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Nov 05 2013

Despite Massive Fraud Corporate Execs Dodge Jail

It’s truly a tale of two cities, or should I say a tale of two courtrooms. Over this past year, I have represented two individuals in separate Federal Court cases both of whom are charged with income tax evasion. One (let’s call him Joe) is a heavy equipment operator who was paid in check and in cash. He didn’t claim the cash portion of his income amounting to about $250,000 over a five year period. The other is a woman (let’s call her Jane) who operates a tax preparation business in a poor community in Nassau County. Over a five year period, she falsified tax returns for her clients to give them a refund they were not entitled to. She received no part of the improper refunds and charged $80 to prepare a tax return. Over the five years, however, she was likely responsible for over $500,000 in improper refunds.

Both Joe and Jane had no defense; records and taped conversations by undercover agents set up a case in which they were dead to rights. By the time I got involved, all I could do was try and mitigate the penalties. I put together massive sentencing memorandums with letters of support; promises to help pay the government back every penny plus interest and penalties;proof that neither of my clients were living high off the hog; proof that both clients were the sole supporters of two minor children; and swift and genuine acknowledgments of guilt and expressions of remorse. They both tried to defraud the tax system and got caught. But they also had suffered loss of their jobs; the embarrassment and humiliation of arrest and prosecution; significant legal bills; and a permanent felony criminal record. In both cases, I persuaded the government to take no position on sentence and to have no objection should the court decide to depart from the Sentencing Guidelines which recommended jail time for on both cases.

Joe got a senior judge who “wrestled with the decision” (his own words) but in the end sentenced Joe to four years probation, fines, community service and restitution. Jane was not so lucky. In my research, I found that Jane’s judge (who was much newer to the bench than Joe’s) had deviated from the Sentencing Guidelines (which are no longer mandatory) in less than 5% of the sentences before him. He sentenced Jane to one year in Federal prison along with fines, restitution and post-release supervision. Jane won’t have to worry about post-release supervision since she never became an American citizen despite being in this country for over 25 years and having two children born in the States, so she will likely be deported to Colombia once her time is served. Her kids were shipped to Florida to live with Jane’s sister, whom they met precisely one time.

189px-SAC_logo.svgSo it is with a little anger and dismay that I read in the business section of today’s NY Times that in two massive corporate fraud cases, free passes were given to the heads of the companies involved. The first involved Johnson and Johnson which agreed to pay $2.2 billion to resolve a criminal and civil investigation by the US Attorney’s Office. The company was accused of illegally and fraudulently marketing anti-psychotic drugs to the elderly and children with developmental disabilities. Even though the government could trace the decisions to break the law down to a couple of high-ranking executives, no individual was charged. Instead the government only brought the case against the corporation.Last year, Johnson & Johnson grossed $65 billion in sales. So the fine represents about 3% of last year’s income.

Even worse is the case of SAC Capital Corp. which faced a gargantuan criminal case of insider trading. SAC fought the case for years trying to buy its way out at $700 Million. But yesterday it agreed to plead guilty to all counts of insider trading and fraud and pay $1.2 billion in fines and penalties. The criminal case was only brought against the company – not its founder and president Steven Cohen. Yet how can a corporation commit such a sweeping and massive crime? It can’t of course, without the knowledge and assistance and complicity of its executives and employees. Seven individual SAC traders are under investigation some of whom reported only to Mr. Cohen or who managed Mr. Cohen’s own personal investments, according to the NY Times. This fine , while large, is about one year of Mr. Cohen’s personal income through the company which owns nearly 20% of Google and which accounts for an incredible 3% of all trades on the NY Stock Exchange, according to Wikipedia. Mr. Cohen’s name graces many of his philanthropic endeavors including Long Island Jewish’s prestigious Children’s Hospital. I suspect the name will not be taken down as long as the cash keeps pouring in.

What is particularly frustrating is that in Jane’s case, since all her tax returns were processed through her corporation, I suggested (actually begged and pleaded) the US Attorney’s office to amend the indictment to add the corporation and to allow just the corporation to plead guilty. That would spare Jane jail time and deportation and have no impact on the restitution as I offered to have a civil judgment entered and to name Jane on the civil judgment. But the AUSA assigned to his case and his supervisors would not budge on that point. They had tried to negotiate with Jane’s first lawyer who improvidently took a hard stance for several years then sat on his hands and never thought of the corporate substitution idea. So when it was time to indict, the government only indicted Jane. That’s when I got involved.

If only the government had given the same free pass to my two clients that they afforded these two corporate titans. No prosecution, no jail, just have the companies involved pay a percentage of one year’s income and we’ll call it square. Luckily these two companies will survive these prosecutions. I say luckily because often, as the Times reports, when the government goes after the corporation, its low level employees take the hit with layoffs or closures while the fat-cat executives have their retirement fund and golden parachutes to live off of for the rest of their lives.

I’m not even saying the executives at SAC and J & J should go to jail by the way. All I’m saying is that we cannot have a Federal criminal justice system that has such disparate outcomes. The little guy (or gal) should be given the same opportunity to avoid prosecution and jail as a Fortune 500 company executive.

1 comment

  1. Cole Trickle fka Carlos Danger

    Very interesting column, as always.

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