Don't Defer, Don't Prefer--Prosecute

Let's get one thing straight: a deferred prosecution agreement, also known as pre-trial diversion, was never intended for serious, repeat wrongdoers like Arthur Andersen LLP.

The papers are reporting that any day now, maybe even today, the Justice Department, using such an agreement, will drop its indictment of Arthur Andersen LLP and put the accounting firm on a type of probation for a period of time. If what is left of Andersen doesn't get caught engaging in further wrongdoing during this probationary period, then no charges will be brought. The firm's criminal slate will be wiped clean.

That's how a deferred prosecution agreement works.

For first time, non-serious offenses, such agreements are a good idea. They save prosecutorial and judicial resources and help unclog the courts.

For serious, repeat wrongdoers like Andersen, they are a bad idea, because they undermine justice by entrenching the double standard between the powerful institutions of society and the less powerful individuals, and by sending a signal that, no matter how many times the powerful get caught, in the end, they will be let off the hook.

If you or I, individuals, engage in serious, repeated wrongdoing, we will lose our freedom (read: prison). But Andersen commits serious, repeated wrongdoing, and it doesn't lose its freedom, even though the law says it must.

Under Securities and Exchange Commission (SEC) Rule of Practice 102(e)(2) "any person convicted of a felony or a misdemeanor involving moral turpitude shall be forthwith suspended from appearing or practicing" before the SEC. The SEC says this means that any accountant convicted of a felony may no longer certify the financial statements of a public company. So, if Andersen is convicted of a felony, it loses much of its business. For an institution, that's the practical equivalent of prison.

Andersen would lose its freedom to operate as it wishes.

Deferred prosecution agreements were never intended for serious offenses like the destruction of tons of documents and obstruction of justice that Andersen is accused of. The U.S. Attorney's Manual makes this clear when it says that a major objective of pretrial diversion is to "save prosecutive and judicial resources for concentration on major cases."

If the Andersen case is not a major case, then they don't exist.

In yesterday's New York Times, Kurt Eichenwald reported that such agreements "are unusual in corporate criminal cases, but they are not unprecedented." He cites as an example a 1994 case where Prudential Securities was allowed to enter into such an agreement to resolve criminal charges that it had defrauded investors in the sale of energy limited partnerships.

But a more relevant example is the case of Arthur Andersen itself, in 1996, when the United States Attorney in Connecticut agreed to defer prosecution of a federal criminal investigation of Andersen's endorsement of a misleading financial prospectus by Colonial Realty Company. Colonial went bankrupt in 1990. Andersen paid $10.3 million to resolve its potential criminal liability and was placed on probation for 90 days. Andersen admitted no wrongdoing. The bankruptcy of Colonial sunk thousands of investors in Connecticut and around the country.

Connecticut Attorney General Richard Blumenthal, who conducted his own investigation of Andersen, has said recently that "in Colonial, Andersen also inexplicably destroyed an unknown number of documents and electronic files relating to Colonial's real estate ventures." Blumenthal's investigators found that Andersen certified as reasonable unsupported financial projections for Colonial's Constitution Plaza syndication and that Andersen employees had destroyed documents relating to its dealings with Colonial.

Blumenthal said that it was subsequently determined that Andersen accountants violated principles of accounting and that the overall relationship between Colonial and Andersen impaired the objectivity of Andersen accountants.

Earlier this year, Blumenthal cited other examples of what he called "Arthur Andersen's shoddy, unethical and illegal work." Recently, the firm settled a major fraud investigation with the Securities and Exchange Commission concerning the services it provided to Waste Management, paid $110 million in damages in the Sunbeam securities fraud case, and is currently under scrutiny in litigation resulting from its alleged role in the collapse of Boston Market.

When David Duncan, the Andersen partner in charge of auditing Enron, pled guilty last week to obstructing justice, he gave federal prosecutors the upper hand.

So what do the prosecutors do? If we are to believe the papers, they agree to drop the obstruction charge against Andersen. This is a perverse result. It is a major victory for Andersen. It makes no sense. It sets another bad precedent.

Andersen already had at least one free bite of the apple. The firm was given a deferred prosecution agreement in the Colonial Realty case, and now it wants a second bite in the Enron case.

If there is time, we make this plea to Michael Chertoff, Leslie Caldwell, and the other prosecutors in charge of this case: don't defer, don't prefer--prosecute Andersen and Enron to the full extent of the law.

Russell Mokhiber is editor of the Washington, D.C.-based Corporate Crime Reporter. Robert Weissman is editor of the Washington, D.C.-based Multinational Monitor. They are co-authors of Corporate Predators (Monroe, Maine: Common Courage Press; see http://www.corporatepredators.org). To subscribe to weekly corp-focus e-mail service, send an e-mail message to listproc@essential.org with the following all in one line: subscribe corp-focus 'your name' (no period).

(c) Russell Mokhiber and Robert Weissman