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It’s a rule of thumb in prosecuting complex financial frauds: You need someone on the inside to help unravel the convoluted artifices executives build to hide their deceit. That person is the first rung in an investigation prosecutors hope will lead them up the corporate ladder. The reward for helping the Justice Department fulfill one of its top priorities — and make notoriously difficult cases more manageable — is usually leniency. But some say stiffer penalties enacted in the wake of Enron and other scandals have the potential to make law enforcement’s job more difficult. “They hurt both sides,” said Robert Friese of Shartsis, Friese & Ginsburg. “They make it more difficult for either side to tell who’s telling the truth.” The idea is that longer jail sentences make it tempting for key figures in a conspiracy to stretch the truth in an effort to be helpful, making the fraud even more difficult to sort out. Furthermore, some insiders may be more reluctant to cooperate at all, knowing that sentences are now double and triple what they used to be. And without cooperators, cases will be more difficult to bring. “In any complex corporate fraud case involving a large company with far-flung operations, it’s very difficult to get a quick handle on what went wrong and who’s responsible without the benefit of insiders,” said Leslie Caldwell, a Justice Department prosecutor heading up the government’s investigation of Enron Corp. But Caldwell argues that the new guidelines will only help the government make its case. “Generally, I think they’ll be tremendously helpful in giving people incentives to come in sooner rather than later so they can maximize their credits at the end of the day,” Caldwell said. Rarely are government cooperators given a free pass for their role in the fraud. Instead, they aim for a downward departure endorsed by the government. Though sentencing is ultimately left up to judges, prosecutors’ recommendations carry great weight. And the more cooperation a defendant provides, the better the sentence. Assistant U.S. Attorney Patrick Robbins, the head of the Northern District U.S. Attorney’s Securities Fraud unit, agreed with Caldwell. “Not unlike the situation with the narcotics laws over the last 10 years, higher guidelines and higher penalties have a tendency to bring people in the door early,” Robbins said. On Wednesday, former Enron treasurer Ben Glisan Jr. pleaded guilty to one conspiracy count and is cooperating with the government in its prosecution of the 109-count indictment of former Enron CFO Andrew Fastow. Even though he doesn’t face the stricter sentencing regime enacted last year, he was sentenced to five years in prison. Since only crimes committed after the sentencing revisions became law are eligible for the new penalties — and it can take several years to bring an indictment in complex financial cases — it may be years before the full impact is known. “It’s fair to say that the calculus is a little different,” said one prosecutor. “The ankle bracelet for the cooperation of the high-level people is a thing of the past.” But there is concern, especially among the defense bar, that the increased penalties raise the stakes to a point that the system becomes skewed. “The system is designed to create a huge incentive for a defendant to help convict someone else, which creates a huge incentive to lie if they can’t do it honestly,” said Daniel Bookin, a partner at O’Melveny & Myers. Looking at a prison sentence that lasts from their children’s kindergarten to college years is enough for most people to consider doing anything to get out of it. “If a person is willing to lie and cheat for money, then you have to believe they’ll lie and cheat to avoid 15 years in prison,” Bookin said. “There’s some evidence of that in cases already,” adds Friese, though he declined to elaborate. “It encourages them to pin the tail on anyone they can.” Robbins counters that prosecutors verify a cooperator’s story through documentation and other witnesses — they don’t bring cases based on the testimony of the first person in the door. Harsher penalties could also encourage more people to take the risk of trial. “In a world where downward departures, especially those that are not supported by the government, are under greater scrutiny, maybe people will think they’ll go ahead and try the case,” said Douglas Young, a partner at Farella Braun & Martel. Young is referring to the PROTECT Act, which was enacted earlier this year. Though different from the white-collar sentencing revisions, in practice they may become interrelated. Aimed at eliminating some downward departures and placing judges who approve them under scrutiny, the PROTECT Act all but leaves cooperation as a white-collar defendant’s best hope for escaping the newer, more punitive guidelines. Either that, or roll the dice with a jury. However, that is something Robbins sees as folly. “The CEO of a public company who engages in securities fraud could get life,” Robbins warns. That risk will doubtless be too much for some. For now, criminal lawyers are waiting to see what happens in court, and behind the scenes. “I’ve got to believe that, like everything else, this will work itself out in some rational way over time,” Young said. Friese agreed. “This is not us versus them. I think everyone’s trying [for] something that’s going to be fair for everyone.”

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