When The Company Becomes A CopLinda Himelstein
For some companies, facing charges of criminal misconduct is tantamount to a death sentence. Federal indictments undid the likes of E.F. Hutton & Co. and Drexel Burnham Lambert Inc. But when Salomon Brothers Inc. was caught in a Treasury auction and government securities scandal in 1992, it emerged from the ordeal virtually intact. The difference: Hutton and Drexel battled prosecutors; Salomon courted them.
Salomon learned a valuable lesson in how to avoid getting indicted. The firm gave the government unrestricted access to virtually everything--company documents and memos, copies of its internal investigation, and employees for interviews. Salomon even agreed to waive the coveted attorney-client privilege, a legal tool that protects the rights of individuals and businesses, just to prove how committed it was to becoming a model corporate citizen. "Salomon set the standard for cooperation," says John K. Carroll, a former prosecutor in the Salomon case, now a defense lawyer in New York. "To be an A-plus cooperator includes waiving the privilege."
NO CHOICE. The strategy worked, and since then dozens of companies have chosen the same course--most recently, Kidder, Peabody & Co. Within days of uncovering a scheme allegedly involving phantom trades in its government bonds department, Kidder announced in April that the firm would cooperate fully with regulators and investigators. Kidder further noted that it had hired Wall Street troubleshooter Gary G. Lynch to conduct a comprehensive internal inquiry into what went wrong. That inquiry, expected to be completed in late June, is likely to become as much a piece of the government's case as it is a part of the company's in-house record. "I don't think we have much of a choice in this situation," says Kidder's General Counsel John M. Liftin. "The way to convince the government that we really [want to cooperate] is to be open with them and let them see everything we see."
But allowing such unhampered--and once unheard-of--access, say critics, comes at a high price. When companies become cops, employees increasingly mistrust their own management. That impedes a company's ability to get to the bottom of alleged misconduct: Employees withhold vital information because they believe that their company will sacrifice them to save itself. "The motivation of those who would otherwise fess up is completely diminished by the likelihood that their information will be made available to government officials," says David M. Brodsky, a New York lawyer who represents Kidder employees in the current probe.
Critics contend that the most dangerous byproduct of the assault on the attorney-client privilege and other legal protections is that it gives the government too much control over routine company affairs, such as keeping or firing employees. "Do you want a corporation setting the ethical and legal standards for its business, or do you want to live in a society where the government solely determines what's right and what's wrong?" asks Paul R. Grand, a New York defense lawyer.
Perhaps the most glaring example of just how far companies are willing to go to appease prosecutors involves Prudential Securities Inc., which is currently under criminal investigation in New York for allegedly defrauding investors out of millions of dollars. Contrary to the practice of most companies, Prudential won't advance money to current or former employees to cover legal bills if they assert the Fifth Amendment against self-incrimination or otherwise refuse to cooperate with the government, say lawyers familiar with the case.
Lee Spencer, Prudential's acting general counsel, says the company is cooperating with prosecutors. And in doing so, the corporation's interests must come first. "We have been very strong about our desire that employees and everyone associated with us cooperate," says Spencer. "We reserve the right to consider [withholding legal fees] in light of a person's cooperation." Prudential may choose to cover these employees when the inquiry is completed.
For its part, regulators and prosecutors say complaints about them overstepping their authority are exaggerated. They note that companies as well as individuals should understand that full cooperation is in everybody's interest--not just the government's--particularly when consumers have been victimized. "What cooperation does is enable us to find out if there is a way to scale back or diminish a penalty," says Richard Walker, head of the Securities & Exchange Commission's New York office. "When we have to fight tooth and nail for everything, there isn't any incentive on our part to be lenient."
BETTER BEHAVIOR. And far from inhibiting a corporation's ability to discover potential internal problems, Walker and others say that giving companies a tangible incentive to police themselves has actually improved corporate behavior. "I don't think [companies] cooperating with the government necessarily means that witnesses are going to clam up and be more difficult," says Howard E. Heiss, chief of the securities and commodities fraud unit in the U.S. Attorney's office for New York's Southern District. "Cooperating with the gov-ernment enhances corporate responsibility and compliance with the law."
The positions that the government is taking these days are mirrored in the federal sentencing guidelines applied to corporations. They make it clear that judges can increase or reduce penalties based on how forthcoming companies have been during investigations.
For the most part, playing ball with the government does pay off. In the case of New York-based Sequa Corp., prosecutors declined to press criminal charges last year even though the company had allegedly performed substandard repairs on airplanes' engine parts. Public records filed by Sequa show that it voluntarily cooperated with regulators and paid a fine to settle the case. Arochem International Inc. also escaped indictment, although the company is now defunct. Arochem even invited FBI agents to interview employees on company premises, says Alan M. Cohen, a New York lawyer who worked on the case.
There is no doubt that the blurring of lines of enforcement between the government and businesses has made life more difficult for many troubled companies. "It's a phenomenon we all have to live with," says Lynch. "There's very little choice but to conduct an investigation." Ultimately, if the result is less scandal and crime, the trade-off is probably worth it.