Federal prosecutors have given big businesses too much leeway in cases

Monday, July 25, 2011 | 2:01 a.m.

When Wall Street melted down in 2008, pulling the nation’s economy down with it, there was plenty of blame to go around, from the investment banks to the regulators. But in the investigation since then, there hasn’t been much major action from federal prosecutors.

As The New York Times recently reported, the government has moved gently for several years when it comes to white-collar crime in corporate America. The Justice Department’s approach goes back to the business-friendly policies of George W. Bush’s administration.

In 2005, the Justice Department was internally discussing how it prosecuted corporate crime. The discussion came after the department had prosecuted — and won convictions — in a string of cases involving the executives of several major corporations, including Enron, Tyco, Rite Aid and WorldCom. Business leaders had complained about the aggressive approach.

Sources told the Times that during one meeting, the deputy attorney general at the time wondered if American business was being hurt by the Justice Department and its prosecutions, and he cautioned prosecutors to be responsible.

If that wasn’t a clear message to back off, the department’s policy started to change. Prosecutors had been told that when determining whether to seek an indictment against a business, it was proper to consider if a corporation was cooperative during the investigation. Added to that was the increased use of “deferred prosecution agreements,” which delay or cancel criminal punishment if a company promises to change its ways.

In a 24-page memorandum issued in 2008, the year Wall Street crumbled, the department officially made deferred prosecutions an alternative to seeking an indictment. Companies such as insurance giant AIG and drugmaker Bristol-Myers Squibb avoided prosecution by making such deals.

The Justice Department also relied more on businesses reporting their own wrongdoing. Prosecutors were counseled to approach corporations earlier in their investigations and tell executives to commission their own probes and report back with what they found. That approach was highlighted — and criticized — in the Justice Department’s handling of mortgage fraud allegations involving Beazer Homes.

The Securities and Exchange Commission has also used deferred prosecutions, and advocates of the approach say they still require some sort of fine or penalty while mandating that a company change its behavior.

Deferred prosecution can be a good tool, giving prosecutors the ability to handle situations that may not rise to the level of an indictment. However, putting an emphasis on them is not the way to go. Prosecutors should evaluate cases and charge them based on the circumstances, not the defendant. Federal prosecutors wouldn’t let a man accused of defrauding his neighbors of millions of dollars investigate his own actions, nor would they go lightly on him. So why should they give corporations special treatment?

The result of the department’s light touch with business has left little real incentive to make corporations follow the law.

“If you do not punish crimes, there’s really no reason they won’t happen again,” said Mary Ramirez, a Washburn University law school professor and former federal prosecutor. “I worry and so do a lot of economists that we have created no disincentives for committing fraud or white-collar crime, in particular in the financial space.”

Indeed.

Given what the nation has seen in the wake of the economic meltdown, the federal government needs to restore balance and make sure corporate America is held responsible for its actions.