US: In Justice Shift, Corporate Deals Replace Trials

Publisher Name: 
The New York Times

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

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

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."

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.

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.

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.

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.

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."

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."

AMP Section Name:Regulation
  • 106 Money & Politics