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In recent years, several American corporations have undergone major governance reforms, including the dismissal of senior management, not because of the requirements of corporate or securities law, but so as to avoid the potential catastrophic effect of corporate criminal indictment. These corporations cooperated with prosecutors and undertook significant and permanent change in order to persuade a prosecutor not to indict the corporation. The most recent example of this phenomenon occurred at Marsh & McLennan, the world’s largest insurance broker. In October 2004, New York Attorney General Eliot Spitzer filed a civil complaint against Marsh that charged it with securities fraud and bid rigging. Spitzer hinted at the strong possibility of an indictment. Within two weeks, Marsh’s board discharged its chief executive, Jeffrey W. Greenberg, and appointed a new chief executive officer, Michael G. Cherkasky. Spitzer then declared that the appointment of a new CEO “makes corporate criminal prosecution unnecessary.” This is by no means the first occasion when a major corporation, faced with the risk of indictment, has undertaken substantial internal change to avoid corporate criminal prosecution. Two cases are of central importance. Between 1989 and 1991, Salomon Brothers, a primary dealer in Treasury notes, engaged in a conspiracy to submit false bids in those notes and concealed that misconduct from officials of the U.S. Department of the Treasury. The head of the Salomon securities desk pleaded guilty to making false statements to the government and spent four months in prison. Under pressure, Salomon’s president and chief executive officer resigned. No criminal charges were brought against Salomon. Instead, Salomon settled the ensuing charges civilly with the payment of $290 million in sanctions, forfeitures and restitution. “With regard to the decision not to seek criminal charges against Salomon,” the federal prosecutor noted, “Salomon has cooperated extensively in the investigation and has taken decisive and extraordinary actions to restructure its management to avoid future misconduct.” Fast forward to September 2004, when the former chairman and CEO of the nation’s fourth-largest computer software manufacturer, Computer Associates, and two other senior officers were indicted for orchestrating a widespread accounting fraud and lying to government investigators. Despite the fraud, Computer Associates itself was not indicted. Rather, it was the beneficiary of a deferred prosecution agreement under which the company accepted full responsibility for the misconduct, discharged culpable executives, appointed new senior management and new independent directors (including a former Securities and Exchange commissioner) and instituted substantial reform. The new chairman promised to fully support the government’s efforts to bring responsible parties to justice and “recover unjust enrichment.” Is this good for the public? What are the broader implications of these cases? In some respects, the replacement by Marsh directors of its chief executive officer in order to avoid corporate criminal indictment of the corporation parallels the actions taken in the Salomon and Computer Associates cases. The resolution in those particular cases advanced important public interest benefits: complete cooperation with the government, coupled with substantial reform and the imposition of substantial sanctions and controls to prevent future misconduct. But unlike the prior cases, the abandonment of corporate prosecution against Marsh was not tied to a comprehensive settlement that guaranteed corporate cooperation, institution of new controls and the establishment of a restitution fund. More broadly, the sequence of events in the Marsh case raises lingering concern about the wisdom of placing the power to institute fundamental management change in the hands of prosecutors who utilize the criminal law, enacted with far different objectives than corporate law, to institute corporate change. That concern is increased when the prosecutor expresses dissatisfaction with current corporate management, suggests managerial change to avoid corporate indictment and abandons corporate prosecution when the chief executive officer is replaced. It is abundantly clear that this occurred in the case of Marsh, since Spitzer told Marsh directors that they should think “very long and very hard about the leadership of your company.” Surely, we should not be completely satisfied with a system that leaves the choice of corporate management in the hands of prosecutors. Leonard Orland, a professor at the University of Connecticut School of Law, is the author of, most recently, Corporate Criminal Liability: Regulation and Compliance (Aspen Publishers 2004).

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