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PhillyDeals: Will U.S. bust bank bad guys, or grab the cash and run?

When should the government file criminal charges against powerful corporations - and when is it enough to accept cash and a promise not to break the law again?

SPENCER WEINER / Associated Press, Pool
SPENCER WEINER / Associated Press, PoolRead more

When should the government file criminal charges against powerful corporations - and when is it enough to accept cash and a promise not to break the law again?

How about selling drugs for unapproved uses? Pfizer Inc. paid $2.3 billion in 2009 to settle government painkiller-marketing accusations, avoiding prosecution.

What about helping rich people illegally evade taxes? Union Bank of Switzerland averted a criminal court battle when it paid $780 million and agreed to give the IRS data from secret Swiss bank accounts in 2009.

Or bribing government officials? Siemens AG settled government accusations in 2008 when it paid $1.3 billion, instead of risking a court fight.

Who is next? Will the giant banks and financial firms that sparked the housing-market collapse and economic slump face criminal charges?

Maybe not. A "too-big-to-fail" bank like Goldman Sachs, accused by a bipartisan Senate committee of dumping loans and bonds it knew were bad on its own clients, is typically "treated not as a hardened criminal but as the equivalent of a juvenile offender that can be reformed," veteran bank analyst Brad Hintz, of Sanford C. Bernstein & Co., told clients in a report last week, according to Bloomberg.

Hintz credited this apparent leniency to U.S. Justice Department guidelines for prosecuting corporations, published under President George W. Bush in 2003. That followed the government's criminal prosecution of accounting giant Arthur Andersen L.L.P. for its alleged role in Enron Corp.'s financial collapse. The case led to Andersen's dissolution, even though its conviction was later overturned.

"There has been much more sensitivity in the approach of the Justice Department since the Arthur Andersen and Enron days," says Cheryl Krause, a former federal prosecutor in New York who now defends corporate clients for Dechert L.L.P. in Philadelphia.

In fact, those Bush-era guidelines were based on an earlier set, written in 1999 under President Bill Clinton, by Eric Holder, now President Obama's attorney general, says Gary R. Weaver, management professor at the University of Delaware's Lerner College and editor of Business Ethics Quarterly.

The guidelines were updated later by Bush officials, most recently in 2008. They remain unchanged, now that Holder is the top U.S. law enforcer, Justice Department spokeswoman Alisa Finelli said.

These guidelines cover a range: While "prosecutors should be mindful of the common cause we share with responsible corporate leaders," Finelli said, there are also "public benefits that can flow from indicting a corporation."

"The Andersen prosecution fits a longstanding, episodic pattern of corporate scandals: High-profile prosecutions, (then) regulatory scrutiny, followed by increasing ambivalence with this scrutiny, periods of regulatory laxity, and then scandals" again, says William Laufer, Julian Aresty Endowed Professor of Legal Studies and Business Ethics at the University of Pennsylvania's Wharton School.

Americans keep "discovering" corporate malfeasance "as if it is a new and a genuine threat to the legitimacy of our markets," instead of a pervasive "base rate of corporate crime," added Laufer, author of Corporate Bodies and Guilty Minds: The Failure of Corporate Criminal Liability (University of Chicago Press 2008).

While busting unpopular companies may "satisfy desires for some degree of accountability and punishment," Laufer said, "most of the time, the corporate criminal law is unnaturally soft, emasculated, and generally predictable." Prosecutors use threats of criminal charges and prison to win big cash awards, appointments of costly corporate watchdogs (including ex-prosecutors), and good-behavior promises.

Despite the odds, Goldman and its rivals, employees and bosses, could yet face criminal charges.

"Just because they haven't been prosecuted, doesn't mean they won't be prosecuted," Paul Fiorelli, co-director of the Cintas Institute for Business Ethics at Xavier University in Cincinnati, said. It took five years for the government to build its case against Enron's top officials, he pointed out.