class actions, disabled rights, copyright, attorneys general, online speech, law schools, obesity, New York, mortgages, legal blogs, safety, CPSC, pharmaceuticals, patent trolls, ADA filing mills, international human rights, humor, hate speech, illegal drugs, immigration law, cellphones, international law, real estate, bar associations, Environmental Protection Agency, First Amendment, insurance fraud, slip and fall, smoking bans, emergency medicine, regulation and its reform, dramshop statutes, hotels, web accessibility, United Nations, Alien Tort Claims Act, lobbyists, pools, school discipline, Voting Rights Act, legal services programs


Criminal Prosecution of Corporations Is A Must In The Battle Against White Collar Crime

July 31, 2009 4:09 PM

It's taken us a week and thousands of words, but I think John and I have identified our fundamental differences. Our opposing positions are now crystal clear.

Let me start by clarifying a few things I said earlier that John seems to misapprehend. When I said that legal decisions are based on policy considerations and empirical determinations, I was not in any way suggesting that law is something other than a normative pursuit. That's what I meant by "policy considerations" - fashioning law in a manner that furthers a set of normative values. The only difference between John and me on this front is his certainty in the rectitude of particular normative propositions, and my reluctant but realistic acceptance of the view that, as William James said, "truth is what works."

John also appears to misunderstand my statement that "[a]dministrative and criminal penalties are different only by degree." My next sentence makes clear that I meant this only in the context of corporate criminal liability. For individuals, the difference is quite real - a criminal conviction brings with it the possibility of time in prison and a negative social stigma that may never be overcome. This stigma may impact the individual's family life, ability to get a job, mental status, and even whether he gets to vote in public elections. For corporations, however, prison is not an option and the stigma associated with conviction affects only the value of the good will attached to the corporate name. So, in the context of corporate criminal liability, a criminal conviction translates solely into a matter of dollars and cents.

I am not, however, conceding that such liability is unnecessary because it could, in theory, be replaced by a regime of aggressive administrative penalties and fines. I'm an academic, true, but I live in the real world. If we eliminated corporate criminal sanctions in the U.S., they would never be replaced by administrative remedies with real teeth in them because of the revolving door that exists between industry, on the one hand, and regulatory agencies and Congress, on the other. Federal prosecutors are wholly insulated from this symbiotic relationship; when pursuing a conviction they are not thinking about taking a job in the industry under investigation. So, for very pragmatic reasons, I believe that criminal prosecution of corporations is a must in the battle against white collar crime.

John reveals the fundamental difference between our world views when he states, "If we eliminate corporate criminal liability, business crime will not run wild." My reaction is this: What planet is he living on? The history of the past twenty years, starting with the S&L crisis, through the crackdown on healthcare fraud, then into and out of the Enron era, and now with the revelation of the rampant bank and mortgage fraud that nearly led to the ruination of our economy, I don't understand how he can make this argument with a straight face. Even with the existence of corporate criminal liability (which was not aggressively pursued by DOJ until the beginning of this century), white collar crime has run amok. If we've learned anything from the collapse of Bear Sterns et al., it's that market forces will assuredly do nothing to police bad actors with access to other people's money. I agree with the present Administration that more regulation is needed to prevent wrongdoing in the first place, but when that fails, the government needs every legitimate tool at its disposal to catch the wrongdoers and bring them to justice.

I am not advocating the pursuit of corporate criminal liability in every instance. The legal threshold for charging a corporation is quite low--the entity may be indicted for any crime committed by any of its agents whose activity fell within the scope of his employment and was undertaken, at least in part, for the benefit of the company. This means that, in theory, if one cashier at a national retail chain is purposely overcharging customers and putting at least part of the ill-gotten gain into the cash drawer, the national chain could be indicted for theft. This is, of course, ridiculous - and it doesn't happen. Instead, we have a system that relies heavily on prosecutor discretion; DOJ determines when pursuit of corporate liability is warranted.

This determination is based on a document referenced twice by John: the Holder/Thomson/McNulty/Filip Memorandum (named for the succession of Deputy Attorneys General who authored and revised it), found at Chapter 9-28 of the United States Attorney's Manual. The memo requires prosecutors to consider a number of factors when making the charging decision, including: (1) the pervasiveness of wrongdoing within the corporation, including the complicity in, or the condoning of, the wrongdoing by corporate management; (2) the corporation's history of similar misconduct, including prior criminal, civil, and regulatory enforcement actions against it; (3) the corporation's timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents; (4) the existence and effectiveness of the corporation's pre-existing compliance program; (5) the corporation's remedial actions, including any efforts to implement an effective corporate compliance program or to improve an existing one, to replace responsible management, to discipline or terminate wrongdoers, to pay restitution, and to cooperate with the relevant government agencies; (6) collateral consequences, including whether there is disproportionate harm to shareholders, pension holders, employees, and others not proven personally culpable, as well as impact on the public arising from the prosecution; (7) the adequacy of the prosecution of individuals responsible for the corporation's malfeasance; and (8) the adequacy of remedies such as civil or regulatory enforcement actions.

The existence of these guidelines is evidence that, in the prosecution of corporate crime, DOJ is not a government agency run amok. Rather, the guidelines are carefully calibrated to ensure that charges are brought only when warranted by the magnitude of criminality within the organization and when the harm to innocent third parties does not outweigh the benefits of prosecution. They form the basis not only for decision-making at the level of the individual prosecutor, but at the supervisory level as well. Indeed, in a significant case, defense attorneys may get hearing on whether corporate prosecution is justified from the Deputy Attorney General him- or herself.

Of course, I cannot guarantee that DOJ's prosecutive power will never be abused. That's why we need the constant vigilance of individual defense attorneys, organizations like the National Association of Criminal Defense Lawyers and the National Organization of Corporate Counsel, the press, and the public. But the risk of a rogue prosecutor abusing his authority does not justify crippling the government's ability to fight white collar crime just when it is starting to get a handle on it.

Twice, John has referred to the Arthur Andersen case as a "Exhibit A" of government overreaching. I'm not surprised, because ever since Andersen's indictment on obstruction of justice charges in connection with the Enron debacle led to the accounting firm's dissolution, opponents of entity liability have used it as their rallying call. The protests got even louder when Andersen's conviction was overturned on appeal by the Supreme Court. Critics of DOJ claimed that the entire prosecution was ill-founded and that Andersen was "hanged" without cause.

This is simply not true. First, the collapse of the firm after indictment - obviously causing serious collateral damage to a variety of innocents - was a very unusual event. The best evidence of this is the huge number of corporations that have been criminally charged (or have settled such charges) over the years that have lived on to produce their widgets for another day. Andersen's situation was unique because, as a firm specializing in public accounting, it faced the loss of its ability to conduct public audits upon conviction. As a result, its indictment led clients to believe that the firm no longer had the credibility necessary to do its job - even if it was eventually exonerated - and so they jumped ship. This extreme reaction by a company's clientele is simply not present in the run-of-the-mill corporate case (and it was probably not anticipated by the Andersen prosecutors and defense lawyers who failed to broker a plea deal to avoid it).

In addition, Andersen suffered because it was a multiple recidivist: it had recently settled a number of administrative cases with the government in connection with prior claims of wrong-doing. The Enron debacle was the final straw; it was evidence that the firm had a deeply entrenched culture of misconduct that simply could not be ignored. Finally, the contention that the firm was exonerated on appeal is incorrect. The Supreme Court held that the trial judge's jury instructions on the criminal intent required for conviction were erroneous, and it remanded the case for a new trial. It did not declare the company innocent. Presumably, prosecutors did not retry the case because by that time the firm was more or less defunct.

On the other hand, the KPMG case is a legitimate example of government overreaching. In that case, prosecutors investigating illegal tax shelters pressured the accounting firm to cooperate early. As part of its cooperation, KPMG agreed not only to make its employees available to prosecutors for questioning, but also to sanction those employees who refused to comply. An employee's invocation of his Fifth Amendment privilege against self incrimination was considered lack of cooperation. Sanctions included the denial of previously promised attorneys' fees and termination of employment. Eventually, some of these employees were indicted.

Judge Lewis A. Kaplan found that the arrangement between prosecutors and KPMG violated the defendants' Fifth Amendment right to due process and their Sixth Amendment right to counsel of choice. In effect, the government and the firm had teamed up against individual employees in an illegal manner. Under Garrity v. New Jersey, there is no question that the government could not have used direct threats of employment termination to force KPMG employees to incriminate themselves. Accordingly, it should not have enlisted the aid of the company to do its bidding under the guise of cooperation. Chapter 9.28 of the USAM has been re-written to take this decision into account.

John points out, and I agree, that the net effect of corporate criminal liability when it results in cooperation is the deputation of corporate counsel and other corporate agents in the fight against white collar crime. Unlike me, however, he thinks this is a negative development. He alludes to the "untoward effects of placing employers and employees in adversarial roles, and claims that the "trust-enhancing systems of procedural justice" that corporations develop on their own are demonstratively better than the "command and control" compliance systems put in place as part of plea deals. Left alone, he says, firms will not only be "more successful financially" (which I don't doubt), but will also "tend to produce ethical 'corporate cultures.'"

Simply put, I don't buy it. Without doubt, aggressive corporate criminal enforcement, which leads in turn to the prospect of corporate cooperation, potentially pits employee against employee within the same organization. It is likely to make employees more distrustful of each other, of management, and of corporate counsel, and result in the workplace becoming a less pleasant environment in which to function. But is this really a bad thing? By many accounts, the present corporate environment is one in which fraudulent practices and other criminal activities abound. When an individual is caught committing a crime red-handed, his response often is that "everyone else was doing it, too." The "trust" relationships that exist are those in which employee A can count on employee B not to report his wrongdoing. Despite the personal hardships involved, shaking up the complacency of the corporate environment is in the public's best interest. We need to be more vigilant in our fight against white collar crime, not less.




Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.