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Who are the Villains? The Companies, The Individuals Who Commit Crimes, or the Federal Agencies that Go After Them?

By Larry Katzen

Ideas get bigger when you share them...

August 1, 2014 (www.investorideas.com newswire) Recently, our government flexed its muscles as evidenced by the following headlines that appeared in the national press.

"An arrogant and lawless IRS"
"GOP turns up heat over IRS emails"
"Refusing to Buckle to SEC Intimidation"
"Citigroup Nears Justice Pact"

Let's look at what is behind some of these stories.

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IRS

As the IRS was being investigated for its handling of conservative not-for-profit groups, it was discovered last April that former IRS official Lois Lerner's subpoenaed emails were lost. John Koskinen, IRS commissioner, admitted that the emails were irretrievably gone and that the backup tapes had been erased. According to IRS court filings, Lerner's hard drive was destroyed.

Mr. Koskinen failed to mention that to either Democrats in Congress or House committee members until specifically asked. He said he couldn't remember who at the IRS told him that two years of Ms. Levine's emails couldn't be found on her computer due to hard drive failure. Mr. Koskinen said he learned of the problems in February, but he didn't understand the full extent of the problems at the time of his earlier testimony and wanted to reconstruct the missing emails before discussing it with Congress.

Lawmakers are seeking to understand how the IRS could be unable to keep track of its own official emails.

So what will happen to the IRS and Ms. Lerner? One thing's for sure -- it will not be anything near the punishment dealt by the government to the Arthur Andersen accounting firm. In 2002, the Department of Justice indicted Arthur Andersen and put the largest accounting firm in the world out of business. Eighty-five thousand people lost their jobs, making this the biggest travesty in the history of Corporate America.

The government indicted Arthur Andersen on charges of destroying emails. The policy the firm followed was similar to the policy that all accounting firms follow, namely to destroy non-relevant documents (e.g. drafts, to-do points, etc.) that do not support its final conclusion. The Supreme Court later overruled the indictment in a 9 -0 decision, but it was too late.

So who was the villain?

SEC

The SEC continues to try to prosecute companies and individuals on insider trading charges. Sometimes it wins and sometimes it loses, as when it tried to convict Mark Cuban, the owner of the Dallas Mavericks, or more recently, Rengan Rajaratnam. However, not everyone is as visible as those public figures, nor do they have as much money to defend themselves. Take for example Nelson Obus, partner for Wynnefield Capital.

Nelson was involved with a small securities firm and fought the SEC's accusations of insider trading. After 12 years and two court cases, he successfully defended himself. However the cost was enormous; he spent millions of dollars on legal fees and his business suffered while his time and energy went to asserting his innocence.

The SEC kept pressuring Nelson and his firm to settle by paying a fine and making admissions of guilt. This might have been the easier route, but being a principled man, Nelson refused to admit to something that he did not do. The SEC tried everything in its power to win the case. In fact, before Nelson received a copy of the lawsuit, the SEC and its public relations firm were in full spin mode, giving interviews to journalists and attacking the firm.

Eight years passed before it finally went to trial. After Nelson was vindicated, the SEC appealed and it went to trial again. The result was the same. So after12 years and a lot of aggravation, this small company was finally successful in defending itself.

So, who was the villain?

Department of Justice

The agency that uses even tougher Gestapo tactics is the Department of Justice. Recently, it has been relentless in trying to get our major banks to cough up BILLIONS of dollars, accusing them of selling shoddy mortgages. JPMorgan Chase & Co. settled for $13 billion because it felt the cost to defend itself was too great considering the reputational risk it would incur.

Citigroup has offered to settle its case for $4 billion, but the Justice Department was seeking $10 billion. Some large investors of Citigroup were encouraging the bank to fight rather than pay billions to the government. But Citigroup was worried about going to court against the government, which would be a long, expensive process and a public relations nightmare, even if the bank won. It recently negotiated a settlement for $7 billion.

The bank is also is trying to stay in the good graces of the Federal Reserve, which this year rejected the bank's "stress test" request to raise its dividend and expand its share buyback.

Likewise, Bank of America is dealing with negotiations over a mortgage-securities settlement with the Justice Department. The Justice Department has rebuffed the bank's requests for a meeting of CEO Brian T. Moynihan and Attorney General Eric Holder. The Justice Department has said that the two sides were still too far apart on the size of a settlement to even have a discussion.

Once again, these tactics remind me of the Arthur Andersen indictment. For months the SEC and Justice Department discussed a settlement in order to avoid indictment. After finally reaching a deal, the only thing preventing the settlement was getting the signature of Michael Chertoff, then head of the Justice Department. But Mr. Chertoff would not sign off unless Arthur Andersen admitted it committed fraud.

Andersen would not admit to such a thing for two reasons. First, it believed it never committed fraud; it merely followed its document destruction policies. Second, if it was convicted of fraud, it would be out of business -- convicted criminals cannot practice public accounting.

The government indicated that it had indicted large companies like GE and Sears Roebuck and they are still in business. But the firm could not convince them that public accounting is different than selling light bulbs or refrigerators and the rules are different. In the end, the firm was falsely convicted and 85,000 people lost their jobs, despite not doing anything wrong.

So who was the villain?

Conclusion

We have had too many episodes of our government convicting companies of wrongdoing and making it onerous for them to survive. Companies don't commit fraud. People commit fraud. By fining firms billions of dollars, our government is really punishing the shareholders. They are the owners of the company. If an individual commits a crime, the individual should be held accountable and convicted, not the company. It makes no sense to destroy the lives of so many innocent people.

About Larry Katzen

After graduating from Drake University in 1967, Larry Katzen started working at Arthur Andersen and quickly rose through the ranks to become the Great Plains Regional Managing Partner. An honorable, hard-working man who devoted his life to Arthur Andersen, Larry was there from the company's meteoric rise to its unjust demise. He stayed with the firm for 35 years, serving clients globally until 2002. He recounts his experiences in, "And You Thought Accountants Were Boring - My Life inside Arthur Andersen," (www.larrykatzen.com).

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