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The New York Times
In Justice Shift,
Corporate Deals Replace Trials
By ERIC LICHTBLAU,
nytimes.com on the Web, April 9, 2008
WASHINGTON — In 2005, federal
authorities concluded that a Monsanto consultant had visited the home of an
Indonesian official and, with the approval of a senior company executive, handed
over an envelope stuffed with hundred-dollar bills. The money was meant as
a bribe to win looser environmental regulations for Monsanto’s cotton crops,
according to a court document. Monsanto was also caught concealing the
bribe with fake invoices.
A few years earlier, in the age of Enron, these kinds of charges would probably
have resulted in a criminal indictment. Instead, Monsanto was allowed to
pay $1 million and avoid criminal prosecution by entering into a monitoring
agreement with the Justice Department.
In a major shift of policy, the Justice Department, once known for taking down
giant corporations, including the accounting firm Arthur Andersen, has put off
prosecuting more than 50 companies suspected of wrongdoing over the last three
years.
Instead, many companies, from boutique outfits to immense corporations like
American Express, have avoided the cost and stigma of defending themselves
against criminal charges with a so-called deferred prosecution agreement, which
allows the government to collect fines and appoint an outside monitor to impose
internal reforms without going through a trial. In many cases, the name of
the monitor and the details of the agreement are kept secret.
Deferred prosecutions have become a favorite tool of the Bush administration.
But some legal experts now wonder if the policy shift has led companies, in
particular financial institutions now under investigation for their roles in the
subprime mortgage debacle, to test the limits of corporate anti-fraud laws.
Firms have readily agreed to the deferred prosecutions, said Vikramaditya S.
Khanna, a law professor at the University of Michigan who has studied their use,
because “clearly it avoids a bigger headache for them.”
Some lawyers suggest that companies may be willing to take more risks because
they know that, if they are caught, the chances of getting a deferred
prosecution are good. “Some companies may bear the risk” of legally
questionable business practices if they believe they can cut a deal to defer
their prosecution indefinitely, Mr. Khanna said.
Legal experts say the tactic may have sent the wrong signal to corporations —
the promise, in effect, of a get-out-of-jail-free card. The growing use of
deferred prosecutions also suggests one road map the Justice Department might
follow in the subprime mortgage investigations.
Deferred prosecution agreements, or D.P.A.’s, have become controversial because
of a medical supply company’s agreement to pay up to $52 million to the
consulting firm of John Ashcroft, the former attorney general, as an outside
monitor to avoid criminal prosecution. That agreement has prompted
Congressional inquiries and calls for stricter guidelines.
Defenders of deferred prosecutions say that they have been too harshly
criticized lately and that they play a crucial role in allowing the government
to secure the cooperation of a company while avoiding the time, expense and
uncertainty of a trial. The agreements, government officials say, also
avoid the type of companywide havoc seen most acutely in the case of Arthur
Andersen, the accounting firm that was shuttered in 2002 after being indicted in
the Enron scandal. The firm’s collapse threw 28,000 employees out of work.
At a Congressional hearing last month, Mr. Ashcroft defended the agreements,
saying that they avoided “destroying entire corporations” through criminal
indictments. “Prosecutors understand that a corporate indictment can be a
corporate death sentence,” he said. “A deferred prosecution can avoid the
catastrophic collateral consequences and costs that are associated with
corporate conviction.”
Paul J. McNulty, a former deputy attorney general who put new guidelines in
place in 2006 for corporate investigations at the Justice Department, said in an
interview, “There’s a fundamental misapprehension with D.P.A.’s to think that
they’re a break for the company.”
With the imposition of fines and an outside monitor, “the reality is that for
the government, it gets pretty much everything without the difficulty of going
forward with an indictment,” said Mr. McNulty, who is now in private practice.
“I think companies are beginning to wonder whether they ought to fight more,
because they are pretty burdensome.”
But critics of the agreements question that assertion. Charles Intriago, a
former federal prosecutor in Miami who specializes in money-laundering issues,
said that huge penalties, like the $65 million fine for American Express Bank
International in 2007, were “peanuts” compared with the damage posed by a
criminal conviction. The company was accused of failing to enact internal
controls to guard against laundering of drug money and other reporting problems.
The agreements were once rare, but their use has skyrocketed in the current
administration, with 35 deals last year alone by the Justice Department, lawyers
who follow the trend said. Banks, financial service companies and auditors
have frequently entered into such agreements, including recent ones involving
Merrill Lynch, the Bank of New York, AmSouth Bank, KPMG and others. Beyond
financial crimes, deferred agreements have been used in lieu of prosecuting
companies — though not individuals — for export control violations, obscenity
violations, Medicare and Medicaid fraud, kickbacks and environmental violations.
In general, such agreements result in companies acknowledging wrongdoing by not
contesting criminal charges, but without formally admitting guilt. Most
agreements end after two or three years with the charges permanently dismissed.
Monsanto, for example, while not admitting guilt, agreed to abstain from further
violations of bribery laws. In an e-mail message, Lori Fisher, a
spokeswoman, said that Monsanto had cooperated with the Justice Department and
fully complied with the agreement, leading to deferred charges being permanently
dismissed in early March.
The trend has led to increased speculation about how the Justice Department
might use the agreements in investigations against financial companies in the
mortgage lending scandal, which has become a top law enforcement priority for
the department as the economy has withered.
The Federal Bureau of Investigation has 17 open inquiries into accusations of
corporate fraud in connection with the subprime scandal, and Neil Power, who
leads the bureau’s economics crime unit, said in an interview that the number
was certain to grow. The F.B.I. has publicly identified only one target —
the Doral Financial Corporation, a mortgage company based in Puerto Rico whose
former treasurer has already been indicted — but major companies like
Countrywide Financial, once the nation’s biggest mortgage lender, have also been
reported to be under criminal investigation.
Mr. Power said the investigations were a reflection of the “environment of
greed” that allowed companies to package mortgages into securities they sold to
investors without sufficient documentation of the borrower’s ability to repay.
One line of criminal inquiry focuses on whether bond companies gave accurate
information to investors.
“What we’re looking at,” he said, “is the fact that they may be performing
accounting fraud.”
Justice Department officials would not discuss the role that deferred
prosecution agreements may play in their ultimate handling of the mortgage
investigations. One official said it was “way too early” to begin
speculating about such possibilities.
But the prospect already has some experts in the field worried.
Michael McDonald, a former Internal Revenue Service investigator in Miami who is
a private consultant and has given seminars on deferred prosecutions, said such
deals “should not be on the board” in the subprime mortgage investigations.
“In light of what this did to our economy, people shouldn’t just be able to
write a check and walk away,” Mr. McDonald said. “People should be
prosecuted for it and go to jail.”
Timothy Dickinson, a lawyer in Washington who was the outside monitor for
Monsanto, agreed. Corporate lenders caught up in the mortgage scandals
should not assume they will be given the chance for a deferred prosecution, Mr.
Dickinson said, and the Justice Department should “insist on a guilty plea”
rather than offering a deal.
“It’s a tool that will remain to be used by prosecutors in appropriate
circumstances, but not every circumstance,” he said. “It depends how
egregious the conduct is.”
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