X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
The Department of Justice last week scored a major victory with the conviction of ex-WorldCom chief Bernard Ebbers for lying to investors and government regulators in an effort to cover up his company’s laggard financial performance. But even as government lawyers prepare for more high-profile trials against individual business executives, they are taking a very different tack against companies accused of cooking the books. Increasingly, aggressive federal prosecutors are willing to put criminal charges they have filed against corporations on hold in exchange for cooperation in their investigations against allegedly crooked employees. In the past six months alone, the Justice Department has announced such arrangements — known as deferred prosecution agreements — with six companies, including the Monsanto Co., Time Warner Inc., American International Group Inc., and Computer Associates International Inc. The loser in a deferred prosecution agreement, say white collar defense lawyers, is an individual defendant like Ebbers. In order to avoid prosecution, the corporation is asked to roll over on rogue employees like a defendant seeking a reduced sentence in a drug case. That, defense lawyers say, gives the government an unfair advantage over individual defendants. Historically, criminal indictments against corporate entities are rare, but when they do occur — as with Arthur Andersen recently or Drexel Burnham Lambert in the late 1980s — companies are prone to collapse. For companies facing criminal indictment, a deferred prosecution may not be an all-out win, but it’s certainly preferable to a trial and potential ruin. “Deferred prosecutions give a company the chance to reform itself without creating a situation where a lot of people are going to lose their jobs and a lot of investors are going to lose more money,” says Timothy Coleman, senior counsel to Deputy Attorney General James Comey Jr. For companies, the fall of Arthur Andersen brought home the devastating consequences of resisting a government investigation. For prosecutors, the case is a reminder that indictments have real-world consequences. In many regulated industries — like health care and defense contracting — a conviction or a guilty plea can mean being barred from conducting business altogether. The slide at Andersen started even before the Justice Department charged the firm in 2002 with obstruction of justice for destroying records related to its accounting work for the Enron Corp. Indictment and conviction helped push the accounting firm into ruin, putting 28,000 people out of work. DOJ officials stand by the decision, but Andersen’s collapse has become a cautionary tale for both sides at the negotiating table. In January 2003, then-Deputy AG Larry Thompson formally endorsed use of deferred prosecution in exchange for a company’s cooperation. The memo to U.S. attorneys, which outlined principles for prosecuting business entities, came to be known simply as the Thompson memo. Prosecutors insist that the rise in such agreements does not mean the government is going soft on corporate offenders. “We have unleashed hundreds and hundreds of prosecutors to make corporate crime a major law enforcement priority,” Coleman says. “There’s been a dramatic increase in the sheer number of investigations.” After Ebbers’ March 15 conviction, Attorney General Alberto Gonzales issued a statement pledging to continue the work of the Corporate Fraud Task Force — created in the wake of the Enron scandal. However, Gonzales also signaled that the department is sensitive to business concerns. “The President’s Corporate Fraud Task Force will continue to work to ensure justice for the workers and shareholders who lost billions of dollars to this fraud,” Gonzales said. “We will also continue to work with those corporate leaders and CEOs whose exemplary ethical standards and transparent business models have helped build and fortify a nation’s trust in our economy.” POLICY PUSH A typical deferred prosecution agreement includes a formal indictment, but the government agrees to put prosecution on hold in exchange for the company’s cooperation. Furthermore, the DOJ requires a company to accept responsibility for illegal conduct by its employees, step up internal compliance programs, and provide investigators with nearly unfettered access to company records. If the company fulfills its obligations under the agreement, the DOJ agrees to drop all charges at the end of an agreed-upon probation period. Increasingly, deferred prosecution agreements also require companies to provide restitution to injured shareholders and to cover the expense of a court-appointed corporate monitor who reports to the government. All told, experts say that the government has entered into deferred prosecution agreements with corporate entities fewer than 20 times — more than half of them since the Corporate Fraud Task Force was formed in 2002. The Thompson memo emphasized that in every corporate fraud matter prosecutors should assess whether to pursue the corporation itself. In the two years since it was drafted, no corporations have been charged in connection with a major corporate fraud investigation outside a negotiated deferral agreement. “We are encouraging prosecutors out there to be innovative, to be creative, to think about possibilities for resolving corporate investigations other than the binary decision — indict company or decline prosecution,” says Coleman, the DOJ lawyer. Prosecutors insist that this does not mean going easy on wayward corporations that tacitly or explicitly encourage criminal conduct. “This can be a way to get better results more quickly,” says Andrew Hruska, the chief assistant U.S. attorney who oversaw the case against Computer Associates in the Eastern District of New York. “We’re getting the sort of significant reforms you might not even get following a trial and conviction.” Plus, says Hruska, deferred prosecution agreements are structured with an enormous penalty for any company that falls short on its end of the bargain. Each agreement includes a lengthy statement of criminal allegations that the company agrees not to contest should the case ever be activated. “The ultimate enforcement mechanism is that at the end of the deferral period it is up to the U.S. Attorney’s Office to determine whether the company satisfactorily lived up to their end of the deal,” Hruska says. “If the answer is no, then the Justice Department has a statement of facts sufficiently incriminating that a prosecutor could put it in as Exhibit A, and that would pretty much be the end of the case.” PLAYING BALL In the case of Computer Associates, the company acknowledged that employees had routinely backdated contracts and recorded income from one fiscal quarter in the preceding quarter in order to meet earnings expectations. Sullivan & Cromwell partner Robert Giuffra, who represented Computer Associates in connection with its deferred prosecution agreement, says he considered that agreement a successful outcome. “It’s an excellent way for prosecutors to satisfy their objectives without imposing serious collateral consequences,” Giuffra says. Skadden, Arps, Slate, Meagher & Flom partner David Zornow, who represents Stephen Richards, a former Computer Associates executive facing criminal charges, says the tactic stacks the deck against defendants. “It undermines the adversarial system of justice,” Zornow says. “I think the Justice Department has ample tools to bring to their investigations already.” The extensive cooperation demanded by most deferred prosecution agreements effectively enlists a company into the investigation of individual employees who might have engaged in criminal conduct. The recent wave of agreements includes language requiring companies to assist in the prosecution of individual defendants by providing documents, waiving legal privileges, and making employees available to testify. To be seen as cooperative and earn favorable treatment, companies must agree to broad waivers of attorney-client and work product privileges. Such waivers often leave the company exposed to expensive civil litigation. McGuireWoods partner Richard Cullen, who represented Time Warner in its agreement with the government, says even a deferred prosecution can unfairly damage a company’s standing in the marketplace. “Sometimes it’s in the best interest of justice for prosecutors simply not to indict at all,” he says. “The government interest often can be satisfied by going after the individuals.” But if a company is so corrupt that criminal activity is seen as an ordinary part of doing business, getting rid of a few bad apples may not be enough to satisfy prosecutors, Coleman, a former New York federal prosecutor, says. “Some cases are so egregious we have no choice but to indict the corporation.” UNDER PRESSURE With Computer Associates, government lawyers were not willing to let the company off the hook altogether. A two-year government investigation launched in 2002 turned up evidence of systematic accounting fraud at the highest levels of the software giant. To make matters worse, following the announcement of the federal probe, top corporate executives seemingly participated in an extensive effort to conceal the criminal conduct. By mid-2004, prosecutors had all they needed to indict. For the next six months, the company’s lawyers and new board of directors waged an aggressive — and ultimately successful — campaign for leniency. The board made sweeping management changes and instituted internal reforms. Giuffra reasoned with the government that moving forward with a prosecution would destroy the company and put thousands of people out of jobs. For weeks, draft agreements flew back and forth between Giuffra and the U.S. Attorney’s Office in Brooklyn. Lawyers quibbled over the specific charges against the company, the length of deferral, the appropriate amount of restitution, and how to select an independent monitor to report on compliance. In September 2004, the parties reached an 18-month deferred prosecution agreement that required Computer Associates to pay $225 million to injured shareholders. At the same time, the DOJ indicted Computer Associates’ former chief executive officer, Sanjay Kumar, and Richards, the former head of worldwide sales, on charges of securities fraud, conspiracy, and obstruction of justice. Deciding how to resolve the Computer Associates case was “very difficult,” says Fish & Richardson of counsel William Mateja, who worked in the deputy attorney general’s office at the time. “The company’s new leadership pushed extremely hard for this kind of arrangement,” he says. Hruska, the assistant U.S. attorney in the Computer Associates case, says deferred prosecution deals allow the government to put a company’s promises to the test. “It takes a long time to investigate a company for this sort of criminal activity. By the time you’re ready to indict, the company has probably already taken remedial measures on their own,” says Hruska. “When that company comes to the government and says, ‘Don’t destroy a great American company,’ that’s a very appealing argument.” Vanessa Blum is a reporter with Legal Times, a Recorder affiliate based in Washington, D.C.

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.