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Investor's Business Daily


Gov't 'Regulation By Prosecution' Is Just Criminal Law On Steroids

December 20, 2010

By James R. Copland

As part of an insider-trading investigation, the FBI raided three prominent hedge fund offices in a multistate November sting operation.

Two of the funds whose offices were searched, Diamondback Capital Management and Level Global Investors, quickly sent investors letters assuring them that the funds themselves were not criminal targets.

As the funds’ managers clearly realized, sophisticated investors know that criminal inquiries can exact untold damage on corporations, as customers become wary, employees look for new opportunities, credit dries up, and management is distracted from its core business.

An increasing percentage of American business managers are similarly distracted, since over the last 20 years, regulation by prosecution has emerged as a significant new form of government control over the marketplace. This practice threatens not only private-sector businesses but also individuals’ rights and the rule of law.

In 1991, the U.S. Sentencing Commission issued guidelines that, in essence, gave corporations and other organizations “credit” for “cooperating” in criminal investigations. The next year, the government entered into its first “non-prosecution agreement” with Salomon Brothers, which paid a civil penalty to avoid criminal trial.

Modern-day regulation by prosecution dates to 1999, when attorney general Eric Holder—then a deputy attorney general in the Clinton Justice Department—issued a memorandum that formalized federal policy for determining whether a business has cooperated with a criminal investigation.

Federal pressure on corporations picked up after the dot-com stock-market bubble burst, and the 2002 conviction of Arthur Andersen, which precipitated the firm’s collapse, signaled to companies that fighting overzealous prosecutors was futile.

Subsequently, nonprosecution and deferred-prosecution agreements (NPAs and DPAs) governing corporate behavior became far more commonplace.

After entering into only 17 such agreements in the first decade after the Salomon investigation, the federal government has entered into 136 NPAs and DPAs since 2002. The list of companies that have recently reached such agreements with the federal government reads like a Who’s Who of international business.

Government lawyers have thus come to wield enormous power over business operations. Prosecutors have forced companies to reverse long-standing corporate policies, to sack management and directors, and to install prosecutor-appointed “business monitors” to oversee corporate activities.

The exercise of such prosecutorial power is disturbing. Prosecutors are lawyers ill-equipped to understand the complexities of the businesses they target, and when prosecutors hand-pick management with an eye toward complying with legal norms rather than weighing business risks and rewards, the results can be catastrophic.

It’s no coincidence that the enormous credit-default swap position that ultimately brought down insurance giant AIG was largely amassed during the nine months after former New York attorney general Eliot Spitzer strong-armed the board into forcing the resignation of the company’s long-time chief executive, Hank Greenberg, who had famously watched the insurer’s financial-products group like a hawk.

Furthermore, under federal guidelines developed in and since the infamous 1999 Holder memo, prosecutors have used the threat of corporate conviction to circumvent individual employees’ legal rights.

In 2008, the U.S. Court of Appeals for the Second Circuit rightly slapped down the government for tying an accounting firm’s “cooperation” to its decision to forgo paying its employees’ legal-defense bills.

But similar strong-arm tactics—including the compromising of individuals’ attorney-client privilege—still exist as express Justice Department policy.

Perhaps most troubling, prosecutorial regulation is essentially an end-run around normal democratic processes and the rule of law. Since the legal theories underlying prosecution of corporate crimes resolved through NPAs and DPAs are, by definition, never tested at trial, the rules of the game are developed on an ad hoc basis by Justice Department officials, with neither legislative authorization nor significant judicial oversight.

Some legislative leaders have recognized these problems. In a rare moment of lucidity, outgoing Senator Arlen Specter introduced the Attorney-Client Privilege Protection Act to rein in some of the most egregious Justice Department practices.

More generally, however, legislators have tended to write ever more new business crimes into the books. As Tiffany Joslyn of the National Association of Criminal Defense Lawyers documented in a recent report, the new Dodd-Frank financial “reform” legislation creates as many as two dozen new corporate crimes.

The incoming Congress should reverse course and insist that corporations are only liable for crimes that expressly apply to businesses in the legislative text, that corporate crimes are limited to serious offenses committed or authorized by senior employees, and that companies can defend themselves upon showing that they tried to comply with legal rules in good faith.

Regulation by prosecution in modern America is criminal law on steroids, and it’s time to clean it up.

Original Source:



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