Reform-School Congress

Democrats may be looking to make hay off the Bush administration's embarrassing brushes with corporate scandal, but the record shows they have little to be proud of.

One study comparing the first Bush White House with Clinton's asserts that under the Man From Hope, prosecutions of white-collar crime dropped by one-quarter and convictions by one-third. Perhaps most significantly, Clinton's Justice Department refused to act on cases referred by the EPA, the Interior Department and other agencies. Written by Russell Mokhiber and Robert Weissman, the analysis makes clear that one business-friendly president after another set the table for today's cascading mess.

With Wall Street reeling from disclosures of cooked books, ordinary Americans are taking the hit for decades of laissez-faire governing. It's their 401(k) plans that are tanking, even as politicians complain that it's really too hard to bring criminal fraud cases against big-deal CEOs. If the execs can't be held accountable now, that's partly because corporate lobbyists spent the 1990s pushing through laws to protect business and open the way for funny-money accounting.

Measures enacted during the last Democratic administration denied investors the right to bring civil actions in state court and instead made them run a gauntlet of roadblocks at the federal level. True, Clinton did veto one egregiously pro-business measure. But by the end of his reign, the nation's statutes ensured that victims of corporations like Enron and WorldCom would struggle to get on the docket and have a much tougher time recovering damages if they ever won.

Now Congress continues to discuss reforms that are hardly more than tepid. The accounting industry will continue to set the rules, and their yo-yo in residence, SEC Chairman Harvey Pitt, will continue to unenforce them. It's no wonder the high-rolling crooks smugly invoking the Fifth at Capitol Hill hearings can barely contain their glee.

The modest changes debated in Congress last week would lengthen prison terms in fraud cases and make it somewhat easier for prosecutors to make felony charges stick. But prosecutors will still be stymied by having to meet narrow standards to keep the cases in court, and they'll face the unenviable job of convincing juries.

As a practical matter, criminal violations require investigation by the FBI, already stretched thin by the war on terror. After Sept. 11, Bush actually shifted agents away from white-collar crime.

The Justice Department can also take referrals from the underfunded and understaffed SEC. But Pitt, who made $3 million per year representing big firms like Merrill Lynch and such individuals as Ivan Boesky, is a free-market man who shies clear of regulation. The commission itself is stacked against even faintly resembling corporate crime busters. Two of its five posts are empty. In addition to Pitt, one other commissioner, Cynthia Glassman, is a former economist with Ernst & Young. "That means two-thirds of the agency's commissioners have ties to the accounting industry," writes Common Cause. Pitt himself has represented all five big accounting firms along with the accounting trade association.

Pitt reportedly wanted New York attorney general Eliot Spitzer to back off his landmark investigation of Merrill Lynch. Spitzer had dug into the firm and discovered analysts cheerily promoting stocks that behind the scenes they characterized as dogs. The AG benefited from the Martin Act, a state measure that makes it easier for him to bring a successful criminal complaint than for the Justice Department to take action. He can issue subpoenas, undertake discovery proceedings and hold hearings. This year, Spitzer forced Merrill Lynch to settle the case.

While aggressive enforcement of state securities laws may turn out to be one avenue of real reform, another lies buried in a whistle-blower bill wending its way through Congress. According to Tom Devine of the Government Accountability Project, the Corporate Fraud and Criminal Accountability Act of 2002 extends whistle-blower protections to employees of publicly traded companies. This means that an employer can't harass or fire a worker like Sherron Watkins, who detailed the problems at Enron.

Legal experts say that without people like Watkins, justice is hard to achieve. "Basically, white-collar cases mostly cannot get a conviction without a witness," said John Coffee, a Columbia professor and expert on securities law. "You can't do it all with documentary evidence."

It's bad enough that corporate swindlers like Ken Lay, who screwed Enron employees out of their retirement funds, remain at large. Even more galling is to watch moneyed lawyers make millions off bankruptcy proceedings. Seven big legal firms and one accounting concern involved in the case are billing for millions of dollars every month. While the workers scrap it out in the bankruptcy pool for the small change, these lawyers stand at the head of the line, their fees guaranteed.

Under the current bankruptcy rules, employees are the last to get any real money back on their ruined 401(k)s—except, that is, for a possible $4,300. On the list of priorities, that symbolic sum comes well after any secured debt owed to banks and the expenses piled on by the attorneys. David Skeel, a University of Pennsylvania law professor and author of Debt's Dominion, says the rank and file is pretty much out of luck. "They're not in good shape," said Skeel. "It's clear they have a lot to lose, and they are going to lose a lot."

Divvying up the pie is the work of a creditors committee, made up of the largest creditors, and in Enron's case, according to court papers, these include such megagiants as J.P. Morgan Chase & Co., Citigroup/Citibank, and 13 others—big banks, an insurance company and a pipeline firm.

Legal Times reports that in the first two months of the bankruptcy proceedings, "425 lawyers and accountants and 125 other professionals billed the bankruptcy estate for nearly $18 million in fees and $1.2 million in expenses. One firm billed for the time an associate took reading The New York Times and Wall Street Journal at $450 an hour." The top takers:

• Weil, Gotshal & Manges: 14,835.5 hours in December for $6.2 million.

• Milbank, Tweed, Hadley & McCloy: 1,612 hours in December for $660,146 and 4,120 hours in January for $2 million.

• Wilmer, Cutler & Pickering: 6,810 hours in December for $3 million.

Not since the heyday of McCarthyism has there been anything like it. On its website, the White House tells how it is putting together the Citizen Corps, a vast network of amateur spies who tattle on any neighbors, friends, acquaintances, fellow workers, church parishioners and family members they suspect of having terrorist ties. So far, the $230 million project includes the Citizen Corps Council, the Terrorist Information and Prevention System (TIPS), and a Medical Reserve Corps.

How will it work? The White House cites the example of Anne Arundel County, near Washington, D.C., as a model. There, people are busy "taking police reports, making follow-up phone calls to victims, doing fingerprinting, helping with the neighborhood watch."

As for TIPS, it's meant to be "a national reporting system that would allow these workers, who have routines and are well-positioned to recognize unusual events, to report suspicious activity to the appropriate authorities," the White House explains. Attorney General John Ashcroft says it's time for the country to turn its attention to "terrorism detection and prevention." He cites the National Sheriffs Association, which claims there are already 7,500 communities actively watching their neighbors.

Additional reporting by Joshua Hersh, Caroline Ragon, Cassandra Lewis and Gabrielle Jackson.


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