After the collapse of Enron in 2002 (and the other corporate train wrecks shortly thereafter), the pendulum of law enforcement against corporate crime swung quite far in one direction. There is some recent anecdotal evidence to support the notion that things are becoming a bit "kinder and gentler."
For example, earlier this year the U.S. Supreme Court struck down the federal sentencing guidelines (rather than being mandatory, they are now to be advisory). By doing so the court gave back to the district judges flexibility to more narrowly tailor the punishment to fit the actual crime.
Then, on May 31, a unanimous court handed down its decision in the Arthur Andersen case. Two charges given to the jury were at issue.
In the first, the judge instructed the jury that even if the firm "honestly and sincerely believed that its conduct was lawful, you may find …[Andersen] guilty."
In the second charge, the jury was told to convict if it found that Andersen intended to "subvert, undermine, or impede" the government's investigatory process by suggesting to employees that they comply with the company's document-retention policy.
These instructions, the court ruled, were seriously flawed and mandated reversal of Andersen's criminal conviction (which had come after seven days of deadlocked deliberations, an Allen charge - an admonition to try harder - from the judge, and then an additional three days of deliberation).
The latter instruction was improper because it deleted reference to any type of "dishonesty" (as had been part of the standard jury charge) and added the concept that it would be sufficient to a finding of guilt that Andersen had merely "impeded" the government's fact-finding ability.
The former instruction was flawed because it essentially eliminated the element of criminal intent; as the court noted, the instruction required so "little culpability" that "it covered innocent conduct."
On June 9 the foreman of a jury rose in a New York City courtroom and said "not guilty" 29 times in a white-collar prosecution brought on by the New York attorney general. On trial was my client Theodore Sihpol - the first person in the history of the United States to be charged criminally for "late trading" of mutual fund shares.
"Late trading," according to the attorney general, takes place when investment decisions are made with respect to the purchase or sale of mutual funds after 4 o'clock.
Was this first-ever prosecution well grounded? From the get-go we thought it was not, principally because Mr. Sihpol (and his lawyers) believed that he lacked the requisite criminal intent to commit any of the substantive crimes alleged by the attorney general.
As adduced at trial, Mr. Sihpol's mutual fund trading was done openly, with no effort to hide the trading. His bosses and colleagues knew what was going on, and no one ever suggested at any time that the trading was illegal, improper, or wrong.
This noncriminal intent/nonconspiratorial conduct mirrored the regulatory environment - or perhaps more telling, the absence of a regulatory environment.
The pricing of mutual funds is governed by a previously obscure forward-pricing provision of the Investment Company Act of 1940, Rule 22c-1. That rule, however, has nothing to do with 4 p.m. or late trading. What is barred is receiving that day's price once the net asset value has been established.
Not long after the attorney general initiated criminal prosecutions based upon "late trading," it was publicly revealed that a number of prominent law firms had advised clients that Rule 22c-1 did not constitute a per se 4 p.m. rule. That advice was based, upon other things:
- The language of Rule 22c-1 not providing a per se structure.
- Most mutual funds historically not computing their net asset values prior to 5:30 p.m.
- There never having been any SEC interpretive guidance or enforcement action with respect to placing mutual fund orders after 4 p.m.
- There never having been a criminal prosecution based upon such conduct.
In February 2004 the head of New York's Investment Protection Bureau announced, "We are living in a completely new regulatory world." Happily, the Sihpol jury reaffirmed that to be found guilty of a crime in this country the government has to convince a jury, by evidence and beyond a reasonable doubt, that among other things the accused actually intended to commit a crime.
Some Not So Good News
Before readers get too giddy (or start making plans to get together and sing "Kumbyah"), a reality check is in order.
First of all, the Supreme Court's ruling on the mandatory sentencing guidelines has no impact whatever on the punitive criminal sanctions for corporate wrongdoing that Congress enacted in the wake of Enron.
Second, the Andersen jury charges were so clearly outside the mainstream that their rejection does not seem to clearly indicate that the Supreme Court is reversing any trends, corporate or otherwise. (That the court's opinion in the matter was unanimous and delivered by the chief justice would tend to underscore this.)
And those who believe it will be easier to evade prosecution for document destruction obviously have not read the new obstruction-of-justice statutes enacted by Congress in the wake of the Andersen case.
As for those who would look at the Sihpol verdict as a harbinger of a softening in white-collar criminal prosecutions, one jury's acquittal does not a trend make. Witness the verdicts delivered just one week later to former Tyco executives Dennis Kozlowski and Mark Swartz. Or look at the New York attorney general's recent criminal probe of Marsh & McLennan (and subsequent $850 million regulatory settlement). Or that same office's ongoing probe into the affairs of AIG and its leading executives.
If anyone needs more evidence on this score, it is provided by the ongoing efforts of KPMG to stave off federal criminal charges against the entire firm with public acknowledgements that its (now) former partners engaged in "unlawful conduct" and "wrongdoing."
We live in an era of zero tolerance; especially in regulated industries, corporate recidivism is not an option. Whether this is a good thing or whether the pendulum will swing back to a point where innocent mistakes by fallible human beings can be excused (or at least be noncriminalized) remains to be seen.
In the meantime what can be hoped for is that those in positions of great responsibility for deciding whether to prosecute individuals and corporations do so with judgment, wisdom, and restraint.
When one of America's greatest prosecutors, Emory Buckner, died, The New York Times wrote in his obituary:
"Buckner realized that he who wields the instruments of justice wields the most powerful instruments of government. In order to assure their just and compassionate use, a prosecutor must have an almost priest-like attitude toward his duties. Buckner practiced this attitude without deviation."
To that, I can only add: Amen.
