Unconfirmed reports last week that the Justice Department was contemplating a criminal investigation of Goldman Sachs inevitably evoked memories of the giant accounting firm once known as Arthur Andersen LLP.
In 2002, the company was convicted of federal criminal charges in connection with the Enron scandal. By 2005, however, the U.S. Supreme Court had reversed the conviction, citing flawed jury instructions.
Had that happened to an individual, the person would have walked free.
But Arthur Andersen was a company, and the reversal came too late. It was out of business, having gone bankrupt upon conviction. Nearly 30,000 people were out of work.
The firm died because too many customers could not or would not do business with it.
In the Department of Justice manual for U.S. attorneys, this is called “collateral consequences,” essentially “nonpenal” punishment inflicted not by the courts but by customers and potential customers, especially governments, formally or informally prohibited from doing business with a convicted corporation.
The relevant section of the manual, updated with Arthur Andersen in mind, advises prosecutors to consider potential collateral damage before proceeding with prosecution and to “consider a nonprosecution or deferred prosecution agreement with conditions designed, among other things, to promote compliance with applicable law and to prevent recidivism.”
But “the mere existence” of collateral consequences, the manual reads, “is not sufficient to preclude prosecution of the corporation.”
The decision is a judgment call based, for example, on “the pervasiveness of the criminal conduct. ... The balance may tip in favor of prosecuting corporations in situations where the scope of the misconduct in a case is widespread and sustained within a corporate division. ... In such cases, the possible unfairness of visiting punishment for the corporation’s crimes upon shareholders may be of much less concern where those shareholders have substantially profited, even unknowingly, from widespread or pervasive criminal activity.”
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