The Justice Department on Thursday announced a bold new policy to catch white-collar criminals like the ones many suspect helped cause the worst financial collapse since the Depression. No longer will prosecutors allow a faceless corporation to plead guilty without offering up some living, breathing executives who broke the law. And they aren't going to stop at low-level employees.
"We’re not going to be accepting a company’s cooperation when they just offer up the vice president in charge of going to jail,” Deputy Attorney General Sally Quillen Yates told the New York Times.
It's a major shift in policy and the question executives and their lawyers are asking now is whether the government can make good on its threat. Because prosecuting white-collar crime is extremely difficult. Unlike a robber with a gun, whose illegal intent is as obvious as the pistol in his hand, the uncomfortable truth is top executives can take money in ways that look sleazy as hell but don't reach the legal threshold of criminal intent. They can borrow money without intending to repay, and they can push their underlings to break the law, not by telling them explicitly to do so but by handing them goals that seem impossible to achieve without cutting corners.
"You have to accept very real possibility that no senior person is involved in crime," said Matthew L. Schwartz, a partner with Boies Schiller & Flexner in New York who until this year was a federal prosecutor in New York overseeing, among other cases, the Bernie Madoff investigation. "The higher you get on the org chart, the more removed they are from the day-to-day decisions."
Prosecutors may face this dilemma in the criminal case against the top partners at the defunct law firm Dewey & LeBoeuf that is coming to a close this week. Several lower-level employees have already pleaded guilty and offered testimony against the firm's former chairman Steven H. Davis and two other executives. Prosecutor Pierce Moser told jurors not to let the three escape justice “just because they had others do their dirty work,” the American Lawyer reported. But jurors have to weigh that plea against a lack of smoking-gun evidence the top executives explicitly told anyone to break the law when they urged them to avoid violating the firm's loan covenants, for example.
"If an executive said `Whatever you do, don’t breach the covenants,' the unsaid subtext is `Do whatever you have to do but don’t break the law,'" Schwartz told me. "You don’t have to say the second part of the sentence."
One downside of pervasive civil litigation in the U.S. is most corporate executives are careful not to put anything in writing that might come back to bite them in court.
Another unfortunate fact for prosecutors is one of the perks of power is keeping your name off of incriminating documents. An Enron accountant once told me about repeatedly making appointments to meet with Chief Executive Jeffrey Skilling to sign a document that required an officer's approval under the corporate bylaws. After being stood up twice, she stopped Skilling as he swept past her toward his office a third time.
"Don't you get it?" she said Skilling told her. "I'm not signing your f-ing document."
I wrote about a similar pattern in the collapse of First City Bancorporation, a Houston bank that failed in the early 1990s. Falling oil prices had a lot to do with First City's collapse, but the bank also was hollowed out from the inside by bad loans to foreign borrowers with connections to the bank's top executives and shareholders. Frank Cihak, a sticky-fingered vice chairman, was convicted of stealing money in a variety of ways including providing fraudulent loans to his friends. But the bank's chairman, Robert Abboud, was never indicted. His signature wasn't on any of the big loans that went bad. Cihak signed off on most of them instead.
Prosecutors were aided in that case by an exhaustive internal investigation commissioned by the bank after Cihak resigned that detailed the numerous ways he used his position to steal money. That document ultimately fingered him as the Vice Chairman in Charge Of Going To Jail.
In one of the most notorious cases, the German conglomerate
Under the new rules at the U.S. Attorney's office, prosecutors are supposed to dig deeper. As Yates told an audience at New York University School of Law yesterday, companies will no longer receive credit for cooperation unless they identify the individuals responsible for wrongdoing.
That’s “a substantial shift from our prior practice,” Yates said, although it is common enough in other criminal cases. If a drug dealer refuses to share information he knows about the cartel leader, “we rip up his cooperation agreement and he serves his full sentence.”
The government also will run civil and criminal investigations in parallel, instead of wrapping up one case and then proceeding to the second. The old policy led to disjointed investigations because the standard of proof for a civil case is much lower than the illegal intent for a criminal conviction and prosecutors were often left trying to assemble their case after memories had faded and documents had disappeared.
"That is significant," Schwartz said. The government is saying, "You're not going to see cases where the government resolves with the company and several years later goes after individuals."
The government's new emphasis on individuals could put prosecutors in the same tough position as some of the lower-level employees they will indict. Given the profusion of criminal penalties in federal law, they can probably obtain indictments just by combing through a big company's records. They will have to exercise a heightened level of discretion to avoid simply gathering scalps.
And the job of getting the bosses will still be tough, as Yates admitted in her talk at NYU:
Without an inside cooperating witness, preferably one identified early enough to wear a wire, investigators are left to reconstruct what happened based on a painstaking review of corporate documents, looking for a smoking gun that most financial criminals are far too savvy to leave behind.
