03/13/2013 02:24 pm ET Updated Mar 13, 2013

Eric Holder Seemingly At Odds With DOJ's Own Manual Over Prosecuting Companies

While Attorney General Eric Holder and the media fret about whether to charge banks with crimes and risk harming innocent people, the Attorney General's own instruction manual already has an answer.

The benefits of enforcing the law generally outweigh the collateral damage of such actions, say the charging guidelines found in Title 9, Chapter 9-28 of the U.S. Attorneys' Manual.

"Indicting corporations for wrongdoing enables the government to be a force for positive change of corporate culture, and a force to prevent, discover, and punish serious crimes," the guidelines say, calling the prosecution of corporate crime a "high priority" for the Justice Department.

The guidelines do instruct federal prosecutors to think twice about the innocents that could be harmed when companies are indicted. When that damage, to employees and the broader economy, outweighs the benefit of bringing charges, then prosecutors should think about other options, like deferred prosecutions.

But they shouldn't let worries about harm to innocents stop them from ever bringing charges.

"Virtually every conviction of a corporation, like virtually every conviction of an individual, will have an impact on innocent third parties, and the mere existence of such an effect is not sufficient to preclude prosecution of the corporation," the guidelines say. (h/t Pam Martens of Wall Street On Parade)

This seems to be a good time for a review of these guidelines, as we appear to be drifting slowly away from the idea of ever prosecuting another corporation again. Several banks have already been ring-fenced from prosecution, as Holder recently admitted. Holder and others believe that charging any bank bigger than maybe Alma Garret Ellsworth's savings and loan would bring ruin to the economy.

The New York Times' Andrew Ross Sorkin, in his DealBook column this week, applies the same reasoning to non-bank corporations:

In truth, our banks aren’t the only companies that are too big to jail. If any of the largest employers in the country were to be indicted, what would happen? The government could clamp down with new controls on operations. But it is also possible that charges could bring down the companies, leaving huge job losses in their wake, and harming shareholders, pensioners and suppliers.

Sorkin goes on to question the value of indicting corporations at all, suggesting individual prosecutions would be a better deterrent. And that may be so, but one thing is for sure: Never, ever indicting corporations is certainly not a deterrent.

And charging corporations has clear benefits, according to the Attorney Generals' guidelines, including one that would seem to apply pretty well to banks:

prosecutors should be aware of the public benefits that can flow from indicting a corporation in appropriate cases. For instance, corporations are likely to take immediate remedial steps when one is indicted for criminal misconduct that is pervasive throughout a particular industry, and thus an indictment can provide a unique opportunity for deterrence on a broad scale.

Libor fraud, for example, has turned out to be fairly pervasive throughout the particular industry of banking, with several banks having paid large fines and several more still under investigation. Money-laundering, mortgage fraud and foreclosure fraud have been widespread problems, too. And yet, in all of those instances, after months of investigation, we so far have exactly one indictment of a corporate unit, the Japanese arm of Swiss bank UBS, in the Libor case.

The UBS indictment came only after public outcry about the government's glaring failure to file charges against either banks or people in several other cases -- most notably the money-laundering case of HSBC, which admitted to allowing money laundering to take place for years in its branches, despite repeated warnings that it should stop.

And even UBS got off relatively lightly, considering it was trailing a long history of deferred prosecutions behind it, including charges of tax fraud and bid-rigging, as James B. Stewart of the New York Times noted recently. The Attorney Generals' charging guidelines, cited by Stewart, say a company's past behavior should also influence whether that company is charged with a crime.

“A corporation, like a natural person, is expected to learn from its mistakes,” the guidelines say. When there are no significant consequences to mistakes, it's easier to forget them.

And while it may be possible that economy-wrecking collateral damage could follow from indicting a big bank or S&P 500 company, we don't know that for sure -- as Sorkin himself notes in his column.

University of Notre Dame law professor Jimmy Gurulé, a former assistant U.S. Attorney General and former Undersecretary for Enforcement for the U.S. Treasury Department, has suggested that prosecutors have tools to charge big banks in ways that limit the broader damage to the bank and the outside world. Even if they don't, then Congress should get to work on making sure they do, suggests Wayne State University law professor Peter Henning in (yet another!) DealBook column on Wednesday.

Otherwise, the will of Congress will be flaunted repeatedly every time its laws aren't enforced.



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