June 4, 2004
The new definition of "cooperation"
This timely Wall Street Journal ($) article reports on the government's new pressure tactic in investigating and prosecuting business crimes -- pressuring businesses to condition the business' support of its employees who are under investigation on the employee's cooperation with the government, which can of course use the employee's statements against him in prosecuting him for a crime. The WSJ article uses the example of the government's ongoing investigation into Big Four accounting firm KPMG's tax shelter promotion (earlier posts on that matter are here). As the WSJ article notes:
Jeffrey Eischeid, a onetime star at accounting giant KPMG LLP, is bracing for possible criminal charges that could land him in federal prison for more than two decades. His offense? Marketing tax shelters that KPMG said were legal.
While the U.S. Attorney in Manhattan is the immediate source of his legal jeopardy, he has another one to worry about: KPMG.
Until recently, the accounting firm staunchly supported both its tax shelters and Mr. Eischeid, whom it sent to Congress to defend the shelters. But this year the firm, which like Mr. Eischeid is at risk of a fraud or conspiracy indictment over the tax shelters, switched strategies. It placed Mr. Eischeid, a 46-year-old partner, on leave, then asked him to resign. And it refused to pay his legal costs unless he agreed to cooperate with the prosecutors, where anything he said could be used against him.
Why the about-face? The answer involves federal sentencing guidelines for businesses, prescribing stiff mandatory penalties for white-collar crimes such as fraud. The sentencing guidelines also tell how companies can lower their odds of being charged with a crime in the first place: by cooperating fully with the federal investigators. And the government has been refining and tightening its definition of cooperation -- with broad implications for how U.S. companies interact with employees.
Recent changes, contend critics who include attorneys for some KPMG staffers, encourage companies to break faith with their own employees, making it harder for them to avoid self-incrimination. The critics say that companies, to avoid facing charges themselves, now sometimes feel obliged to fire people, snitch on them, refuse to pay their legal fees and withhold documents they need.
And the price of not cooperating with the government? Based on recent cases, the price is extremely high:
Companies can ill afford to ignore the guidelines because criminal charges, even without a conviction, take a severe toll. This is especially true for financial-services companies. The damage is evident in the fate of such once-mighty firms as Drexel Burnham Lambert and Arthur Andersen LLP, which later faced criminal charges. Drexel folded and Andersen all but disappeared, with a remnant today of only 215 employees.
For a partner like Mr. Eischeid in a firm such as KPMG, the choices and stakes in such a criminal investigation are also extremely high:
After Mr. Eischeid learned prosecutors were interested in him, KPMG gave him a choice. He could cooperate with the investigators, and the firm would pay his legal fees. Or he could go it alone, in which case he would have to foot his own legal bills and would risk being fired.
Mr. Eischeid decided it was too risky to meet KPMG's conditions for paying his bill. He retained Mr. Arkin. The lawyer recently refused prosecutors' requests to speak with his client unless Mr. Eischeid is assured "he would not be viewed with the specter of certain indictment or forced guilty plea."
Mr. Eischeid has a lot to lose. Since graduating from the University of Georgia, he has never held any other job than the one at KPMG and a predecessor firm, and his chances of finding other employment in his field now appear slim.
[Mr. Eischeid] could face more than 20 years in prison if he is indicted and later convicted at a trial. Mr. Eischeid knows that cooperating with the prosecutors prior to charges could mean a smaller penalty. But prosecutors have indicated he would have to plead guilty to at least three felonies, his lawyer says, even though "everything Jeff Eischeid said and did with the tax products he's now being investigated for selling was scripted by KPMG and approved by KPMG's professional-responsibility committee."
Finally, the sad case of Jamie Olis looms large over Mr. Eischeid's case:
Looming large in Mr. Eischeid's thinking is the case of Jamie Olis, a midlevel executive at Dynegy Inc. Maintaining his innocence, Mr. Olis went to trial in Houston, was convicted -- and drew a 24-year prison term dictated by federal sentencing guidelines. Says Mr. Eischeid, whose last day at KPMG was last Friday, "That could be me some day."
Let's assume for a moment that Mr. Eischeid's tax shelter work was on the margin of tax avoidance legitimacy. Apart from the issue of whether our Tax Code should be written in a manner that encourages such tax avoidance schemes, is not the public interest protected sufficiently by the financial risk that Mr. Eischeid's clients take in attempting to avoid taxes in this manner? Additional tax, penalties, defense costs and even more accounting fees -- clearly, the potential cost of such avoidance schemes is high. Does criminalization of such behavior -- particularly where the government's approach makes it difficult for the persons involved to mount a defense -- serve any useful public purpose?
Posted by Tom at June 4, 2004 8:07 AM |
KPMG's shoddy treatment of Mr Eischeid will certainly come back to haunt it. When a soldier attacks a beach after being told the artillery will back him up, and then that artillary decides to go home, something is very wrong. That is precisely what KPMG is doing here. By its own admission, KPMG spent months reviewing and then approving the products it demanded that Mr Eisheid sell. From what we have been told, everything that Mr Eischeid did had the KPMG institutional stamp of approval. He was an agent of KPMG's corporate purpose, relying on the capability of his principal. Now, he is forced into the role of sacrifical lamb just because KPMG will not defend his actions as its own. If what we have been told in the WSJ is correct, KPMG's stance regarding Mr Eischeid is more morally reprehensible than any problems it might have had with its audit or tax consulting lapses. Clearly, we need to hear a lot more about this before we can consider the outcome fair.
Posted by: R Polk at June 8, 2004 10:10 AM
One might grant the shabby treatment point, but only at the expense of substantive justice. KPMG is, as you suggest, no less culpable, and should have been prosecuted and put out of business. The government caved on the point and permitted it to remain a going concern, since hundreds of innocent partners would have been affected. This was a mistake. The guilty partners should be jailed for long periods and the firm prosecuted and shut down, as was done with the last national firm engaging in illegal conduct. The innocent partners should be given plenty of time to ponder the wisdom of partnering with, and therefore assuming legally responsiblity for, (what are alleged to be) crooks in ties.
But the government's weakness and inconsistency in refusing to prosecute the firm neither justifies nor makes me feel the least sorry for Mr. Eischied and his co-conspirators, assuming they committed the acts alleged and are duly convicted.
Posted by: Pete at August 29, 2005 10:36 PM
It is disgraceful that KPMG is allowed to make scapegoats of men like Mr. Eisheid and then assume no responibility in the matter. Mr. Eisheid was simply one of many workers of the company and cannot be help accountable for the firms actions as a whole.
Posted by: G at February 25, 2006 9:19 PM
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