Monday, April 14, 2008

Tough Love, With Pillows

Americans have a peculiar habit of skipping from one concern to the next. That which fills hours of continuous coverage on Cable News today will be forgotten before the sun rises on tomorrow. Such is the case with corporate crime.

Back in 2002, George Bush was fully on board with the effort to crack down on shady accounting practices which brought down Enron and Arthur Anderson along with numerous other companies and not least of all the pensions of thousands of innocent employees.

Bush, upon signing the Sarbanes-Oxley Act in 2002:

This new law sends very clear messages that all concerned must heed. This law says to every dishonest corporate leader: you will be exposed and punished; the era of low standards and false profits is over; no boardroom in America is above or beyond the law.


Corporate misdeeds will be found and will be punished. This law authorizes new funding for investigators and technology at the Securities and Exchange Commission to uncover wrongdoing. The SEC will now have the administrative authority to bar dishonest directors and officers from ever again serving in positions of corporate responsibility. The penalties for obstructing justice and shredding documents are greatly increased. Corporate crime will no longer pay. CEOs who profit by betraying the public trust will be forced to return those gains to investors. And the maximum prison term for common types of fraud has quadrupled from five to 20 years.


This law gives my administration new tools for enforcement. We will use them to the fullest. We will continue to investigate, arrest and prosecute corporate officials who break the law. The Corporate Fraud Task Force I established is now hard at work, overseeing investigations of alleged fraud and insider trading. More than 200 federal prosecutors are at work detecting and punishing corporate crimes. Every corporate official who has chosen to commit a crime can expect to face the consequences. No more easy money for corporate criminals, just hard time.

Sounds good enough. Corporate accountants risk jail time for playing fast and loose with the all-too-precarious futures of shareholders and employees. Increased SEC scrutiny and audits. All around, promises that major collapses like those of 2001 and 2002 would never happen again.

But, as is often the case, Americans moved on. They moved on to more inane celebrity gossip, got wrapped up in whatever reality show was popular at the moment, or occasionally paid attention to a fleeting political faux-scandal. But mostly, they lost interest. And the tide moved out. Almost immediately.

President Bush's utilization of signing statements to undermine the effectiveness of the bills he signs into law--often effectively nullifying them entirely--is no secret. The corporate crime bill was no exception, as Bush eliminated a provision to protect whistle blowers who bring to light violations by companies not already under investigation. In other words, at the same time he was declaring a new tough stance against corporate crime, President Bush was working to ensure that the process of prosecution would be stamped out at its root.

From there, many of the other mechanisms intended to prevent another catastrophic corporate malfeasance were rolled back or put on the back burner. Kim Clark details many of those efforts in this April, 2006 article in US News. Among other things, Clark details the elimination of SEC oversight positions and illuminates the first glimpse of what would become a theme later, saying "Since 2004, federal prosecutors have struck at least nine deals with companies accused of accounting fraud, to defer prosecution or not prosecute at all. In the previous five years, the Justice Department announced just four, according to the Corporate Crime Reporter."

But that jump--from 4 over 5 years to 9 over 16 months--in deferred prosecutions was but the tip of the iceberg, as Eric Lichtblau reveals in the New York Times.

In a major shift of policy, the Justice Department, once known for taking down giant corporations, including the accounting firm Arthur Andersen, has put off prosecuting more than 50 companies suspected of wrongdoing over the last three years.

Instead, many companies, from boutique outfits to immense corporations like American Express, have avoided the cost and stigma of defending themselves against criminal charges with a so-called deferred prosecution agreement, which allows the government to collect fines and appoint an outside monitor to impose internal reforms without going through a trial. In many cases, the name of the monitor and the details of the agreement are kept secret.

While the fines levied still carry a modicum of determent by punishment, it is not nearly the substantial and public retribution promised by Bush in 2002. Bush didn't say that corporate misdeeds would merely be met with fines, he promised purveyors of magic accounting and other corporate malpractice would be greeted with "hard time."

Consider, though, that many of those shady accounting practices have made their way into today's economic framework. Much of the attention is payed to inability to pay mortgages, which decidedly misses the point. The failure of a company like Bear Stearns stemmed from lax corporate oversight which allowed companies to take poor investments (sub-prime mortgages) and pass them off further and further up the chain until the system simply couldn't handle it anymore.

And once again, it's the employees of that company that bear the brunt of the fallout. Much is made of the use of federal funds to back JP Morgan's buyout, but nary a peep about the employees whose shares were bought for $2. They pay the price with their retirement plans.

Faced with an economic downturn strongly tied to dishonest and creative accounting practices, withholding of the shaky foundations of investments, and active pushing of disastrous mortgage agreements, attention needs to be given to the role that lax oversight played.

Corporations, like children, only understand and respond to consequenses, not words. Bush spoke strongly six years ago, but his actions illustrated to accountants and bankers that they would be mostly free to practice business as usual. Deferred prosecution agreements instilled an accurate perception that shady practices could be persued with a virtual guarantee that if caught a company would be greeted with a slap on the wrist and a fine.

Proponents of these agreements say they work to "avoid the type of company-wide havoc seen most acutely in the case of Arthur Anderson." While there certainly is credence to that--bringing a company to its knees (along with its innocent employees) out of a sense of retribution does more harm than good--it effectively, as we've seen in the mortgage scene, kicks the can down the road.

Prosecuting every wrongdoing with the zeal required by the Sarbanes-Oxley Act is probably impractical, but simply laying the foundation for a regulation/oversight-free environment that comes back to bite the country cannot be a reliable substitute.

Also, those suggesting that every prosecution would wreak havoc must explain the discrepancy in numbers. Jumping from 4 deferred prosecutions over 5 years to more than 50 over three years and 35 last year alone requires explanation stretching the bounds of credibility. The implication of disaster doesn't sync with the fact that prior to the Bush administration these agreements were rare without a simultaneous rash of company failures. The reality, once again, fails to support the administration's factual maneuvering.

Deferred prosecution agreements on the scale that the Justice Department has utilized them in recent years is indicitive of a larger picture. A picure painted with broad strokes of lax regulation, failure to employ oversight, and attempts to stymie investigations at their very root. Failure on this scale has allowed an entire segment of the economy to be propped up on a foundation of popsicle sticks. Sadly, it's not an accident. The economic issues created by the poor investment practices of the banking industry are a direct result of the nod-and-wink relationship it has with the Bush administration.

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