In recent years DOJ and SEC prosecutors have adopted a new, more lenient approach toward business organizations engaged in wrongful conduct according to a recent New York Times article. This is evidenced by the increased use of non-prosecution and deferred prosecution agreements as well as reports of investigations. The trend may account for the lack of prosecutions following the market crisis according to the article by Gretchen Morgenson and Louise Story in the Thursday, July 7, New York Times, available here. To reach this conclusion the article mixes, matches and misinterprets events. Perhaps more fundamentally it misses the key point – these are tools to encourage cooperation to speed investigations and resolve a case once the inquiry is complete. Whether more market crisis cases will be brought is a function of the facts, not these tools.

First, the use of deferred prosecution agreements by the Department of Justice and more recently the SEC has noting to do with whether market crisis cases will be brought. The DOJ and the SEC have been conducting numerous investigations into the market crisis. Whether government officials decide to charge business organizations or individuals is a function of the facts and the proper application of the law. Once an investigation is complete if there are facts establishing violations of the law a prosecutorial decision has to be made on how to proceed. It is at that point that the issue of non-prosecution agreements, deferred prosecution agreements and SEC reports on investigations becomes a question along with a number of other critical factors. That is because these are devices offer an avenue for resolving charges in certain instances, typically depending on the cooperation of the company with the inquiry.

Second, the discussion in the article about the Supreme Court’s reversal of Arthur Anderson’s conviction which arose out of the Enron investigations misses the mark. The critical point here is what happened before the Supreme Court’s ruling: The firm collapsed and thousands of people lost their jobs from the filing of the charges. The Supreme Court’s ruling was a hallow victory at best for the firm.

Under the American system of justice those charged are presumed innocent, not put out of business. Yet this is precisely what happened to Arthur Anderson and earlier to one time Wall Street junk bond power house Drexel Burnham Lambert which also collapsed shortly after being indicted. While less draconian results might occur when charging business organizations other than professional services firms, for any company the mere fact that charges are filed has an extremely detrimental effect which is the reason most can not fight and go to trial. The collapse of Arthur Anderson reinforced this point and is thought by many to have helped spark more extensive use of alternative resolutions for criminal investigations. Non-prosecution and deferred prosecution agreements are tools government prosecutors can use to impose appropriate sanctions without putting the entity out of business.

Third, the article’s reference to the SEC’s Report of Investigation regarding Moody’s Investor Services, Release No. 62802 (August 31, 2010) misinterprets what happened. Issuance of the Report has nothing to do with softening the standards toward business organizations or the number of market crisis cases brought by the SEC and the DOJ. It had everything to do with the Supreme Court’s decision in Morrison v. National Australia Bank, 130 S.Ct. 2869 (June 24, 2010) which was handed down shortly before the Moody’s Report. That decision severely constricted the reach of the antifraud provisions of the federal securities laws, confining the scope of the statutes to transactions which occur in the U.S. or on an exchange in this country. The impact was so severe that congress added a last minute provision to Dodd-Frank, signed into law July 21, 2010, giving the SEC and the DOJ a legislative fix. Since most of the conduct detailed in the Moody’s Report occurred outside the U.S. and in Europe and the Dodd-Frank fix could not be used, it was questionable at best under Morrison that the SEC had the authority under its statutes to prosecute. Accordingly, the Commission chose to issue a report giving notice to the market place regarding its views of the conduct while warning that in the future the prosecutorial decision may well be different in view of its new authority under Dodd-Frank. By issuing this warning rather than filing an enforcement action which it would likely lose in court, the SEC effectively policed the market place with the authority available to it.

Finally, and perhaps more importantly, the article totally ignores the purpose of bringing criminal and civil enforcement actions. To be sure, enforcement actions are brought to punish wrongful conduct. At the same time a key component of any enforcement program is not just retribution but also ensuring that going forward there will not be a repetition of the wrongful conduct, thereby making the company a better citizen and improving the market place for all. The use of non-prosecution agreements and deferred prosecution agreements fosters these goals by encouraging corporations to cooperate with law enforcement and acknowledge their wrongful conduct. At the same time they also give prosecutors the tools to impose appropriate sanction including fines, repayment of ill-gotten gains and restitution while ensuring meaningful reform in corporate procedures and governance to ensure against future wrongful conduct.

In the end more market crisis cases can only be brought if there are facts to support them. Those facts can only be developed through painstaking investigation and the proper application of the law. As those investigations proceed, tools which encourage cooperation may facilitate the inquiries. If there are facts establishing violations of the law tools such as non-prosecution and deferred prosecution agreements or reports on investigation may aid in crafting an effective resolution by inflicting the appropriate punishment and helping fashion a better market place for the future. This is effective law enforcement, not going soft on corporate crime.