Monday, June 20, 2005
The issues related to the investigation and prosecution of corporate misconduct are front and center today. The Wall Street Journal has a front-page article (here) about the focus on corporate crime by federal prosecutors, including the expanding use of deferred prosecution agreements that avoid the pitfalls of an Arthur Andersen scenario (a corporate death sentence, in effect) while still imposing a measure of punishment coupled with an enforceable agreement for corporate reform. Of course, the focus on corporate crime isn't really all that new, if one recalls the S&L crisis of the late 1980s and early 1990s, the overseas bribery scandals of the 1970s that led to the FCPA, and for those who passed their 20th Century U.S. History class, the Progressive Era featured corporate corruption and the dangers of trusts as important legislative and prosecutorial goals. The Supreme Court recognized corporate criminal liability in New York Central in 1909 in a case involving freight rates, so this has been an issue for nearly a century.
On the topic of deferred prosecutions, the Journal has another article (here) about how Christopher Christie, the U.S. Attorney for the District of New Jersey, hammered out the agreement with Bristol-Myers Squibb that gives his office a hand in the continuing operation of the company's compliance efforts. The article also notes that one of the beneficiaries of the agreement is Christie's law school alma mater, Seton Hall, which will receive funds to set up a chair in business ethics and corporate governance (see earlier post here). Will Bristol-Myers get a tax deduction for its gift to the law school, and will the chair be named for the company (assuming the "Bristol-Myers Squibb Chair in Business Ethics and Corporate Governance" is not an oxymoron)?
On the investigatory front, the U.S. Attorney's Office for the Southern District of New York joined in the finite insurance investigation melee with subpoenas to additional insurance companies that wrote the types of policies that are also the focus of the AIG-General Re case. New York Attorney General Eliot Spitzer and the SEC have sent separate subpoenas to a number of insurance companies already. Those receiving federal grand jury subpoenas include St. Paul Travelers (Form 8-K here) and Ace Ltd. (Form 8-K here), a Bermuda reinsurer whose CEO is the last remaining Greenberg (Evan) heading a public company -- his father, Maurice, resigned from AIG in the midst of the government's investigation and his brother, Jeffrey, was forced out of Marsh & McLennan last year by Spitzer's demand for his removal. It would not be a surprise to see more guilty pleas from former General Re executives (two have already), and perhaps some from the AIG side of the transaction, in the next few weeks. The companies themselves have avoided criminal charges so far (Spitzer's office filed a civil fraud suit against AIG and Greenberg recently), and it would not be a surprise if AIG entered into a deferred prosecution agreement of its own with the Department of Justice. General Re is a subsidiary of Berkshire Hathaway, and Warren Buffett's sterling reputation may allow it to avoid having to walk the deferred prosecution plank. (ph)
UPDATE (6/20): I neglected to include KPMG LLP in the tour of corporate crime -- the firm is a limited liability partnership, but we'll ignore the corporate formalities for the moment. The firm has been under investigation by the Department of Justice for its tax shelters that have since been declared abusive that were used by corporate executives and others to avoid large tax liabilities on capital gains. The DoJ is seriously considering filing criminal charges, and on Thursday, June 17, KPMG issued a statement (here) that includes the following admission: "KPMG takes full responsibility for the unlawful conduct by former KPMG partners during that period, and we deeply regret that it occurred." The firm's statement stresses that it no longer provides tax shelters -- not a tough decision to make in the current environment-- and has undertaken significant changes in its business practices. That statement is not something you read before a firm has been charged with a crime or enters into a settlement/deferred prosecution agreement, and KPMG is clearly seeking a deferred prosecution agreement to avoid being hung with a criminal charge that could cost it licenses to practice in the various states. The government is obviously concerned with the Andersen effect from an indictment of an accounting firm, and I suspect will not risk reducing the field to the Big 3. Still, the pressure on both sides is enormous, and another example of the importance of criminal liability for business organizations. (ph)