Federal Prosecutors Relax Guidelines, Wall Street Polices Itself

During the summer of 2008, a move by Federal prosecutors that was not publicized much outside of the legal community, led to newly relaxed guidelines for charging corporations with crimes. Not surprisingly, these new rules were good news for banks and their defense counsel.

Unlike previous, more aggressive Justice Department practices, the new rules move toward more deferred prosecutions and new guidelines that promise leniency when companies under investigation self report their deviations from the rules. The new guidelines allow the government to agree to delay or cancel a prosecution if the company under investigation promises to change operations and move toward compliance. Although used prior to the financial crisis, deferred prosecution agreements were officially offered as an alternative by the Justice Department in 2008. Critics believe this self-reporting approach risks letting companies off too easily.

"If you do not punish crimes, there's really no reason they won't happen again," said Mary Ramirez, a professor at Washburn University School of Law and a former assistant United States attorney. "I worry and so do a lot of economists that we have created no disincentives for committing fraud or white-collar crime, in particular in the financial space."

Deferred prosecution is not a tool used only at the Justice Department. After the Supreme Court overturned the conviction won by the SEC against Arthur Anderson, the SEC began pulling back from prosecutions. So now the SEC not only employs deferred prosecution, but also has added another alternative to prosecution, reports that chronicle wrongdoing at institutions "like Moody's Investors Service," often without punishing anybody.

Now government lawyers are outsourcing investigations. During the early stages of an inquiry, the government lawyers instruct companies to determine whether improper activities occurred. The companies then hire law firms to investigate and report to the government. This arrangement only heightens compromise and conflicts of interest whereby government lawyers allow companies and their lawyers to self police their activities.

This collaboration is even more widespread in the banking industry and dates back to the mid 1990's. In an effort to reduce regulators' workload, the Treasury Department requested that banks regularly report suspicious activities. This assumes that banks would willingly identify and report all wrongdoing, the likelihood of which is rather low according some academics.

Solomon L Wisenberg, former chief of the financial institutions fraud unit for the United States attorney in the Western District of Texas in the early 1990s said, "Traditionally, a bank would tell the Department of Justice when an employee engaged in crimes, but what do you do when the bank itself is run by a criminal enterprise? You have to be able to investigate without just waiting for the bank to give you the referral. The people running the institutions are not going to come to the D.O.J. and tell them about themselves."

Industry wide strategies to respond to investigations are being developed as a result of companies' cooperation with the government. "The corporate crime defense bar has this down to a science," said Russell Mokhiber, the editor of Corporate Crime Reporter, a publication that tracks prosecutions. "I interview them all the time, and they boast about how they've gamed the system."

In the end the process occurs behind closed doors. The Justice Department does not make public any details about its decision making in specific cases. We can never know why individuals at a company were never charged.

Source:
As Wall St. Polices Itself, Prosecutors Use Softer Approach, The New York Times; Business Day, by Gretchen Morgenson and Louise Story, July 7, 2011.