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Congress’ push to crack down on corporate fraud by creating new felonies and increasing penalties for old ones will likely have more of a symbolic than jail-time impact, according to securities and corporate litigators and scholars. New and enhanced criminal penalties are part of sweeping corporate and accounting reforms now before a House-Senate conference committee. They draw skepticism and concern from critics who say the problem isn’t existing criminal laws but resources and prosecutorial will. “The fact of the matter is that while there are other aspects of the bill that are very helpful, this particular set of provisions is really largely duplicative of existing law,” says Lawrence Mitchell of George Washington University Law School and the author of “Corporate Irresponsibility: America’s Newest Export.” “Increasing prison sentences five to 10 years doesn’t mean anything unless you throw people in prison and the likelihood of that is as yet unclear to me in the Bush Justice Department.” Like chicken soup, the new penalties probably won’t be harmful even if not very helpful, says David Becker, a securities partner in the Washington, D.C., office of Cleary, Gottlieb, Steen & Hamilton and former general counsel to the Securities and Exchange Commission. “I don’t think there’s a whole lot of conduct out there that under current law is legal and that would be made illegal as a result of this,” he says. While agreeing that prosecutors have always had the tools to go after the kind of frauds that erupted in the Enron, Rite Aid and other recent scandals, securities law scholar Richard Painter of the University of Illinois says there is an “expressive value” in law apart from actual penalties and sanctions. “I do think there’s a signaling effect here in terms of the corporate culture, and that is a very good thing,” he explains. The new criminal penalties, he says, signal “a new emphasis on the accountability of corporate executives.” Both the House and Senate measures would create a new felony of securities fraud with a maximum 10-year sentence (Senate) and 25 years (House). Under the Senate provision, anyone who “knowingly” executes or attempts to execute a scheme or artifice to defraud shareholders of publicly traded companies is liable. The House measure does not include “attempts.” “That sounds like fraud to me and it already can be a felony to violate the anti-fraud provisions of the federal securities laws,” says Cleary Gottlieb’s Becker. Legislative counsel involved in drafting the provisions say career prosecutors advised that a separate securities fraud felony would be a useful tool because no generally accessible statute now deals specifically with it. Prosecutors, they say, use the mail or wire fraud statutes to tackle securities fraud or work their way through a patchwork of standards and regulations to find the right fit under the securities laws. But it’s a crime to violate any provision of the securities laws, “including the prohibition against securities fraud,” says Donald Langevoort of Georgetown University Law Center. “I’m not entirely sure how much change these provisions represent.” Mail and wire fraud laws have shown “considerable elasticity,” says securities litigator Judah Best of the Washington office of Debevoise & Plimpton. “Time will tell whether the mail and wire fraud statutes are not specific enough for what we have been seeing,” says Best, but he says, “There’s adequate equipment within the Department of Justice to prosecute Enron.” Enron shows why the mail and wire fraud statutes are preferred, says Georgetown’s Langevoort. “To show someone knowingly or willfully violated securities laws with respect to what was disclosed to investors, you’ve got to go through the thicket of what did these people know, what did they understand their obligations to be, what did they say, etc.,” he says. “If you’re a prosecutor, you have to struggle with those questions because they go deeply to intent. “One reason prosecutors love mail and wire fraud as opposed to securities fraud is you don’t have to get into what was said to investors. Engaging in self-dealing within the corporation is enough to be mail and wire fraud so long as telephone, faxes or e-mail were utilized, which it almost always is.” But existing laws have not been used much against corporate officers or directors, says securities scholar Thomas Hazen of the University of North Carolina School of Law. Most of the mail fraud and securities fraud cases, he says, have involved insider trading or outright stockbroker fraud. “This new felony is a strong message that prosecutors should be using securities laws to deal with corporate fraud,” he says. “In that sense, it’s more than window dressing.” His colleague Painter agrees. “I think there was a feeling in the ’90s to let the civil litigation system take care of most of it and only prosecute the most egregious cases. When you crack down on corporate chieftains, you make yourself politically unpopular.” Both bills impose a new requirement on chief executives, with criminal penalties for violations. CEOs would have to certify that the company’s financial statements fairly and accurately represent its financial condition. “It’s trying to eliminate a deniability defense,” Hazen says. Dorothy Coleman, vice president for tax policy at the National Association of Manufacturers, says the requirement causes considerable concern among CEOs if they are forced to certify information over which they have little control. Mitchell wonders whether the requirement is counterproductive. “Of course a CEO should know what’s in the financial statement,” he says. “But once you say to a guy that you’re going to be held liable personally if you’re reckless — and we don’t have any case law defining reckless — it creates incentive to spend more time on that function of the business, which is not the real function of the CEO. Nearly as important as the new felonies, Hazen says, are the tougher criminal penalties in the bills. Mail and wire fraud could draw 10 or 20 years (Senate and House versions ).”These bills are sending the message that corporate fraud — fraud on shareholders — is serious crime,” he says. Here too there is disagreement over the practical impact of the bills. “If they’re willing to risk five years, they’re going to risk 10 years,” says former SEC official John Sturc of the Washington, D.C., office of Gibson, Dunn & Crutcher. So do the criminal reforms mean nothing? No one is willing to go that far.” Best, of Debevoise, notes, “What they’re really focusing on is the lack of a corporate culture as to the criminality of the conduct. That’s the real issue.”

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