By Reynolds Holding
NEW YORK, Dec 11 (Reuters Breakingviews) - Criminal charges
aren't the corporate death sentences many people think. The
demise of accounting firm Arthur Andersen made U.S. prosecutors
skittish about indicting the likes of HSBC Holdings, which
skirted charges with a record $1.9 billion settlement announced
on Tuesday. But new research suggests convictions don't cause
company failures. Banks may be special cases, but enforcers
should question their assumptions.
Even Andersen's downfall wasn't quite what it seemed. The
firm settled criminal fraud charges and received a Securities
and Exchange Commission censure years before it confessed to
destroying documents as Enron's auditor. Yet its 2002
conviction, rather than an already iffy reputation, usually gets
the blame for its collapse.
Fear of further reducing the ranks of large audit firms
probably protects today's "big four" from prosecution. And worry
over the systemic fallout of a bank failure makes enforcers
loath to charge big financial firms. Often, prosecutors use
so-called deferred prosecution agreements instead. In exchange
for cooperating, paying a fine and reforming business practices,
a corporation can avoid a conviction.
Yet corporate criminal liability isn't as life-threatening
as advertised. A University of Pennsylvania study has found
that, of 54 publicly traded companies convicted of U.S. federal
crimes between 2001 and 2010, none failed because of the
conviction. Eli Lilly's guilty plea for peddling misbranded
drugs, for instance, cost it some $1.6 billion but did not
threaten its existence. And plea deals can still allow watchdogs
to insist on changes to companies' behavior.
No financial firms appeared in the study's sample, perhaps
because prosecutors viewed them as too risky to indict. And
there may be reasons for greater concern than with other
companies. A guilty plea can jeopardize a bank's U.S. charter
and preclude investments from, say, pension funds - both
potentially damaging events. A loss of trust, if it extended
across a bank's varied businesses, might also endanger a bank's
liquidity.
But deferred prosecution agreements have drawbacks. The
deterrent value of convictions is lost, and deals can allow
prosecutors to extract onerous penalties without proving
wrongdoing. Given the new study's conclusion about other types
of companies and banks' serious wrongdoing, the pros and cons of
indictments may be worth a second look.
CONTEXT NEWS
- HSBC Holdings agreed on Dec. 11 to pay a record $1.92
billion to settle accusations that it helped Iran and Mexican
drug cartels launder money through American subsidiaries. The
settlement came in a so-called deferred prosecution agreement,
in which the U.S. Justice Department and the Manhattan District
Attorney's Office promised not to immediately pursue criminal
charges in exchange for the British-based bank's agreement to
forfeit almost $1.3 billion and pay more than $650 million in
civil fines.
- A study scheduled for publication next year in the
University of Pennsylvania Journal of Business Law found that
none of 54 public companies convicted of U.S. federal crimes
from 2001 to 2010 failed because of the convictions. No
financial companies were convicted in that period.
(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
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