Who Is the Government Prosecuting for White Collar Crime?: Corporate Prosecutions, Shifting Blame, and the Ghost of Arthur Andersen

October 21, 2015

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The Transactional Records Access Clearinghouse (TRAC) at Syracuse University reports that the U.S. Department of Justice filed fewer criminal charges against corporations in 2014 than in 2004. Key figures in the Department of Justice have focused on corporate crime as a threat to the American people, but TRAC found that corporate prosecutions declined 29 percent between 2004 and 2014.

It is important to note that TRAC was unable to formulate a reliable measure for whether white collar crime has gone up or down throughout the same period, so it is unclear the extent to which this decrease in prosecutions corresponds to decreased white collar criminality. However, TRAC was able to measure the number of referrals of corporations to United States Attorneys during this time period. Referrals actually increased 2.6 percent, so the gap between referrals and prosecutions widened. What does this suggest about the criminal justice system? Is it that the government is failing to prosecute corporations, or are they merely pursuing different methods? Are corporate prosecutions costly and time-intensive operations that tax government resources that may be better spent elsewhere? Or does it have something more to do with the serious repercussions that attend a company’s death?

After a series of scandals, Arthur Andersen, once one of the “Big 5”—now “Big 4”—accounting firms, became embroiled in the DOJ’s Enron investigation and faced an obstruction of justice charge after it allegedly destroyed evidence of its involvement in Enron’s accounting schemes. The resulting investigation, including an indictment handed down at the height of the audit season, gutted the firm. It could not retain clients and was banned from bidding on federal contracts. Ultimately, the firm’s collapse took with it the jobs and careers of not just the malfeasors but other employees. The conviction of Arthur Andersen was reversed on appeal. In the wake of this investigation, the DOJ created a new policy urging prosecutors to take into account what happens when a corporation is convicted of a crime. Not only do the offenders lose, but there are tremendous consequences to employees, investors, and customers, who may have been completely unaware of, or unable to stop, any criminal activities. The drop in prosecutions is much more substantial after this policy than before.

In this light, one might expect that government prosecutions of individuals for white collar crimes would increase during this time period. In fact, according to TRAC, this also dropped by more than a third over the same time frame. Indeed, as Senior U.S. District Judge for the Southern District of New York Jed Rakoff observes, no high-level executives have been prosecuted in connection with the 2008 financial crisis.

Judge Rakoff posits several reasons for this. First, both the SEC and the FBI were beleaguered during this time period—the SEC with demands to uncover Ponzi schemes, and the FBI with transnational terrorism investigations. Meanwhile, the DOJ spread financial fraud investigations to US Attorney’s Offices that had previously never investigated sophisticated financial frauds. Judge Rakoff also suggests that, as the government may have created conditions leading to the crisis in the first place, they were reluctant to put CEOs on the stand. Ultimately, however, Judge Rakoff suggests that these prosecutions did not occur because of the increasing number of corporate prosecutions—the same ones which TRAC reported have decreased, not increased. If the shift has not been to corporate prosecutions, it is possible the government is pursuing fewer prosecutions altogether.

Ultimately, many of these cases now result in deferred prosecutions and monetary penalties—essentially agreements between the government and the defendants to settle the matter, typically with additional internal safeguards—rather than hauling executives to jail, something for which TRAC does not necessarily account. It is possible that the DOJ is entering a new era of corporate regulation, with deferred prosecutions as its primary lever. Or, as Judge Rakoff states, citing University of Virginia law professor Brandon L. Garrett, it could be that “as a result of the shift from prosecuting high-level individuals to entering into ‘cosmetic’ prosecution agreements with their companies, the punishment and deterrence of corporate crime has, for all the government’s rhetoric, effectively been reduced.”

Additional citations:

James Kelly, The Power of an Indictment and the Demise of Arthur Andersen, 48 S. Tex. L. Rev. 509 (2006).