Ex-Officials Benefit From Corporate Cleanup
Tuesday, January 15, 2008
Federal prosecutors are steering no-bid contracts to former government officials who earn millions of dollars by monitoring companies accused of cheating investors and other schemes.
A consulting firm led by former U.S. attorney general John D. Ashcroft recently won an assignment, valued at more than $25 million, to ensure that a medical equipment maker stops paying kickbacks to doctors who use its products. Other former government officials with ties to the Bush administration have secured similar deals, which are paid using corporate funds and entail few, if any, checks on spending.
The lucrative arrangements are known as "monitorships," unusual contracts in which an outsider comes into a troubled company with vast power to expose corruption and change business practices. The deals allow scandal-plagued companies to avoid criminal charges -- and they give prosecutors a way to ensure businesses keep their promises and clean up abuses. But legal experts and lawmakers are expressing growing concern about inconsistency and secrecy surrounding the appointments.
The chairmen of the House and Senate Judiciary committees last week demanded that Justice Department leaders provide a list of all such deals and the fees they have generated. The Project on Government Oversight watchdog group has questioned whether the agreements reward "cronies" who share political affiliations or backgrounds with the U.S. attorneys handing out the deals.
The arrangements raise alarms about "potential favoritism and political interference that can undermine our judicial system," said Rep. Frank Pallone Jr . (D-N.J.). Pallone has been critical of U.S. Attorney Christopher J. Christie, the New Jersey prosecutor who chose Ashcroft and a possible GOP gubernatorial candidate in the state.
The number of corporate monitors has risen more than sevenfold since 2001, researchers said, a move that reflects a shift from lodging criminal indictments against businesses for fear they will collapse and cost employees their jobs. Instead, the government has taken a different path: forcing companies to submit to outside oversight at their own expense as a condition of settling fraud and corruption cases. Major companies from AOL and Bristol-Myers Squibb to Merrill Lynch have yielded to such oversight after recent financial scandals.
The arrangements all but give prosecutors a seat in the corporate boardroom. The arrangements are spelled out in contracts and vary depending on the company and its problems. Generally, though, monitors enjoy wide latitude to interview employees, sift through business contracts, uncover legal violations and mandate that companies change their ways. In recent years the overseers have made recommendations to hire and fire workers, enlisted high-priced accountants and consultants to review corporate operations, and blown the whistle to prosecutors if the company fails to respond to their concerns. The monitors typically send private reports to update prosecutors several times a year -- and send their bills to the companies.
Fees for most of the cases that involve monitors are not publicly available, but people involved in the arrangements say they can surpass tens of millions of dollars over two or three years. The fees rarely involve court approval and, according to defense lawyers, are hardly questioned by companies because they fear reprisal. Current and former executives at two businesses that were monitored under Justice Department agreements years ago declined comment last week, citing the sensitivity of the issue.
Richard C. Breeden, a former Republican chairman of the Securities and Exchange Commission, engineered a nearly complete overhaul at WorldCom after its top executives faced criminal charges in one of the largest fraud schemes in the nation's history. After being appointed by a federal judge from a different political party, Breeden and his team helped reshape WorldCom from its board of directors to its executive ranks, before guiding the telecommunications company, which emerged from bankruptcy protection as MCI, into a 2006 merger with Verizon.
"People should be very careful to make sure that monitorships do not become political plums," said Breeden, who stressed that he was not speaking about specific cases. "The key is the person who is monitor has to have a very good understanding of the business they're dealing in."
In the past few years, U.S. attorneys in Alabama, New York and Virginia have turned to corporate monitors to keep companies clean, hiring various former prosecutors and SEC officials with ties to President Bush, his father and other Republican luminaries. Some prosecutors hammer out with companies a short list of candidates from which to choose, while others have retained veto power over a business's choice. A smaller group has given corporate executives little input on the selection.
At least three of the monitors, former Manhattan prosecutor David Kelley and Clinton-era Justice Department officials James Robinson and James Cole, are registered Democrats.
Even before the congressional interest, the Justice Department's criminal division launched a policy review of the issue, meeting with business executives, former prosecutors and defense lawyers last year to evaluate how the monitorships are working and whether a process for selecting them should be centralized, in part to avoid appearance problems.
The deals now drawing sharp outside criticism involve Christie, a GOP fundraiser who has served as New Jersey's top federal prosecutor since 2001.
One of the steps that Bristol-Myers Squibb took to resolve accounting charges was an endowment to create a job "dedicated to the teaching of business ethics and corporate governance" at Seton Hall University's law school, Christie's alma mater. That came on top of more than $300 million in criminal penalties and millions more in fees that the drugmaker paid to corporate monitor Frederick Lacey, a retired federal judge and New Jersey U.S. attorney under President Richard M. Nixon. Lacey played a role in the ouster of Bristol's chief executive two years ago. He did not return calls placed to his law office.
After Zimmer, an Indiana manufacturer of medical implants for knee and hip replacements, took the rare step of disclosing its fee deal with Ashcroft to resolve kickback allegations, Democratic officials in New Jersey began to agitate for more information about the former attorney general's role and qualifications.
In government filings, Zimmer said it had agreed to pay senior executives at Ashcroft's consulting group $1 million per month for advice and expenses, as well as to hire more accountants and lawyers who would bill the company on an hourly basis. The deal works out to about $1.5 million monthly for 18 months, the company estimated.
Ashcroft, who led the Justice Department from 2001 to 2004, said in an interview Friday that he had enlisted more than two dozen former prosecutors, accountants, FBI agents and management consultants to review Zimmer's operations across the country and recommend changes. To prepare for the assignment and learn more about the business, Ashcroft said he recently watched as a replacement knee made by Zimmer was implanted in a cadaver.
Ashcroft, who now runs a consulting firm that advises corporations on how to follow the law, said he is well qualified for the role, given his background overseeing business fraud investigations.
Monitor arrangements, he said, represent "the overwhelming public interest," because they preserve employees' jobs and shift the costs of fixing errant companies onto the businesses themselves.
"We have a cooperative agreement between prosecutors and a vital industry, and the expense is born by the industry and not the public," Ashcroft said. "What's wrong with that picture? There isn't anything wrong with that picture."
Michael Drewniak, a spokesman for Christie, said the office had received no complaints from the companies under oversight and pointed to new management and reforms at Bristol-Myers as evidence that the system is working as the government had intended. The drugmaker, he said, is the one that proposed endowing a law school seat, not Christie. Citing the congressional interest, Drewniak declined to comment about broader allegations of political patronage.
Drewniak said the prosecutor had been "very open" about the monitors he appointed. "We chose people that we know and trust, people the office has worked with in the Department of Justice. They're known quantities."