Cuomo’s parting shot

By Felix Salmon
December 20, 2010
reports the WSJ, to file civil fraud charges against Ernst & Young in the waning days of his tenure as New York's attorney general -- news which has been received with delight by Yves Smith, on the grounds that it might strengthen a criminal case against Dick Fuld.


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Andrew Cuomo has decided, reports the WSJ, to file civil fraud charges against Ernst & Young in the waning days of his tenure as New York’s attorney general — news which has been received with delight by Yves Smith, on the grounds that it might strengthen a criminal case against Dick Fuld.

But what does this mean for E&Y, and for David Einhorn’s theory, as recounted to Andrew Ross Sorkin, that the government has held back on crisis-related prosecutions because of “an embedded belief that they did the wrong thing with Enron and with Arthur Andersen — the criminal prosecution, particularly of Andersen”?

One way of looking at the news is that Cuomo is stepping up where federal prosecutors fear to tread, and is filing the suit now precisely because he knows that if he doesn’t, the chances are that E&Y will suffer no consequences at all for the way that it signed off on Lehman’s books.

On the other hand, a civil fraud suit is not a criminal prosecution. Even if E&Y fights the charges and loses, it probably won’t find itself on the receiving end of the kind of criminal charges which brought down Andersen. Still, I’m sure that Cuomo’s office is doing nothing to downplay the contingent existential threat here, in its negotiations with E&Y.

So what happens once Cuomo moves to Albany? Will the U.S. attorney general, Eric Holder, pick up where he left off? It’s probably more likely that Cuomo’s successor, Eric Schneiderman, will take note of the way in which both Cuomo and his predecessor, Eliot Spitzer, used Wall Street prosecutions to boost their public profile in their quest to become governor. But in general, Cuomo seems to be by far the most zealous prosecutor out there. Without him, the number of crisis-related fraud charges is likely to dwindle sharply.

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Comments
8 comments so far

I think you’ve got the strategy spot on, Felix.

And I support it, too. I’d love to see a civil investigation of E&Y and a criminal one against the individual accountants, but would be loathe to see the firm criminally charged.

I’ve worked with people who were involved with the civil side of the Enron fiasco, and to a man, they opposed the criminal prosecution of Arthur Andersen, and supported vigorously prosecuting the indvidual accountants involved.

Killing the firm put a lot of people who had nothing to do with Enron out of work. And it has made civil investigations against major corporations much more difficult for conflicts reasons.

Major fraud or malfeasance cases tend to involve many parties that need serious accounting manpower. A bankruptcy trustee, a bankruptcy examiner, several creditors committees, the Debtor, and state agencies (which often hire outside accounting help in big cases).

Since public companies typically use two or three accounting firms, it was hard enough for everyone to find an unconflicted major (or niche) firm when there was a Big 5.

Posted by AnonymousChef | Report as abusive

I am a licensed professional. The threat of civil and criminal action against me personally is something that I take seriously.

For some reason, this country has been loathe to go after CPAs and lawyers for anything other than straight embezzlement. Even perjury doesn’t seem to get prosecuted.

I agree with AnonymousChef. Civil litigation against the accounting firm and then individual civil and criminal prosecutions against licensed individuals who aided and abetted a fraud. If CPAs, attornies, and others see people going to jail over this, then they will be much less likely to go along down the road. Just killing the ocmpany and sending the individuals out to create mayhem elsewhere doesn’t solve the problem.

Posted by ErnieD | Report as abusive

If you can’t trust auditors, then the entire financial system falls apart, as no company will have any credibility. Anybody, and not just politicians and Fox news, will be able to make stuff up. If accountants and the “brands” that front them are not held accountable, there will be no downside to making stuff up. And nobody is going to care if Joe Smith, an accountant at E&Y was the on responsible for the corrupt (or even incompetent) audit, because they only cared that it was E&Y that signed off on it. E&Y must be punished if one of their accountants, using their brand, told the investing public that Lehman was doing no wrong.

I don’t expect the current administration to pursue this any more than they pusrued criminal action against the previous administration, because they want to move on, and look forward. Yeah, they can look forward to obstruction and deadlock driven by ignorance and fantasies.

Posted by OnTheTimes | Report as abusive

OnTheTimes,

If you’re responding to me, I’m not advocating letting E&Y off the hook. They should be hit with large civil damages – auditors need some threat to counterbalance the fact that all their rewards come from the company seeking the audit.

I will say this, though – people don’t usually grasp how complex and time consuming white collar crime investigations are. Just because charges haven’t been brought doesn’t mean they aren’t coming.

Posted by AnonymousChef | Report as abusive

@Chef, I wasn’t responding to you, but I don’t see why corporations can’t be charged with crimes. After all, they now have the same rights as humans when it comes to making campaign contributions. The people running corporations are allowed to use other people’s money to influence legislation and elections, so I don’t see the problem in sending them to prison when they illegally disrupt the system.

I can appreciate that investigating these paper shuffling crimes can take a long time. I just don’t expect the government to do much, in any case, even if they do uncover wrongdoing, as that creates political problems. And a political problem avoided is one that doesn’t have to be fixed.

Posted by OnTheTimes | Report as abusive

@OnThe Times,

I’m not saying corporations can’t (or even should never) be charged with crimes. And we agree that you should charge the people causing the corporation to break the law.

My point is simply this:

Big companies have a lot of economic value built into them that are destroyed if they’re put out of business on criminal charges. There are a lot of secretaries, paraprofessionals, junior accountants, and honest partners at E&Y or AA who depend on those companies for their livelihood.

If the entity is consumed by corruption, go ahead and indict it. But if you can excise the cancer without destroying the honest part of the company, do so.

Posted by AnonymousChef | Report as abusive

@Chef,

I think if a giant accounting firm is shut down because of criminal negligence, most of the workers will still have jobs. Unlike, say, when a car company goes bankrupt and the employees can’t just start making their own cars, the employees of the big accounting firms have direct relationships with their clients, who won’t just go to another accountant. Many small firms will be formed as the result of the giant one dissolving; this was the case for me, when Andersen went under after the Enron scandal, as most of their employees had nothing to do with the Enron mess, so they started a new firm which consisted of many former employees of Andersen. I think if E&Y went under, most of the secretaries (who uses secretaries any more?), paraprofessionals, and junior accountants woould join the honest partners at their new firm.

Posted by OnTheTimes | Report as abusive

From experience…when the actions the government took caused the fall of ANDERSEN, many Partners and employees found other opportunities. However, the triage included those who “could not soldier on” because of age or health or previously retired.

Tragically, except for the individuals’ retirement funds that belonged to the individuals, the retirement funds administered by ANDERSEN were included in the windup of the residual organization.

The irony of the events…the Supreme Court of the U.S. overturned the decision against ANDERSEN. Now…the reputation of ANDERSEN must be restored.

Posted by RFK1 | Report as abusive
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