Friday, July 8, 2011
The NYTimes has a main story today, titled, As Wall St. Polices Itself, Prosecutors Use Softer Approach. Contributing blogger Sol Wisenberg offers an important perspective to the discussion - the problem of cooperation when the enterprise itself is tainted.
But the article itself misses some key aspects in its criticism of deferred prosecutions. It fails to look at the net result of a prosecution with and without a deferred prosecution agreement. With a deferred prosecution agreement you have the company admitting to culpability, you have change in the company assured, you usually have monitors added to the organization to avoid future problems, and you obtain the entity's cooperation. Does the company suffer? Most definitely yes - they pay huge fines. For example, Seimens - 800 million; Daimler - 185 million; SnamprogettiNetherlands BV - 240 million. And the cost for this prosecution or threat of prosecution is low because the company is agreeing to pay the fine. On the other hand, if the case had gone to trial there is the risk of a not guilty verdict (e.g., WR Grace; Xcel Energy, Inc.). Even if the company is convicted it will have cost the US taxpayer a significant amount of money for the prosecution, and the net result will be - payment of a fine by the company. The reality that is missed in this NYTimes article is that corporations cannot be put in jail. And if you put the company out of business - like Arthur Andersen LLP then you are putting many innocent workers out of a job that they were doing honestly. And maybe it's OK if it's a civil matter, like Bank of America just paying 8.5 billion to settle its problem with the money going to investors.
Deferred prosecutions do have their problems. For example, many of the terms in the agreement are one-sided, the company often has no choice but to agree, and corporate executives can get thrown under the bus to save the company. (See my co-authored article here).
But calling the use of deferred prosecutions a "softer approach" is missing what gets achieved with deferred prosecutions.