CRIME WITHOUT CONVICTION:

THE RISE OF DEFERRED

AND NON PROSECUTION AGREEMENTS

 

 

 

A Report Released by

Corporate Crime Reporter

Wednesday, December 28, 2005

National Press Club

Murrow Room

Washington, D.C.

 

 

 

INTRODUCTION

Good morning.

My name is Russell Mokhiber.

I’m the editor or Corporate Crime Reporter.

Corporate Crime Reporter is a print legal newsletter, now in its 19th year of publication.

Corporate Crime Reporter is published 48 times a year.

Subscribers include corporations, white collar defense lawyers, prosecutors, law school libraries, and large media outlets.

Today, we are releasing this report that profiles thirty-four cases where prosecutors – confronted with solid evidence of corporate criminal wrongdoing – have chosen instead to enter into a non-prosecution agreement or a deferred prosecution agreement with the corporation.

Seventeen (17) of the thirty-four cases were settled with non prosecution agreements.

That is where the prosecutor agrees not to criminally prosecute the corporation in exchange for fines, cooperation, monitors, and changes in the corporate structure.

The seventeen companies that settled their cases with non prosecution agreements are:

American Electric Power (January 2005)
Adelphia Communications (May 2005)
Aetna (August 1993)
Aurora Foods (January 2001)
Bank of New York (November 2005)

Coopers & Lybrand (September 1996)
Hilfiger (August 2005)
John Hancock Mutual Life (March 1994)
Lazard Freres (October 1995)
MCI (September 2005)

Merrill Lynch (September 2003)
Merrill Lynch (October 1995)
Micrus Corporation (March 2005)
Salomon Brothers (May 1992)
Sequa (June 1993)

Shell Oil (June 2005)
Symbol Technologies (June 2004)


The other seventeen (17) cases were settled with deferred prosecution agreements.

Under a deferred prosecution agreement, the prosecutor charges the corporation with a crime, but agrees to drop the charges if the corporation fulfills its promises to the prosecutor.

These promises include fines, cooperation – including the highly controversial waiver of attorney-client privilege – and monitors.

The seventeen companies that settled their cases with deferred prosecution agreements are:


American International Group (November 2004)
America On-Line (December 2004)
Amsouth Bancorp (October 2004)
Arthur Andersen (April 1996)
BDO Seidman (2003)

Banco Popular De Puerto Rico (January 2003)
Bristol Myers Squibb (June 2005)
Canadian Imperial Bank of Commerce (December 2003)
Computer Associates (September 2004)
InVision Technologies (December 2004)

KPMG (August 2005)
MCI (March 2004)
Monsanto (January 2005)
New York Racing Association (December 2003)
PNC Financial (January 2003)

Prudential Securities (October 1994)
Sears (April 2001)


The report that we are releasing today is titled: Crime Without Conviction: The Rise of Deferred and Non Prosecution Agreements.

It is posted on our web site at www.corporatecrimereporter.com.

This report finds that prosecutors have entered into twice as many non-prosecution and deferred prosecution agreements with major American corporations in the last four years (23 agreements between 2002 to 2005) than they have in the previous ten years (11 agreements between 1992 to 2001).

And it raises the question – are these companies too big to indict, to big to convict?

On our web site, the agreements themselves – the ones we could find – are linked to each of the case profiles.

Increasingly, non-prosecution and deferred prosecution agreements have become the settlements of choice for prosecutors and corporate defense attorneys.

And yet this trend to not criminally prosecute corporate criminals to conviction is the subject of little serious scrutiny by corporate crime defense lawyers, reporters, and law school professors.

This despite the good chance that the rise of these agreements has undermined the general deterrent and adverse publicity impact that results from corporate crime prosecutions and convictions.

Being a corporate criminal carries the heavy weight of adverse publicity – and the potential of being barred from doing business with federal, state and local governments.

Also, individual citizens might shy away from doing business with convicted companies.

Want to buy your automobile from a corporation convicted of criminal bribery?

Maybe not.

Want to own stock in an company convicted of dumping wastes at sea?

Maybe not.

Want to buy gasoline from an oil company felon?

Perhaps I’ll drive across the street.

It could very well be that the rise of these deferred and non prosecution agreement deals represents a victory for the forces of big business who for decades have been seeking to weaken or eliminate corporate criminal liability.

The antipathy of business and business lawyers toward corporate criminal liability is deep and far reaching.

Many advocates for big business openly advocate for the elimination of corporate criminal liability.

One such person is Jeffrey Parker, a Professor of Law at George Mason University.

Parker argues that corporate crime simply does not exist and can not exist.

"Crime exists only in the mind of an individual," Parker said in an interview with Corporate Crime Reporter a couple of years ago.

"Since a corporation has no mind, it can commit no crime,” Parker said.

He argues that a since a corporation is not a living breathing human being, it should not be treated as a living breathing human being in the criminal law arena.

But if a corporation is not a person for purposes of the criminal law, then why should it be is a person for the purposes of constitutional law – where it is considered a person and is granted protections, including – First Amendment guarantees of political speech and commercial speech, Fourth Amendment safeguards against unreasonable searches, Fifth Amendment double jeopardy and liberty rights, and Sixth and Seventh Amendment rights to trial by jury?

On paper and in their rhetoric, judges and prosecutors disagree with Parker and those business boosters who would do away with corporate criminal liability.

The law on corporate criminal liability was settled early in the last century – in1906 by the U.S. Supreme Court in the New York Central case (New York Central & Hudson RR Co. v United States (1906) 212 US 481.

In that case, the Supreme Court ruled that to give corporations immunity from all punishment because of the doctrine that a corporation cannot commit a crime “would virtually take away the only means of effectively controlling the subject matter and correcting the abuses aimed at.”

In 2002, in a speech to the American Bar Association, then Deputy Attorney General Larry Thompson, put it this way:

“Large corporations develop their own methods and culture that guide employees thoughts and actions. That culture is a web of attitudes and practices that tends to replicate and perpetuate itself beyond the tenure of any individual manager. That culture may instill respect for the law or breed contempt and malfeasance. The organization itself must be held accountable for the culture and the conduct it promotes. Without this tool, the public would have no adequate deterrent to corporate criminal conduct because the culture that condoned, or at least acquiesced in, that behavior would be beyond the criminal law’s power to correct. Only by prosecuting the corporation itself can we insure systemic reform.”

So, the law on corporate criminal liability is settled.

Corporations can and must be criminally prosecuted for serious crimes.

But in current practice, with the increased use in recent years of deferred prosecution and non-prosecution agreements, prosecutors are sending quite a different message to corporate criminals and it is this:

Don’t worry.

Your can commit any crime you wish, from bribery, to corruption, to fraud.

Just help us put the individuals executives in jail, and we well let you off the hook.

No conviction.

No record of criminal wrongdoing.

So, a double standard is being set – if not by law, then by prosecutorial discretion.

On the one hand, if you are a living, breathing, human being who commits a crime, you will be prosecuted, convicted and sent to prison.

On the other, if you a large corporation, you will be deemed too big to convict and granted a deferred or non-prosecution agreement.

When you ask corporate defense attorneys – and almost to a person, they favor deferred prosecutions – to justify this double standard, they say – well, a corporation is nothing but a legal fiction.

You can’t put a corporation in jail.

The important thing is to put real human beings in jail – and to save innocent shareholders and workers and the community from the collateral consequences of a conviction.

Earlier this year, we asked Joseph Savage, a criminal defense attorney at Goodwin Procter in Boston about the double standard.

“Is there a double standard?” he asked. “Absolutely. And there should be. There can be no crime of a corporation without an individual act. It can never be the other way around – a corporate crime without individuals acting. To me, there is a double standard. There ought to be a double standard.”

In August 2002, Robert Bennett, a partner at Skadden Arps in Washington, D.C. and a leading white-collar criminal defense lawyer put it this way:

"The concept of corporate criminal liability has not gotten enough attention. When you indict a company, you are doing enormous damage to its stock. You are doing enormous damage to innocent people. When a company gets indicted it has a real impact on them. I really question the value of that. . . Is it just this macho -- we indicted so and so? Why do that harm?"

Well, there are a number of answers to this question – why do that harm?

First of all, when you convict a corporation, it does not automatically follow that the corporation will be put out of business.

A few years ago, we ran a list of the Top 100 Corporate Criminals of the 1990s.

These were all major corporations that had been convicted of serious crimes.

And few if any of them were driven out of business because they were convicted of a crime.

We ranked the corporations by the amount of the criminal fine imposed on them after they were convicted.

Number one on the list was Hoffman LaRoche, which pled guilty in 1999 to fixing the prices in the vitamins market and paid a $500 million criminal fine.

Number 100 was Samsung America, which pled guilty to violating federal elections law and paid a $150,000 fine.

Exxon, Archer Daniels Midland, Pfizer, Chevron, Georgia Pacific, Tyson Foods, Hoffman LaRoche – these are big robust companies.

There were all convicted of serious crimes.

And they were not bankrupted as a result.

We get phone calls and e-mails regularly asking if we are going to update The Top 100 Corporate Criminals list.

Our answer – we’re not sure there will be enough convicted corporations to get to 100 in this decade.

Why?

Because fewer and fewer corporations are being required to plead guilty when faced with evidence of serious corporate crime.

And here’s a second point:

Deferred prosecution agreements – also known as pre-trial diversion – were never intended for major corporate crime cases.

As the U.S. Attorney’s Manual makes clear – a major objective of pretrial diversion is to "save prosecutive and judicial resources for concentration on major cases."

Pre-trial diversion was originally intended for juvenile delinquents and minor crime cases – to clear the courts so that judges could concentrate on major criminal cases – like the ones profiled in this report.

Now, the order of things has been reversed.

Large multinational corporations and other entities are admitting that they committed crimes, but not admitting that they are criminals.

Take the case of KPMG.

In August of this year, KPMG, one of the remaining big four accounting firms, admitted to criminally engaging in a fraud that generated at least $11 billion dollars in phony tax losses which cost the United States at least $2.5 billion dollars in evaded taxes.

Nonetheless, KPMG was granted a deferred prosecution agreement.

At the press conference announcing the deferred prosecution agreement, Attorney General Alberto Gonazales said that KPMG “has admitted to criminal wrongdoing in the largest-ever tax shelter fraud.”

Yet there was no criminal conviction.

The deferred prosecution deal with KPMG was reportedly cut over the objections of the U.S. Attorney in New York, David Kelley, who believed that because of the widespread criminality and obstruction of justice, the firm deserved a criminal conviction.

Earlier this year, Corporate Counsel magazine reported that former U.S. Attorney Kelley “had convened a grand jury and appeared determined to indict the company as much for its cover-up tactics as for its tax shelters.”

But KPMG went over Kelley’s head to then Deputy Attorney General James Comey – Kelley’s predecessor as U.S. Attorney in Manhattan.

Citing unnamed sources, the magazine reported that Comey “ordered” Kelley to enter into a deferred prosecution agreement with KPMG, a decision that saved KPMG from a criminal conviction.

It was the Arthur Andersen case that set this deferred prosecution train in motion.

The Andersen case sends chills down the spines of corporate defense counsel.

In March 2002, federal prosecutors indicted Arthur Andersen for destroying tons of paper documents and other electronic information related to the Enron investigation.

Andersen went to trial and was found guilty of obstruction, although the Supreme Court earlier this year overturned the conviction.

It is popular for legal commentators to repeatedly blame the prosecutors for the demise of one of the big five accounting firms.

Now there are only the big four – including KPMG, Deloitte, PricewaterhouseCoopers (PWC) and Ernst & Young.

But Columbia University Law Professor John Coffee, a respected authority on white collar crime and a fan of deferred prosecutions generally, says that it wasn’t the prosecutors who killed Andersen.

Andersen killed itself.

Coffee says that even a deferred prosecution agreement would not have saved the company.

“I believe the company was already dead at that point,” Coffee told us earlier this year. “Remember, an auditor is in an exposed position. You are being brought in so that shareholders will trust the company’s financial statements. If you bring in a company that has become notorious for Enron, that doesn’t enhance the shareholder trust. It probably diminishes it. There was negative value to Arthur Andersen’s name at that point. And that destroyed it. The brand was simply killed.”

In addition, Andersen already had one free bite of the apple.

As you will see in this report, in 1996, fully six years before it was indicted for obstruction the Enron investigation, Andersen was granted a deferred prosecution in connection with a real estate fraud in Connecticut.

Another major factor that led to this shift away from convicting corporate criminals – The Thompson memo – also known as Principles of Federal Prosecution of Business Organizations.

Written by former Justice Department official Larry Thompson in 2003, this memo lays out nine factors that prosecutors should consider in deciding whether or not to criminally prosecute a corporation – the nature and seriousness of the offense, the pervasiveness of wrongdoing within the corporation, the corporation’s history of similar conduct, collateral consequences, and the corporations willingness to cooperate.

Ted Wells is one of the leading corporate and white collar crime defense attorneys in the nation.

He’s a partner at Paul Weiss in New York.

Wells says that it was Thompson memo’s emphasis on the authenticity of cooperation that threatened corporations with a choice – full cooperation or conviction.

Wells put it this way:

“The Justice Department came to believe that cooperation from corporations wasn’t real cooperation. And so the Department, in the Thompson memo, demanded ‘authentic’ cooperation from corporations. And now it’s getting it.”

And in exchange, the corporations are getting deferred prosecution agreements.

As to whether deferred prosecutions work to deter crime or not, corporate defense attorneys and prosecutors say this – let’s wait and see.

Let’s see if these deferred prosecutions actually work to change the corporate culture.

But we already know from the most notorious case – Arthur Andersen – that a deferred prosecution in 1996 didn’t little to change the corporate culture of an Andersen.

The firm didn’t learn its lesson from the 1996 accounting scandal and deferred prosecution and was once again facing federal prosecutors in 2002.

Most of the cases in this report deal with accounting and securities fraud.

Professor Coffee believes that deferred prosecution agreements are well designed to handle these cases.

In most of these cases, the corporation is being accused of criminally cheating its shareholders.

But if you criminally prosecute the company to conviction, you wipe out shareholder value, he says.

You are destroying the corporation in order to save it.

At the press conference in September 2004 announcing the Computer Associates deferred prosecution, James Comey said that corporate criminal prosecution should be used only in cases where you want to “put down” a corporation.

“We have no interest in swinging at a wrong door and knocking down thousands of innocent employees,” Comey said. “What we try to focus on is – is this an entity that is recidivist or that is so sick – its culture is so sick – that it's going to re-offend, that it has to be put down and that we have to suffer the collateral consequence of the loss of all those jobs?”

But when you ask corporate defense counsel – and prosecutors – and law professors – to name an American corporation that is so sick that it has to be “put down,” as Comey put it, they can’t come up with one.

In effect, they are saying – big corporations – no matter how sick – are too big to convict.

It is for this reason that corporate defense attorneys are in love with deferred and non prosecution agreements.

David Pitofsky was the prosecutor in the Computer Associates case.

He is now a partner with a corporate defense law firm – Goodwin Procter in New York.

Last month, Pitofsky told us that deferred prosecution agreements were “almost too good to be true.”

Even impartial observers – law professors like Columbia’s Coffee and the University of Connecticut Law School’s Leonard Orland – are big fans because, in part, of the leverage it gives prosecutors.

Orland put it this way:

“Corporations faced with serious wrongdoing by corporate executives must promptly accept full responsibility, discipline wrongdoers, institute serious institutional reform and fully cooperate with the government. If they do, they may escape institutional indictment. If they do not, they face the risk of indictment, conviction, and corporate death.”

But Pitofsky says that the trend toward deferred prosecutions will trend back to corporate convictions if corporations see federal prosecution as less of a deterrent because they decide they can live with a deferred prosecution.

Or if there are more Andersen cases – where after the first deferred prosecution the same company turns around and again engages in serious illegal wrongdoing.

And there are some signs that there is a crack in the near unanimous expressed support for these agreements.

As mentioned above, the U.S. Attorney in Manhattan reportedly wanted to convict KPMG for its obstruction of justice, but was overruled by Main Justice.

And William Mateja, formerly a lead prosecutor with President Bush’s Corporate Fraud Task Force, has questioned whether, given the evidence of obstruction, Computer Associates should have been granted a deferred prosecution agreement.

Pitofsky, who was the line attorney on the Computer Associates case, agrees that “a decision to have insisted on a conviction of Computer Associates would have been entirely defensible.”

“There is not a right or a wrong answer in these cases, which is part of what makes them so difficult,” Pitofsky said. “The Thompson factors never all point in the same direction. And while the Thompson factors are helpful in terms of understanding what the breadth of the analysis should be, they don't, and they can't, provide any guidance as to what the answer should be. That has to be left up to the individual U.S. Attorney who has to weigh all of the factors.”

Because these are such close calls, this is an area that is ripe for what defense attorneys see as an abuse of prosecutorial discretion.

In the Bristol Myers Squibb case profiled in this report, the U.S. Attorney in New Jersey insisted that as a condition of the deferred prosecution agreement, the company fund a chair in business ethics at Seton Hall Law School – the law school the U.S. attorney graduated from.

In the MCI case, the Attorney General of Oklahoma demanded that, as a condition of the deferred prosecution agreement, the company create 1,600 jobs over ten years.

And in December 2003, the New York Racing Association was required as a condition of the agreement to bring slot machines into its racing venues.

Some defense attorney see these demands as a form of prosecutorial abuse since they totally unrelated to the underlying alleged criminal activity.

But another form of prosecutorial abuse is to give up the store, to forfeit the criminal conviction of the company – and the sanction that big companies fear most – the fear of adverse publicity that results from that criminal conviction.

And it doesn’t have to be.

Federal prosecutors can get the same results with corporate probation. They don’t have to give up the conviction to get where they want to go.

There is precedent – although not much precedent – for corporate probation.

In November 1994, Consolidated Edison was convicted of environmental crimes and placed on court supervised probation.

A monitor was appointed.

And the monitor reported on the changes within Consolidated Edison to the judge over the entire probationary period.

When the judge was satisfied that the corporation had rehabilitated itself, he lifted the probation.

By contrast, conditions of deferred prosecution and non prosecution agreements are generally outside the judicial system.

Judges have little or no control over them.

Finally, this much is clear -- whatever your take on the impact these agreements are having on corporate crime and deterrence, there is unanimous agreement that there has been a seismic shift in prosecutorial practice when it comes to corporate crime.

This is how corporate defense attorney Ted Wells put it earlier this year:

“Ten years ago, it was – save the individuals and plead the corporation. Now, things have radically changed and it’s totally reversed. Now, the government has set up a system where it’s – save the corporation by sacrificing the individuals. The independent directors hire a law firm, which becomes in effect a deputized prosecutor. And the individual executives are sacrificed to save the corporation.”

In this report, which you is now posted on our web site, you will find a summary of each of the 34 cases, with links to the agreements (26 at last count) that we could find.

In some of these cases, like the Hilfiger, BDO, and Sears agreements, federal prosecutors refused to release the underlying documents.

 

The Cases

Adelphia Communications (May 2005, Non prosecution agreement (NPA))

The company engaged in one of the most extensive financial frauds ever.

In May 2005, federal officials alleged that from 1998 through March 2002, Adelphia — the nation's sixth largest cable-television company — systematically and fraudulently excluded billions of dollars in liabilities from its consolidated financial statements by hiding them on the books of off-balance sheet affiliates.

It also allegedly inflated earnings to meet Wall Street's expectations, falsified operations statistics, and concealed blatant self-dealing by the family that founded and controlled Adelphia, the Rigas Family.

The founder of the company, John Rigas was convicted in the $100 million fraud and sentenced earlier this year to 15 years in prison.

His son Timothy was sentenced to 20 years.

The company entered into a non-prosecution agreement with the Justice Department.

In a global settlement agreement, Rigas family members will forfeit in excess of $1.5 billion in assets that they derived from the fraud, including the Rigas family's interests in certain cable properties.

Upon the forfeiture of these assets, Adelphia will obtain title to those cable properties and will pay $715 million into a victim fund to be established in the District Court in accordance with the non prosecution agreement.
Time Warner and Comcast are joining to buy Adelphia for $12.7 billion.

(Source: “Adelphia Gets Non-Prosecution Agreement,” 19 Corporate Crime Reporter 18(7), May 2, 2005)

 

Aetna   (August 1993, NPA)

In August 1993, Aetna Life Insurance Co. agreed to pay $ 5.2 million in fines and restitution as part of a non-prosecution agreement with state and federal officials.

The company was not required to admit wrongdoing.

Aenta was accused of making secret payments to a broker, Carmen Elio – who advised boards to invest millions with Aenta.

Law enforcement officials charged that Aetna and Elio defrauded more than 20 pension funds.

And they charged that Aetna failed to disclose $1.8 million in fees to Elio while he was advising the pension funds to make more than $230 million in Aetna investments.

Elio’s lawyer Stephen R. Delinsky, told the Boston Globe that federal and state prosecutors allowed Aetna “to buy its way out of an indictment."

"How can our government let the sharks go free and think justice is being served by pursuing the minnows?" Delinsky asked.

The Globe reported that Delinsky accused Aetna's general counsel, Zoe Baird, of using her political muscle to ward off an indictment.

In March 1995, Elio was sentenced to 15 months in prison yesterday on federal fraud charges for breaching his duty to tell local retirement boards that he was receiving commissions from Aetna Life Insurance Co. when he peddled investment products, many of them losing propositions.

(Source: “Aetna Will Pay $5.2 Million in Pensions Scandal,” Boston Globe, August 20, 1993)


American Electic Power (January 2005 NPA)

Federal officials alleged that American Electric Power Inc., based in Columbus, Ohio, knowingly submitted inaccurate reports concerning a commodities market.

In January 2005, the company entered into a non-prosecution agreement with the Justice Department.
Under the agreement, AEP’s wholly owned subsidiary, AEP Energy Services, paid a $30 million criminal penalty to the Justice Department.

Under the non prosecution agreement, AEPES accepted and acknowledged responsibility for the actions of its employees, and is required to fully cooperate with an ongoing Justice Department investigation.

Because of the cooperation commitment and the remedial actions taken by the company to date, and in conjunction with the payment of substantial monetary fines, the Department of Justice agreed to not file criminal charges stemming from the investigation for a 15-month period.

Federal officials said that if AEPES fails to fully comply with the terms of the agreement during that 15-month period, they will charge AEPES with delivering knowingly inaccurate reports concerning the commodities market for natural gas, based on conduct outlined in an agreed-upon statement of facts.

AEP, one of the nation’s largest electric utilities, serving approximately five million customers, agreed by letter to uphold the terms of the government’s agreement with its subsidiary.

According to a statement of facts, between November 2000 and July 2002, traders at three of AEPES’s four regional natural gas trading desks submitted false, misleading or knowingly inaccurate trade data to industry publications, altering the published index price of natural gas at various trading hubs.

Natural gas traders use the published index prices to price and settle certain physical and over-the counter financial derivative natural gas transactions.

Upon discovery of the false reporting, AEPES management alerted government authorities, dismissed several traders who admitted falsely reporting data, and restructured the company’s reporting system to prevent future submission of false reports.

In addition to the $30 million criminal payment, AEP and AEPES also entered civil settlements of related investigations with the Commodities Futures Trading Commission and the Federal Energy Regulatory Commission.

Under the terms of a consent order entered in the matter, AEP and AEPES agreed to pay a civil monetary penalty of $30 million to resolve the allegations of attempted manipulation and false reporting raised in a complaint filed September 30, 2003 by the CFTC.

AEP and AEPES simultaneously agreed to a $21 million civil penalty to resolve the FERC’s investigation into preferential treatment AEPES received in natural gas storage and transportation through non-public agreements and agreements with affiliated intrastate pipelines.

(Source: “AEP Gets Deferred Prosecution Agreement,” 19 Corporate Crime Reporter 5(6), January 31, 2005)

American International Group (November 2004, Deferred Prosecution Agreement (DPA))

In November 2004, the world’s largest insurer, American International Group Inc. (AIG), cut a deal with the Justice Department that ends a criminal probe into its finances with a deferred prosecution agreement.

Under the deal, an AIG subsidiary will be 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.

Deferred prosecution agreements historically have been limited to minor federal offenses.

In fact, the U.S. Attorney’s Manual says a major objective of such agreements is to "save prosecutive and judicial resources for concentration on major cases."

But ever since July 2003, when then Deputy Attorney General Larry Thompson issued a memo – "Principles of Federal Prosecutions of Business Organizations” – deferred prosecution agreements have been used in major corporate crime cases.

“After reading the Thompson memo, you recognize that companies that cooperate should not be criminally prosecuted the same way that you would prosecute an individual,” said William Jeffress, a partner at Baker Botts in Washington, D.C. and one of the lawyers representing AIG.

On the benefits of a deferred prosecution agreement to resolve the AIG criminal investigation, Jeffress said that “obviously, AIG is not convicted of a crime, it certainly does not admit that its conduct constituted a crime, and the deferred prosecution agreement puts an end to the investigation without any criminal finding.”

As part of the agreement, AIG and two subsidiaries will pay $80 million and cooperate fully in the government's ongoing criminal investigation of those transactions.

Federal officials 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 involving a special purpose entity known as a PAGIC entity.

In July 2003, the PAGIC transactions were previously the subject of a deferred criminal disposition in United States v. PNC ICLC Corp.

Earlier, the Department dismissed the criminal complaint against PNC ICLC Corp., a subsidiary of PNC, after the company fulfilled its obligations under its deferred prosecution agreement.

As part of its agreement with AIG, the Department of Justice will defer prosecution on the criminal complaint for 13 months, and eventually dismiss the complaint if AIG and its subsidiaries fully comply with the obligations set forth in the deferred prosecution agreement.

The agreement requires AIG to implement a series of reforms addressing the integrity of client and third-party transactions.

As part of the agreement, a retrospective review will be conducted by an independent consultant, chosen by the Justice Department, the Securities and Exchange Commission (SEC) and AIG.

The consultant will report its findings to all three parties.

The alleged wrongdoing arose from structured financial transactions by AIG-FP.

AIG-FP, in conjunction with a national accounting firm, developed the structured financial products used by PNC to transfer $750 million in mostly troubled loans and venture capital investments from subsidiaries of PNC to the PAGIC entities.

AIG placed the PAGIC entities on its balance sheet.

The ability of PNC to account for the PAGIC entities as off-balance sheet SPEs – as if PNC no longer owned the assets transferred to those entities – depended upon whether or not the transactions complied with the requirements for non-consolidation under generally accepted accounting principles.

According to the statement of facts, the PAGIC transactions violated the GAAP requirements for non-consolidation because AIG-FP did not make or maintain a substantive capital investment of at least three percent in the PAGIC entities.

Certain fees paid to AIG-FP in the transactions compensated AIG-FP for structuring the transaction and for taking the assets and liabilities of the PAGIC entities onto AIG's balance sheet, thereby reducing AIG-FP's investment in the PAGIC entities below three percent.

PNC's restatement on January 29, 2002, following its decision to consolidate the PAGIC entities back onto PNC's balance sheet, resulted in a drop in PNC's net income for 2001 of approximately $155 million and a drop in PNC's share price by over nine percent.

In a related enforcement proceeding filed by the SEC, AIG consented to the entry of a judgment requiring AIG to disgorge $39.8 million in fees received from the PAGIC transactions and $6.5 million in prejudgment interest.

(Source: “AIG Gets Deferred Prosecution Agreement,” 19 Corporate Crime Reporter 47(1), December 6, 2004)

 

America On-Line  (December 2004, DPA)

In December 2004, America Online, Inc., (AOL) entered into an agreement with the government to defer prosecution on charges of aiding and abetting securities fraud in connection with transactions between AOL and PurchasePro.com.

A criminal complaint filed in the Eastern District of Virginia charges Dulles, Virginia-based AOL with aiding and abetting securities fraud.

AOL has agreed to accept responsibility for the conduct of its employees in the PurchasePro transactions, adopt internal compliance measures and cooperate with an ongoing criminal investigation.

An independent consultant was chosen to monitor the company’s compliance with the agreement. AOL has also agreed to pay into a compensation and settlement fund $150 million and a criminal penalty of $60 million.

The Department of Justice has agreed to defer prosecution on the complaint for 24 months.

A separate agreement also requires AOL’s parent company, Time Warner, Inc., to cooperate with the ongoing criminal investigation.

Four former PurchasePro executives have agreed to plead guilty to criminal charges arising from the investigation into the AOL/PurchasePro transactions.

Federal officials alleged that PurchasePro, based in Las Vegas, Nevada, engaged in the sale of Internet procurement software and services.

The criminal complaint and an accompanying statement of facts allege that in March 2000, PurchasePro and AOL entered into a strategic partnership in which PurchasePro paid AOL $70 million and gave one million warrants for placement on AOL’s Netbusiness website, Internet advertising and other services.

In exchange for this cash and warrants to AOL, PurchasePro expected AOL would help PurchasePro sell its products by referring customers and generating revenue through transactions on AOL’s Netbusiness platform.
But by September 2000, AOL had not helped PurchasePro generate any revenue.

When the strategic partnership did not generate the expected revenues, AOL began to help PurchasePro meet its quarterly revenue objectives by directly buying products from PurchasePro that AOL did not want or need. AOL then helped mislead PurchasePro’s auditors about how the revenue was in fact earned.

The court documents allege that AOL aided and abetted PurchasePro’s officers in reporting at least $10 million in false revenue in the fourth quarter of 2000 and announcing at least $20 million in false revenue in the first quarter of 2001.

As a result of allegedly aiding the PurchasePro fraud, AOL was able to report approximately $20 million in additional revenue in the fourth quarter of 2000 and about $15 million of additional revenue in the first quarter of 2001.

In exchange for an agreement by the Department of Justice to defer prosecution, AOL is required to:

      * Accept and acknowledge responsibility for the conduct of AOL personnel in the PurchasePro transactions;

      * Cooperate fully with the Department of Justice;

      * Pay $150 million to a compensation fund and $60 million in penalties;

      * Adopt internal controls designed to deter potential violations of company policies and procedures; and

      * Cooperate with an independent monitor, mutually agreed upon by the Department of Justice and AOL, who will report to the Department on at least a semi-annual basis.

New York-based Time Warner, Inc., which merged with AOL in January 2001, entered into an agreement with the Department of Justice requiring the company’s cooperation with an ongoing investigation in exchange for an agreement by the Department to not prosecute the company.

Time Warner has accepted responsibility for the actions of its employees in the AOL/PurchasePro transactions.

The agreement requires Time Warner’s cooperation with the independent monitor’s examination of AOL’s internal controls.

Four former PurchasePro executives have agreed to plead guilty to criminal charges in the Eastern District of Virginia and cooperate with the government’s investigation.

Those four individuals are:

      * Robert Geoffrey Layne, 39, of Lexington, Kentucky. Layne, a co-founder of PurchasePro who held the position of Executive Vice President, agreed to plead guilty to a single-count criminal information charging him with securities fraud;

      * Shawn P. McGhee, 41, of Memphis, Tennessee. McGhee, the Chief Operating Officer at PurchasePro from December 2000 until June 2001, agreed to plead guilty to a single-count criminal information charging him with conspiracy to commit securities fraud;

      * Dale L. Boeth, 42, of Roanoke, Texas. Boeth, a former Senior Vice President of Strategic Development and Senior Vice President of Consulting Services at PurchasePro, agreed to plead guilty to a single-count criminal information charging him with conspiracy to commit securities fraud; and

      * James S. Sholeff, 37, of Las Vegas, Nevada. Sholeff, a former sales representative, sales manager, project manager and vice president at PurchasePro, agreed to plead guilty to a one-count criminal information charging him with perjury.

(Source: “America Online Gets Deferred Prosecution Agreement for Criminal Fraud, Will Pay $210 Million,” 19 Corporate Crime Reporter 2(4), January 10, 2005)

Amsouth Bancorp (October 2004, DPA)

In October 2004, AmSouth Bank entered into a deferred prosecution agreement with the U.S. Attorney in Jackson, Mississippi.

Under the agreement, which settled charges of failure to report suspicious financial activity, the bank will forfeit $40 million.

AmSouth has over 600 branches throughout the southeast with over $45 billion in assets.

AmSouth waived indictment and agreed to the filing of a criminal information in the U.S. District Court for the Southern District of Mississippi charging one count of failing to file Suspicious Activity Reports (SARs) in violation of the Bank Secrecy Act.

The law requires banks to have anti-money laundering programs sufficient to identify and report suspicious financial transactions to the Financial Crimes Enforcement Network (FinCen), a division of the U.S. Treasury Department.

Banks must report suspicious financial transactions and other suspicious activity by filing SARs with FinCEN.

Federal officials alleged that AmSouth failed to file SARs in a timely manner, failed to file accurate SARs, and failed to file SARs at all with regard to suspicious financial transactions at AmSouth and its broker dealer subsidiary.

The U.S. Attorney said that “a partial listing of AmSouth's failures which form the basis for the charge is being filed under seal due to the sensitive customer information it contains.”

The U.S. Attorney said that because AmSouth acknowledged responsibility for its actions, the government will recommend to the court that any prosecution of the bank on the criminal charge be deferred for 12 months and subsequently dismissed with prejudice, if AmSouth fully complies with its obligations as stated in the Agreement.

The charges against AmSouth arose out of a grand jury investigation of Louis Hamric, Victor Nance and other individuals who were operating a Ponzi scheme in Mississippi and elsewhere in the United States.

In such a scheme early investors are paid a "return" on their investments using monies obtained from later investors, thereby creating an appearance of successful investments and by so doing encouraging others to "invest" their money.

In this scheme, the "investment" was a promissory note, issued by Hamric and held in an AmSouth custodial trust account which either Hamric or Nance established for each victim.

AmSouth handled the administrative duties of the scheme by accepting "interest" payments from Hamric and depositing them into various custodial trust accounts based upon a spreadsheet provided by Nance.

AmSouth also provided copies of the custodial trust account holders' bank statements to Hamric and Nance, on a quarterly basis, without the knowledge or consent of the account holders.

Victor Nance pled guilty to a money laundering charge and is currently serving a 10-year sentence.
Hamric pled guilty to money laundering conspiracy and is serving a seven-year term.

(Source: “Amsouth Bank Enters Deferred Prosecution Agreement, Will Pay $40 Million,” 18 Corporate Crime Reporter 40(7), October 18, 2005)

 

Arthur Andersen (April 1996, DPA)

In 1996, the United States Attorney in Connecticut entered into a deferred prosecution agreement to resolve a federal criminal investigation of the accounting firm Arthur Andersen LLP.

Under the agreement, Andersen paid $10.3 million to resolve the firm's potential criminal liability.

Andersen satisfies the conditions of the agreement and the government formally closed its investigation of the company after 90 days.

The criminal investigation arose out of Andersen's accounting services for the former real estate syndicator Colonial Realty Company of West Hartford, Connecticut, which was placed in involuntary bankruptcy in September 1990.

Federal officials focused their investigation on Andersen's accounting services in 1989 and 1990 for the last and largest of Colonial's syndications, Colonial Constitution Limited Partnership, which offered interests in the downtown Hartford landmark, Constitution Plaza.

The bankruptcy of Colonial sunk thousands of investors in Connecticut and around the country.

A six-month investigation by the Hartford Courant in 1992 concluded that Colonial relied on fraud to sell shares in its Constitution Plaza deal and that the company was aided by Arthur Andersen's endorsement of a misleading financial prospectus.

The U.S. Attorney in Connecticut, Edwin G. Gale, said that the decision to settle the case without bringing criminal charges against the company was based on a number of considerations, including:

     * the fact that the allegations were not firm wide;

     * the related concern that an indictment would cause significant collateral consequences to many innocent Andersen employees;

     * Andersen's efforts to date to cooperate, and its commitment to continue cooperating, in the government's ongoing investigation of Colonial matters; and

     * Andersen's willingness to pay significant monies to make whole the wronged investors in Colonial's Constitution offerings.

Assistant U.S. Attorney Thomas Murphy told Corporate Crime Reporter that a similar resolution in the Prudential criminal case in 1994 and a Massachusetts case were used as models for the settlement against Arthur Andersen.

In October 1994, Mary Jo White, the U.S. Attorney for the Southern District of New York, agreed to defer prosecution of criminal charges against Prudential Securities Inc. for three years if specified conditions were met, including the company's paying $330 million to compensate investors victimized by Prudential limited partnerships. (See "NASAA Chief Questions Whether Prudential Would Go Bankrupt If Convicted," 8 Corporate Crime Reporter 43(1), November 7, 1994)

But unlike the Prudential case, where the company was forced to acknowledge criminal wrongdoing, in the Arthur Andersen case, the partnership admits to no wrongdoing of any "law, rule, regulation, professional standard, or other standard of practice."

"The public interest is well served by this agreement," Gale said. "Each decision concerning prosecution is necessarily fact intensive. Even upon conviction, a partnership could be required only to pay fines and restitution and to take certain other corrective measures."

Under the agreement, Andersen agreed to pay $10.3 million into a fund to be used to reimburse Colonial's Constitution investors.

Andersen also has paid another $200,000 to cover the costs of the administrator to oversee the distribution of the Constitution fund.

Andersen also pledged to provide its complete and continuing cooperation in the ongoing federal investigation of Colonial-related matters.

In 1993, Arthur Andersen settled a state of Connecticut investigation by agreeing to pay $3.5 million in refunds and fines.

Two of Colonial's founders pled guilty to fraud and other related charges in 1993. A third committed suicide on the eve of trial in 1992.

(Source: “Federal Diversion Settlement Ends Criminal Investigation of Arthur Andersen in Colonial Realty Case,” 10 Corporate Crime Reporter 17(1), April 29, 1996)


Aurora Foods (January 2001, NPA)

Federal officials charged the chief executive officers and three other executives of Aurora Foods Inc. – the maker of Duncan Hines baking mixes, Log Cabin and Mrs. Butterworth's syrups, Mrs. Paul frozen seafood, Lender's bagels, and Aunt Jemima breakfast products – with hiding $43.7 in trade promotion expenses in an attempt to meet earnings-per-share and net income targets of Wall Street analysts.

Charged in the indictment were Ian Wilson, the companies former chief executive officer, Ray Chung, the company's former executive vice president, M. Laurie Cummings, the company's former chief financial officer, and Dirk Grizzle, the former vice president for finance.

Upon the discovery of the allegedly fraudulent accounting practices, Aurora reported its preliminary findings to the Securities and Exchange Commission (SEC) and U.S. Attorney's office in the Southern District of New York.

Federal officials said that they had reached an agreement with Aurora, under which the company will not be prosecuted as long as it continues to cooperate in the investigation.

The SEC filed parallel civil charges.

"The indictment charges an earnings management scheme that gives new meaning to the phrase 'cooking the books,'" said U.S. Attorney Mary Jo White. "The manipulation of any public company's financial statements is an especially pernicious fraud because accurate financial statements are critical to the protection of investors and the proper functioning of our financial markets."

(“Executives of Aurora Foods Charged with Hiding Expenses to Inflate Company's Earnings,” 15 Corporate Crime Reporter 5(3), January 29, 2001)

BDO Seidman (April 2002, DPA)

BDO Seidman, LLP was a top six accounting firm.

In April 2002, it entered into a deferred prosecution agreement with Miriam Miquelon, the U.S. Attorney in the Southern District of Illinois.

The company paid a $16 million fine.

There was little reporting on this agreement.

One article we found was reported by Ms. Miquelon herself, in the U.S. Attorney’s Bulletin of May 2003.

Miquelon is currently a professor of law at Southern New England School of Law in Dartmouth, Massachusetts.

Here is her report from that Bulletin:

“The BDO St. Louis office operated relatively independently from its other partners. While the partnership shared revenues and had common management policies, each office operated as its own autonomous cost center.
There was relatively little communication between the various partners relative to local operations and clientele except for client conflict checks."

"Unfortunately, certain partners in the St. Louis office helped one of their more lucrative clients unlawfully convert annuity funds held in trust for personal injury clients to acquire part of the National Tea grocery chain in St. Louis."

"Not surprisingly, the businessman knew nothing about operating grocery stores, the business failed, and the annuitants, most of whom were paraplegics, widows, and orphans, were left with nothing."

"The losses to the victims were catastrophic and in excess of $60 million. But for the assistance of the accounting firm in issuing reckless opinion letters and less than accurate financial statements, the businessman could not have succeeded."

"Indeed, there is no question that the accounting firm could have blown the whistle and advised authorities long before the losses increased to such monumental proportions."

"Under the first consideration of the Deputy Attorney General's memo – that the nature and seriousness of the offense, including the risk of harm to the public, be considered – there was no question that BDO had to be criminally prosecuted."

"At the same time, the investigation revealed that the criminal conduct was confined to the St. Louis office, and when the conduct became known to management, the local office was disbanded by the remaining members of the partnership."

"In the case of a partnership, as opposed to a corporation, there is no other entity, such as a subsidiary, that can step forward and enter a guilty plea in an attempt to minimize the institutional damage suffered by the business organization."

"Consideration number seven of the (Thompson) memo requires the prosecutor to review the "collateral consequences, including disproportionate harm to shareholders, pension holders and employees not proven personally culpable, and impact on the public arising from the prosecution."

"The institutional damage to an accounting partnership, particularly one that serves large national clients, is severe."

"Once the indictment is announced, the clients jump ship in an effort to avoid the perception that anything could be improper with their internal accounting practices or agency filings. Other accounting firms also take advantage of their colleague's misfortune and use the opportunity to shepherd the business to their own firms. The bottom line is that a criminal prosecution may contribute to insolvency for the business organization. Sometimes that collateral consequence is warranted, as the example in this article demonstrates. However, part of our job as prosecutors is to make that judgment call. In many respects that is a heavy burden. As a caveat, that burden can be shared by seeking advice and review from the Fraud Section of the Criminal Division at Main Justice."

 

"In the BDO case, however, the victims were so vulnerable and the amount of the funds diversion so great, that the balance easily tipped in favor of prosecution. However, a prosecution technique was utilized that did tend to minimize, at least to some degree, the collateral consequences to the "innocent partners." First, a criminal information was filed with the court. At the same time, BDO entered into a pretrial diversion agreement which effectively suspended the prosecution of the crime during which time the partnership could make restitution to victims, engage in appropriate remedial actions to implement compliance programs, replace management, and provide full cooperation in the continuing prosecution of culpable individuals."

"The pretrial diversion agreement was also filed as a public document with the court, along with a stipulation of facts providing a factual basis for an admission of guilt in the event that the agreement was revoked and the government proceeded on the information."

"Other salient features of the agreement include provisions governing the waiver of the applicable statute of limitations past the expiration date of the pretrial diversion, a waiver of the attorney-client privilege where such information is required to satisfy the cooperation provisions of the agreement, and a formal resolution authorizing the entry of the pretrial diversion agreement and the stipulation of facts."

"Of course, this subjects the business organization to additional collateral consequences, including related civil actions that can be filed by the victims, unless the agreement specifically structures the payment as restitution requiring each victim to sign a release in order to receive their distributive share of the restitution.”

(“Dispositions in Criminal Prosecutions of Business Organizations,” by Miriam Miquelon, U.S Attorney’s Bulletin, page 33, May 2003)


Banco Popular De Puerto Rico (January 2003, DPA)

In January 2003, Banco Popular de Puerto Rico agreed to turn over $21.6 million to the United States as part of a deferred prosecution agreement on charges of failing to report suspicious financial activity.

A criminal information was filed in federal court in Puerto Rico charging Banco Popular with one count of failing to file Suspicious Activity Reports (SARs).

Banco Popular waived indictment, agreed to the filing of the information, and accepted and acknowledged responsibility for its behavior in a factual statement accompanying the information.

The company will forfeit $21.6 million to the United States to settle any and all civil claims held by the government.

In light of the bank's remedial actions to date and its willingness to acknowledge responsibility for its actions, the government recommended to the court that any prosecution of the bank on the criminal charge be deferred for 12 months, and eventually dismissed with prejudice if the bank fully complies with its obligations.

Concurrently, FinCEN has assessed a $20 million civil money penalty for violations of the Bank Secrecy Act against Banco Popular for its conduct, which will be deemed satisfied by the payment of the $21.6 million forfeiture.

The charges and the deferred prosecution agreement filed arose out of transactions conducted by and through Banco Popular between June 1995 and June 2000.

During this time, several unusual or suspicious transactions were conducted in connection with certain accounts at Banco Popular. Although the bank filed Suspicious Activity Reports (SARs) on these accounts, they were untimely or, in some cases, inaccurate.

In one series of transactions, Roberto Ferrario Pozzi deposited approximately $20 million in cash into a Banco Popular account from June 1995 to March 1998.

Deposits were made to the account by Ferrario and employees of Phone Home – a phone card, long distance and money transmission service – often in paper bags or gym bags filled with small-denomination bills.

Despite the suspicious nature of the deposits, the bank did not investigate and file timely and complete SARs reporting the activity.

These untimely filings, the absence of supplementary SARs and the errors in the SARs that the bank did file hindered law enforcement's ability to initiate investigations on these accounts in a timely manner, resulting in the laundering of millions of dollars of drug proceeds through these accounts.

Ferrario was indicted in December 1998 for money laundering in connection with certain deposits to Banco Popular and was sentenced to 97 months imprisonment in 2002.

"The lengthy U.S. Customs/IRS investigation into Banco Popular de Puerto Rico established that millions of dollars worth of drug proceeds were laundered through this bank over a period of several years," Customs Commissioner Robert Bonner said. "In some cases, gym bags full of cash were literally brought into the bank for deposit by money launderers. Despite its legal obligation to report these suspicious transactions to the government in a timely manner, Banco Popular, in some cases, chose not to report these transactions until years after the fact – and did so only after learning about the U.S. Customs/IRS investigation into the bank."

(Source: “Banco Popular De Puerto Rico Gets Deferred Prosecution Agreement,” 17 Corporate Crime Reporter 3(1), January 20, 2003)

 

Bank of New York (November 2005, NPA)

In November 2005, Bank of New York admitted that it engaged in extensive criminal conduct, will pay $38 million in penalties and compensation, but it will not be criminally prosecuted.

That’s according to an agreement reached with federal prosecutors in New York.

Federal officials said that Bank of New York will forfeit $26 million and pay $12 million in restitution to its victims.
A federal investigation uncovered a scheme, which was facilitated by a corrupt Bank of New York vice president, involving the unlicenced transmission of billions of dollars originating in Russia through Bank of New York accounts in the United States to third-party transferees around the world.

To date, this criminal wrongdoing has resulted in the convictions of at least nine individuals, including a former Bank of New York vice president and a former Bank of New York branch manager.

Bank of New York is the oldest bank in the United States and the principal subsidiary of The Bank of New York Company, Inc., a publicly traded corporation.

Bank of New York maintains retail branch locations across the United States, provides global financial services, and is a leading participant in capital markets throughout the world.

Bank of New York acknowledged that:

      * it failed to have an effective anti-money laundering program ;
      * it intentionally failed to take steps to report known evidence of suspected criminal conduct by a bank customer and Bank of New York employees as required under the Bank Secrecy Act – even after the evidence came to the attention of senior Bank of New York executives; and
      * both the bank’s general counsel, managing counsel, and other senior executives repeatedly ignored the bank’s legal obligations to file the required suspicious activity report (SAR) doing so only after the principals of a Bank of New York customer were arrested months later by federal authorities.

When the SAR was ultimately filed it was both inaccurate and incomplete, in that it failed to make any reference to the misconduct of Bank of New York personnel relating to the escrow agreements, or how the escrow agreements were used to defraud other banks.

During this period, Bank of New York was already under an legal obligation to correct problems in its anti-money laundering program pursuant to an agreement between Bank of New York, the Federal Reserve Bank of New York, and the New York State Banking Department that placed the bank under heightened regulatory scrutiny and required enhanced due diligence and suspicious activity reporting procedures by the bank.

Federal officials said that Bank of New York’s failures allowed the fraudulent activities to continue, resulting in at least $18 million in losses to victims.

Under the terms of the non prosecution agreement:

      * Bank of New York accepted responsibility for its criminal conduct, and its chairman of the board of directors has signed a statement admitting the criminal conduct in detail.
      * Bank of New York agreed to pay $12 million for purposes of compensating banks for losses arising out of the company’s criminal conduct, and to forfeit an additional $26 million as a penalty for its illegal conduct.
      * Bank of New York agreed to continue cooperating with the ongoing federal investigations and has begun to take steps to prevent repetition of the misconduct and criminal activity uncovered during those investigations.

      * Bank of New York agreed to the appointment of an independent examiner to serve for three years to monitor and report to the government, the Federal Reserve Bank of New York, the New York State Banking Department and Bank of New York on Bank of New York’s suspicious activity reporting practices, its anti-money laundering procedures relating to those practices, and its compliance with the agreement reached with the government.

Federal officials said that in light of Bank of New York’s acceptance of responsibility, continued cooperation, remedial measures, and agreement to compensate the victims of its unlawful conduct, they have agreed not to prosecute Bank of New York for the unlawful practices engaged in by its executives and employees – provided Bank of New York complies for three years with all the terms of the agreement.

Should Bank of New York violate the terms of the agreement, or commit any other crimes, it shall be subject to prosecution, including prosecution for the criminal conduct described in the agreement.

(“Bank of New York Admits Criminal Conduct, But It Won’t Be Criminally Prosecuted,” 19 Corporate Crime Reporter 44(1), November 14, 2005)



Bristol Myers Squibb (June 2004, DPA)

In June 2005, Bristol-Myers Squibb Company (BMS) agreed to pay $300 million in restitution and undertake a series of corporate reforms as part of an agreement with the government to defer prosecution on a charge of conspiring to commit securities fraud for the company's failure to disclose its "channel-stuffing" activities in 2000 and 2001.

Federal officials alleged that throughout 2000 and 2001 BMS concealed from the investing public its persistent use of an earnings management technique commonly known as "channel stuffing."

BMS's channel stuffing consisted of enticing its wholesalers through use of financial incentives to buy and hold greater quantities of prescription drugs than was warranted by the demand for those products.

By the end of 2001, BMS's channel stuffing resulted in nearly $2 billion in "excess inventory" at the wholesalers.

At the same time, federal officials filed a two count indictment against Frederick S. Schiff, 57, of Manhattan, a former senior vice president and the chief financial officer at BMS and Richard J. Lane, 54, of Doylestown, Pa., a former executive vice president at BMS and president of its Worldwide Medicines Group.

Federal officials charged Schiff and Lane with conspiracy and securities fraud for allegedly planning and concealing the channel-stuffing scheme to meet aggressive internal sales and earnings targets and Wall Street consensus earnings estimates.

A criminal complaint filed in the District of New Jersey charges New Jersey-based BMS with conspiring to commit securities fraud.

As part of the deferred prosecution agreement, BMS accepted responsibility for its conduct, agreed to adopt internal compliance measures and cooperate with the ongoing criminal investigation.

An independent consultant has been chosen to ensure the company's compliance with the agreement.
Under the deferred prosecution agreement, BMS agreed to pay an additional $300 million in restitution to victims of the fraud scheme.

That brings the total to $839 million that BMS has paid to shareholders harmed by the fraudulent conduct, including an earlier consent agreement with the Securities and Exchange Commission to pay a $100 million civil penalty and an additional $50 million Shareholder Fund payment -- as well as monies paid by BMS in settlement of two class action proceedings.

This represents the full restitution for the losses sustained for shares traded in the four days after BMS announced their restatement in 2001.

Based on acceptance by BMS of these conditions and others, the Department of Justice agreed to defer prosecution on the complaint for 24 months.

If at the end of that period the company has fully complied and met all its obligations under the deferred prosecution agreement, the criminal complaint will be dismissed.

"We balanced the need for punishment with an acknowledgment that this company provides great value and that its work should continue," said U.S. Attorney Christopher Christie in Newark, New Jersey. "At the same time, we have compensated the victimized shareholders and are prosecuting individuals responsible for the fraud at BMS. This approach meets the needs of justice, sends a deterrent message to others and does not cause undue harm to an otherwise outstanding company, its shareholders and employees."

The two years at issue in the investigation – 2000 and 2001 – were, respectively, the last year of BMS's "Double-Double" and the first year of its "Mega-Double" campaigns, publicly announced corporate goals to double sales and earnings, first in the seven years from 1994 to 2000, and then in the five years from 2001 to 2005.

BMS's channel stuffing and other improper earnings management during 2000 and 2001 were part of an effort to report financial performance consistent with its Double-Double and Mega-Double public announcements.

Without the channel stuffing, BMS also likely would have missed the Wall St. consensus estimates for its sales and earnings.

BMS failed to disclose and made false and misleading statements to the investing public regarding the use of financial incentives to the wholesalers to generate sales in excess of demand, the use of sales in excess of demand to hit budget targets, the level of excess inventory at the wholesalers; the amount that excess inventory increased each quarter in 2000 and 2001.

As a result, investors were misled regarding BMS's true sales and earnings, and did not have an accurate picture of the health of the company's business operations.

In exchange for an agreement by the Department of Justice to defer prosecution, BMS is required to:

      * Accept and acknowledge responsibility for its conduct, as reflected in the factual statement accompanying the agreement;
      * Appoint a current member of the Board of Directors, James Robinson III, as the Non-Executive Chairman of the Board, to ensure BMS emphasizes openness, accountability and integrity in corporate governance;
      * Cooperate fully with the U.S. Attorney's Office in its ongoing investigation;
      * Pay $300 million in additional restitution to shareholders;
      * Adopt internal controls and other remedial measures designed to prevent and deter potential violations of the federal securities laws; and
      * Engage an independent monitor, former U.S. Attorney and Federal Judge Frederick B. Lacey, as agreed upon by the Department of Justice and BMS, who will monitor BMS's ongoing remediation efforts and report to the Department on a regular basis.

The deferred prosecution agreement also requires BMS to endow a chair at Seton Hall University Law School dedicated to the teaching of business ethics and corporate governance.

The two-count indictment against Schiff and Lane alleges that they and other co-conspirators at BMS supervised and perpetuated the channel-stuffing scheme.

(“Bristol-Myers Squibb Gets Deferred Prosecution Agreement, Two Executives Indicted,” 19 Corporate Crime Reporter 25(6), June 20, 2005)



Canadian Imperial Bank of Commerce (December 2003, DPA)

In December 2003, Canadian Imperial Bank of Commerce (CIBC) entered into a deferred prosecution agreement with federal prosecutors.

The bank accepted responsibility for the criminal conduct of its employees in connection with a series of structured finance transactions with Enron Corp., and agreed to cooperate fully with the Enron investigation.

As part of an agreement reached with the Department of Justice, CIBC will cease engaging in most structured finance transactions with U.S. public companies for a period of three years.

The bank also agreed to implement a series of reforms required by the Justice Department that address the integrity of client and third-party transactions.

An independent monitor will oversee CIBC’s compliance with these new reforms.

The written agreement with the Justice Department includes a factual statement of how CIBC aided and abetted Enron’s fraudulent financial practices.

According to the factual statement, by 1998, CIBC had engaged in a number of significant, complex financial transactions with Enron and earned substantial fees.

However, CIBC had not yet attained the coveted “Tier 1" status of Enron’s most favored banks, to which Enron routed its most attractive and lucrative business.

Beginning in 1998, CIBC and Enron engaged in a series of accounting-driven transactions – known as FAS 125/140 – which involved the sale of Enron assets to “special purpose entities” with off-balance sheet financing.

CIBC understood that Enron’s purpose in entering into these transactions was to remove assets from its balance sheets and book earnings and/or cash flow at quarter-end and year-end. After engaging in some of these transactions, Enron awarded “Tier 1" status to CIBC.

Federal officials alleged that CIBC and Enron knowingly violated applicable accounting rules governing these transactions in two ways.

Before entering into the transactions, CIBC and Enron orally agreed to unwind several of the transactions prior to their stated maturity date. These oral side deals were not disclosed to Enron’s auditors because this would have negated the off-balance sheet accounting treatment sought by Enron.

In 1999, Enron solicited CIBC to become the three-percent “equity” holder in FAS transactions and to provide the lucrative debt component of the transaction, meaning CIBC was the lender and earned fees for the transaction.

In order for such a transaction to be properly taken off balance sheet, at least three percent of the financing had to be contributed by an independent equity source that was truly at risk.

CIBC provided the “equity” stake only because Enron’s senior management first orally promised CIBC that the “equity” would be repaid with a profit at or before the end of the term of the transaction.

This promise of repayment meant that CIBC’s “equity” investment was not truly at risk, and therefore that off balance sheet accounting treatment was improper.

CIBC sought and obtained such promises from Enron’s senior management in connection with its three percent equity investment in Projects Leftover, Nimitz, Alchemy, Discovery and Hawaii 125-0. Again, these oral side deals were not disclosed to Enron’s auditors for fear of negating the desired accounting treatment.

The transactions at issue moved significant assets off Enron’s balance sheets and manufactured massive amounts of cash flow and earnings for Enron.

These transactions accounted for significant portions of the reported earnings of Energy Energy Services (EES) and Enron Broadband Services (EBS), Enron’s two most touted business units at the time. CIBC’s transactions with Enron generated between 75 percent and 100 percent of EES’s reported earnings in 2000 and the first two quarters of 2001, and between 46 percent and 62 percent of EBS’ reported earnings for 2000 and the first quarter of 2001.

As long as CIBC abides by the terms of the agreement, the Justice Department has agreed to not prosecute the bank, based on CIBC’s acceptance of responsibility, its full cooperation with the Enron investigation, its agreement to cease structured finance transactions with U.S. companies for three years, its adoption of a series of significant reforms, and its acceptance of a monitor to oversee compliance, along with the payment of $80 million to the Securities and Exchange Commission.

(Source: “Another Deferred Prosecution Agreement: Canadian Imperial Bank of Commerce Accepts Responsibility for Criminal Conduct of Employees,” 18 Corporate Crime Reporter 1(3), January 5, 2004)

Computer Associates (September 2004, DPA)

In September 2004, Computer Associates International Inc. entered into a deferred prosecution agreement, while two former executives of the software giant were indicted for their alleged participation in a long-running, company-wide accounting fraud scheme and subsequent efforts to obstruct the government’s investigation.

The 10-count indictment, handed down by a federal grand jury in Brooklyn, New York, charges Sanjay Kumar, the former CEO and Chairman of the Board of Computer Associates International, Inc. (CA), and Stephen Richards, CA’s former head of worldwide sales, with securities fraud conspiracy, obstruction of justice and conspiracy to obstruct justice.

Richards was also charged with one count of perjury, and Kumar was also charged with one count of making false statements to law enforcement officers. Both plead not guilty.

In addition, Stephen Woghin, CA’s former General Counsel and Senior Vice President, pled guilty to securities fraud conspiracy and obstruction of justice charges for his role in the fraudulent scheme.

Woghin entered his plea before U.S. District Judge I. Leo Glasser at the U.S. Courthouse in Brooklyn.

CA was charged and has accepted responsibility for the illegal conduct of its former executives, adopted significant corporate reforms, agreed to continue its cooperation with the government’s ongoing investigation, and agreed to pay $225 million to compensate victims of the fraud as part of a deferred prosecution agreement.

If CA abides by the terms of the agreement, the United States Attorney’s Office has agreed not to prosecute CA.

The agreement does not protect any individuals from prosecution.

Federal officials alleged that in 2000, Kumar and Richards, along with others, allegedly took part in a systemic, company-wide practice of falsely and fraudulently recording and reporting within a fiscal quarter revenue associated with certain license agreements, even though those agreements had not in fact been finalized and signed during that quarter.

This practice, sometimes referred to within CA as the “35-day month” or the “three-day window,” violated generally accepted accounting principles and resulted in the filing of materially false financial statements.

The goal of the 35-day month, according to the indictment, was to permit CA to report that it met or exceeded its projected quarterly revenue and earnings when, in truth, it had not.

The indictment alleges instances in which Kumar and Richards personally advanced the goals of the 35-day practice.

For example, Kumar, assisted by former CA Chief Financial Officer Ira Zar, kept CA’s books open at the end of fiscal periods. In the week following the end of fiscal periods, while the books were held open, Kumar and Richards directed CA sales managers and salespeople to finalize and backdate license agreements.

Revenue from those falsely dated license agreements was then improperly recognized in the quarter just ended. Kumar and Richards allegedly met routinely and conferred with each other and with Zar during the week following the end of fiscal periods to determine whether CA had generated sufficient revenue to meet the quarterly projections, and closed CA’s books only after they determined that CA had generated enough revenue to meet the quarterly projections.

Zar and three other individuals – David Kaplan, former Senior Vice President of Finance and Administration; David Rivard, former Vice President of Finance; and Lloyd Silverstein, former Divisional Senior Vice President in Charge of the Global Sales Organization – previously pled guilty to charges arising out of the CA investigation.

The magnitude of the 35-day month accounting fraud scheme was made apparent on April 26, 2004, when CA filed forms with the Securities and Exchange Commission restating certain financial data for the fiscal years 2000 and 2001.

The restatement was based on an internal investigation conducted by CA’s Audit Committee which found that $2.2 billion of revenue was booked prematurely.

In February 2002, CA retained a law firm to represent it in connection with the government investigations.

Shortly after being retained, the company’s law firm met with Kumar, Richards, Woghin and other CA executives in order to inquire into their knowledge of the practices that were the subject of the government investigations.

During these meetings, the defendants and others allegedly failed to disclose, falsely denied and concealed the existence of the 35-day month practice.

Kumar, Richards, Woghin and others allegedly presented to the law firm an assortment of false justifications to explain away evidence of the 35-day month practice.

The indictment alleges that Kumar, Richards and Woghin knew, and in fact intended, that the company’s law firm would present these false justifications to the U.S. Attorney’s Office, the SEC and the FBI in an attempt to persuade the government that the 35-day month practice never existed.

The indictment further alleges that Kumar frequently instructed Woghin to meet with CA employees prior to their being interviewed by the government or the company’s lawyers to coach them on how to answer questions without disclosing the 35-day month practice.

The indictment alleges that on October 23, 2003, Richards perjured himself while testifying under oath before the SEC by attempting to conceal the existence of the 35-day month practice and his involvement in it.

The indictment also alleges that Kumar, in an interview with the FBI and the U.S. Attorney’s Office on Nov. 5, 2003, made materially false statements to conceal the same scheme and his involvement in it.

If convicted on all counts, Kumar and Richards each face a maximum prison sentence of 100 years. Woghin faces a maximum prison sentence of 25 years on the charges to which he pleaded guilty.

CA accepted responsibility for its conduct and acknowledged that, as a result of the conduct of certain of its former officers, executives and employees, the company filed multiple materially false and misleading financial reports with the SEC, made other materially false and misleading public statements and omissions in connection with the purchase and sale of CA securities, and obstructed the government’s investigations.

Under the terms of the agreement, CA has also agreed to pay $225 million for purposes of compensating shareholders for losses arising out of the company’s criminal conduct.

Last year, CA settled a series of shareholder class action lawsuits through which it agreed to issue up to 5.7 million shares of CA stock and pay cash to compensate CA shareholders at a total cost to CA of approximately $163 million.

CA agreed to continue its cooperation and to continue its implementation of numerous remedial steps undertaken to ensure that the fraud at CA does not recur.

These remedial steps include:

       * the termination of CA officers and employees who were responsible for the improper accounting, inaccurate financial reporting, and obstruction of justice, as well as those who took steps to obstruct or impede CA’s internal investigation;
       * the appointment of new management, including, but not limited to, an Interim Chief Executive Officer, a new Chief Operating and Chief Financial Officer, a new Head of Worldwide Sales, and a new General Counsel;

       * in addition to including former SEC Commissioner Laura Unger on CA’s Board of Directors, adding a minimum of two new independent directors, so that no less than two-thirds of the members of CA’s board will be independent directors;

       * establishing a new Compliance Committee, a new Disclosure Committee, enhanced corporate governance procedures, and a comprehensive ethics program;
       * reorganizing CA’s Finance Department, including the appointment of a Corporate Controller, a Chief Accounting Officer, and a Financial Controller for each of CA’s primary business functions, and the reorganizing of its Internal Audit Department.

Under the agreement, the court will appoint an independent examiner who will be empowered to review CA’s compliance with all of the terms and conditions in the agreement.

Prosecutors said that in light of CA’s acceptance of responsibility, continued cooperation, remedial measures, and agreement to compensate the victims of its fraud, the United States Attorney’s Office has agreed not to prosecute CA for the fraudulent and obstructive conduct of its former officers, executives and employees.

However, should CA violate the terms of the agreement executed, or commit any other crimes, it shall be subject to prosecution, including prosecution for the fraud that is the subject of the indictment.

(Source: “Computer Associates Gets Deferred Prosecution Agreement, Executives Indicted,” 18 Corporate Crime Reporter 37(4), September 27, 2004)

Coopers & Lybrand (September 1996, NPA)

Coopers & Lybrand entered into a non prosecution agreement in September 1996 with the U.S. Attorney in Los Angeles.

Under the agreement, Coopers agreed to pay a $2.75 million to the government to settle allegations that of obtaining confidential bid information during contract selection.

The firm also admitted to concealing information and lying during grand jury testimony.

Under the terms of the agreement, Coopers & Lybrand LLP, agreed to accept responsibility for the misconduct, and cooperate with an ongoing investigation. The company also agreed to take on an independent monitor.

Coopers & Lybrand will perform 3,000 hours of community service and teach ethics classes for partners and employees. The firm has paid $725,000 to the state of Arizona, and will pay $2.75 million to the United States.

(Source: “Bid-rigging Settlement,” City News Service September 20, 1996)

InVision Technologies (December 2004, DPA)

In December 2004, InVision Technologies, Inc., a public company based in Newark, California that sells – in domestic and foreign markets – an airport security screening product designed to detect explosives in passenger baggage, entered into a deferred prosecution agreement to resolve allegations that it violated the Foreign Corrupt Practices Act (FCPA).

The company will pay $800,000 in penalties to the United States and agreed to cooperate fully in the parallel investigations by the Department of Justice and the Securities and Exchange Commission.

The investigations by the Department and the SEC revealed that InVision, through the conduct of certain employees, was aware of a high probability that its agents or distributors in the Kingdom of Thailand, the People’s Republic of China and the Republic of the Philippines had paid or offered to pay money to foreign officials or political parties in connection with transactions or proposed transactions for the sale by InVision of its airport security screening machines.

The investigations followed the voluntary disclosure to the Department and the SEC by InVision and GE of facts obtained in their internal investigation into the potential FCPA violations.

In exchange for the Department’s agreement not to prosecute InVision for the conduct disclosed by InVision and GE – which assisted InVision in conducting an internal investigation – to the Department and the SEC, InVision agrees, among other things, to:

       * Accept responsibility for its misconduct, agree that a statement of facts summarizing the subject transactions is materially accurate and agree not to contradict those facts;
       * Negotiate in good faith a settlement with the SEC;
       * Pay a monetary penalty to the United States of $800,000; and
       * Fully and affirmatively disclose to the Department and the SEC activities that InVision believes may violate the FCPA, and continue to cooperate with the Department and the SEC in their investigations.

The GE agreement governs the obligations of GE with respect to its InVision business.

In exchange for the Department’s agreement not to prosecute GE for conduct disclosed by InVision and GE to the Department and the SEC, GE agrees, among other things, to:

       * Integrate the InVision business into GE’s FCPA compliance program and retain an independent consultant acceptable to the Department to evaluate the efficacy of GE’s effort in that regard;
       * Cause the full performance by InVision of the InVision Agreement;
       * Accept, based on its present factual understandings, that the factual statement in the InVision Agreement describing the subje