Rules Issued For Oversight Of Fraud Cases
Tuesday, March 11, 2008
The Justice Department yesterday imposed new restrictions on government-sanctioned contracts with outside experts to implement and monitor corporate fraud settlements, an issue that has come under scrutiny because of a multimillion-dollar contract given to former attorney general John D. Ashcroft.
Under the new guidelines, U.S. attorneys would have to get approval from senior officials at Justice Department headquarters in Washington for such agreements, which allow companies to avoid criminal prosecution by making changes in corporate governance under the scrutiny of an outside monitor.
U.S. attorneys should "avoid potential and actual conflicts of interest" in such cases, and any corporate monitor "must be selected on the merits," according to an eight-page memo laying out the new guidelines, which were signed by Acting Deputy Attorney General Craig S. Morford. Prosecutors must also subject the arrangements to review by special committees before they can be approved, the memo said.
The rules were issued on the eve of Ashcroft's scheduled testimony today before a House Judiciary subcommittee about his highly lucrative contract, which involves monitoring a settlement between an Indiana medical equipment firm and a federal prosecutor who used to work under him.
Justice officials say they began work on draft guidelines for corporate monitors before Ashcroft's contract with Zimmer Holdings, a Warsaw, Ind., company that manufactures replacement knees and hips. They refused to comment yesterday on whether that deal would have been approved under the new rules, although it did not receive the level of scrutiny that would be applied to such contracts in the future.
"It's not for the purpose of saying that some agreement that was entered into before violated a policy, because there was no policy," a senior Justice official said during a background briefing with reporters.
Corporate monitors have been used with increasing frequency since the 2002 indictment of accounting firm Arthur Andersen LLP, which folded after being convicted of obstructing justice and put most of its employees out of work. Prosecutors view deferred prosecutions, with monitor arrangements, as a way to avoid closing a company altogether while ensuring compliance with the law.
The cost of the monitoring is borne by the companies involved, which agree to pay to avoid criminal prosecution. Typically, U.S. attorneys defer the threat of prosecution as a way of maintaining some leverage over the companies' future conduct. Such deferred prosecutions have mostly been used for nonviolent juvenile and drug offenders, rather than for large corporations suspected of criminal wrongdoing.
Democratic lawmakers have said the monitoring arrangements for corporations are ripe for abuse as political patronage, since monitors are often chosen by the company and operate without a judge's oversight.
Ashcroft, who served as attorney general during President Bush's first term, heads a lobbying and consulting firm called the Ashcroft Group. His firm's contract calls for oversight of Zimmer's operations.
Under the terms of the arrangement, Zimmer officials have said they expect to pay Ashcroft's firm $28 million to $52 million for 18 months of work. Zimmer avoided criminal prosecution for allegedly paying doctors to use its products, according to the settlement last year with New Jersey U.S. Attorney Christopher J. Christie.
Ashcroft's firm is set to make at least $1 million per month from Zimmer in fees and expenses, with some of its lawyers billing as much as $895 per hour under the deal. Christie awarded the contract to the firm without considering competing bids, which Democratic lawmakers later criticized.
Christie has also come under scrutiny for encouraging another company with which he negotiated a monitoring arrangement to fund a teaching position at his law school alma mater, Seton Hall University, as part of that deal.
In a January interview, Ashcroft strongly defended the use of corporate monitors as fulfilling "the overwhelming public interest." He said the Zimmer contract requires him to enlist the help of more than two dozen former prosecutors, accountants, FBI agents and other experts to review the company's operations.
The current attorney general, Michael B. Mukasey, has also defended the use of corporate monitors, saying they are often a better solution than a criminal trial. He was a finalist for a corporate monitor assignment last year but withdrew his name from contention after he was nominated to lead the Justice Department.
Congressional investigators sought Christie's appearance today, but the Justice Department decided instead to send U.S. Attorney David Nahmias of the Northern District of Georgia. Nahmias worked under Ashcroft in two Criminal Division posts from 2001 to 2004 before becoming the chief prosecutor in Atlanta.
Ashcroft initially balked at testifying, citing legal and ethical obligations to his client and ongoing criminal investigations of individuals and other businesses in the industry. But after Democratic lawmakers scheduled a vote to authorize a subpoena for his appearance, he relented.
The Government Accountability Office is probing the monitorships at the request of the House and Senate Judiciary committees.