Wednesday, July 15, 2009

The NPA (Non-Prosecution Agreements) Scandal

If you were shocked to read WST's report that AIG practices were being directly monitored by a prosecutor-appointed rep as it was sinking, then you heard nothin' yet. California Lawyer Magazine exposes the yet-more-shocking procedural detail of what seems to be a wholesale practice.

We at KYI do not cry foul, but we do point to the dangers of value investing in a reality of continued lack of transparency at the highest levels. Systemic support for concealing practices (while and after the crash of a company) means the end of value investing - such companies can only be considered as "black boxes" and if you insist on investing in black boxes I don't see how anything but technical analysis could mean anything at all.

"[WSJ's AIG story on AIG being monitored while it was going downhill] opened a window on a little-known practice of the Bush administration's DOJ following the 2002 indictment of Arthur Andersen [Enron]—and its subsequent collapse. Indicting the corporate entity had led to the loss of some 85,000 jobs worldwide, and it sent shock waves through corporate America. So between 2002 and 2009 federal prosecutors stepped back, reaching 103 agreements to defer or forgo prosecuting corporations, compared to just 11 such agreements from 1992 to 2001.

The DOJ describes the agreements as a middle ground between declining to prosecute and formally charging a corporation. DPAs usually are accompanied by a charging document that is withdrawn after a period of probation. Non-prosecution agreements (NPAs) are private contracts not filed with a court.

Corporate monitors, according to the DOJ, were enlisted in 40 percent of the more recent pretrial agreements. Often former prosecutors or judges, they are selected by the government, paid by the company, and report to both as an independent third party. According to Lawrence D. Finder, a partner in Houston's Haynes and Boone and a former federal prosecutor, their role is anomalous: 'There is no client, so there's no fiduciary duty and no attorney-client privilege,' he says."

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