Corporate Restatements of Earnings: The Department of Justice's New Weapon?

For executives worried about being prosecuted criminally for their jobs, the environment has never been worse. The Department of Justice has announced that it is more aggressively targeting individual executives when it goes after corporations. It used to be that business people wouldn't be prosecuted unless they're conduct was well outside the bounds of what others in their industry were doing; now staying within industry practice is no longer a safe harbor.

A good example of that is the prosecution of four executives at WellCare, a publicly traded health care company.

The company provided a broad range of health care services in a number of states, including behavioral health services in Florida. The Florida legislature passed a statute changing how to account of behavioral health services that were paid for by Medicaid. When this new statute - the 80/20 statute - became law, the part of the Florida government responsible for interpreting it didn't issue any regulations clarifying what it meant.

The 80/20 statute, in essence, said that a company providing behavioral health services had to have 80% of the money that the state of Florida paid go to the provider of those services. In addition, WellCare and Florida entered into a contract that further provided how the funds were to be spent.

As with any unclear law and contract, WellCare did what many companies would do - it hired lawyers and used their interpretation of what the 80/20 Statute meant in light of the contract.

This approach, which is what a business should do, ended poorly. WellCare was raided in October 2007 by 200 FBI and and law enforcement agents, seizing computers, documents, and frightening employees. Five executives, including the CEO, CFO, and the General Counsel were indicted for charges relating to health care fraud based on the company's interpretation of the 80/20 Statute.

For a publicly traded company like WellCare, an indictment alone can be a death sentence. Arthur Anderson was charged with obstruction of justice, and vindicated in the United States Supreme Court, but is out of business solely by virtue of the criminal charges against it.

Wanting to avoid the same fate as Arthur Anderson, as soon as WellCare learned it was under investigation it started to try to work things out with the government. One of the things it did was file with the Securities and Exchange Commission a restatement of its earnings - disavowing the interpretation of the 80/20 Statute it had used before the investigation.

The restatement said, in essence, that what WellCare told the Florida government about its charges subject to the 80/20 Statute was false.

WellCare had little choice. To buck the government's interpretation of the 80/20 Statute would have been unthinkable. Because of the tremendous leverage the federal government has when it is investigating a corporation, when the Justice Department says jump, the only meaningful question is how high and how quickly. WellCare simply could not afford to challenge what the government said. The company therefore entered into a Deferred Prosecution Agreement, paid huge fines, and agreed to restate its earnings to comport with the government's preferred interpretation of the law and the contract.

Four executives were put on trial. One of the things the government used against them at trial was that restatement of earnings- where the company started using the new calculation of the 80/20 Statute. At closing argument, the government relied heavily on the restatement, saying that those were the accurate numbers and that they lined up perfectly with the government's view. Though, of course they did - the government required the new accounting.

Because WellCare itself was forced to agree with the government that the statements it made about how it should be paid under the 80/20 statute were false, the jury was left to believe that even the company these men worked for thought they were lying when the company used their interpretation of the 80/20 statute.

The trial of the WellCare executives was lengthy. The jury deliberations were too. Ultimately, the executives were convicted on a handful of charges, though the men were either acquitted or the jury was unable to agree on most of the government's counts.

The appeal was argued in October 2015 before a three-judge panel of the U.S. Court of Appeals for the Eleventh Circuit. Besides the main issue on appeal that an objectively reasonable interpretation of a statue (which even the government's experts conceded was the case here) is not criminal, the executives raised the unfair prejudice that came from the restatement of earnings being used against them at trial. It's hard to conclude much from the statements appeals judges make during an oral argument, but when Judge Frank Hull said the government's use of WellCare's restatement is "big time prejudicial" it's hard not to pay attention.

Executives in publicly traded companies will be at extreme risk of this prejudice if the government can essentially coerce companies into restating earnings, then use those restatements against them in a criminal trial. The Department has said that its gunning for executives. Let's hope if it's looking for a fight, that it's at least looking to fight fair.