The Softer Side of the Justice Department: The Civil Settlement and Deferred Prosecution

There is a dearth of criminal cases targeting the executives involved in the 2008 investment banking house collapses and its seeds of destruction planted in the subprime mortgage market. The void has raised questions throughout the hallowed halls of law schools and the not-so-hallowed halls of Hollywood. The New York Times (Gretch Morgenson and Louise Story, “Behind the Gentler Approach to Banks by U.S.,” July 8, 2011) explored the new Justice Department’s guidelines on corporate criminal prosecutions that tend to defer prosecutions and settle instead for collecting civil fines and restitution. Under this approach, companies cooperate with DOJ by hiring outside lawyers to investigate and then have those lawyers present their findings to the DOJ, along with their opinion as to whether there is “anything there.” There are pros to this strategy:
• The DOJ is able to exponentially increase its investigative powers by transferring the burden to the companies, who then pay law firms to do that work.
• The government and victims get restitution without losses of jobs and pensions and the usual downsides of fraud, i.e., the company ceases to exist or contracts its operations and workforce.
• Sometimes there is just not enough “there there” to pursue prosecution and resources are wasted in pursuit.
• The gentler approach encourages self-reporting.
But, then again, there are cons:
• The true moral hazard of the company’s conduct is taken away. Irwin Stelzer has it right, “Capitalism without failure is like religion without sin.” Fraud is not a natural market correction! You need a little more action than that. To prevent fraud, one must be willing to lop consequences onto perpetrators.
• ‘Tis always dangerous to rely on the perpetrators and their paid counsel for an objective look at events. Sometimes a diagnosis bias in favor of the client company does kick in – even the best law firms in the world are subject to proven psychological influences on processing facts. That “Nothing to see here, move along,” conclusion from the company’s law firm does carry an underlying conflict of interest.
• Cozy relationships between the corporate defense bar and the DOJ breed what happened at Enron and other companies between external auditors and the company suits. They became friends, they job-hopped, and their decisions were grounded in what offers were pending for individuals, not the actual facts.
• A body of unwritten precedent builds that companies come to use as one of their quivers when they argue for the softer treatment still. And all without the benefit of judicial precedent.
• The Department of Justice is not alone in these investigations – there are agencies that may have done preliminary investigations and/or discovered disturbing information that warrants something more than a homework assignment of, “Why don’t you take a look at this and get back to us?” from the DOJ. The article documents tensions between what agencies perceive as the criminal conduct of companies vs. what DOJ sees as negotiable civil wrongs.
• There is a great deal of rationalization going on to justify the hands-off, heads-turned investigations by the DOJ.
Here’s the issue: Was there criminal activity at the company? If there was, the only questions are: (1) What should the charges be? Against whom? and (2) What are appropriate penalties?
There may not have been much criminal activity afoot in the great financial collapses of 2008. And the DOJ may be correct in using its softer approach in answering these questions. One big problem remains. The DOJ may not have enough information to answer those questions. What is presented to the DOJ by the company and its lawyers has been characterized accurately by those very same lawyers who have bagged simple civil settlement for their corporate clients. In moments of unthinking braggadocio they have described their remarkable off-the-hook results for their clients as “gaming the system.” Inspectors general in government agencies charged with ferreting out tomfoolery are rightfully concerned about seeing the softer side of DOJ. How ironic that as Dodd-Frank creates the largest consumer protection agency in the history of mankind that the law enforcement arm of the government goes squishy.