded to put on a paper-thin case against the defendants, which was good enough to obtain convictions in the hyper-anti-Enron climate of Houston in 2004.

Furthermore, consider the KPMG tax shelter fraud case:

Under [the deferred prosecution] agreement, KPMG LLP admitted criminal wrongdoing in creating fraudulent tax shelters to help wealthy clients dodge $2.5 billion in taxes and agreed to pay $456 million in penalties. KPMG LLP will not face criminal prosecution as long as it complies with the terms of its agreement with the government. On January 3, 2007, the criminal conspiracy charges against KPMG were dropped. However, Federal Attorney Michael J. Garcia stated that the
charges could be reinstated if KPMG does not continue to submit to continued
monitorship through September 2008.

The agreement required KMPG's "cooperation" in prosecuting 19 individuals. According to DOJ, "full cooperation" means that KPMG cannot pay their employees' legal fees (which is a standard benefit for partners who are prosecuted for a work-related crime and indeed was part of these employees' employment contract with KPMG).

The judge however slammed DOJ for this tactic:

On 27 June 2006, Judge Kaplan ruled that by threatening KPMG with indictment unless the firm reneged on its policy of paying the defense costs of partners who were indicted for work performed in the course of the firm's tax shelter business, the Department of Justice violated the constitutional rights of employees. In his opinion, Judge Kaplan agreed with the defendants' contention that KPMG was improperly pressured to pay [sic! I think this should say "not pay"] their legal expenses, "because the government held the proverbial gun to its head."

On 17 July 2007, Judge Kaplan dismissed charges against 13 former KPMG
employees, ruling that he had no alternative because the government had strong-armed KPMG into not paying the legal fees of defendants and had violated their rights. "This indictment charges serious crimes. They should have
been decided on the merits as to every defendant," Kaplan wrote. "But there are limits on the permissible actions of even the best prosecutors." Barring KPMG from paying its former employees' legal bills "foreclosed these defendants from presenting the defenses they wished to present, and, in some cases, even deprived them of the counsel of their choice. This is intolerable in a society that holds itself out to the world as a paragon of justice," Kaplan wrote in his ruling.

However, while what happened to Arthur Andersen was a travesty, it may explain the increase in deferred prosecution agreements.

Indeed, according to Andrew Weissmann, the former director of the Enron Task Force (which prosecuted Arthur Andersen) in this interview and "against a growing consensus in the defense bar that the firm should not have been prosecuted":

“One of the fallouts from Andersen is that corporations are much more willing to say yes to deferred prosecution agreements, because they can see what happened to Andersen,” Weissmann said. “What major corporation is now going to gamble that the Justice Department is going to go away and issue a declination? That's one of the reasons you are seeing a dramatic rise in deferred prosecution agreements and non-prosecution agreements.”

To which Tom Kirkendall replies:

H'mm, let's break this reasoning down. An improper prosecution that cost people and communities in the U.S. over 30,000 jobs was really Andersen's fault because the firm didn't agree to a deferred prosecution agreement in regard to crimes that the firm did not commit. Besides, despite the cost of thousands of jobs and millions of dollars in retirement benefits, the improper prosecution was still justified because it achieved the better good of scaring other companies into selling out their employees and copping deferred prosecution agreements.

That such appalling reasoning goes unchallenged in the article is a daunting sign of our times. Prosecution of business crimes has become a game of roulette for prosecutors such as Weissmann, who play on an ugly cauldron of public cynicism, resentment, and tolerance for abusive use of governmental power to prosecute the unpopular business executive of the moment. When the frightening loss of thousands of jobs and the destruction of careers and families is glibly rationalized by a former high governmental official as merely a tolerable cost of the use of the state's awesome prosecutorial power for the better good of society, we are well on our way to a time when, as Sir Thomas warns us, we will not be able to "stand upright in the winds" of abusive state power that will blow then.

Like I said, I am encouraged that businesses are no longer being destroyed, but I am skeptical of the fine print underlying this new "shift." When the government threatens a company with destruction unless it agrees to a deferred prosecution agreement that requires it to destroy the lives of selected employees, hmm indeed.