The nation's number one corporate crime buster, New York Attorney General Eliot Spitzer, launched his campaign for higher office in December, announcing that he was running for Governor of New York, the next step in his quest for the presidency.
Spitzer is out to prove that projecting a tough cop image against corporate crime pays dividends — as long as you pull your punches when it comes to settlement time.
When Spitzer announced in November that he was opening a new front against the insurance industry, there was the usual quaking in the boots by the Wall Street Journal and the other lead megaphones for big business, charging Spitzer with using his law enforcement powers to force changes in business practices.
And have no doubt — the corporate lobbies would prefer a do-nothing law enforcement agency to an activist one, even a mildly activist one.
That's why they rail against Spitzer, and even against SEC chair William Donaldson, a former chief executive himself and friend of the Bush family.
Big business now reportedly wants even Donaldson removed from office for his mild activism.
But when push comes to shove, there is no shoving allowed by prosecutors. If you do shove, or push too hard, you will not be allowed to proceed up the political ladder. Period. End of story.
Spitzer sent clear signals when he started his crusade against Merrill Lynch.
Remember the Merrill Lynch analysts who told their customers — trust me, buy this stock, this stock is highly rated?
And then they would turn around and e-mail their buddies — hey, this stock is lousy, why are we recommending this stock to our customers?
Spitzer got his hands on the e-mails, charged Merrill with violating the law and forced them to pay $100 million.
But he got Merrill to pay up only by agreeing not to criminally prosecute the company.
Spitzer later admitted that had he forced Merrill to admit wrongdoing, the firm would have gone kaput.
Just like Arthur Andersen.
In October, 2004 Spitzer moved against a major insurance broker, Marsh & McLennan, alleging that the company steered unsuspecting clients to insurers with whom it had lucrative payoff agreements, and that the firm solicited rigged bids for insurance contracts.
By threatening criminal action, Spitzer forced the company's CEO to resign — and replaced him with a former work colleague.
Major insurance companies — ACE, American International Group, The Hartford and Munich American Risk Partners — were named in the complaint as participants in steering and bid rigging. Other insurance companies are still under investigation.
Here's a prediction — Marsh & McLennan will not be convicted of any wrongdoing. Why? Because Spitzer fears, as he feared in the Merrill case, that forcing a company to admit to guilty would push it to the brink — à la Andersen.
Andersen's conviction sent a powerful message to big business — engage in criminal wrongdoing, and you will be criminally prosecuted to the full extent of the law.
Too powerful, as it turns out.
So, with the Merrill case, Spitzer has started a trend.
Yes, prosecute corporate crime, but don't force companies to admit guilt.
Thus, when the world's largest insurer, American International Group Inc. (AIG), was charged by federal prosecutors with crimes in November, it quickly cut a deal with the Justice Department that ended a criminal probe into its finances with a deferred prosecution agreement.
In a deferred prosecution, the corporation accepts responsibility, agrees not to contest the charges, agrees to cooperate, usually pays a fine and implements changes in corporate structure and governance to prevent future wrongdoing.
If the company abides by the agreement for a period of time, then the prosecutors will drop the criminal charges.
In a non-prosecution agreement — like the one secured by Merrill Lynch's in 2003 with New York Attorney General Eliot Spitzer — prosecutors agree not to bring criminal charges in exchange for corporate fines, cooperation and a change in corporate structure and governance.
“This comprehensive settlement brings finality to the claims raised by the SEC and the Department of Justice,” said AIG Chair M. R. Greenberg. “The role of the independent consultant complements our own transaction review processes. We welcome this enhancement to our overall risk management and control mechanisms.”
“We have always sought to adhere to the highest ethical standards and ensure that we are in compliance with the applicable laws and regulations that govern our businesses around the world. As part of this effort, we regularly review our compliance policies and procedures and take additional action whenever appropriate to enhance them.”
Under the deal with AIG, an AIG subsidiary was charged with a crime for the next 12 months, but then the charge will be dismissed with prejudice — if AIG abides by the deferred prosecution agreement.
As part of the agreement, AIG and two subsidiaries will pay an $80 million penalty, and $46 million into a disgorgement fund maintained by the SEC.
Federal officials in October filed a criminal complaint charging AIG-FP PAGIC Equity Holding Corp., a subsidiary of AIG, with violating the federal securities laws, by aiding and abetting PNC Financial Services Group, Inc. (PNC) in connection with a fraudulent transaction to transfer $750 million in mostly troubled loans and venture capital investments from subsidiaries off of its books.
These transactions were previously the subject of a deferred criminal disposition involving PNC.
Earlier this year, the Department dismissed the criminal complaint against a PNC subsidiary, after the company fulfilled its deferred prosecution agreement obligations.
Merrill, AIG and PNC are three of 10 major corporations that have settled serious criminal charges with deferred prosecution, no prosecution or de facto no prosecution agreements over the last two years. The other seven are Computer Associates, Invision, AmSouth Bancorp, Health South, Banco Popular de Puerto Rico, Canadian Imperial Bank of Commerce and MCI. Bank of New York is currently seeking a similar deal with prosecutors in Brooklyn.
Companies are getting off the criminal hook with these agreements, which were originally intended for minor street crimes.
Now they are being used in very serious corporate crime cases.
If a crime has been committed — and there is little doubt that crimes have been committed by the corporations in these cases — then the companies should plead guilty and pay the penalty.
If prosecutors want to impose change on the corporation, they can do this after securing a conviction through probationary orders.
Right now, corporate lawyers are teaming up with prosecutors to go after individual executives while the company's record is wiped clean.
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