Obama DOJ Continues Practice Of Deferring Corp Prosecutions

Much has changed at the Justice Department since the Obama administration took charge, but one controversial tactic in corporate-crime cases has not: the use of settlements that allow corporations to avoid prosecution for wrongdoing.

The department has entered into 10 of these agreements at the mid-point of 2009, a pace slightly ahead of 2008, when the department entered into 18 agreements over the whole year, according to a report by the law firm Gibson, Dunn & Crutcher.

And the pace could quicken in the coming months if the department builds criminal cases against firms that are connected to the economic meltdown. "There could be a lot of deferred prosecution agreements coming out of that," law-firm partner Joseph Warin said.

Under the agreements, called deferred prosecution agreements or non-prosecution agreements, a corporation typically pays a fine and agrees to take a number of steps to remedy its wrongdoing, in exchange for a government promise not to prosecute.

Notable agreements this year include settlements in which UBS AG (UBS) admitted to helping wealthy Americans evade taxes and Beazer Homes USA Inc. (BZH) admitted to mortgage fraud and securities fraud violations, the first deferred prosecution agreement tied to the mortgage meltdown.

These types of agreements were largely unheard of a decade ago, but their use has grown rapidly in recent years, especially since accounting firm Arthur Andersen LLP collapsed after its 2002 criminal conviction on obstruction-of-justice charges related to the Enron scandal. The firm's demise resulted in the loss of tens of thousands of jobs. The conviction was later overturned by the Supreme Court, but the damage already had been done.

Justice Department lawyer Gary Grindler, testifying at a U.S. House hearing last month, said deferred prosecution agreements ensure that corporations face serious consequences for wrongdoing while also minimizing the impact to innocent third parties. Employees, shareholders and customers all can be harmed when a corporation is prosecuted, he said.

But critics, including some lawmakers, have suggested that the agreements encourage disrespect for the law and fail to hold corporations fully accountable for their actions.

Rep. Steve Cohen, D-Tenn., speaking at the same hearing, said companies "shouldn't necessarily get a sweetheart deal because they are a corporation and be subjected to a different set of justice than an individual would."

Other critics have approached the issue from a different angle, questioning whether the deals give prosecutors too much leverage over corporations and allow them to extract penalties in questionable cases where in the past the government would have chosen not to prosecute.

A preliminary U.S. Government Accountability Office report, released last month, said federal prosecutors around the country varied in their willingness to use the agreements, and in the conditions they included in them.

Warin of Gibson Dunn said there have been several notable variances in the agreements reached so far this year.

Under the Beazer Homes deal, announced earlier this month, the home builder cannot make statements that contradict its acceptance of responsibility for its criminal wrongdoing, but if the company faces related lawsuits from private parties, it can argue that the government's allegations should not apply in those cases.

"Many prosecutors won't agree to that provision," Warin said.

As part of the UBS agreement, prosecutors allowed the bank to continue to fight a high-stakes IRS summons that seeks the identities of 52,000 clients who may have used UBS accounts to evade taxes.

A settlement involving WellCare Health Plans Inc. (WCG) required the company to post copies of the deferred prosecution agreement and the Justice Department's charges prominently on its Web site until the agreement expires.

The deal, announced in May, resolved charges that the company defrauded Florida's Medicaid and Healthy Kids programs.

-By Brent Kendall, Dow Jones Newswires; 202-862-9222; [e-mail]