A serious threat to our national economy that no one seems to have noticed is the Justice Department’s new posture in corporate criminal prosecutions. The lesson of the Arthur Andersen prosecution back in 2002—which left the venerable accounting firm in ruins and 28,000 people jobless—is that a corporate criminal prosecution can be catastrophic. For corporate defendants in regulated industries, a conviction will trigger a loss of license and inability to continue doing business. The larger the corporate defendant, the deeper the impact on the economy at large.
Federal prosecutors, in the decade since Arthur Andersen’s downfall, have internalized the seriousness of a taking a corporation to trial. In the place of corporate criminal prosecutions, prosecutors have come to rely almost exclusively on deferred prosecution agreements (DPAs)—settlement agreements that allow corporate defendants to escape criminal prosecution, provided they pay a sizable penalty and undertake corporate governance reforms. While DPAs carry the same punitive, deterrent, and rehabilitative effect as a guilty plea, they allow prosecutors to carefully control collateral consequences that could put the domestic and global financial systems at risk.
Despite these measurable benefits, prosecutors’ reliance on DPAs to resolve corporate criminal investigations is very much in question. The cause of this dangerous paradigm shift is the public and lawmaker uproar over the lack of entity-level prosecutions in the wake of the financial crisis. The common refrain among legislators and the general public is that the Justice Department has adopted a corporate charging policy that treats some corporate defendants as “too big to jail.” While public indignation over the lack of crisis-related prosecutions has dissipated with time, it resurfaced with a vengeance when prosecutors entered into a DPA with HSBC in December 2012 in connection with allegations that HSBC had laundered hundreds of millions of dollars of drug money and transacted with the likes of Iran, Sudan, Libya and Cuba. Despite the record $1.2 billion penalty imposed on HSBC, a number of prominent public figures criticized the Justice Department’s move. Sen. Elizabeth Warren, among the most outspoken critics of the DOJ’s favored treatment of big banks, remarked:
“If you’re caught with an ounce of cocaine, the chances are good you’re gonna go to jail. If it happens repeatedly, you may go to jail for the rest of your life. But evidently if you launder nearly a billion dollars for drug cartels and violate our international sanctions, your company pays a fine and you go home and sleep in your bed at night—every single individual associated with this.”
If the “too big to jail” criticism were coming from only one branch of the government, prosecutors could easily deflect it. But it’s not. The criticism also coming from a place not generally the source of criticism of prosecutors’ charging policies: the federal judiciary. Led by Senior U.S. District Court Judge Jed S. Rakoff—who recently told a New York City Bar Association audience that prosecutors’ use of DPAs is “technically and morally suspect”—a growing number of federal judges have, in unprecedented fashion, questioned federal agencies’ use of settlement agreements to resolve allegations of corporate wrongdoing. In reviewing a DPA, one federal judge went so far as to say: “It’s very hard for society and for the court to differentiate between the everyday working Joe and Jane who goes to prison and the corporate giant … that gets a slap in the hand and doesn’t miss a beat.”
As a result of the legislative criticism and judicial intervention, a sea change in corporate prosecutions is under way in the form of a shift away from DPAs as the default prosecutorial tool. One need only look to two recent prominent corporate criminal prosecutions for evidence of this dangerous phenomenon.
First, in February—and on the heels of the legislative criticism over the HSBC DPA—the Justice Department secured guilty pleas from the Japanese subsidiaries of the Royal Bank of Scotland and UBS, for their roles in rigging the London Interbank Offered Rate. Prosecutors’ refusal to enter into a DPA with the two banks was historic, as it represented the first time the government insisted that a corporate defendant be prosecuted for a financial fraud since Arthur Andersen back in 2003 (a conviction that was later overturned).
Still, many commentators cautioned reading too much into the convictions: the parent companies—RBS and UBS—were spared from prosecution and prosecutors received assurance from Japanese regulators that the Japanese subsidiaries wouldn’t lose their banking licenses. Thus, the risk of collateral consequences was largely non-existent.
The argument that the RBS and UBS prosecutions were not representative of a shift in prosecutors’ corporate charging practices was dealt a substantial blow with the recent prosecution of SAC Capital for insider trading. It marked the first time a U.S.-based firm with strong connections to Wall Street had been indicted since Drexel Burnham Lambert in 1989. In addition to the record $1.8 billion penalty SAC Capital agreed to pay, it will have to shut its doors to outside investors. In announcing the SAC Capital guilty plea, the U.S. Attorney for the Southern District of New York, Preet Bharara, cautioned future corporate wrongdoers: “No institution should rest easy in the belief that it is too big to jail.”
A retreat of any degree from federal prosecutors’ reliance on DPAs to resolve corporate criminal investigations would be utterly misguided. The risk of another Arthur Andersen-style collapse is much too high to justify any added measure of deterrence a criminal conviction offers. While many are quick to criticize the Justice Department for maintaining a de facto policy that some institutions are too big to jail or take to trial, few have offered a convincing argument for why the perceived benefit of a conviction outweighs its potential costs. Corporate defendants, unlike their individual counterparts, can’t go to jail—however big or small. They don’t suffer the same reputational harm as a branded criminal. Nor do they lose any fundamental constitutional rights. A conviction is purely symbolic. But in pursuing this symbolic gesture, prosecutors are needlessly creating the risk of emitting a systemic shock through the financial system—one that’s too big to ignore.
The cautionary note Attorney General Eric Holder sounded in 2002 in arguing against the indictment of WorldCom is as appropriate today as it was then: “to ensure that even more innocent Americans are not harmed, prosecutors must not give in to the pressures of the day and feel compelled to indict more corporations simply because they can.”