Seeking Guilty Pleas From Corporations While Limiting the Fallout

When it comes to bringing criminal charges against corporations, prosecutors have been gun-shy, fearing the dreaded “Arthur Andersen effect.”

The effect, named for the accounting firm that went out of business in 2002 after its conviction for obstruction of justice, has prosecutors concerned that demanding a guilty plea from a large company could cause it to be dissolved, leading to job losses and disruption in the market.

Now that the Justice Department is said to be poised to bring criminal charges against two international banks, the issue is back in the spotlight.

DealBook has reported that the two banks, BNP Paribas and Credit Suisse, are the focus of the latest effort by federal prosecutors to show that the mantra of “too big to jail” no longer applies to Wall Street.

When you look past the headline, however, the crucial issue for prosecutors is not whether the banks engaged in criminal conduct - that almost seems to be a given. Rather, the government seems to be looking for a way to limit the fallout from a conviction while still achieving an admission of guilt.

For individuals, any criminal conviction comes with collateral consequences - among them the cost of paying a lawyer, the potential loss of a job and the stigma that attends being labeled a criminal. Those convicted often have to live with that fallout. As Sammy Davis Jr. intoned in theme song of the otherwise forgettable 1970s cop show “Baretta”: “Don’t do the crime if you can’t do the time.”

Corporate crime has usually elicited a different response. A company can be convicted based on the conduct of a single employee, so otherwise innocent staff members, along with customers and stakeholders, could be harmed by a conviction. Arthur Andersen had 85,000 employees and thousands of clients worldwide. They were all affected by the misconduct of a few employees and partners in the Houston office who destroyed documents related to Arthur Andersen’s audit work for the Enron Corporation.

The Supreme Court ultimately held that the trial judge’s instructions to the jury failed to require the necessary proof that Arthur Andersen knew its actions were wrong. It is important to note that the court’s decision did not find that Arthur Andersen was not guilty of any misconduct.

Preet Bharara, the United States attorney in Manhattan, signaled a different approach in a speech in March when he said that “after Arthur Andersen, the pendulum has swung too far and needs to swing back a bit.” He rejected the notion that some banks were “too big to jail,” so “you can expect that before too long a significant financial institution will be charged with a felony or be made to plead guilty to a felony, where the conduct warrants it.”

Since the demise of Arthur Andersen, prosecutors have used deferred-prosecution agreements, like the one JPMorgan Chase entered into over its failure to detect Bernard L. Madoff’s huge Ponzi scheme. Although companies admit to misconduct, there is no criminal conviction entered against them, allowing them to avoid most of the consequences of a finding of guilt.

Even with a more aggressive stance requiring a guilty plea, the Justice Department appears to be trying to minimize the collateral consequences of a conviction. As DealBook has reported, prosecutors have met with federal and state regulators to gauge whether they would revoke licenses that allow BNP Paribas and Credit Suisse to operate in the United States if the parent companies enter guilty pleas.

The problem is that not every possible effect of a conviction can be assessed in advance, so pushing for a guilty plea from the two banks necessarily entails hazards that could cause the banks substantial - albeit unintended - damage.

BNP Paribas, for example, owns Bank of the West and First Hawaiian Bank, which have branches in 20 states and over $75 billion in deposits from four million customers. A criminal conviction of the parent company could affect whether some depositors, including local governments and pension funds, might have to stop doing business with BNP as a result of local laws or investment guidelines that restrict dealings with firms convicted of a crime. And regulators in states where the subsidiary banks have branches may not view a conviction favorably, perhaps putting licenses at risk.

Resistance may also be building at the regulatory agencies to limiting the collateral consequences of a conviction. Kara M. Stein, one of five commissioners at the Securities and Exchange Commission, dissented from a decision to overturn the automatic exclusion of Royal Bank of Scotland from the agency’s “well-known seasoned issuer” program that makes it easier and less costly for established companies to issue securities. A foreign subsidiary of R.B.S. pleaded guilty to charges arising from manipulation of the London interbank offered rate, or Libor, which triggered the exclusion.

Ms. Stein pointed out that the S.E.C. had granted 30 exemptions from the automatic exclusion since 2010, with some firms receiving several waivers in that period. She warned that it appeared the agency “may have enshrined a new policy - that some firms are just too big to bar.”

The Justice Department is currently examining two foreign banks, so the effect of a criminal conviction would not be as great in the United States as in their home countries. It is not clear whether prosecutors would be willing to take the same hard line with a giant American bank that has thousands of employees and customers across the United States. Those banks might well be “too big to jail” because the domestic consequences of a conviction could be so great.

There is also the question of how much weight to give the possible consequences when deciding whether to charge a bank with a crime. Attorney General Eric H. Holder Jr. was criticized for his statement last year at a congressional hearing that “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them.”

The Justice Department cannot, and should not, ignore the effects of a decision to pursue charges, whether the case involves an individual or a corporation. Yet there is the nagging feeling that prosecutors are trying to have it both ways in deciding whether to file charges against banks by taking steps to ensure they do not cause too much collateral damage.

In the end, the issue is whether the misconduct is serious enough to warrant criminal prosecution, and, if so, then perhaps the government should let the chips fall where they may.