Posted by: mutantpoodle | July 23, 2007

DOJ Drops Corprate Fraud Case – Justice or Politics?

Cartoon by Mike Smith

Cartoon by Mike Smith

Marisa Taylor at McClatchy has a story up this morning about the Justice Department’s decision to drop its investigation of a Virginia reinsurer, General Reinsurance, shortly after the removal of the lead prosecutor in the case. The prosecutor, David Maguire, had even prepared a draft indictment charging a employees of Reciprocal of conducting a series of secret deals to hide losses from regulators. The decision by his replacement, who hadn’t spent any time with the investigation before then, is, how shall we say this, controversial.

It’s a good thing the Bush Justice department has such a squeaky-clean reputation, right?

Taylor got her hands on “internal Justice Department documents”, and while I am no expert in these things, I read that as “career DOJ employees who think this stinks are leaking like the SS Minnow.”

Now, corporate fraud cases are difficult to prosecute, and this one clearly was massively complex. The short version is that one reinsurance company, Reciprocal of America (now in receivership), was short on reserves and made a deal with General Reinsurance:

Reciprocal’s surplus began to erode in the late 1990s, when medical malpractice awards shot up. Desperate to pump up the surplus, the company’s executives asked General Reinsurance to assume millions more in risk. The Berkshire subsidiary agreed, according to documents from both companies. General Reinsurance, known as “Gen Re,” treated the unusual transactions as “side” or “unenforceable” deals. Its executives referred to one deal as an “off balance sheet loan,” according to internal documents.

Maguire included details of the deals in his draft indictment as part of the alleged accounting-fraud scheme designed to help Reciprocal falsely inflate its surplus and hide its losses from regulators.

As Reciprocal of America continued to lose money, executives from the company and General Reinsurance took trips together aboard a yacht, the Scottish Lass. They dubbed their outings on the Chesapeake Bay their “Chesapeake Audits,” according to the pending lawsuit.

In pursuing suspects, regulators and FBI agents sifted through thousands of e-mails and memos. The trail led straight to Reciprocal President Kenneth Patterson and his executive vice president, Carolyn Hudgins.

Investigators found evidence that the pair had manipulated the company’s accounting records to conceal losses, and urged the pair to admit their guilt.

In February 2005, Patterson and Hudgins pleaded guilty to felony fraud charges. They agreed to cooperate with investigators. But agents soon became frustrated with the pair because they didn’t appear to be divulging much detail. Corporate fraud cases were hard enough to prosecute because of their complexity. Without testimony from convincing cooperators, the case could be difficult to sell to a jury.

A federal judge sentenced Patterson to 12 years in prison and Hudgins to five years. Both declined requests for interviews.

It may be that the decision not to pursue General Reinsurance – whose actions, at the very least, are suspect – was made considering the current climate for prosecuting corporate fraud (somewhat weak) and the facts of the case – I don’t know.

But if anyone wants to know why you don’t mess with prosecutorial independence and what the consequences are, here’s a case study: would it shock you if this was a solid case, scuttled by higher-ups based on political considerations?

I didn’t think so.

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