Corporate and white-collar crime enforcement: Should regulation and rehabilitation spell an end to corporate criminal liability?

Columbia Journal of Law and Social Problems

Volumn 40, Issue 1, 2006, Pages 77-124

  Meeks, Wilson ^a  

^a NONE

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EID: 33846473169     PISSN: 00101923     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (268)

1. For the purposes of this Note, the term "corporate crime" refers to crime committed within a corporate organization for which the corporate entity is held criminally liable. In contrast, within this Note, the term "white-collar crime" refers to those crimes committed by an individual working for a corporation for which that individual is held criminally liable.
2. In 2004, the FBI investigated over 184 instances of corporate fraud, the top eighteen of which cost investors over one billion dollars. Federal Bureau of Investigation, Strategic Plan 2004-2009 (2004), http://www.fbi.gov/ publications/strategicplan/stategicplanfull.pdf, 57. White-collar crime costs the public over $300 billion a year Cornell Law School Legal Information Institute: Wex, White-collar Crime. http://www.law.cornell.edu/wex/index.php/ White-collar_crime (last visited Aug. 27, 2006) Estimates of the loss to shareholders at WorldCom range as high as $200 billion dollars SEC v. WorldCom, Inc., 273 F. Supp. 2d 431,431 (S.D.N.Y. 2003).
3. SEC, The Investor's Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation, http://www.sec.gov/about/ whatwedo.shtml (last visited Aug. 27, 2006).
4. According to the Department of Justice's press release concerning the indictment of Timothy and John Rigas, the former majority owners and executives of Adelphia Communications Corporation, these individuals diverted about $1.85 billion dollars from the company for their personal use. Press release, DOJ (Oct. 7, 2005), http://www.usdoj.gov/tax/usaopress/2005/ txdv05100705.htm.
5. The SEC is a civil agency, the traditional role of which has been to regulate corporate disclosure. Over the last quarter of a century, the SEC's role has broadened to encompass a greater role in regulation and law enforcement. SEC, The Investor's Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation, http://www.sec.gov/about/whatwedo.shtml (last visited Aug. 27, 2006).
6. Gerhard O.W. Mueller, Mens Rea and the Corporation: A Study of the Model Penal Code Position on Corporate Criminal Liability, 19 U. PITT. L. REV. 21 (1957) (providing an exposition on the fallacy of corporate entity mens rea).
7. For an argument in favor of making individuals the focus of corporate law enforcement, see John C. Coffee, Jr., Corporate Crime and Punishment: A Non-Chicago View of the Economics of Criminal Sanctions, 17 AM. CRIM. L. REV. 419 (1980).
8. See N.Y. Cent. & Hudson River R.R. Co. v. United States, 212 U.S. 481, 495 (1909) (reasoning that corporate criminality was necessary to enforce certain laws passed by Congress).
9. V.S. Khanna, Corporate Criminal Liability: What Purpose Does It Serve?, 109 HARV. L. REV. 1477, 1482-88 (1996) (reiterating the traditional line of thinking that enforcement concerns were the primary movers behind corporate criminal liability).
10. For a discussion of how corporate criminality constitutes the dominant paradigm within the United States and influences policy in European countries, see Sara Sun Beale & Adam G. Safwat, What Developments in Western Europe Tell Us About American Critiques of Corporate Criminal Liability, 8 BUFF. CRIM. L. REV. 89, 97-105 (2004).
11. These scandals include those which involved Enron and WorldCom. See infra Part III for a discussion of these scandals.
12. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (to be codified as amended in scattered sections of 11, 15, 18, 28, and 29 U.S.C.) (discussed in Part III infra).
13. See infra Part III.
14. See, e.g., Exec. Order No. 13271, 67 Fed. Reg. 46091 (July 9, 2002), amended by Exec. Order No. 13286, 68 Fed. Reg. 10619 (Feb. 28, 2003) (establishing the Corporate Fraud Task Force and directing enforcement departments to aggressively pursue corporate crime and to work together with a level of cooperation that was up until then unprecedented); see also Christopher A. Wray, Assistant Attorney Gen. Criminal Div., Remarks to the ABA White-collar Crime Luncheon (Feb. 25, 2005), http://www.justice.gov/criminal/press_room/ speeches/2005_3853_rmrkCrimLuncheon030205.pdf (stating that since the creation of the Corporate Fraud Task Force in 2003, the DOJ has obtained over 600 corporate fraud convictions, and charged over 990 defendants -convicting at least seventy-seven corporate CEOs and presidents in connection with over 480 charged crimes - and noting that these numbers are unprecedented in the realm of white-collar and corporate crime enforcement).
15. See infra Part III.
16. DPAs are essentially contracts between the government and a corporate criminal in which the government agrees not to prosecute a corporation in return for a list of concessions. These agreements are increasingly used and are very controversial. See discussion infra Part III; see also Vanessa Blum, Justice Deferred: The Feds' New Weapon of Choice Makes Companies Turn Snitch to Save Themselves, LEGAL TIMES, Mar. 21, 2005, at 1 (stating that the DOJ uses DPAs to force companies to turn "snitch" on their employees);
17. Kathryn Kennealy, Kenneth M. Breen & Stephanie Martz, The KPMG Deferred Prosecution Agreement: Warning Flags for Defense Rights, CHAMPION MAG., Nov. 2005, available at http://www. criminaljustice.org/public.nsf/0/63a17c1d1be6d973852570de0078fd34? OpenDocument;
18. Leonard Post, Deferred Prosecution Deal Raises Objections: Attorneys for Indicted Employees Say Deal Limits Ability to Build Defense, NAT'L L. J., Jan. 30, 2006, at 4, column 1 (stating that deferred prosecution agreements make defending individuals much more difficult).
19. SEC, Statement of the Securities and Exchange Commission Concerning Financial Penalties (Jan. 4, 2006), http://www.sec.gov/news/press/2006-4.htm (explaining the criteria used by SEC when deciding how steep of a financial sanction to levy against an offender and implying that the implementation of effective corporate controls is an important factor that mitigates culpability).
20. Both DPAs and SEC enforcement policies regarding the punishment of corporations include considerations of the level and sincerity of the cooperation of the defendant corporation. One of the relevant factors in this is whether the corporation cooperates in exposing the individual perpetrators of the alleged malfeasance. See infra Part III.
21. For a discussion and criticism of the combination of SOX and SEC enforcement policy as acting to create an atmosphere of "massive deterrence," see generally Cristie L. Ford, Toward a New Model for Securities Law Enforcement, 57 ADMIN. L. REV. 757 (2005).
22. See HAROLD S. BLOOMENTHAL, SARBANES- OXLEY ACT IN PERSPECTIVE, Preface (2002) (expounding this proposition).
23. See generally JAMES HAMILTON, GUIDE TO INTERNAL CONTROLS: UNDER SECTION 404 OF THE SARBANES-OXLEY ACT (2004).
24. See SEC v. WorldCom, Inc., 273 F. Supp. 2d 431, 436 (S.D.N.Y. 2003) (reviewing a settlement agreement between the SEC and WorldCom under the well established test of fairness, reasonability, and adequacy, while not substituting the court's own views for those of the parties, and considering the degree to which the settlement advances the public interest) (internal citations omitted); United States v. Chevron U.S.A., Inc., 380 F. Supp. 2d 1104, 1111 (N.D. Cal. 2005) (setting out the deferential judicial review for consent decrees).
25. For an example of how corporations are created see generally DEL. CODE ANN. tit. 8, §§ 101-11 (2006).
26. John C. Coffee, Jr., 'No Soul to Damn: No Body to Kick': An Unscandalized Inquiry into the Problem of Corporate Punishment, 79 MICH. L. REV. 386 (1981) (quoting Edward, First Baron Thurlow 1731-1806).
27. 212 U.S. 481 (1909) [hereinafter H.R.R.].
28. Corporations are liable for the actions of corporate employees who act within the scope of their employment and intend to benefit the corporation. United States v. Jorgensen, 144 F.3d 550, 560 (8th Cir. 1998);
29. Mylan Labs., Inc. v. Akzo, N.V., 2 F.3d 56, 63 (4th Cir. 1993). Misfeasor employees, however, do not have to act exclusively for the corporation's benefit;
30. see United States v. Am. Radiator & Standard Sanitary Corp., 433 F.2d 174, 204 (3d Cir. 1970). Nor does the corporation need to receive any benefit from the act. Id. Inability attaches to a corporation even when an employee's acts were unauthorized or forbidden by the corporation. H.R.R., 212 U.S. at 493. Generally, the theory of respondeat superior serves as the foundational principle for this practice.
31. See generally RICHARD S. GRUNER, CORPORATE CRIME AND SENTENCING (1994).
32. See, e.g., United States v. Bank of New England, 821 F.2d 844, 856 (1st Cir. 1987) (holding that the knowledge of the bank's employees could be aggregated into a collective corporate knowledge that satisfied the mens rea of an offense).
33. GRUNER, supra note 25, at 12.
34. Khanna, supra note 9 and accompanying text.
35. Lawrence Friedman, Essay, In Defense of Corporate Criminal Liability, 23 HARV. J. L. & PUB POL'Y 833 (2000) (arguing that the criminality of corporations serves distinct and necessary functions).
36. Stephen M. Cutler, Director, Div. of Enforcement, SEC, Speech by SEC Staff: 24th Annual Ray Garret, Jr. Corporate and Securities Law Institute (Apr. 29, 2004), http://www.sec.gov/news/speech/spch042904smc.htm (providing a brief background of SEC enforcement powers).
37. See Khanna, supra note 9, at 1522-25 (referencing 15 U.S.C. § 78u (2000), which provides the SEC with subpoena powers).
38. Arthur Anderson was indicted by the DOJ for alleged crimes relating to the Enron scandal. When the indictment was unsealed, Anderson's business went into a tailspin Some believe that the stigma of prosecution in connection with a notorious corporate scandal caused clients to leave Anderson, thus depriving Anderson of the revenue required to keep it afloat. Contributing to this loss of business might have been the prospect that Anderson would lose its licenses and suffer a general drain of resources. See Benjamin M. Greenblum, What Happens to a Prosecution Deferred? Judicial Oversight of Corporate Deferred Prosecution Agreements, 105 COLUM. L. REV. 1863, 1886-87 (2005), for a discussion on the possible effects that adverse publicity and the threat of criminal punishments that accompany a criminal proceeding have on a corporation.
39. Friedman, supra note 29, at 838 (arguing that corporate criminality serves distinct and necessary functions because the criminal system serves to stigmatize corporations, a punishment needed to deter corporate misfeasance).
40. Greenblum, supra note 32, at 1886.
41. For a discussion of this theory and its merits, see generally Coffee, supra note 23, at 387-407;
42. see also Coffee, supra note 7.
43. Coffee, supra note 23, at 398.
44. Id. at 393.
45. Id. at 397-98.
46. Id. at 401.
47. Id. at 387-407.
48. Id. at 387-400.
49. Id. at 397-400.
50. Id.
51. Id. at 392, 387-400.
52. Id. at 399.
53. Id.
54. Id. at 390.
55. Id. at 400-05.
56. Id. at 397-400.
57. Id. at 394.
58. Id. at 393-94.
59. Id. at 397-400.
60. Id. at 393-400.
61. See Wray, supra note 14 and accompanying text.
62. Beale & Safwat, supra note 10.
63. Joseph F.C. DiMento & Gilbert Geis, Empirical Evidence and the Legal Doctrine of Corporate Criminal Liability, 29 AM. J. CRIM. L. 341 (2002).
64. SEC v. WorldCom, Inc., 273 F. Supp. 2d 431, 433 (S.D.N.Y. 2003). Among the many other scandals that involved sums of over one billion dollars was that concerning the Rigas family and Adelphia Communications. DOJ, supra note 4.
65. Coffee, supra note 23, at 389-400.
66. BLOOMENTHAL, supra note 20, at i;
67. see also HAMILTON, supra note 20, at 1.
68. Wray, supra note 14 and accompanying text.
69. For a discussion of SOX and its general rules, see generally Byron F. Egan, The Sarbanes-Oxley Act and Its Expanding Reach, 40 TEX. J. BUS. L. 305 (2005).
70. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204,116 Stat. 745. SOX created the Public Accounting Oversight Board to supervise corporate accounting processes.
71. Id. §§ 101-09 (to be codified at 15 U.S.C. § 7211). It increased the regulation of corporate auditors,
72. id. §§ 201-09 (to be codified at 15 U.S.C. §§ 78j-1, 7231-34), by, for example, limiting their ability to consult for their clients.
73. Id. § 103 (to be codified at 15 U.S.C. § 7213). SOX also prohibited certain acts that are considered irresponsible, such as a corporation's giving personal loans to executives or executives selling stocks during certain periods.
74. Id. §§ 301-08 (to be codified at 15 U.S.C. §§ 77t(e), 78j-1, 78u(d), 7241-46).
75. Securities Act of 1933, 15 U.S.C. §§ 77a-aa (2000) (mandating that publicly traded companies disclose certain material facts); Securities Exchange Act of 1934, 15 U.S.C. § 78 (2000) (providing for the creations of the SEC to enforce the securities laws and maintain fairness in the marketplace).
76. See SEC Homepage, The Investor's Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation, http://www.sec.gov/about•' whatwedo.shtml (last visited Aug. 17, 2006).
77. SEC Homepage, Information Matters, http://www.sec.gov/answers/ infomatters.htm (last visited Aug. 17, 2006).
78. See Brian Kim, Recent Developments, 40 HARV. J. ON LEGIS. 235, 236 (2003).
79. Section 404 of SOX states: (a) The commission shall prescribe rules requiring each annual report [required by certain SEC rules]... to contain an internal control report, which shall - (1) state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and (2) contain an assessment, as of the end of the most recent fiscal year of the issuer, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting. Sarbanes-Oxley Act § 404 (to be codified at 15 U.S.C. § 7262).
80. The SEC defines internal controls as: A process designed by, or under the supervision of, the registrant's principal executive and principal financial officers, or persons performing similar functions, and effected by the registrant's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting a nd the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant; (2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant; and (3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the registrant's assets that could have a material effect on the financial statements. SEC Homepage, Staff Statement on Management's Report on Internal Control Over Financial Reporting, http://www.sec.gov/info/accountants/stafficreporting.htm (last visited Aug. 21, 2006).
81. HAMILTON, supra note 20, at 1-15 (discussing how internal controls are supposed to create a system of top down corporate responsibility where management is held ultimately responsible for public disclosures, insists on both the accuracy of public information and on good corporate behavior, and creates and enforces corporate policies to en-courage these ideals); see also Staff Statement on Management's Report, supra note 68.
82. SOX also mandates the disclosure of corporate ethics programs to encourage corporate responsibility. Sarbanes-Oxley Act § 406 (to be codified at 15 U.S.C. § 7264).
83. Id. § 307 (to be codified at 15 U.S.C. § 7245) (providing rules of professional responsibility for lawyers, including "reporting up" requirements);
84. see also id. § 806 (to be codified at 18 U.S.C. § 1514) (mandating that corporations under SOX adopt "whistle-blower" protections). Additionally, there is a proposed rule that would force lawyers to quit their employment if the response to internal disclosure is unsatisfactory. For a discussion of this proposed "noisy withdrawal" rule, which would be under SOX § 307, as well as related submissions and comments,
85. see Implementation of Standards of Professional Conduct of Attorneys (2006), http://www.sec.gov/rules/proposed/33-8186.htm.
86. Sarbanes-Oxley Act § 307 (to be codified at 15 U.S.C. § 7245). In accordance with SOX § 307, the SEC passed rules which govern the specific responsibilities of lawyers to report. 17 C.F.R. pt. 205 (2003).
87. Sarbanes-Oxley Act § 307 (to be codified at 15 U.S.C. § 7245).
88. Members of upper management being prosecuted for white-collar crime often use the defense of ignorance, thus sometimes forcing prosecutors to prove conscious avoidance to obtain a guilty verdict. See, e.g., Erin McClam, Tearful Ebbers Gets 25 Years, SEATTLE TIMES, July 14, 2006, at D1.
89. Sarbanes-Oxley Act § 806 (to be codified at 18 U.S.C. § 1514A).
90. Id. (demanding that employers not "discharge, demote, suspend, threaten, harass. or in any manner discriminate against an employee" who is a whistleblower). Sarbanes-Oxley Act § 806 (to be codified at 18 U.S.C. § 1514A(b)), additionally provides employees with remedies for an employer's violation of the section, in addition to any other state or federal remedy. Also, section 1107 provides that "[w]homever knowingly, with the intent to retaliate, takes action harmful to any person...for providing to a law enforcement officer any truthful information relating to...any Federal offense, shall be fined under this title or imprisoned not more than 10 years, or both...."
91. Id. at § 1107 (to be codified at 18 U.S.C. § 1513).
92. Some question whether these rules will result in their desired affects. Others argue that these SOX rules are undesirable because they over-regulate the market. Specifically, it is argued that disclosure rules, along with whistleblower protections and SOX's emphasis on internal controls, effectively turn outside directors, auditors, outside counsel, and corporate employees into "the eyes and ears of the state." Larry Cata Backer, Surveillance and Control: Privatizing and Nationalizing Corporate Monitoring After Sarbanes-Oxley, 2004 MICH. ST. L. REV. 327, 329 (2004). Backer argues that SOX represents an attempt by the government to "privatize and nationalize" corporate monitoring. Backer also argues that a system where stakeholders and markets regulate corporations and industry without direct governmental intrusion into the day-to-day operations is preferable and economically efficient.
93. Id. This criticism, at its core, implicitly recognizes the government's shift away from post hoc enforcement and toward government regulation. Beyond this point, an in-depth analysis of such criticism is beyond the scope of this Note, which seeks to merely recognize current policies and suggest solutions to some of the problems that they create.
94. Sarbanes-Oxley Act § 302 (to be codified at 15 U.S.C. § 7241) (mandating that "the principal executive officer or officers and the principal financial officer or officers, Or persons performing similar functions, certify" the accuracy of each quarterly or annual financial report to be filed under the Securities Exchange Act of 1934 and other mandated disclosures, such as internal control disclosures under Sarbanes-Oxley Act § 404.
95. Id. § 304 (to be codified at 15 U.S.C. § 7243) (providing that officers of companies forced to amend the certified disclosures can be forced to disgorge certain bonuses and profits);
96. see also id. § 906 (to be codified at 18 U.S.C. 1350) (creating criminal penalties in regard to the certifications);
97. id. § 306 (to be codified at 15 U.S.C. § 7243) (loosening the standards under which the SEC can penalize certifying officers or bar these individuals from acting as officers or directors of public companies).
98. Id. §§ 801-07, 901-06, 1101-07 (to be codified as amended in scattered sections of 18 and 26 U.S.C.) (providing for corporate criminal fraud accountability, white-collar crime penalties enhancements, and corporate fraud and accountability, respectively).
99. Exec. Order No. 13271, supra note 14.
100. Memorandum from Larry D. Thompson, Deputy Attorney General., U.S. Department of Justice, to Heads of Department Components. Principles of Federal Prosecution of Business Organizations (Jan. 20, 2003), http://www.usdoj.gov/dag/ cftf/corporate_ guidelines.htm [hereinafter Thompson Memo] (spelling out the criteria used by the DOJ to decide whether or not to prosecute a corporation);
101. see also U.S. Sentencing Guidelines Manual § 8C2.5(g) (2004) (establishing the criteria used by the DOJ to decide whether or not to prosecute corporations; compliance with this memo's tenets, especially those of cooperation, is essential for a corporation to receive a DPA).
102. Wray, supra note 14 and accompanying text.
103. See generally Coffee, supra note 7.
104. U.S. Sentencing Guidelines Manual § 2B1.1 (a)(b)(1) (2002).
105. See generally Sarbanes-Oxley Act §§ 801-07, 901-06, 1101-07 (to be codified as amended in scattered sections of 11, 15, 18, 28, and 29 U.S.C.).
106. Under the guidelines, a CFO who participates in a 150 million dollar fraud and directs five members of his accounting group in carrying out the fraud can be sentenced to thirty years. The guidelines are currently discretionary, but they still influence sentencing decisions. United States v. Booker, 543 U.S. 220 (2005).
107. See, e.g., Government's Memorandum of Law in Opposition to Defendant's Sentencing Motions, United States v. Ebbers, S4 02 Cr. 1144 (BSJ) (S.D.N.Y. June 24, 2005).
108. Brooke A. Masters, What Does 25 Years Do? Stiff Sentences Effect as Corporate Fraud Deterrents Debated, WASH. POST, July 14, 2005, at D1.
109. Id.
110. Ann Woolner, How Ebbers Lucked Out with a 25 Year Sentence, Bloomberg.com (2005), http://quote.bloomberg.com/apps/news?pid= 10000039&refer=columnist_woolner& sid=aNqZilt7.VXE.
111. Id.
112. Editorial, The Milken File - fairness of decision to reduce term of Michael R. Milken's prison sentence, NAT'L REV., Aug. 31, 1992.
113. Corporate Crime Reporter, Crime Without Conviction: the Rise Of Deferred And Non Prosecution Agreements, (Dec. 28, 2005), http://www.corporatecrimereporter.com/deferredreport.htm (stating that prosecutors have entered into more than twice as many DPAs and NPAs over the period spanning 2002-2005 than they had in the ten years before).
114. Id. Both DPAs and NPAs act as binding contracts between corporations and prosecutors, the terms of which must be followed in order for a corporation to avoid prosecution. The terms of these documents, and the threats that enforce them, are often very similar. Because of this, the arguments in this Note regarding DPAs are also relevant to NPAs. As a result, this Note refers to both DPAs and NPAs collectively as "DPAs."
115. DPAs have been around for many years. They were originally developed for a very different purpose: the deferred prosecution of juveniles for whom exposure to the criminal justice system might do more harm than good. Greenblum, supra note 32, at 1865-72. These contracts, however, were used in the context of corporate criminality even before the Anderson collapse.
116. Id. at 1871-80.
117. See, e.g., Deferred Prosecution Agreement, United States v. Computer Assocs., Inc., No. 04-837 (ILG) (E.D.N.Y. Sept. 22, 2004) [hereinafter CA Agreement] (contracting Computer Associates to a monetary settlement and to making a host of corporate reforms to be enacted under the guidance of an independent monitor). DPAs also often include punitive or quasi-punitive fines.
118. See, e.g., Deferred Prosecution Agreement, United States v. Bristol Myers Squibb Co., ¶ 5(b), (c) (D.N.J. 2005) [hereinafter Bristol Agreement] Some DPAs, including the CA Agreement, include settlement terms for restitution to shareholders. Other DPAs, such as the Bristol Agreement, include an agreement by the corporation to resolve civil cases filed against the corporation by both private parties and by enforcement officials such as the SEC. DPAs also sometimes involve extensive agreements by the corporation, as a proxy for its employees, to cooperate with authorities.
119. See, e.g., Deferred Prosecution Agreement. United States v. KPMG LLP, ¶¶ 7-9 (S.D.N.Y. Aug. 26, 2005) [hereinafter KPMG Agreement]. These cooperation terms often include an explicit or implicit agreement to fire all of the individual employees the corporation believes are responsible for the criminal acts, and to hire independent investigators to root out evidence against both the corporation itself and these individuals.
120. See, e.g., Bristol Agreement, ¶ 5(d). Sometimes cooperation also means a corporation agrees not to contradict any of the admissions of guilt for the infractions listed in the DPA, regardless of the evidence against the corporate offender.
121. See, e.g., Deferred Prosecution Agreement, United States v. Monsanto Co., ¶ 4 (D.D.C. Jan 6, 2005) [hereinafter Monsanto Agreement], Companies that enter into DPAs also often cooperate with authorities against their employees, in an effort to seek favorable settlement.
122. See, e.g., Monsanto Agreement, ¶ 6(a).
123. CA Agreement, supra note 97 (providing for a contractual term of eighteen months);
124. see also Bristol Agreement, supra note 97 (providing for a contractual term of two years).
125. For a discussion of DPAs, their history and their content, see Greenblum, supra note 32.
126. See, e.g., CA Agreement, supra note 97.
127. United States v. Arthur Andersen, LLP, No. CB-H-02-121 (S.D. Tex. Mar. 7, 2002), available at http://usdoj.gov/dag/cftf/chargingdocs/ andersenllprndictinent.pdf.
128. See Richard B. Schmitt, Devon Spurgeon & Jonathan Weil, Behind Andersen's Tug of War with U.S. Prosecutors, WALL ST. J., Apr. 19, 2002, at C1. The fear of corporate criminal conviction is well founded. For example, a company found guilty of a crime can lose various licenses to do business.
129. Greenblum, supra note 32, at 1885. For example, a corporation can lose its ability to contract with the government.
130. Id. at 1886-87. The bad publicity that comes from an indictment and a trial can wreak significant and serious reputational damages on a corporate entity.
131. Id. Corporate partners want to disassociate with the accused. Also, the potential effect that lost business and large fines will have on the repayment loans might spook creditors and chill their desire to advance new debt. Any one of these harms, or all of them together, might potentially ruin a corporation.
132. See Id.
133. Bill Mears, Arthur Anderson Conviction Overturned, CNNMoney.com, May 31. 2005, http://money.cnn.com/2005/05/31/news/midcaps/ scandal_andersen_scotus/index.htm
134. Corporate Crime Reporter, supra note 94.
135. Mears, supra note 103.
136. Id.
137. For the purposes of this Note, these unintended consequences inflicted on innocent parties will be referred to as collateral damage. The problem of this external place ment of the punishment for corporate malfeasance is the same problem enforcers face when instituting punitive damages against a corporation. See, e.g., Coffee, supra note 23, at 400-05.
138. The primary evidence for this proposition is, generally, the subsequent increase in the government's use of deferred prosecution agreements. See Corporate Crime Reporter, supra note 94.
139. Greenblum, supra note 32, at 1875.
140. Id. (describing how NPAs and DPAs work).
141. Thompson Memo, supra note 82.
142. Id.; see also U.S. Sentencing Guidelines Manual, supra note 82.
143. For example, the CA Agreement, supra note 97, ¶ 4 recognizes the preemptive firing of employees as positive cooperation with authorities. As a result, other corporations will likely follow suit. Thus, corporations fire those suspected of misdoings even before an investigation has taken place. The end result is that new management has little or no incentive to protect those who preceded them, and perhaps even an incentive to shift the blame onto those former employees.
144. Bristol Agreement, supra note 97, ¶ 5 (listing "reforms and remedial actions" taken by Britsol-Myers Squibb before entering into the DPA).
145. See, e.g., id. This is true even to the extent where the corporation hires and pays for investigators to uncover evidence of individual and collective malfeasance within the corporate entity, which is then reported to the DOJ.
146. CA Agreement, supra note 97, ¶ 5 (including as a term of the agreement the hiring of an independent investigator to investigate the allegations of fraud in the company). Additionally, DPAs often contain waivers of attorney client privilege in regard to matters of actual or potential bad acts.
147. Bristol Agreement, supra note 97, ¶ 31(d). DPA terms can also prevent corporations from acting in any way contrary to their admission of guilt.
148. Monsanto Agreement, supra note 97, ¶ 4.
149. See, e.g., Blum supra note 16;
150. Kennealy, supra note 16; Post, supra note 16.
151. Presumably, the pursuit of individual malefactors and the increased severity of their sentences serve the purpose of tilting the cost benefit analysis of potential bad actors. Increasing the risk of misfeasance for individuals encourages compliance with the law, and thus provides increased deterrence. This also focuses the retributive aspect of criminal law on individual defendants and not on the corporation, thus reducing wide-spread collateral damage.
152. See, e.g., Bristol Agreement, supra note 97, ¶¶ 6-11;
153. KPMG Agreement, supra note 97, ¶¶ 16-18;
154. CA Agreement, supra note 97, ¶¶ 12-18;
155. Monsanto Agreement, supra note 97, ¶¶ 8-10. These can include the systemic adoption of principles of integrity and professionalism to generally foster an "ethical" corporate culture.
156. KPMG Agreement, supra note 97, ¶ 18 (mandating that the corporation implement a compliance and ethics program under the supervision of an independent monitor).
157. See, e.g., Bristol Agreement, supra note 97, ¶¶ 11-16;
158. CA Agreement, supra note 97, ¶¶ 19-22;
159. KPMG Agreement, supra note 97, ¶ 18;
160. Monsanto Agreement, supra note 97, ¶ 9. These recommendations are meant to prevent recidivism and to change the corporation into a good corporate citizen. Veto power for the choice of monitor is usually given to the DOJ.
161. See, e.g., CA Agreement, supra note 97, ¶ 20.
162. For example, CA Agreement, supra note 97, ¶ 22, exemplifies how these agreements may include a term stating that if the corporation protests to the DOJ about a particular reform, the DOJ will hear this protest, and, if the DOJ agrees with the complaint, support it. If the DOJ rejects the protest, the corporation must then adopt the recommendation or be prosecuted.
163. Id. ¶ 28. Given the admissions made in DPAs. the corporation has little chance of making any defense.
164. See Sarbanes-Oxley Act § 404 (to be codified at 15 U.S.C. § 7262);
165. HAMILTON, supra note 20 (explaining what disclosure of internal controls means and by what standards the SEC measures these controls).
166. For the factors used by the DOJ in determining the culpability level of a corporation as mitigated by effective internal controls, see Thompson Memo, supra note 82.
167. For a list of the same factors from the SEC's perspective see SEC, supra note 17 (explaining the criteria that the SEC uses when deciding how steep of a financial sanction to levy against an offender and implying that the implementation of effective corporate controls is an important factor). For a discussion of how the SEC uses the threat of imposition of large fines through civil suits to exact basically the same kinds of terms as the DOJ does through DPAs,
168. see Ford, supra note 19, at 759-60.
169. 698 A.2d. 959 (Del. Ch. 1996).
170. Id. at 969-70. The Organizational Sentencing Guidelines still use
171. Caremark, 698 A.2d. at 969-70.
172. Employees would likely want to hedge against the potential bad actions of their colleagues.
173. For a discussion of the SEC's policy of forcing corporations to adopt corporate reform in settlement agreements through threats of giant fines, see Ford, supra note 19.
174. For a critical discussion of these DOJ and SEC practices, see John S. Baker, Jr., Reforming Corporations Through Threats of Federal Prosecution, 89 CORNELL L. REV. 310 (2004) (criticizing this practice as an unnecessary and potentially inefficient and ineffective foray by the government into regulating practices traditionally left to the market).
175. Coffee, supra note 23.
176. This Note does not argue as to the effectiveness of these policies or whether they are justified or wise. Instead, this Note focuses on potential problems created by these practices. In regard to increased individual liability, there appear to be a few systemic problems with either the current practices or conflicts in their implementation. These problems may be especially acute in terms of DPA practice, which some criticize as unfair to individual defendants. See, e.g., Blum, supra note 16;
177. Kennealy, supra note 16;
178. Post, supra note 16. Also, problems appear to arise when the current means of regulating corporations and the implementation of corporate controls are considered. These problems are not well documented, except for the fact that internal controls are extremely expensive and onerous for businesses.
179. Joyce Cutler, Internal Controls: Forum Urges Section 404 Relief To Aid Small Business Reporting Efforts, 37 SEC, REG. & L. REP. 1613, Sept. 26 2005;
180. Kristina Shevory, Boards of Directors Compliance Efforts Come With Big Accounting Bills, SEATTLE TIMES, Oct. 3, 2004;
181. Jenny Strasburg, Corporate Backlash over Sarbanes-Oxley, SAN FRANCISCO CHRON., Wednesday, Mar. 23, 2005.
182. This Note is not an empirical study of the consistencies and inconsistencies of bifurcated regulation, nor is the author aware of any proof of the existence of these potential problems. But because the DOJ and the SEC are independent bodies, an implicit information gap exists between them. Also, because these two bodies have traditionally served two very different purposes - the DOJ as a law enforcer, and the SEC as a regulator of markets via disclosure - it is arguable that their decision-making processes are distinct enough that parallel decisions made within each agency would have a high likelihood of coming out differently.
183. See Cutler, supra note 130;
184. Strasburg, supra note 130.
185. For support for the proposition that some costs of internal controls discourage companies from entering U.S. markets, see Andrzej Zwaniecki, U.S. Securities Official Urges More Leeway in Corporate Audits: Corporate Governance Application Costs Discourage Foreign Companies, U.S. DEPT. OF TATE, Jan. 24, 2006, http://usinfo.state.gov/ei/Archive/ 2006/Jan/27-42578.html.
186. See infra Part II for support for this proposition. Specifically, ineffective regulation would most likely allow more corporate malfeasance than efficient regulation.
187. Corporate Crime Reporter, supra note 94.
188. See supra Part III.
189. Greenblum, supra note 32 (stating that in the federal system judges have neither the power to review the prosecutor's decision to decline to prosecute nor the terms of DPAs, and that the Federal Judiciary intervenes only in so far as the DPAs are considered ordinary, enforceable contracts). Nor is the DOJ's determination of breach of a DPA reviewable by the courts.
190. See, e.g., CA Agreement, supra note 97, ¶ 28. Some DPAs, however, have been reviewed by courts under the Speedy Trial Act, 18 U.S.C. § 3161 (2000): (h) The following periods of delay shall be excluded in computing the time within which an information or an indictment must be filed, or in computing the time within which the trial of any such offense must commence: (2) Any period of delay during which prosecution is deferred by the attorney for the Government pursuant to written agreement with the defendant, with the approval of the court, for the purpose of allowing the defendant to demonstrate his good conduct.
191. For a brief synopsis of many of the criticisms of how the DOJ uses DPAs, see Deborah Solomon & Anne Marie Squeo, Crackdown Puts Executives, Corporations in New Legal Peril, WALL ST. J. ONLINE, June 28, 2005, http://www.careerjournal.com/myc/legal/20050628- solomon.html;
192. see also Blum, supra note 16;
193. Kennealy, supra note 16;
194. Post, supra note 16.
195. For example, in a recent decision in the Southern District of New York, the court declared unconstitutional a provision in the KPMG Agreement that forbade the corporation from paying for the representation of former executives. United States v. Stein, 435 F. Supp. 2d 330 (S.D.N.Y. 2006).
196. Greenblum, supra note 32.
197. See, e.g., Deferred Prosecution Agreement, United States v. N.Y. Racing Ass'n, No. 03-1295 (E.D.N.Y. Dec. 11, 2003) (defendant corporation agreed to make reasonable efforts to install state-run slot machines at its race tracks, the money from which was to be used to fund court-mandated public education initiatives).
198. See, e.g., Bristol Agreement, supra note 97 (mandating that Bristol Myers create a teaching chair at the U.S. Attorney's former law school to conduct one or more seminars on business ethics).
199. See Blum, supra note 16;
200. Greenblum, supra note 32;
201. Kennealy, supra note 16;
202. Post, supra note 16.
203. Thompson Memo, supra note 82.
204. United States v. Stein, 435 F. Supp. 2d 330 (S.D.N.Y. 2006).
205. See, e.g., Bristol Agreement, supra note 97, ¶ 5(b), (c);
206. CA Agreement, supra note 97, ¶ 3;
207. KPMG Agreement, supra note 97, ¶ 3.
208. For a discussion of the "externality" problem with punitive fines, see Coffee, supra note 23, at 399-405.
209. Wray, supra note 14.
210. Id.
211. Id.
212. Id.
213. See, e.g., SEC v. WorldCom, Inc., 273 F. Supp. 2d 431 (S.D.N.Y. 2003) (analyzing the balancing of these concerns within the context of imposing an SEC fine). The bankruptcy issue is especially interesting because agreements that provide restitution to shareholders effectively place shareholders, owners of the residual interest in the corporation who are therefore last in line to collect assets upon liquidation, in front of secured creditors to get a piece of the corporate pie.
214. Id.
215. Thompson Memo, supra note 82.
216. For a brief discussion of some of these problems, see Corporate Crime Reporter, supra note 94.
217. Id. (providing an account of the government's offer of a DPA to KPMG, and including the anecdote that David Kelly, the then acting U.S. Attorney for the Southern District of New York, advocated prosecuting KPMG, but was overruled in part because of the concerns over industry consolidation).
218. See generally Ford, supra note 19.
219. See discussion supra Parts II, III.
220. See discussion supra Part III.
221. Because the adoption of corporate controls is indirectly mandated, this might result in the adoption of more corporate control than would otherwise be necessary under a purely civil system.
222. Sarbanes-Oxley Act § 3 (to be codified at 15 U.S.C. § 7201) ("The Commission shall promulgate such rules and regulations, as may be necessary or appropriate in the public interest or for the protection of investors, and in furtherance of the Act.").
223. See, e.g., id.
224. SEC, How the SEC Rulemaking Process Works, http://www.sec.gov/about/ whatwedo.shtml (last visited Aug. 17, 2006) (explaining the SEC's notice and comment rule making procedures). 163. SEC, Final Rule: Management's Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, Aug. 14, 2004, http://www.sec.gov/rules/final/33- 8238.htm.
225. Id.
226. Id.
227. Sarbanes-Oxley Act § 404 (to be codified at 15 U.S.C. § 7262) (mandating the disclosure of internal controls, including changes in programs and perceived weaknesses).
228. Id.
229. Roberta Romano, The Sarbanes-Oxley Act and the Making of Quack Corporate Governance, 114 YALE L. J. 1521, 1544 (2005).
230. SEC, How the SEC Rulemaking Process Works, supra note 162.
231. The potential problems with this lobbying are discussed infra Part IV.C.
232. DOJ, Mission Statement, http://www.uedoj.gov/02organizatioins/index.html, (last visited Aug. 15, 2006) ("to provide federal leadership in preventing and controlling crime; to seek just punishment for those guilty of unlawful behavior"). 172.
233. See, e.g., SEC v. WorldCom, Inc., 273 F. Supp. 2d 431 (S.D.N.Y. 2003) (analyzing the approval of a settlement between WorldCom and the SEC, for violations of sections of the Securities Act of 1934). In its review of the settlement agreement between WorldCom and the SEC, the WorldCom court took into account the problems of bankruptcy discussed in note 152, supra, and generally balanced the interests of all parties when approving a fine that suitably reflected the severity of the crime but didn't result in inequity.
234. Id. at 431-38. The court actively participated in creating an equitable fine and, to pursue this goal, invited third parties to submit briefs expressing their interests and opinions to the court.
235. Id. Also, the court recited the history of the settlement in which it acknowledged that it could, in essence, kill the corporation with a fine.
236. Id. But the court also acknowledged that such an act would unjustifiably harm third parties such as shareholders, employees, and creditors, and undo all of the gains achieved through the companies' cooperation with the government and through self-rehabilitation.
237. Id. WorldCom can also be read to say that many of the same rehabilitative acts carried out in DPAs can transfer to the civil forum. For example, WorldCom accepted a court-ordered monitor and enacted all of his recommendations.
238. Id. But, unlike monitors in the DPA process, this monitor was an agent of the court, and thus the court itself acted as a monitor of the monitor and as a guarantor of the reasonability of any recommendations in terms of cost-benefit analysis.
239. Id.
240. Greenblum, supra note 32, at 1886.
241. The SEC has authority over those companies, organizations and individuals who participate in the securities market. Securities Act of 1933, ch. 36, 15 U.S.C. §§ 77a-aa (2000) (mandating that publicly traded companies disclose certain material facts); see also Securities Exchange Act of 1934, ch. 404, 15 U.S.C. § 78 (2000) (providing for the creation of the SEC to enforce the securities laws and maintain fairness in the marketplace).
242. According to the Investor's Advocate: The main purposes of [the laws the SEC is empowered to enforce] can be reduced to two common-sense notions: Companies publicly offering securities for investment dollars must tell the public the truth about their businesses, the securities they are selling, and the risks involved in investing. People who sell and trade securities - brokers, dealers, and exchanges - must treat investors fairly and honestly, putting investors' interests first. Investor's Advocate, supra note 64.
243. Ford, supra note 19, at 775-82 (discussing the growth of the SEC's enforcement powers and enforcement activities in recent years).
244. Id.; see also Securities Enforcement Remedies and Penny Stock Reform Act of 1990, 15 U.S.C. § 78o(b)(6) (2000) (giving the SEC power to impose civil monetary fines against corporations for acts other than insider trading, which the SEC could already punish with fines);
245. WorldCom, 273 F. Supp. 2d at 435 (contemplating the imposition of a fine that would ruin any chance for the company's continued existence).
246. Barry W. Rashkover, Comment, Reforming Corporations Through Prosecution: Perspectives from an SEC Enforcement Lawyer, 89 CORNELL L. REV. 535, 536 ("The specter of prosecution can motivate corporations to change their long term behavior.");
247. see also Ford, supra note 19 (comparing the use of DPAs with SEC settlements and concluding that they share many of the same qualities in terms of content and motivation).
248. Ford, supra note 19, at 775-82 (discussing the growth of the SEC's enforcement powers and enforcement activities in recent years).
249. Id.
250. Id. WorldCom, 273 F. Supp. 2d at 432 also notes that courts review agency settlement agreements for fairness, reasonability and adequacy, but do not substitute their own views for those of the parties. The corporate reforms in this case were imposed by an independent monitor under the watch of the presiding judge.
251. Id.
252. Khanna, supra note 9, at 1512 (comparing the information gathering powers of criminal and civil enforcers in the context of corporate crime).
253. Id. at 1523-25 (discussing the rise of the SEC's use of civil investigative demands, and favorably comparing the power of a civil investigative demand to a grand jury subpoena).
254. Id.
255. Id.
256. See, e.g., S.E.C. v. WorldCom, 273 P. Supp. 2d 431, 433 (S.D.N.Y. 2003).
257. See, e.g., United States v. Chevron U.S.A., Inc., 380 F. Supp. 2d 1104 (N.D. Cal. 2005) (using the highly deferential judicial review of consent agreements).
258. By contrast DPAs often call for the waiver of any and all privilege. See, e.g., CA Agreement, supra note 97, ¶ 6(c).
259. See supra note 172.
260. See, e.g., WorldCom, 273 F. Supp. 2d 431 (here the fine was both cash and equity, which is arguably more effective than its pure cash counterpart).
261. See, e.g., CA Agreement, supra note 97, ¶ 25.
262. These problems include, for example: inequity in terms; inefficiency in regulation: and inequitable findings of breach.
263. This may create over-deterrence for some behavior, but this can be cured through prosecutorial discretion and legislation.
264. There are no civil equivalents for some laws that it is socially desirable to hold corporations liable for. Thus, the SEC would need the legal power and jurisdiction to prosecute these crimes. A possible legislative solution to this problem would be to pass a law which allocates sole jurisdiction to prosecute these crimes to the SEC by creating civil analogues to crimes that do not currently have them. This would include giving the SEC sufficiently analogous remedies for violations. For an example of the kind of law that might work, see N.Y. EXEC. LAW § 63(12) (2005), which gives the New York Attorney General the right to sue individuals or businesses on behalf of the public when a pattern of crime has occurred. I would propose, however, that the range of remedies available to the SEC should be greater than the limited powers given to the New York Attorney General.
265. The Legislature can also use its "power of the purse" to influence the agencies.
266. This happened in the 1980s under President Ronald Regan, in the context of antitrust enforcement. Harry First, Delivering Remedies: The Role of States in Antitrust Enforcement, 69 GEO WASH. L. REV. 1004, 1036-37 (2001) (discussing how the states moved in to fill the gap in antitrust enforcement left when the Reagan administration removed federal antitrust enforcement from certain areas of corporate behavior).
267. Id.
268. It is possible that the stigmatic effect of civil enforcement will not reach the same as criminal prosecution because the concept of criminality is ingrained in our society.