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Article Excerpt
INTRODUCTION
Much has been written about the government's increased reliance on corporate cooperation and, in particular, deferred prosecution agreements ("DPAs"), (1) as tools to address corporate and individual malfeasance. The defense bar has been extremely critical of this effort, which has increased dramatically in this post-Enron era, with the notable passing of Arthur Andersen.
However, the decision by the government to use DPAs, and corporations' apparent willingness to execute them, is based upon perfectly sound reasoning on both sides. On one hand, the government is able to address corporate wrongdoing without seeking an indictment and the resulting severe consequences to both the company and its employees who were uninvolved in the allegedly wrongful conduct. On the other hand, given those potential consequences, it can hardly be viewed as irrational for a company to stave off indictment by agreeing to execute a DPA, even though the corporation in the process may become a de facto partner of the government.
The problem, though, lies not in the reasoning behind the advent of the DPA, but in its collateral consequences: to the company, to individual employees under investigation, and to the government itself.
With respect to the corporation, DPA's "cooperation" provisions typically obligate the corporation to act at the direction and on the behalf of the government in the investigation and prosecution of individuals. This has the potential to turn corporations into agents of the state, with resulting corporate governance and constitutional implications.
For employees, the partnership between corporations and the government can have severe adverse consequences. Among other provisions, DPAs normally require corporations to make employees "available" to prosecutors for interviews, proffers, grand jury testimony and the like. Thus, corporations are expected to facilitate employee cooperation with the ongoing investigation. Through implicit (or occasionally even explicit) threats of professional and financial harm, corporations place employees in an untenable Catch-22. Employees who choose to assert their constitutional rights--such as the privilege against self-incrimination--face the loss of employment, while employees who decide they have no choice but to cooperate face potentially additional criminal exposure and may well disadvantage themselves in the event of a future prosecution.
For the government, the decision to enlist corporations in the investigation of individual wrongdoing may come with a price, as prosecutors who demand an unqualified right to documents and information as a condition of cooperation may find themselves in "control" of such material for purposes of an individual defendant's discovery requests. Expansively written DPAs also arguably alter the function of the government. For example, DPAs occasionally contain provisions that give prosecutors or their designated agents significant power over corporate decision-making. While this may improve corporate behavior and speed an investigation in the short term, it can also place prosecutors beyond the limits of their office and expertise, and undermine traditional corporate governance principles.
This article is an attempt to highlight the collateral consequences that stem from corporate cooperation. In Part I of this article, we discuss why corporations agree to "cooperate." Specifically, we note the powerful forces that drive corporations to enter into DPAs, and examine why the government has moved to the DPA as both an end and a means to achieving favorable prosecutorial outcomes. In addition, we explore the past and current policies of the Department of Justice regarding corporate prosecution and the impact such policies have played in the use and content of DPAs. Finally, we examine the Justice Department's current policy regarding corporate cooperation.
In Part II of this article, we examine the consequences Of cooperation. First, we look at the law attributing private conduct to the state and conclude that prosecutors may be effectively turning corporations into agents of the state for purposes of the Constitution. Second, we note how corporate cooperation obligations have become a means to compel employee cooperation. More specifically, we examine how prosecutors sometimes compel corporations, wittingly or not, to undermine their employees' ability to avail themselves of their Fifth Amendment right against self incrimination. Third, we note that cooperation typically includes providing the government with unfettered access to documents and information. We conclude that the government's extensive rights to corporate documents and information may well place it firmly in "control" of such material for purposes of discovery requests by individual defendants. Fourth, we examine common oversight and structural changes called for by DPAs and note that such provisions can place prosecutors beyond the institutional competence of their office as well as in conflict with basic principles of corporate governance.
THE FORCES THAT LEAD TO CORPORATE COOPERATION
The Irrelevance of Innocence
It is a hallowed maxim of our criminal justice system that a criminal defendant is innocent until proven guilty. (2) Although true in a literal sense, corporations facing a criminal investigation find little solace in the knowledge that they will be presumed innocent upon entering the courthouse doors for trial. Indeed, it is hardly a secret among prosecutors and the defense bar that the traditional notions of innocence and guilt are largely irrelevant in the context of allegations of corporate wrongdoing. Rather, what matters is that upon the mere announcement of an indictment, a corporation is effectively punished as if a guilty verdict had been returned.
While criminal defendants of all stripes are adversely impacted by an indictment, the unique characteristics of business entities make the consequences particularly dire. For example, an indicted entity may face, inter alia, (1) a collapse in share price; (2) being found in default of loan covenants; (3) a lower bond rating; (4) a prohibition on contracting with government agencies; (5) the revocation of licensing requirements; and (6) severe reputational harm, resulting in an inability to find business partners or clients. The severity and irreversibility of the consequences have led many commentators to declare that a corporate indictment is tantamount to a death sentence. The unraveling of Arthur Andersen demonstrates that such sentiments are far from hyperbole.
Because the consequences of an indictment are so severe, prosecutors are able to exert tremendous pressure on corporations under investigation. Prosecutors are taking full advantage of this leverage by pressuring corporations to admit guilt and accept increasingly draconian DPAs. Prosecutors seek these agreements because (1) they are able to extract from corporations all that they could win at trial (i.e., financial penalties, structural reforms, personnel changes, etc.), without the significant expenditure of time and resources; (2) they immediately benefit from the corporation's assistance in the investigation and prosecution of individual wrongdoing; (3) they avoid the harm to innocent employees, vendors and other affected third parties; and (4) they escape the criticism that would likely flow from the destruction of the corporate entity. (3) With few rational business organizations willing to risk the consequences of an indictment, in the past few years we have seen a significant upswing in the number of investigations that culminated in a DPA. (4)
"Principles" of Corporate Prosecution
On June 16, 1999, then United States Deputy Attorney General Eric Holder issued a memorandum providing guidance for prosecutors considering criminal charges against corporations (the "Holder Memo"). (5) Prior to this time, "the Justice Department had no consistent policy on corporate prosecution." (6) The Holder Memo set forth nine non-binding factors that prosecutors could consider when deciding whether to prosecute a corporation: (1) the "nature and seriousness of the offense;" (2) the "pervasiveness of wrongdoing within the corporation;" (3) the "corporation's history of similar conduct;" (4) the "corporation's timely and voluntary disclosure of wrongdoing;" (5) the corporation's "willingness to cooperate in the investigation of its agents, including, if necessary, the waiver of the corporate attorney-client and work product privileges;" (6) the "existence and adequacy of the corporation's compliance program;" (7) the "corporation's remedial actions;" (8) "collateral consequences, including disproportionate harm to shareholders and employees not proven personally culpable;" and (9) the "adequacy of non-criminal remedies." (7)
Generally speaking, the Holder Memo was met with relative silence among prosecutors and defense attorneys. However, the factors articulated therein took on a new level of importance when, shortly after the turn of the millennium, corporate America was beset with a number of large-scale corporate scandals, including those involving Enron, Adelphia, WorldCom and Tyco. In response, on January 20, 2003, then Deputy Attorney General Larry Thompson, issued a revision to the Holder Memo entitled Principles of Federal Prosecution of Business Organizations (the "Thompson Memo"). (8)
Although strikingly similar to the Holder Memo in content, the Thompson Memo contained a few significant additions. First, the Thompson Memo added a tenth factor that prosecutors could consider when deciding whether to indict a corporation: "the existence and adequacy of the corporation's compliance program." (9) Second, the Thompson Memo was binding on federal prosecutors. (10) Thus, prosecutors were compelled to consider the ten enunciated factors when making a charging decision. Third, the Thompson Memo specifically stated that pre-trial diversion may be an appropriate resolution of a corporate criminal investigation. (11) Fourth, and most importantly, the Thompson Memo placed "increased emphasis on and scrutiny of the authenticity of a corporation's cooperation." (12) The impetus for the change was made clear: "Too often business organizations, while purporting to cooperate with a Department investigation, in fact take steps to impede the quick and effective exposure of the complete scope of the wrongdoing under investigation. The revisions make clear that such conduct should weigh in favor of a corporate prosecution." (13)
Taking the Thompson Memo's guidance seriously, and eager to seek out and punish any hint of wrongdoing in a post-Enron world, prosecutors began to demand sweeping concessions as a precondition of entering into DPAs. (14) Cognizant of the Thompson Memo's blueprint for avoiding an indictment, and fearful of becoming the next Arthur Andersen, corporations repeatedly relented to prosecutors' demands, irrespective of the severity of the attached conditions. Thus, for example, because prosecutors viewed a corporation's willingness to waive the attorney client privilege and work product protection as the sin qua non of cooperation, such waiver provisions were included in numerous DPAs. (15) In addition, many DPAs included a "statement of facts," wherein prosecutors laid out their factual allegations and corporations agreed to accept them as true. If a corporation, including any of its officers, agents or employees, disputed such facts, or made statements contrary to them, prosecutors retained the right...
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