The Crackdown Cracks
Getting tough on corporate crime is so yesterday. The pendulum is swinging back, hitting everyone from gumshoes to judges
The hang-'em-high days of cracking down on white-collar crime may already be over. As the trial of the two former CEOs of Enron captures headlines, companies and executives are quietly winning policy changes and court rulings to water down investor protection and weaken fraud investigations, prosecution, and punishment.
Even investor champions say some retrenchment may be needed to correct overzealous regulators and prosecutors. But there is a danger that this turn of the tide could run too swift and reach too far. Periods of corporate scandal are customarily followed by reforms. "Then they fade from the public's mind, and we roll back the reforms," says Lynn Turner, a former chief accountant of the Securities and Exchange Commission who now directs research for the Glass, Lewis & Co. institutional investor advisory firm. "But I have been surprised by how quickly the pendulum has swung back this time." If the current trend continues, he warns, "the American public [will have] every right to question whether crime pays."
The pullback is evident at every level--from investigations to prosecutions to sentencing. And there's even a drive to weaken some new investor protection rules that force executives to give up conflicts of interest and do tougher audits.
Slowing the sleuths. Investigations may suffer if the Bush administration sticks with its 2007 budget, which calls for a reduction in the number of SEC investigators. Also, new legal barriers could hamper the longtime cooperation among different agencies' investigators. Several judges have dismissed charges against defendants because of concerns that overlapping investigations might result in a kind of double jeopardy. The judge in HealthSouth Corp. CEO Richard Scrushy's trial, for example, tossed out some of his charges last spring, saying the coordination between the SEC and the Department of Justice created an unfair "perjury trap" for Scrushy. Civil regulators can fine suspects who don't cooperate. But those who do talk risk providing incriminating evidence that will send them to jail on criminal charges. (Scrushy was eventually fully acquitted.) A federal judge in an Oregon accounting fraud case made a similar ruling in January.
And the SEC last month overturned a lifetime investment industry ban of former Credit Suisse First Boston banker Frank Quattrone, ruling that he should not be penalized for invoking his right to silence. These decisions can't help but make investigators more careful and defense attorneys more aggressive, says Brent Gurney, a former federal prosecutor now in private practice. "Defense attorneys are going to take advantage of these cases, absolutely," he says. Investigators are also losing a weapon they've been using to persuade people and companies to turn state's evidence. Until recently, prosecutors could get corporations and executives to turn over sensitive records--including attorneys' memos that are traditionally kept private--by threatening tough sanctions on those who didn't cooperate. But earlier this month, the U.S. Sentencing Commission voted to no longer penalize those who insisted on their attorney-client privilege.
Probers will still be able to subpoena materials like E-mails and general business records. But business and legal groups are taking the retreat on attorneys' notes as a sign that "there is a shift in momentum" that may allow them to neutralize other threats investigators often use, says Susan Hackett, senior vice president of the Association of Corporate Counsel. Her group next hopes to persuade Congress and the administration to eliminate punishment of companies that pay the legal fees of accused executives. "We are going to tackle one thing at a time," she says.
advertisement
