Can the Enron era finally be laid to rest, now that important figures have been convicted and Ken Lay, former chairman, has died? Not necessarily. The prosecutors’ success has been accompanied by sharp criticism that, in its exuberance to crack down, the Bush administration has engaged in excesses of its own. Some of the government’s more aggressive tactics have left serious questions and perhaps a few regrets.
Here are a few proposals to avoid such problems in the next wave of scandals.
Privilege Waivers. The most serious case of anxiety in the business community has been caused by corporations waiving the attorney-client privilege, the principle that protects confidential communications between clients and their lawyers, in order to give incriminating evidence to the government. Although waiving the privilege can help the government get to the bottom of a case of corporate malfeasance more quickly and at a lower cost, it can expose the company to devastating harm, not least in undermining executives’ loyalty if they fear statements made to the company’s lawyers will be disclosed. Giving privileged information to the government can also make it accessible to plaintiffs’ lawyers.
Congress should pass legislation permitting companies to turn over information to the government without fear of it being used against them in lawsuits. Some federal courts have recognised such a “selective waiver” of the attorney-client privilege. But in most jurisdictions the law is either unclear or it precludes selective waiver. The time is right for such legislation, which would save taxpayers money on corporate investigations and go a long way toward alleviating this headache.
Corporate Prosecutions. In the most controversial case of the post-Enron era, the government won a conviction against former “Big Four” accounting firm Arthur Andersen for obstruction of justice, only to have the conviction reversed by the Supreme Court. But the mere indictment of the firm led inevitably to its demise, which even the Supreme Court was powerless to undo – hence the term “corporate death penalty”.
The legal standards for corporate criminal liability are too broad. The law says that a rogue employee on a misguided mission to boost the company’s profits can bring down the whole organisation, even if his primary objective is to line his own pockets.
Everyone, including the government, recognises that society could not function if every corporation that could be prosecuted under that standard were put out of business. Under the justice department’s internal procedures, prosecutors have to justify to their superiors the decision to charge a corporation based on such factors as how serious the crime was, how high up in the organisation it went, whether the company had been in trouble before, and so on.
Restraints on corporate prosecution should be written into law, not left to the sole discretion of prosecutors. Congress should enact legislation limiting the circumstances in which corporations can be convicted for crimes committed by their employees. Prosecutors would still have broad discretion to bring charges, but requiring them to justify their decisions in court would deter ill-founded cases. By shifting the ultimate decision from the executive branch into the courts, Congress could make the process more transparent, reassuring the public that corporate prosecution decisions are insulated, at least to some extent, from political pressures.
The administration should also prevent the corporate death penalty from being imposed based on a mere allegation in an indictment, as opposed to a conviction in a court of law. Healthcare companies, defence contractors and other companies that do business with the government are at risk of being debarred if they are so much as charged with a crime, let alone convicted. That gives the prosecutor the power to put the company out of business without going to the trouble of proving the case beyond a reasonable doubt. The administration should issue regulations protecting businesses charged with criminal misconduct from debarment unless and until the charges against them have been proved in court.
These prescriptions would alleviate a good deal of corporate America’s current pain in its dealings with the enforcement authorities. But they will not prevent future excesses, either in the boardroom or the courtroom. Ultimately, the best hope for avoiding painful effects is if both the regulators and the regulated have learned something from the mistakes of the past.
The writer, a former US federal prosecutor, is a partner at Dewey Ballantine
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