Almost Criminal

Will the Obama administration shy away from indicting lawbreaking companies?

Barack Obama

Earlier this month, the Department of Justice and Manhattan’s district attorney announced that Lloyd’s TSB Bank will pay a $350 million fine for illicitly funneling Iranian and Sudanese money into the U.S. banking system. The British financial giant stripped identifying information from its clients’ wire transfers for as much as a decade, allowing the Iranians to covertly buy a large quantity of tungsten, a material vital in building long-range missiles.

But Lloyd’s wasn’t convicted of any crime. It didn’t go to trial, take a plea deal, or even get indicted. Instead, the bank and prosecutors agreed on what’s called a deferred-prosecution agreement. If Lloyd’s pays its fine, cooperates with prosecutors, and keeps its nose clean for two years, it will never be formally charged.

Along with their close cousin, the nonprosecution agreement, deferred prosecutions became the norm for punishing corporate crime under the Bush administration. The growth has been rapid: 37 such agreements were publicly announced in 2007, compared with only 11 during all of the Clinton years. The list of malfeasant companies that have skipped off without indictments includes blue chippers like Boeing, Merrill Lynch, and Bristol-Myers Squibb. As Hogan & Hartson defense attorney Peter Spivack observed in an American Criminal Law Review article last year, the government has not filed criminal charges against a single major publicly traded corporation since 2003 without opting for a deferred-prosecution agreement first.

Now that the Bush Justice Department’s top brass has decamped for the private sector, it might seem reasonable to expect that the new Obama DoJ will start charging big companies for the crimes they commit. But that’s not likely. Given the power that deferred prosecutions give prosecutors, and the fear that corporate trials do more harm than good, Obama’s appointees aren’t likely to change course. That might be pragmatic, but it’s not the end to corporate exceptionalism that Obama proposed on the campaign trail.

The Bush administration didn’t so much create deferred prosecutions as allow them to proliferate. First used with corporate defendants by U.S. attorneys in the early 1990s, the agreements are conceptually akin to pretrial diversion programs, in which prosecutors agree to drop charges against cooperative, low-level scofflaws. (In a run-of-the-mill criminal case, for example, a minor narcotics offense might be overlooked if the suspect agrees to complete a drug-treatment program and rat out his dealer.)

Substitute a Fortune 500 firm for the junkie, and you’ve got the basic elements of a corporate deferral. By agreeing to cooperate, a company saves itself the crippling publicity and business sanctions that a trial or conviction would entail. Meanwhile, prosecutors can use the threat of filing the indictment to compel the company to clean up its act, accept an outside monitor, or provide damning evidence against specific employees.

By heading off proceedings before they reach the courthouse, deferred prosecutions strip judges of the oversight role they would have over a plea deal or probation (or, far more rarely, a trial). The legal process then becomes a largely unrefereed negotiation between two parties, one of which carries a big stick.

Despite this obvious advantage for prosecutors, the practice didn’t really take off until after the corporate accounting scandals earlier in the decade, in which convictions sometimes proved pyrrhic victories. Prosecutors won a conviction against accounting giant Arthur Andersen for shredding Enron auditing documents, but within a few months, the disgraced firm surrendered its accounting licenses, laid off more than 20,000 American employees, and ceased to exist.

Whether Arthur Andersen’s collapse was caused or merely hastened by its felony conviction is debatable. But the subsequent economic carnage led U.S. attorneys to seek a gentler way to snuff out corporate wrongdoing.  Deferred prosecutions provided exactly that.

Internal Justice Department guidance encouraged prosecutors to use the agreements to leverage their authority. In a 2003 memo to U.S. attorneys, Deputy Attorney General Larry Thompson suggested that prosecutors could demand that a company waive its attorney-client privileges and cut off payment of its employees’ legal fees.  The policy didn’t last: Thompson’s successor declared the tactics off-limits after a federal judge found that prosecutors violated defendants’ right to due process.

But that didn’t address all the criticism of the use of deferrals. Business watchdogs like the Washington-based Corporate Crime Reporter have warned that treating companies as “too big to indict” makes them less respectful of the law. Corporate white-collar attorneys like Spivack argue, on the other hand, that it’s sometimes the other way around—the threat of prosecution can result in fines and conditions beyond what a court would ever impose on a company if it were convicted. “Companies will go to great lengths to avoid the symbolic process of prosecution,” says John Coffee, a securities-and-white-collar criminal-law professor at Columbia University.

With no judge to referee, prosecutorial whim can play a large role in the terms of a deferral. Companies have agreed to all kinds of novel conditions to get a deferral in recent years, such as creating 1,600 jobs in Oklahoma or installing slot machines at New York racetracks. Sometimes, the terms of deferred prosecutions seem to be heavily influenced by the personal inclinations of prosecutors themselves. Former U.S. Attorney Chris Christie, now running for governor of New Jersey, has been among the more creative: He required Bristol Myers Squibb to endow a $1 million chair of legal ethics at his own alma mater, Seaton Hall Law School. And in 2007, he awarded a no-bid, $27 million-plus monitoring contract to retired Attorney General John Ashcroft—his former boss.

The size of that contract, along with an accompanying whiff of cronyism, led to another DoJ memo reining in the use of monitors, a congressional inquiry, and an ongoing Government Accountability Office review. According to Kristy Brown, a GAO assistant director, one of the questions the agency hopes to answer is whether such arrangements have been the result of “two-sided negotiation” or simply rammed down companies’ throats. The GAO should release its findings sometime this summer, which would provide an opportune time for the Obama Justice Department to put its own stamp on the process if it wished.

But no one is anticipating that the spirit of change will result in a repudiation of deferred prosecutions. For starters, the president’s choice to lead the Justice Department is partly responsible for the agreements’ entrenchment. In 1999, then-Deputy Attorney General Eric Holder issued a memo to U.S. attorneys suggesting that a company’s cooperation and the well-being of its employees and shareholders were legitimate factors to consider when deciding whether to press charges.  While it didn’t make waves at the time, it provided a legal foundation for the Thompson memo and the subsequent boom in deferred prosecutions.

Even if the Obama Justice Department were inclined to end that boom, Coffee points out, the parlous state of the economy would prevent prosecutors from seeking convictions against companies snared by the financial crisis. No U.S. attorney wants to be remembered as the prosecutor who pushed an already ailing company off a cliff.

In other words, the weaker a misbehaving company is, the better its lawyers’ bargaining position. It’s never been possible to put a corporation in jail. For the time being, even branding one a felon may be practically off-limits.