In his summer of discontent, there were few days of undiluted glory for attorney general Alberto Gonzales and 17 July was no exception. Just six weeks before he resigned, Gonzales stood before hundreds of federal prosecutors and investigators in the US Department of Justice's Great Hall to celebrate the fifth anniversary of the department's Corporate Fraud Task Force and declare victory over white-collar corruption.

But the white-collar crime news that day was not dominated by Gonzales' recitation of notches on his prosecutorial belt. Instead, the headlines focused on a federal judge in New York who dismissed indictments against 13 former KPMG executives; a very pointed rebuke to the Justice Department for some of the more aggressive tactics used by federal prosecutors over the past five years.

Along with raining on Gonzales' parade, that confluence of events also served as a neat summary of the Justice Department's corporate fraud record: a litany of achievements punctuated by disappointment and controversy.

The Enron effect

Created by President George Bush's executive order in July 2002, the task force was the president's signature response to the flood of revelations of criminal wrongdoing in America's boardrooms.

The new task force, by marshalling the firepower of nine different federal law enforcement agencies, was designed to restore investor confidence – and to deliver a strong dose of deterrence to executive suites.

Today, the Department of Justice and the White House say the task force did just that. At the five-year anniversary event, Gonzales announced that the task force had won an unprecedented 1,236 corporate fraud convictions, including the convictions of 214 chief executive officers and presidents, 53 chief financial officers, 23 corporate lawyers and 129 vice presidents.

"Our victories have been about more than just compiling statistics or making an example out of one or two bad actors," Gonzales said. "They have been about preserving the integrity of our corporate boardrooms and our financial markets."

But how much did the Corporate Fraud Task Force truly accomplish? Last spring The American Lawyer began investigating the Justice Department's record on corporate fraud prosecution. It was a massive undertaking, made all the more so because the Justice Department does not formally account for its corporate fraud cases.

We found a highly-publicised, top-down strategy that encouraged local prosecutors to charge both corporations and individual defendants with fraud. The effort resulted in hundreds of convictions – 337 in the 124 cases we tracked – with the vast majority, 76%, coming through plea deals. Corporate criminals paid dearly for their crimes, with more than 50 – including former WorldCom chief executive Bernard Ebbers, Adelphia chief executive John Rigas and Computer Associates head Sanjay Kumar – sentenced to spend upwards of five years in prison.

But the Corporate Fraud Task Force suffered important failures as well. Among the cases highlighted on the task force website, we found several high-profile acquittals, hung juries and appellate reversals – and some of those prosecution failures were due specifically to questionable tactics by the Justice Department. In all, 27 of the defendants whose cases we examined, including executives from Adelphia, America Online and Qwest Communications, were acquitted at trial. Another 28 cases were dismissed. There were 22 mistrials. And nine convictions were overturned on appeal, including those of such high-profile defendants as Credit Suisse First Boston banker Frank Quattrone and the Enron 'Nigerian Barge' defendants from Merrill Lynch.

Moreover, say many former prosecutors and defence lawyers, credit for the Justice Department's successes in corporate fraud prosecution is due to the local US attorney's offices that handled the cases – not to the Corporate Fraud Task Force. And while many of the lawyers we interviewed say that the task force's directives did result in more corporations co-operating with the government, defence lawyers and even some federal judges came to believe that that co-operation was won at a high cost: the erosion of such basic defendant's rights as the attorney-client privilege and the right to counsel.

Perhaps the most curious of our findings is the precipitous decline in the number of major corporate fraud indictments in the two years since the re-election of President Bush. After issuing detailed reports in 2003 and 2004, the task force stopped reporting on its efforts in 2005, just as corporate fraud indictments slowed to a trickle. Our analysis shows 357 indictments in major corporate fraud cases between 2002 and 2005. But only 14 indictments were identified by the Justice Department as significant corporate fraud cases in 2006. There have been only 12 major corporate fraud cases indicted so far in 2007.

That decline raises a critical question: has the problem of corporate fraud really been solved? Or has the Justice Department simply stopped trying as hard to prosecute it?

The Corporate Fraud Task Force was the administration's attempt to forestall a crisis. "The task force was formed in the middle of the market free-fall," recalls Debra Wong Yang, now a partner at Gibson Dunn & Crutcher, but then the US attorney in Los Angeles and a member of the original task force.

"There was a real concern there would be an economic free-fall. At the same time, you had a number of companies where things were coming to light that looked like egregious conduct." Congress had responded by quickly cobbling together the Sarbanes-Oxley Act. The administration was right on Congress's heels; on 9 July, 2002, President Bush issued the executive order creating the new task force.

That September, the president gathered hundreds of federal prosecutors, agency directors and regional US attorneys for a special day-long conference. "Over the past year, high-profile acts of deception in corporate America have shaken people's trust in corporations, the markets, and the economy," the president told his audience at the Washington Hilton. "The American people need to know we are acting, we are moving and we are moving fast."

The conference was carefully orchestrated to convey that impression. The president and then-attorney general John Ashcroft declared that they would root out corporate crime through more aggressive federal investigations, faster prosecutions, and the threat of all-out destruction for companies that resisted cleaning up their act.

Chaired initially by then-deputy attorney general Larry Thompson, the task force included senior Department of Justice officials, seven US attorneys from major districts around the country, and the heads of eight different federal agencies, from the Securities and Exchange Commission (SEC) to the US Department of Labour. The idea was to improve coordination among federal officials, speed up investigations and prosecutions, motivate US attorneys nationwide to bring complex corporate fraud cases and convince corporations to cooperate in the investigations. Although the focus was largely on criminal prosecution, the SEC received an infusion of funds in 2003 to step up civil investigations as well.

Early success

Statistics suggest that, initially, the task force did just what the administration had intended. By the end of its second year, according to the task force's 2004 report, the Justice Department had obtained more than 500 corporate fraud guilty pleas or trial convictions. And new corporate fraud charges had been filed against more than 900 defendants, including 60 corporate chief executive officers (CEOs) and presidents.

The increased volume of corporate fraud prosecutions was largely the result of the task force's prodding of US attorney's offices around the country.

Cases were also being filed quickly after fraud allegations surfaced. In perhaps the biggest change in prosecutorial policy, the Corporate Fraud Task Force emphasised "real-time enforcement" – bringing indictments quickly.

"The idea was to segment investigations and not let the perfect become the enemy of the good," explains William Mateja, a former senior Justice Department official and coordinator of the Corporate Fraud Task Force, first under deputy attorney general Thompson and later under his successor, James Comey Jr. "The rule of thumb was, if this is a case you are going to pursue, we need to look toward bringing charges within six months."

As Christopher Wray, former assistant attorney general of the criminal division, now a litigation partner at King & Spalding, puts it: "Better to convict them quickly than to take years and convict them four times over."

Wray cites the example of the case against Adelphia, in which the Justice Department began looking into accounting fraud in April 2002, just days after allegations first surfaced – and then arrested key players in July. "Within four months you had the CEO and four other top executives arrested," he says. Indeed, 77-year-old John Rigas was led away in handcuffs before dozens of news cameras in July 2002, only two weeks after the task force was created. He and his son were found guilty at trial two years later and sentenced to 15 and 20 years, respectively.

Local difficulties

But while the task force was pressing these new policies from Washington, the cases themselves were being prosecuted by local assistant US attorneys, often without significant help from the Justice Department, aside from the day-long conference in September 2002 and some additional training sessions the following year.

And those offices were frequently hard-pressed to come up with the manpower and money to investigate and prosecute complex fraud cases. "We found the [Justice] Department was challenged by a lack of resources, both technical and in terms of personnel," says John Hueston, a co-lead prosecutor in the investigation and trial of former Enron chairman Kenneth Lay and CEO Jeffrey Skilling. Although he says the Justice Department did what it could to help, "we often felt that the defence was outgunning us on both levels".

The assistant US attorneys on his team, for instance, did not have the resources to create a searchable electronic database of Enron documents until shortly before trial, Hueston says, leaving them anxious that they would not be able to convince the jury that Enron's top officers were guilty.

The task force, meanwhile, had no prosecutorial staff or budget of its own. The Justice Department's criminal fraud section actually lost two of its 54 attorneys between 2002 and 2007. And while the SEC has added more than 1,000 accountants, lawyers, and economists to its staff since late 2002, budget cuts at the Justice Department forced many US attorney's offices to impose a hiring freeze.

The number of federal prosecutors peaked in 2003, when the Justice Department added about 200 assistant US attorneys to its then total of 473, but has declined steadily since then.

And as the US Government shuffled limited resources, the US attorney's office in Manhattan – which, as the chief prosecutors of corporate fraud, had previously received additional money – actually lost about $5m (£2.4m) in personnel and other assistance from the SEC, according to two former prosecutors in the office.

The prosecution of corporate fraud cases by assistant US attorneys new to the field presented some drawbacks when cases went to trial. The Justice Department touts its recent closely-watched victories – including the convictions of Hollinger International chief executive Conrad Black in Chicago and Brocade Communications Systems chief executive Gregory Reyes in San Francisco – but other high-profile prosecutions backfired, leading to an embarrassing string of defeats for the Justice Department. These include the acquittals of senior executives at AOL, Capital Consultants and Duke Energy Corporation.

US attorneys offices outside New York also lost important appeals. In January this year, the Tenth Circuit Court of Appeals reversed the convictions of two former Westar Energy executives in Kansas, writing that the Government's theory of the case "hung by a thin legal thread".

In June 2005, the US Supreme Court reversed the conviction of Enron's accounting firm, Arthur Andersen, after concluding that the trial judge's jury instruction was insufficient to establish obstruction. And the Enron 'Nigerian Barge' cases, in which Merrill Lynch executives were convicted of orchestrating a deal that helped Enron illegally inflate earnings, were also largely overturned on appeal.

The pressure mounts

Former prosecutors say the pressure to win corporate fraud prosecutions grew more intense as the losses began stacking up. The trial of Enron chief executive Jeffrey Skilling, for example, came on the heels of the acquittal of Richard Scrushy. "[Justice] told us, 'The future of white-collar prosecutions may rise and fall on how you perform in this trial'," says former prosecutor Hueston.

"There was this level of intensity," adds defence lawyer Carey Dunne, a litigation partner at Davis Polk & Wardwell who represented Credit Suisse in connection with the obstruction of justice trial of former trader Frank Quattrone, and ImClone Systems in the insider trading investigations of Martha Stewart and Samuel Waksal. "There was a sense many of us had in dealing with local prosecutors [that] they were accountable to more than their usual local supervisors."

The most controversial of the Justice Department's corporate fraud prosecution tactics were outlined in the Thompson Memo, a document issued to federal prosecutors in January 2003 by then-deputy attorney general Thompson. Thompson listed nine factors that prosecutors should take into account when considering the indictment of a company, including the corporation's "timely and voluntary disclosure of wrongdoing and its willingness to co-operate in the investigation of its agents, including, if necessary, the waiver of corporate attorney-client and work-product protections".

The Thompson Memo effectively urged prosecutors to convince companies to lay themselves bare, disclosing reports of internal investigations, waiving privilege, and jettisoning employees – whose legal fees, it was suggested, should not be paid by cooperating corporations.

Such prosecution tactics provoked an angry outcry from defence lawyers. In 2005, at the urging of the National Association of Criminal Defense Lawyers, the US Chamber of Commerce, and others, the ABA passed a resolution opposing the government's routine pressure on corporations to waive their rights.

Several federal judges agreed that these prosecution tactics were excessive. In 2005, in the prosecution of Richard Scrushy, the court excluded Scrushy's SEC deposition because the SEC had failed to inform Scrushy of the parallel criminal investigation against him.

In 2006, an Oregon district court in US v Stringer dismissed indictments against three former executives of FLIR Systems Inc, finding that the SEC and Justice had "engaged in deceit and trickery" by using the SEC's civil investigative authority to gather evidence for the criminal case while concealing its existence from the defendants. And in the most dramatic example of judicial push-back, Lewis Kaplan, a federal district court judge in Manhattan, ruled in 2006 that prosecutors in the KPMG tax shelter case had violated the constitutional rights of former KPMG officials when they pressured the company to condition its payment of attorneys' fees on cooperation with the Government.

Last December the Justice Department finally responded. In a revised memorandum, Thompson's successor, then-deputy attorney general Paul McNulty, clarified that prosecutors should only seek privileged information when there was a "legitimate need" for it; and they should not penalise companies for paying their employees' legal fees.

Still, the revision came too late for the Justice Department to avoid Judge Kaplan's harsh rebuke. On 17 July – the same day that Gonzales and President Bush were celebrating the five-year anniversary of the Corporate Fraud Task Force – Kaplan dismissed the indictments of 13 former KPMG executives. "[Prosecutors'] deliberate interference with the defendants' rights was outrageous and shocking in the constitutional sense because it was fundamentally at odds with two of our most basic constitutional values – the right to counsel and the right to fair criminal proceedings," Kaplan wrote.

Other priorities

Beginning in 2005, only three years after the Corporate Fraud Task Force was established, the Department of Justice significantly scaled back its prosecution of corporate crimes. According to an analysis of Justice Department statistics by TRAC, the 2007 year-to-date number of white-collar filings is 64% lower than the 2006 number – and 77% lower than in 2004. In part, the drop is a matter of priorities. And in part, it is a result of a decline in investigatory resources: according to a 2005 Federal Bureau of Investigation inspector general report, after 9/11, the FBI "reduced its investigative efforts related to traditional crimes by more than 2,400 agents" in order to focus its work on terrorism.

The Justice Department did launch several stock options backdating investigations in 2006, but such cases were not the result of corporate fraud task force enterprise. They were prompted, as even the department acknowledges, by the 2005 backdating study conducted by University of Iowa associate professor Erik Lie and subsequent investigations by The Wall Street Journal. The task force was essentially uninvolved in the July 2007 stock options backdating trial of former Brocade Communications Systems CEO Gregory Reyes in San Francisco, according to Timothy Paul Crudo, the assistant US attorney who prosecuted Reyes. The former CEO was convicted on 10 counts of conspiracy and fraud.

The department insists that the recent decline in prosecutions is actually a sign of the remarkable success of the Corporate Fraud Task Force. "You are getting a lot more focus on compliance, and on ethics internally, in corporate structures," says Justice's Meyer.

"We got all the big bad players, or most of them. The mandate has always been not to strangle corporate America, but to put investor confidence back into the market, which I think we have," adds one former Chicago prosecutor.

Ultimately, the task force was neither a prosecuting body nor a provider of resources to support the prosecutions of complex corporate fraud cases around the country. Rather, it was "a working group of US attorneys and people from regulatory agencies who sat in a conference room, announced policy initiatives and kept track of results", according to Steven Peikin, a partner at Sullivan & Cromwell and former chief of the Securities and Commodities Fraud Task Force of the Manhattan US attorney's office. The Corporate Fraud Task Force was just one star in a larger constellation of government efforts to calm investors in an escalating financial crisis.

But as its role diminishes and prosecutors cast their sights elsewhere, new corporate criminal schemes – whether related to risky hedge funds, options backdating, sub-prime loans, or something else, are bound to crop up. As Robert Kent notes wryly: "The history of fraud prosecutions is that there is going to be another area [of trouble]."

And more than likely another new task force to combat it.

A version of this article first appeared in The American Lawyer, Legal Week's US sister title.