Justice Department Putting New Focus on Combating Corporate Fraud
Thursday, February 12, 2009
Ten years ago, a Justice Department official drafted a set of guidelines for prosecuting corporate crime. Little noticed at the time, the strategy ultimately transformed the way prosecutors pursue corrupt businesses -- by exhorting them to hire their own investigators and share the results with the government in exchange for leniency in plea deals.
The memo's author was Eric H. Holder Jr., who has become the nation's attorney general at the same time that a financial crisis is putting pressure on prosecutors to hold businesses accountable for fraud.
"I want to see people prosecuted," Senate Judiciary Committee Chairman Patrick J. Leahy (D-Vt.) said yesterday at a hearing that examined the Justice Department's handling of corporate corruption.
Senators from both parties are advocating that more federal resources be devoted to investigating business fraud, pointing out that such prosecutions plunged after the Sept. 11, 2001, attacks, when more than 2,000 FBI agents were diverted to protect national security.
Justice Department and FBI officials committed anew to weeding out fraud in the marketplace, telling lawmakers that they are looking into more than 530 cases of alleged corporate malfeasance. Among them are 38 investigations of name-brand businesses and financial institutions involved in the financial crisis, including American International Group, Countrywide Financial, Fannie Mae and Freddie Mac.
FBI Deputy Director John S. Pistole said the bureau is "doing a complete scrub of all resources" to ensure that enough agents are assigned to corporate investigations.
Prompted by the government's bank bailouts and mounting taxpayer anger, Democrats have introduced two bills in recent weeks to fund the hiring of more agents and prosecutors to combat mortgage fraud and financial wrongdoing.
Any government crackdown on financial malfeasance is likely to tap into corporate resources, given the drain of years-long investigations on tight federal budgets. Many of the Justice Department's largest ongoing fraud inquiries appear to be months if not years from reaching their targets, lawyers said yesterday. It is far easier for department officials to deputize companies to hire law firms and bear the cost of investigations of themselves. The companies are encouraged to turn over the results to the government, along with evidence against employees complicit in accounting fraud or other schemes.
That strategy has alienated some judges who argue that employers have sacrificed individuals to secure better deals for their companies. It also could rile lawmakers who already have put the Justice Department on notice about protecting employee rights.
While President Obama has decried corporate greed and fraud in recent weeks and during the presidential campaign, it is too early to know how his administration will approach such cases, and Holder has been difficult to read.
"We're not going to go out on any witch hunts, and yet we'll drill down and see" what evidence exists of fraud and other crimes, the attorney general told reporters after being sworn in last week.
Holder's experience on both sides of the courtroom adds to interest in the legal community about how he will tackle the issue.
A decade ago, after Holder, who was deputy attorney general at the time, heard persistent complaints from corporate defense lawyers, he enlisted a group of government lawyers to draft guidelines for prosecutors handling business cases. The Holder memo instructed lawyers to take into account a company's cooperation with authorities in deciding whether to bring an indictment. The government wields substantial leverage in negotiations, because even the threat of criminal charges can put some companies out of business, as happened to accounting firm Arthur Andersen more than six years ago.
In 2001, Holder left government and moved into a lucrative career in private law practice, conducting investigations for companies and then sharing the results with prosecutors in exchange for leniency.
Holder is not the only senior Justice Department official with experience defending corporate America. David W. Ogden, who is nominated to serve as the department's second in command, represented media companies, government contractors and technology firms while in private practice. And Lanny A. Breuer, the nominee to lead the department's criminal division, defended a host of businesses and individuals.
New Justice Department officials are still considering their options for policing corporate fraud. Among the questions is whether to create a national task force to standardize decisions about what criminal charges and prison sentences to pursue in cases against employees at mortgage companies and financial institutions, said Rita M. Glavin, acting chief of the department's criminal division.
But authorities appear to sense that interest in the issue is peaking as the economy suffers. Ogden told senators at his confirmation hearing last week that on his watch, the department would undertake a "strong, law enforcement response" to crime on Wall Street.
"Serving jail time may well be an appropriate result, and it could be a deterrent in the future," he said.