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June 26, 2016


Yesterday in Part I of this blog I erroneously wrote Federal Corrupt Practices Act. I should have written Foreign Corrupt Practices Act. Mea culpa.

So how did we ever get to where we are in letting the “too big to fail” and “too big to jail” escape punishment that ordinary Americans must endure? Garrett writes that the DOJ’s current handling of serious corporate crimes is wanting. He is right. It’s as though the DOJ is scared to indict the biggest companies in America. It probably started with George W. Bush’s DOJ with its 2002 indictment of the major accounting firm of Arthur Andersen for destroying documents of its audit of Enron, the notorious energy fraud (all the more shocking since Enron’s CEO – who committed suicide upon his own conviction – was a personal friend of George W. Bush and a major campaign contributor to Bush’s political campaigns).

The evidence in the Andersen case was clear; Andersen had plainly been an enabler of Enron’s deception. (Perhaps Andersen’s executives thought they could get away with it because Enron’s CEO was a close friend of the president – a fatal mistake.) A jury found Andersen guilty of obstruction of justice and it went out of business, throwing tens of thousands of people out of work. (A unanimous Supreme court threw out the conviction a few years later on grounds that the jury instructions were faulty – which is not a finding on the merits per se.)

Fallout from the Andersen case where thousands of the innocent lost their jobs (as well as the guilty who were involved with the Enron fraudsters) involved “collateral consequences” of putting companies out of business, an undesirable outcome which the DOJ took to heart because they have largely avoided even trying to indict businesses since, apparently for fear of an “Andersen” outcome.

Evidence of such policy direction within the DOJ is found in a public statement of then AG Eric Holder to the effect that he was concerned some financial firms had become so large that it makes it “difficult for us to prosecute them.” This admission stoked outrage among Americans and was quickly followed by Holder’s attempted explanation of what he meant with such a public statement, but the problem persists to this day. Perhaps Andersen had to die so that other giant corporations could continue living, even when committing the baldest and most egregious crimes.

So what did we do? We substituted fines and promises to reform in lieu of jail time for corporate executives after the Andersen case, and it isn’t working (as the recidivism numbers show). Garrett writes that since the Andersen case fines for corporate misbehavior are skyrocketing but that usually these are paid by shareholders and have little effect on corporate executives. He rightly thinks that the fines are too lenient and found that half of the agreements didn’t have a criminal fine at all. In contrast to present day kid glove treatment of corporate criminals, he notes that after the accounting scandals of the late 1990s and early 2000s, top executives of Enron, WorldCom, Tyco and Adelphia all went to prison, and that after the savings-and-loan scandals of the late 1980s, 1,100 people were prosecuted. No more.

The average time of probation for these corporate agreements is just over two years, and this isn’t enough time to change something as entrenched as a corporate culture, and further, if the company is merged into another or has a successor or assignee of its assets after signing an agreement (as is often the case), the prosecution disappears. The DOJ is not set up to monitor compliance with the agreements they make, and Garrett thinks that compliance should be given to the courts who, in my experience, would not be happy to have such new responsibilities in view of their already-crowded dockets.

So where are we? What can we do to effectively end or at least reduce corporate crime committed by executives in their myopic quest to impress analysts with improvements in quarterly earnings? It is clear that fines and agreements to do better are not working, given the recidivism numbers. It’s as though government regulation of such criminal conduct is a minor annoyance and an inside joke among the rich and corporate class, and that the rest of us occupy the role of suckers whose interests may safely be ignored in view of the lessons learned from the Andersen case (which gave rise to timid prosecution).

My solution? It’s the same old, same old. Let all publicly-held corporate boardrooms hear the tinkle of handcuffs as we adopt a new philosophy calling for jail time AND fines for corporate criminals irrespective of who they know and how big they are as opposed to what they did. So will this put some companies out of business a la Andersen? Perhaps, or perhaps corporations will monitor the conduct of their executives more carefully and avoid such a disaster. The present system isn’t working, so let’s trade in our kid gloves in favor of stronger enforcement of the criminal laws and punishment for their violation.    GERALD      E

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