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Arthur Andersen’s downfall illustrates how devastating criminal prosecution of a corporation or partnership can be. But that dramatic demonstration has created the misperception in some quarters that corporate convictions are routinely devastating. In fact, federal officials frequently exercise their discretion to spare convicted companies from a like fate, especially if they perform functions essential to the government. Arthur Andersen’s fate — which included suspension from entering into new federal contracts and of its authority to certify audits of public companies — has led some observers to urge prosecutors to go after the individuals responsible for corporate wrongdoing, but to avoid charging the corporations themselves. For instance, Eric H. Holder Jr., a partner at Washington, D.C.’s Covington & Burling and former deputy attorney general in the Clinton administration, has warned that an indictment of WorldCom would likely cause it to lose its eligibility for government contracts, put its bankruptcy reorganization in doubt and throw thousands of innocent employees out of work. Holder’s views carry particular weight because, as deputy attorney general, he oversaw the drafting of guidelines for indicting corporations. Those guidelines, commonly referred to as “the Holder memo,” are still looked to by the Bush administration. Other experts, however, assert that the Andersen outcome was not typical of corporate convictions. Most convicted corporations — especially large ones with a unique expertise, such as defense contractors — stay in business and continue to win government contracts. That fact is brought home most dramatically by a ranking of the top 100 corporate criminal fines of the 1990s maintained by Russell Mokhiber, editor of Corporate Crime Reporter. Among the corporate defendants very much still in existence are F. Hoffmann-La Roche Ltd. (topping the list with a $500 million fine for price fixing), Daiwa Bank (No. 2, fined $340 million for securities fraud), Exxon (No. 5, $125 million for the Valdez oil spill), Archer Daniels Midland (No. 7, $100 million for price fixing), Rockwell International (No. 19, $18.5 million for improper storage of nuclear waste) and Blue Cross/Blue Shield of Illinois (No. 52, $4 million for Medicare fraud). One key reason corporations survive conviction is that prosecutors choose which corporations to prosecute, and federal procurement officers have great latitude in deciding what consequences will flow from a conviction. Prosecutors have the power to indict corporations for an extraordinary range of offenses. As the Holder memo notes, under the theory of respondeat superior, a corporation can theoretically be convicted on the basis of a single crime by a low-level employee, even if upper management was not aware of his or her actions and, indeed, even if the employee acted contrary to express instructions. All that is necessary is that the employee has acted within the scope of his duties and that his crime has the potential to benefit the corporation, even if that benefit is only incidental to the employee’s main purpose of enriching himself. But corporate prosecutions are comparatively rare. According to the U.S. Sentencing Commission, there were 304 corporate convictions in 2000, while about 10,000 individuals were convicted of fraud and other white-collar crimes. That pattern is borne out in the current crop of corporate scandals, with prosecutions of former officers at Enron, WorldCom and Adelphia, but not against the companies — so far. GUIDE FOR PROSECUTORS The Holder memo lays out factors that guide prosecutors, including the severity of the offense, the pervasiveness of wrongdoing within the company, the company’s record, its degree of cooperation with the government, the “collateral consequences” to innocent shareholders and employees, and whether the company has a compliance program in place. For most companies that do business with the federal government, a conviction is not a death sentence. Procurement officers may declare a company “not responsible” enough to enter government contracts, but for reasons that are not necessarily tied to formal criminal proceedings. For instance, on April 4, the General Services Administration (GSA) announced that Global Crossing was ineligible for a Defense Department contract worth up to $450 million over a 10-year period, because of the company’s insolvency. Ironically, the contract went instead to WorldCom, which filed for bankruptcy about three months later. Even after a conviction, federal law directs procurement officers to suspend or debar corporations only to protect government interests, not as punishment. Richard J. Bednar, a former Army debarment officer who’s now senior counsel for Washington, D.C.’s Crowell & Moring, says that being debarred or suspended from government contracts or grants can be catastrophic, since a black mark at one agency usually ensures pariah status at all agencies. But he adds that in his role representing companies, he finds that federal procurement officers will stop short of debarment if a convicted company shows that it has taken steps to clean up its act. The suspension of Arthur Andersen and Enron by the GSA, at the prompting of the Office of Management and Budget (OMB), was unusually precipitous, according to Steven L. Schooner, formerly an OMB procurement policy official and now a law professor at George Washington University. He sees the move as “political posturing,” noting that neither company did a significant amount of business with the federal government. Schooner says that suspension and debarment are usually reserved for small companies that have proven themselves a nuisance. He adds that suspension and debarment are not feasible when it comes to companies vital to the national interest, such as defense contractors. Neither the OMB nor the GSA responded to questions about why they have not suspended WorldCom, which provides telecommunications service to many government agencies.

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