The Shadow Chancellor's Notebook by Orlando Plumbe

Deferred Prosecution Deal Raises Objections

Link: Deferred Prosecution Deal Raises Objections.

Attorneys defending the indicted former employees or partners of these companies complain that the ever more onerous terms contained in deferred prosecutions prevent them from effectively representing their clients. "A problem is that there are no standards governing what terms are appropriate in these agreements," said Stephanie Martz, director of the White Collar Crime Project of the National Association of Criminal Defense Lawyers. "It's whatever prosecutors can get away with, and that's a lot, because companies trying to save themselves are willing to do anything, and that starts with cutting government-targeted employees loose and not paying their lawyers," Martz said.

This is Overdue - SEC Stakes Out Middle Ground On Fines Policy

Link: WSJ.com - SEC Stakes Out Middle Ground On Fines Policy.

The Securities and Exchange Commission, seeking to defuse a controversy about its use of big fines to punish corporate wrongdoing, publicly laid out a set of guidelines to help determine whether and how much to fine companies engaged in financial fraud.

Bristol-Myers Reaches $300 Million Settlement - New York Times

Link: Bristol-Myers Reaches $300 Million Settlement - New York Times.

NEWARK (AP) -- Bristol-Myers Squibb Co. agreed to pay $300 million in a deal to defer federal prosecution of a conspiracy charge stemming from an accounting scandal, the U.S. Attorney's Office in New Jersey said Wednesday. Two of its former executives also were indicted for their alleged roles in the same scandal.

AremisSoft Ex-CEO to Pay SEC

Link: WSJ.com - AremisSoft Ex-CEO to Pay SEC.

The former chief executive of defunct software company AremisSoft Corp. has agreed to pay $200 million to settle Securities and Exchange Commission charges that he unloaded millions of company shares while misleading investors about the software company's revenue. Roys Poyiadjis, the executive, also accepted a permanent ban on serving as an officer or a director of a public company. He settled without admitting or denying wrongdoing in a case that regulators said marks one of the largest recoveries of improperly earned money that the SEC has ever obtained from a single individual.

Eliot Spitzer Tastes Defeat in Court With Broker's Acquittal - New York Times

Eliot Spitzer Tastes Defeat in Court With Broker's Acquittal - New York Times.

A former broker with Bank of America was acquitted today of most charges that he aided in the improper trading of mutual funds, handing Eliot Spitzer, the New York attorney general, his first major legal defeat in his crackdown on Wall Street.

Spitzer's power came from defendants being afraid to even go to trial. It will be inetresting to see how Spitzer fares if some of his prey offer more stubborn defenses.

HealthSouth Settlment with the SEC

Link: WSJ.com - The Evening Wrap.

HealthSouth settled Securities and Exchange Commission claims of accounting shenanigans. The health-care provider said it would pay $100 millionthat would likely be used to set up a fund for HealthSouth investors. It will also hire consultants to review its internal controls and cooperate with continuing SEC investigations. It added that there were other claims against unspecified parties still outstanding and said it had been the victim of "massive fraud." Its former CEO, Mr. Scrushy, has been accused of orchestrating $2.7 billion in accounting fraud at the firm, charges he denies. His jury has been struggling to reach a verdict after 12 days of deliberation.

Life After Donaldson

Link: WSJ.com - Life After Donaldson.

I do not include in "profound errors" the banal, relatively low-cost regulatory mistakes that are the life-blood of SEC regulation. This would include ineffectual or easily surmounted efforts like the ill-fated attempt to give shareholders some power to nominate directors; or specifying the composition of boards of individual mutual funds; or requiring more frequent and earlier disclosure of financial information. Such changes, even though compliance and circumvention costs are never trivial, will hardly be noticed in the greater scheme of things. Rather, I have reference first and foremost to Sarbanes-Oxley and, second, to the efforts by Mr. Donaldson, largely unnoticed outside Wall Street, to protect the age-old privileged position of the New York Stock Exchange against competition and to register hedge funds. Neither of these Donaldson initiatives, it might be noted, has anything at all to do with the great scandals of our era other than the fact that political hysteria often enables adoption of otherwise irrelevant laws. But each of these symbolizes what is probably the costliest aspect of our system of securities regulation -- the inhibition of open competition. (The phrase "securities regulation" has become an anachronism, as the SEC is now manifestly involved in substantive regulation of the entire financial services industry%2

More Evidence--The Pendulum is Swinging Back

Very cold comfort for the now defunct Arthur Andersen to be sure.  WSJ.com - Supreme Court Overturns Arthur Andersen Conviction.

The unanimous opinion, by Chief Justice William Rehnquist, is a rebuke to prosecutors who have responded aggressively against corporate fraud allegations, suggesting that in ambiguous cases the government may have a heavier burden to meet. Although it comes too late for Andersen, which collapsed in the wake of its conviction, and after Sarbanes-Oxley legislation that tightened accounting responsibilities, the ruling came as a relief to corporate attorneys who feared a government victory would effectively criminalize what they consider routine legal advice.

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The concerns seem to be resonating. Earlier this month Attorney General Alberto Gonzales, who oversees the Justice Department, noted the need for balance in a recent speech, saying "we also understand that irresponsible or overreaching exercise of investigatory and prosecutorial powers -- in addition to being unjust -- can create its own problems, through overdeterrence."

This raises writ large who gets hit when the SEC or DOJ insists on entity level penalties. AA's performance on the Enron engagement is an abomination to be sure. Oddly, AA correctly read the coming thrift crisis in the late eighties and emerged from that accounting debacle with its wing tips barely scuffed. Regrettably, it started smoking and peddling  the new economy dope on a habitual basis in the nineties. But its mistakes were largely those of improper credulity rather than venality.

Who benefited from giving AA the corporate death sentence, which indictment means for an accounting or financial services firm?  Following AA's demise, there is a "big 4" instead of a "big 5" accounting firms. But reducing competition for audit work hardly seems like a desirable social goal. A lot of AA partners and employees had a big dislocation in their personal lives . But I doubt that 95% of them ever did anything dishonest or disreputable in their lives. If there were some real bad eggs on the Enron and other engagements, they should be penalized, booted out of the auditing profession and with as much harshness as fairness allows. But why penalize the whole firm? Should not the punishment fit the crime? I am waiting for a good answer.

Deloitte Statement About Adelphia Raises SEC's Ire

Defendants litigation related conduct continue to draw enforcement authority threats.  From WSJ.com - Deloitte Statement About Adelphia Raises SEC's Ire.

Deloitte found itself again in the SEC's cross hairs after issuing a public statement that appeared to shift blame to Adelphia by saying the company and some executives "deliberately misled" Deloitte's auditors. Under terms of the settlement agreement, Deloitte is required to neither admit nor deny the SEC's charges. SEC officials viewed the statement as denying liability and forced Deloitte to rescind it.

Together with SEC demands for self investigation and waiver of privilege in some enforcement actions, the SEC is making very difficult for some defendants to mount a vigorous defense of SEC charges. Maybe it does not make a difference in out and out frauds like Adelphia, but it is a potentially dangerous enforcement attitude if allowed to spread unchecked.

Is the Tide Turning Back

Link: The New York Times > Opinion > Op-Ed Contributor: Corporate Misconduct vs. Criminal Behavior.

But when a state prosecutor uses criminal law, enacted for far different objectives from corporate law, to institute corporate change, it should be cause for concern. That concern is increased when the prosecutor insists that a corporation change its management to avoid indictment. A system that leaves decisions about corporate management in the hands of prosecutors instead of shareholders is far from ideal.

For businesses in regulated industries (e.g., banking, insurance, there is no choice but to acede to a regulator's demands.  That is not to say that these demands show appropriate prosecutorial discretion.