Insuring corporate crime

Indiana Law Journal

Volumn 83, Issue 3, 2008, Pages 1035-1096

  Baer, Miriam Hechler ^a  

^a NEW YORK UNIVERSITY   (United States)

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EID: 49049085671     PISSN: 00196665     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (326)

1. N.Y. Cent. & Hudson River R.R. v. United States, 212 U.S. 481, 493-94 (1909) (explaining that it is "well established" that in actions for tort, corporations are responsible for the actions of their agents).
2. See, e.g., Mary Kreiner Ramirez, The Science Fiction of Corporate Criminal Liability: Containing the Machine Through the Corporate Death Penalty, 47 ARIZ. L. REV. 933 (2005) (embracing deterrence rationale and proposing a "three strikes" death penalty approach towards corporations whose employees violate the law);
3. Michael L. Seigel, Corporate America Fights Back: The Battle over Waiver of the Attorney-Client Privilege, 49 B.C. L. REV. 1, 10-11 (2008) ("corporate culpability achieves significant additional deterrence, specific and general, beyond that achieved solely by the prosecution of individuals").
4. But see Preet Bharara, Corporations Cry Uncle and their Employees Cry Foul: Rethinking Prosecutorial Pressure on Corporate Defendants, 44 AM. CRIM. L. REV. 53, 113 (2007) (accepting general premise that corporate criminal liability deters wrongdoing but arguing for narrower standard of liability);
5. Daniel R. Fischel & Alan O. Sykes, Corporate Crime, 25 J. LEGAL STUD. 319 (1996) (questioning theoretical necessity of criminal liability as means of achieving deterrence);
6. Gilbert Geis & Joseph F. C. DiMento, Empirical Evidence and the Legal Doctrine of Corporate Criminal Liability, 29 AM J. CRIM. L. 341 (2002) (calling for empirical testing of efficacy of corporate criminal liability);
7. Vikamaditya S. Khanna, Corporate Criminal Liability: What Purpose Does it Serve?, 109 HARV. L. REV. 1477, 1478 & n.2 (1996) (criticizing analysis of corporate criminal liability and citing earlier critiques and defenses).
8. See Julie O'Sullivan, The Federal Criminal "Code" Is a Disgrace: Obstruction Statutes as a Case Study, 96 J. CRIM. L. AND CRIMINOLOGY 643, 668 (2006) ("it is difficult to find a case in which a corporation cannot be tagged for the activities of its agents");
9. Andrew Weissman, A New Approach to Corporate Criminal Liability, 44 AM. CRIM. L. REV. 1319, 1320-21 (2007) (observing that even minimal employee conduct will trigger corporate-level liability).
10. For a discussion of the collateral consequences of corporate indictment, see discussion infra at 28-29 n. 144-49, and Erik Paulsen, Note, Imposing Limits on Prosecutorial Discretion in Corporate Prosecution Agreements, 82 NYU L. REV. 1434, 1453-54 (2007). For a discussion of costs and inefficiencies encountered in compliance programs, see infra at 23-26.
11. Cf. Seigel, supra note 2, at 12-13 (observing - without apparent criticism - that uncertainty inherent in corporate criminal law "undoubtedly makes corporate officers much more risk averse"). For a more negative view of liability-fueled risk aversion, see Assaf Hamdani, Rewarding Outside Directors, 105 MICH. L. REV. 1677, 1679 (2007) (arguing that liability imposed on lawyers, accountants, and directors for failing to prevent misconduct may cause risk aversion "particularly since they act on behalf of third parties and therefore do not bear the full costs of taking precautionary measures or making conservative decisions").
12. See discussion infra at 33-34 (discussing costs of corporate cooperation).
13. See supra note 4.
14. See discussion infra at 15 and notes 81-85.
15. Id. See also Weissman, supra note 3, at 1320 (observing that "minimal" employee conduct will trigger entity liability).
16. "[A]n indictment - especially of a financial services firm - threatens to destroy the business regardless of whether the firm ultimately is convicted or acquitted." United States v. Stein, 440 F. Supp. 2d 315, 337 (S.D.N.Y. 2006); see also Weissman, supra note 3, at 1321.
17. See Brandon L. Garrett, Structural Reform Prosecutions, 93 VA. L. REV. 853, 916 (2007) (describing four recent agreements that required the corporate defendant to make payments to entities that were unconnected to the underlying harm).
18. For a discussion of monitoring regimes, see infra at 35-38.
19. See Garrett, supra note 10, at 899.
20. See infra at 29-38.
21. As of July 31, 2006, the Department of Justice had announced twelve deferred prosecution agreements for the year. Sue Reisinger, Deal-Making by DOJ Is on the Rise, NAT'L L.J., July 31, 2006, at 8. Since 1992, over forty pre-trial agreements have been documented and reported by either the Department of Justice or individual United States Attorneys' Offices. Lawrence D. Finder & Ryan D. McConnell, Devolution of Authority: The Department of Justice's Corporate Charging Policies, 51 ST. LOUIS U. L.J. 1, 2 fig.1 (2006). Whereas DPAs prior to 1999 were fairly simple settlements that called for fines and limited corporate reforms, today's DPAs require, among other things: outside monitors and extensive reporting; the corporate defendant's promise to prohibit its employees from contradicting factual statements contained in the DPA; and waiver of the attorney-client privilege. See Garrett, supra note 10, at 853 (discussing increase in corporate prosecutions that seek far-reaching "structural reforms" in lieu of indictments); Finder & McConnell, supra, at 5-7, 17-19.
22. See infra at 31-32.
23. Despite the federal government's increased prosecution of corporate entities and defendants, corporate crime (particularly, corporate fraud, which is one of the key forms of criminal conduct in the white collar context) remains a significant problem across thousands of organizations. See KPMG FORENSIC, KPMG FORENSIC FRAUD SURVEY 2003 at 2, available at http://www.us.kpmg.com/RutUS_prod/Documents/9/ FINALFraudSur.pdf (reports of employee fraud increasing even though organizations are "responding with anti-fraud" measures);
24. PRICEWATERHOUSECOOPERS, 2005 GLOBAL ECONOMIC CRIME STUDY: US AND NORTH AMERICA 4, available at http://www.pwc.com (follow "publications" hyperlink) [hereinafter PWC 2005 REPORT] (economic crime is "pervasive" throughout North American companies despite increased reliance on internal controls and audits).
25. See infra at 35.
26. See, e.g., JOHN HASNAS, TRAPPED: WHEN ACTING ETHICALLY IS AGAINST THE LAW (2006) (corporate criminal liability results in unethical conduct); Elizabeth K. Ainslie, Indicting Corporations Revisited: Lessons of the Arthur Andersen Prosecution, 43 AM. CRIM. L. REV. 107 (2006) (arguing that costs of corporate prosecutions often outweigh benefits); Fischel & Sykes, supra note 2, at 319 (arguing that civil liability more efficiently deters corporate conduct than criminal liability); Khanna, supra note 2, at 1477 (same);
27. William S. Laufer, Corporate Liability, Risk Shifting, and the Paradox of Compliance, 52 VAND. L. REV. 1343 (1999) (criticizing liability scheme's emphasis on compliance programs);
28. Shayne Kennedy, Note, Probation and the Failure to Optimally Deter Corporate Misconduct, 71 S. CAL. L. REV. 1075 (1998) (arguing that civil fines would more effectively deter misconduct than probationary sentences envisioned by the Organizational Sentencing Guidelines).
29. For criticism of the waiver issue generally, see AMERICAN BAR ASSOCIATION, REPORT OF ABA TASK FORCE ON ATTORNEY-CLIENT PRIVILEGE 1 (2006), available at http://www.abanet.org/buslaw/attorneyclient/materials/hod/ emprights_report_adopted.pdf [hereinafter ABA TASK FORCE REPORT] (emphasizing unanimous support for Resolution 111 opposing further erosion of attorney-client privilege);
30. Elkan Abramowitz & Barry A. Bohrer, Waiver of Corporate Attorney-Client and Work Product Protection, N.Y. L.J. Nov. 1, 2005, at 3 (pointing out efforts by the ABA and SEC to prevent the erosion of corporate attorney-client privilege);
31. Lynnley Browning, Ex-Officials of Justice Dept. Oppose Prosecutors' Tactic in Corporate Criminal Cases, N.Y. TIMES, Sept. 7, 2006, at C1 (describing letter from Kenneth Starr and Richard Thornburgh to the Justice Department criticizing government's request for privilege waivers in corporate prosecutions). On December 11, 2006, in response to threatened legislation and criticism of prosecutorial practices, the Department of Justice promulgated new guidelines for prosecutors.
32. Memorandum from Paul J. McNulty, Deputy Attorney General, to United States Attorneys, Principles of Federal Prosecution of Business Organizations, available at http://www.usdoj.gov/dag/speeches/2006/mcnulty_memo.pdf [hereinafter McNulty Memo]. The McNulty Memo requires prosecutors to classify potentially privileged material into two categories and then seek approval from the Department of Justice prior to seeking the material.
33. For a defense of the government's procedure of obtaining waivers, see George M. Cohen, Of Coerced Waiver, Government Leverage, and Corporate Loyalty: The Holder, Thompson and McNulty Memos and Their Critics, 93 VA. L. REV. (IN BRIEF) 137 (2007) (contending that unwillingness to waive privilege is simply a manifestation of corporate management's attempt at "saving their own necks").
34. As described by the court, the scheme: allegedly involved at least four separate tax shelter vehicles, called FLIP, OPIS, BLIPS, and SOS, designed to generate phony tax losses through a series of sham transactions. The conspirators allegedly sought to protect their clients from potential IRS penalties by paying co-defendant Raymond Ruble, a New York tax attorney, to issue opinion letters falsely representing that the tax shelters were likely to survive IRS review. United States v. Stein, 488 F. Supp. 2d 350, 354 (S.D.N.Y. 2007).
35. United States v. Stein (Stein I), 435 F. Supp. 2d 330, 338 (S.D.N.Y. 2006). Pursuant to revised prosecutorial guidelines contained in the memorandum issued in the McNulty Memo of December 2006, prosecutors may no longer consider the payment of an employee's attorney fees as reason for an indictment except in extraordinary circumstances. See McNulty Memo, supra note 19, at 11 (stating that "[p]rosecutors generally should not take into account whether a corporation is advancing attorneys' fees to employees or agents under investigation and indictment").
36. Kaplan suppressed several of the KPMG employees' statements. United States v. Stein (Stein II), 440 F. Supp. 2d 315, 319 (S.D.N.Y. 2006).
37. Stein I, 435 F. Supp. at 345-47.
38. "In other words, KPMG told its personnel that it would cut off payment of legal expenses of any employee who refused to talk to the government or who invoked the Fifth Amendment." Stein II, 440 F. Supp. at 318.
39. Stein II, 440 F. Supp. at 319.
40. United States v. Stein (Stein III), 495 F. Supp. 2d 390, 414 (S.D.N.Y. 2007) (criticizing the government's "willingness . . . to use their life and death power over KPMG to induce KPMG to coerce its personnel to bend to the government's wishes notwithstanding the fact that the Constitution barred the government from doing directly what it forced KPMG to do for it"). Previously, the court had attempted to remedy the situation by suppressing the coerced employee statements and by authorizing and taking ancillary jurisdiction over a civil suit between the former employees and KPMG over the attorney fee payments. United States v. Stein, 452 F. Supp. 2d 230, 242-43 (2006), vacated, Stein v. KPMG, 486 F.3d 753 (2d Cir. 2007) (holding that the district court had no jurisdiction).
41. See McNulty Memo, supra note 19. The McNulty Memo in part arose in response to proposed legislation authored by Arlen Specter that would make it illegal for prosecutors to request a waiver of the attorney-client privilege. Attorney-Client Privilege Protection Act of 2006, S. 30, 109th Cong. (2006), available at http://online.wsj.com/public/resources/documents/ WSJ_thompsonmemoleg.pdf.
42. Judge Kaplan's attempts at reform were made moot when the Second Circuit found a lack of ancillary jurisdiction over the KPMG attorneys' fees dispute. The Second Circuit took no position on Kaplan's previous conclusion that the DOJ had violated the employees' rights to counsel by placing pressure on KPMG to withhold payments for attorneys fees. See KPMG, 486 F.3d at 753. Another court criticized the attorneys fees policy as "unquestionably obnoxious." United States v. Rosen, 487 F. Supp. 2d 721, 737 (E.D. Va. 2007).
43. See McNulty Memo, supra note 19, at 11.
44. According to several studies, corporate crime has increased in the last five years. PWC 2005 REPORT, supra note 16, at 4 (explaining that "[e]conomic crime is a pervasive and growing threat to US and North American businesses of all types"). According to the PWC Report, internal controls fail to detect economic crime approximately sixty percent of the time. Id. at 16.
45. To the extent entities were already the subject of civil lawsuits, the system simply would ensure that the entity's insurance paid for the costs of its employees' wrongdoing, regardless of whether that wrongdoing was labeled "criminal."
46. This Article focuses primarily on federal criminal prosecutions. I intend the term "corporate criminal liability" to encompass prosecutions of all legitimate business entities (corporations, partnerships, associations, and other unincorporated organizations). The concerns discussed in this Article do not apply to entities created solely for the purpose of masking criminal conduct.
47. Stolt-Nielsen S.A. v. United States, 442 F.3d 177, 183 (3d Cir. 2006) ("[T]he executive branch 'has exclusive authority and absolute discretion to decide whether to prosecute a case . . . .'" (quoting United States v. Nixon, 418 U.S. 683, 693 (1974))); see also Jennifer Arlen & Reinier Kraakman, Controlling Corporate Misconduct: An Analysis of Corporate Liability Regimes, 72 N.Y.U. L. REV. 687, 688 (1997) (explaining that the corporate liability standard is "far reaching").
48. See, e.g., Arlen & Kraakman, supra note 33, at 688; Vikamaditya S. Khanna, Corporate Liability Standards: When Should Corporations Be Held Criminally Liable?, 37 AM. CRIM. L. REV. 1239 (2000);
49. Kimberly D. Krawiec, Organizational Misconduct: Beyond the Principal-Agent Model, 32 FLA. ST. U. L. REV. 571, 581-83 (2005).
50. See discussion infra at 15.
51. See discussion infra at 22-27.
52. See Donald C. Langevoort, Monitoring: The Behavioral Economics of Corporate Compliance with the Law, 2002 COLUM. BUS. L. REV. 71, 72 (2002).
53. See Howard W. Goldstein, When the Government Ends a Deferred Prosecution Pact, N.Y. L. J., May 4, 2006, at 5 (explaining that from the point of view of "the corporate target, a deferred prosecution agreement - no matter how harsh and intrusive the terms - is frequently an offer the company simply cannot refuse when the alternative is possibly death or less drastic, but nonetheless severe, consequences"); Langevoort, supra note 37, at 74 (concluding that overestimates of the reliability of in-house monitoring combined with underestimates of the costs of third-party audits "biases the legal response towards insisting on too much auditing, forcing unnecessarily costly compliance initiatives").
54. See Ainslie, supra note 18, at 110 (listing four suggested reforms); Samuel W. Buell, The Blaming Function of Entity Criminal Liability, 81 IND. L.J. 473, 530-32 (2006) (suggesting that the criminal prosecution of corporations should be limited to situations where the agent's action is the result of institutional influence).
55. Richard A. Bierschbach & Alex Stein, Overenforcement, 93 GEO. L. J. 1743, 1758 (2005).
56. Benjamin M. Greenblum, Note, What Happens to a Prosecution Deferred? Judicial Oversight of Corporate Deferred Prosecution Agreements, 105 COLUM. L. REV. 1863, 1896-1904 (2005).
57. Fischel & Sykes, supra note 2, at 319.
58. Even in the tort context, the wisdom of corporate vicarious liability has been questioned. See, e.g., Gary T. Schwartz, The Hidden and Fundamental Issue of Employer Vicarious Liability, 69 S. CAL. L. REV. 1739, 1749-1754 (1996) (criticizing fairness-based explanations for vicarious liability).
59. Professors Ronen and Cunningham have proposed and elaborated on an insurance scheme that would replace auditor liability for misstatements or omissions later found in public companies' financial statements. See Lawrence A. Cunningham, Choosing Gatekeepers: The Financial Statement Insurance Alternative to Auditor Liability, 52 UCLA L. REV. 413 (2004);
60. Joshua Ronen, Post-Enron Reform: Financial Statement Insurance, and GAAP Re-Visited, 8 STAN. J.L. BUS. & FIN. 39 (2002). Professor Griffith has also argued for mandatory disclosure of directors' and officers' policies as a market signal.
61. Sean J. Griffith, Uncovering a Gatekeeper: Why the SEC Should Mandate Disclosure of Details Concerning Directors' and Officers' Liability Insurance Policies, 154 U. PA. L. REV. 1147 (2006) (calling for mandatory disclosure of officers' and directors' policies because policies can signal market on strength of corporation's internal governance mechanisms).
62. Gatekeepers have been described as persons who use their reputation capital to bridge the gap between investors and corporate managers. See John C. Coffee, Jr., Gatekeeper Failure and Reform: The Challenge of Fashioning Relevant Reforms, 84 B.U. L. REV. 301, 308 (2004) [hereinafter Coffee, Gatekeeper Reform];
63. John C. Coffee, Jr., Understanding Enron: "It's About the Gatekeepers, Stupid," 57 BUS. LAW. 1403, 1405 (2002) (describing gatekeepers as "reputational intermediates"). Sean J. Griffith has referred to insurance carriers as "accidental gatekeepers," since their primary intent is to assess risk and not to provide information to investors. Griffith, supra note 44, at 1150.
64. By the mid-1800s, some courts permitted criminal prosecution of municipal corporations for failing to maintain public bridges or highways. See Ainslie, supra note 18, at 110-11; Laufer, supra note 18, at 1361. Under English common law: well into the 1800s - the corporation could not be indicted at all unless it created a nuisance by failing to perform a public duty. "Prosecution" in such instances was not viewed as a criminal proceeding, but as a means of ensuring that duties imposed by charter or statute were carried out. Most cases involved a failure to repair highways or bridges, or to keep navigable waterways clear. Not until the 1840s - just as the corporation was becoming intertwined in the daily lives of ordinary men and women - was it held that corporations could be prosecuted criminally for malfeasance, at least when nonviolent misdemeanors were charged. Lawrence Mitchell Rothman, Life After Doe? Self-incrimination and Business Documents, 56 U. CIN. L. REV. 387, 403 n.82 (1987) (citations omitted).
65. N.Y. Cent. & Hudson River R.R. v. United States, 212 U.S. 481 (1909).
66. Id. at 494. The railroad company was charged with payment of an illegal rebate. Id. at 489.
67. Id. at 494.
68. Id. at 495.
69. See Pamela H. Bucy, Organizational Sentencing Guidelines: The Cart Before the Horse, 71 WASH. U. L.Q. 329, 340 (1993) (describing the Court's reasoning as "flawed and outdated").
70. See Greenblum, supra note 41, at 1885-89 (explaining that the government may seek civil fines or forfeiture; freeze the offender's assets; obtain cease and desist orders; withdraw necessary licenses or permits; and/or cancel government contracts and debar or disqualify the offender from contracting to supply future business to government agencies).
71. Vikamaditya S. Khanna, Corporate Crime Legislation: A Political Economy Analysis, 82 WASH. U. L.Q. 95, 95 (2004) ("[M]ost corporate crime legislation arises when there is a large public outcry over a series of corporate scandals during or around a downturn in the economy.").
72. See Robert A. Creamer, Criminal Law Concerns for Civil Lawyers, FED. LAW., May 2005, at 34, 35 (citing the thirteen federal criminal statutes that are most often invoked against individuals in white-collar cases). Unlike common law fraud, which required a showing of loss caused by a particular false statement, the federal mail and wire fraud statutes require only the use of the mails or interstate wires and a scheme to defraud a person of property or the intangible right to another person's honest services. HASNAS, supra note 18, at 12 (concluding that the federal fraud statutes "authorize the punishment of almost any kind of dishonest or deceptive behavior, even when no other party has suffered any harm").
73. See John C. Coffee, Jr., Does "Unlawful" Mean "Criminal"?: Reflections on the Disappearing Tort/Crime Distinction in American Law, 71 B.U. L. REV. 193, 202 (1991).
74. See generally Lawrence A. Cunningham, The Appeal and Limits of Internal Controls to Fight Fraud, Terrorism, Other Ills, 29 J. CORP. L. 267, 280 (2004) (noting the recent increase in corporate compliance programs).
75. See Tanina Rostain, The Emergence of "Law Consultants," 75 FORD. L. REV. 1397 (2006). Compliance programs first surfaced in response to the Federal Corrupt Practices Act (FCPA), which required compliance officers to educate corporate employees on the illegality of bribing foreign officers.
76. Rebecca Walker, The Evolution of the Law of Corporate Compliance in the United States: A Brief Overview, 1561 PLI/CORP 13 (2006). Later scandals in the defense contracting, health care, and securities industries prompted further rounds of internal controls. Id.
77. See John C. Coffee, Jr., Paradigms Lost: The Blurring of the Criminal and Civil Law Models - And What Can Be Done About It, 101 YALE L.J. 1875, 1880 (1992) (explaining the vulnerability of corporations to be a result of "the common statutory pattern in the United States for a statute establishing an administrative agency to provide that any willful violation of the rules adopted by the agency constitutes a federal felony").
78. For a more general discussion of over-criminalization and legislators' political incentives to err on the side of greater criminal liability than necessary, see William J. Stuntz, The Political Constitution of Criminal Justice, 119 HARV. L. REV. 780, 802-07 (2006).
79. See Pamela H. Bucy, Moral Messengers: Delegating Prosecutorial Power, 59 SMU L. REV. 321, 327 (2006) (noting that states have lagged behind the federal government in passing aggressive laws).
80. Id. at 321 (discussing broad prosecutorial subpoena power). Unless protected by the attorney-client privilege or work product doctrines, entities must produce the documents specified in the grand jury subpoena. See id. They may not rely on the Fifth Amendment privilege against self-incrimination. See Hale v. Henkel, 201 U.S. 43, 74 (1906); HASNAS, supra note 18, at 27.
81. United States v. R. Enters., 498 U.S. 292, 298 (1991) (emphasizing that rules and restrictions that apply at trial do not apply to grand jury proceedings); see also Niki Kuckes, The Useful, Dangerous Fiction of Grand Jury Independence, 41 AM. CRIM. L. REV. 1, 3 (2004) (criticizing pretense that grand jury is independent from federal prosecutor).
82. Chavez v. Martinez, 538 U.S. 760, 767-68 (2003) ("It is well established that the government may compel witnesses to testify at trial or before a grand jury, on pain of contempt, so long as the witness is not the target of the criminal case in which he testifies.").
83. See id. at 768 ("Even for persons who have a legitimate fear that their statements may subject them to criminal prosecution, we have long permitted the compulsion of incriminating testimony so long as those statements (or evidence derived from those statements) cannot be used against the speaker in any criminal case."); Bucy, supra note 51, at 341 (discussing broad prosecutorial power to grant immunity).
84. See Fed. R. Crim. P. 41 (authorizing search warrants); 18 U.S.C. § 1505 (2000) (criminalizing obstruction of justice in federal investigations); 18 U.S.C. § 1511 (2000) (criminalizing obstruction of state or local investigations); 18 U.S.C. § 1519 (Supp. V 2005) (criminalizing destruction or alteration of records with the intent to impede or obstruct federal investigations).
85. See Susan R. Klein, Enhancing the Judicial Role in Criminal Plea and Sentence Bargaining, 84 TEX. L. REV. 2023, 2043-45 (2006). Compare FED. R. CRIM. P. 16, with FED. R. CRIM. P. 26.
86. R. Enters., 498 U.S. at 301 (limiting quashing of grand jury subpoenas to situations in which there is no reasonable possibility of uncovering relevant information).
87. Matter of Sealed Affidavits to Search Warrants Executed on February 14, 1977, 600 F.2d 1256, 1257 (9th Cir. 1979) ("courts have inherent power, as an incident of their constitutional function, to control papers filed within the courts within constitutional and other limitations"); United States v. Napier, 436 F.3d 1133,1139 (9th Cir. 2006) (affirming lower court's refusal to unseal portions of affidavit that related to confidential informant); Times Mirror Co. v. U.S. District Court, 873 F.2d 1210, 1219 (9th Cir. 1999) (sealing of affidavit appropriate to protect pre-indictment investigation). See also David Horan, Breaking the Seal on White Collar Search Warrant Materials, 28 PEP. L. REV. 317, 324 (2001) (observing that sealing of federal search warrants has become common).
88. See FED. R. CRIM. P. 16.
89. Id.
90. "In our system, so long as the prosecutor has probable cause to believe that the accused committed an offense defined by statute, the decision whether or not to prosecute, and what charge to file or bring before a grand jury, generally rests entirely in his discretion." Bordenkircher v. Hayes, 434 U.S. 357, 364 (1978); see also U.S. CONST. art. D, § 3 (granting Executive power to "take Care that the Laws be faithfully executed").
91. See generally Linda R.S. v. Richard D., 410 U.S. 614, 619 (1973) (holding that private individuals lack "judicially cognizable interest" in prosecution of another person).
92. United States v. Williams, 504 U.S. 36, 48 (1992) (holding that prosecutor not required to seek court's approval for indictment).
93. DPAs fall within two broad categories. Some are drafted and entered into before the prosecutor has filed any charges whatsoever. In those instances, the DPA is purely "private" and the courts have no interest in these agreements ex ante. In a second group, the Government files an information or complaint, but the parties agree that it will be deferred for the length of time agreed upon in the DPA. A court then must sign off on the DPA insofar as it implicates the Speedy Trial Act. Other than the Speedy Trial Act concern, however, the court does not review the agreement's substance. See Wilson Meeks, Note, Corporate and White-Collar Crime Enforcement: Should Regulation and Rehabilitation Spell an End to Corporate Criminal Liability?, 40 COLUM. J.L. & SOC. PROBS. 77, 107 (2006).
94. For similar criticisms of the judiciary, see Richard A. Epstein, The Unintended Revolution in Products Liability Law, 10 CARDOZO L. REV. 2193, 2202-03 (1980) ("Today all doctrinal innovation has to come from the courts, where the technical lags and information deficits are at their highest. Yet there is no alternative forum, save legislation, in which to override judgments when they have proved mistaken; indeed, there is no way to find out whether they are mistaken at all.").
95. See Bharara, supra note 2, at 72 (citing the "widespread - and largely legitimate - view that white collar crime is singularly difficult to detect, investigate, and prosecute"); Peter J. Henning, Testing the Limits of Investigating and Prosecuting White-Collar Crime: How Far Will the Courts Allow Prosecutors to Go?, 54 U. PITT. L. REV. 405 (1993) (analyzing current trends in white collar cases that courts are struggling to resolve).
96. Cohen, supra note 19, at 146-47.
97. See generally HASNAS, supra note 18, at 23-55 (describing solutions to enforcement of corporate criminal liability).
98. Hale v. Henkel, 201 U.S. 43 (1906).
99. HASNAS, supra note 18, at 31-32.
100. See Frank O. Bowman, Pour Encourager Les Autres? The Curious History and Distressing Implications of the Criminal Provisions of the Sarbanes-Oxley Act and the Sentencing Guidelines Amendments that Followed, 1 OHIO ST. J. CRIM. L. 373 (2004) (tracking the increase of penalties for economic crime offenders under United States Sentencing Guidelines in 2001, and additional increases that occurred following passage of Sarbanes-Oxley Act of 2002);
101. Geraldine Szott Moohr, An Enron Lesson: The Modest Role of Criminal Law in Preventing Corporate Crime, 55 FLA. L. REV. 937, 954 (2003) (describing significant increases in statutory maximum penalties for economic crimes pursuant to Sarbanes-Oxley).
102. In a 2005 speech, Mary Jo White, a former United States Attorney of the Southern District of New York, soberly warned an audience of defense attorneys: [T]he sweep of corporate criminal liability could hardly be broader. All of you in this audience probably know the law well, but its breathtaking scope always bears repeating: If a single employee, however low down in the corporate hierarchy, commits a crime in the course of his or her employment, even in part to benefit the corporation, the corporate employer is criminally liable for that employee's crime. It is essentially absolute liability. Mary Jo White, Corporate Criminal Liability: What Has Gone Wrong?, 1517 PLI/CORP 815 (2005).
103. See, e.g., United States v. Automated Med. Labs, 770 F.2d 399 (4th Cir. 1985).
104. United States v. Hilton Hotels Corp., 467 F.2d 1000 (9th Cir. 1972).
105. See United States v. Bank of New Eng., 821 F.2d 844 (1st Cir. 1987).
106. See HASNAS, supra note 18, at 12 (federal criminal law statutes such as mail fraud statute "authorize the punishment of almost any kind of dishonest or deceptive behavior, even when no other party has suffered harm").
107. "Legislative and regulatory responses to private sector crises using internal controls enable the state to reach into the private sector to exert power, while preserving the essentially private character of its organizations and their operation." Cunningham, supra note 56, at 281.
108. Arlen & Kraakman, supra note 33, at 718. Arlen and Kraakman further distinguish between "adjusted strict liability" regimes that hold firms strictly liable for their employees' crimes, but insulate their monitoring results (through an evidentiary privilege, for example); and "composite regimes," which hold firms liable for "all detected wrongs but impos[e] an additional sanction on firms with suboptimal policing measures." Id. at 726. As used in this Article, the term "composite liability" refers to this second category of mixed liability regimes.
109. Id. at 715-16.
110. Id.
111. Id.
112. Id. at 707-09; see also Jennifer Arlen, The Potentially Perverse Effects of Corporate Criminal Liability, 23 J. LEGAL STUD. 833 (1994) (presenting an economic analysis of the impact of strict liability on corporate expenditures on enforcement costs). Even under a strict liability regime, some corporate managers will employ monitoring as a form of self-defense, which in turn may disclose crimes that "help" the organization.
113. For example, a CFO who is cooking the books might also be siphoning money from corporate accounts into his own bank account. If organizations employ controls to deter the second type of conduct, they may simultaneously detect the first type. See James D. Cox, Private Litigation and the Deterrence of Corporate Misconduct, 60 LAW & CONTEMP. PROBS. 1, 14-15 (1997). Self-defensive monitoring, however, may be insufficient if the employee of the organization is effectively insulated from the effects of the employee's criminal conduct (e.g., dumping toxic chemicals into a river that is located far away).
114. Nor does it ensure that corporations will report to authorities the misconduct that they detect. Cf. Richard A. Epstein, Imperfect Liability Regimes: Individual and Corporate Issues, 53 S.C. L. REV. 1153, 1156-57 (2001) (in the context of automobile accidents, observing that self-bonding is an incomplete deterrent when injurer can insulate himself from harm).
115. See Arlen & Kraakman, supra note 33, at 707, and Arlen, supra note 91, at 836, for discussions of diversion of resources. For
116. Kimberly D. Krawiec, Cosmetic Compliance and the Failure of Negotiated Governance, 81 WASH. U. L.Q. 487 (2003).
117. Arlen & Kraakman, supra note 33, at 714-15. If the probability of detection were already very high, firms subject to strict liability might still adopt monitoring regimes since they would not increase the probability of detection substantially. See Khanna, supra note 92, at 1232.
118. See Khanna, supra note 92, at 1268-69.
119. I am referring to the tri-partite discussion of regulation (command-and-control rules, performance based standards, and incentives) set out by Susan Rose-Ackerman and amplified by Jon Hanson and Kyle Logue. Jon D. Hanson & Kyle D. Logue, The Costs of Cigarettes: The Economic Case for Ex Post Incentive-Based Regulation, 107 YALE L.J. 1163, 1173-74, 1264 (1998) (citing SUSAN ROSE-ACKERMAN, RETHINKING THE PROGRESSIVE AGENDA: THE REFORM OF THE AMERICAN REGULATORY STATE (1992)).
120. "The most profound problem with [the composite regime] is the likely indeterminacy of the undertaking to engage in 'optimal' compliance efforts. Such a finding will be made ex post and there likely will be little guidance ex ante as to what constitutes optimal compliance efforts." Cox, supra note 91, at 16 (emphasis in original).
121. It is unclear how the DOJ would respond to instances in which prosecutors failed to adhere to these policies, which expressly deny the creation of any substantive or procedural rights for business entities. See, e.g., McNulty Memo, supra note 19, at 19. The Department of Justice historically has exercised uneven levels of authority over the United States Attorneys' offices. See Daniel C. Richman, Federal Criminal Law, Congressional Delegation, and Enforcement Discretion, 46 UCLA L. REV. 757, 805 (1999) (discussing dispersed authority of U.S. Attorneys' offices).
122. The SEC maintains a separate Framework for Cooperation by which its Enforcement Division evaluates whether corporations should be fined or criminally prosecuted for their employee's violations of the security laws. Like the DOJ's internal policies, the SEC's framework urges its regulators to examine the organization's compliance program and its subsequent cooperation with SEC staff. Criminal charging decisions, however, are ultimately made by the prosecutors within the United States Attorneys' Offices and the Department of Justice. The relationship between federal prosecutors and regulators and the costs and benefits of parallel civil and criminal litigation is beyond the scope of this Article.
123. See McNulty Memo, supra note 19.
124. E.g., ABA Task Force on the Attorney-Client Privilege, Report of the American Bar Association's Task Force on the Attorney-Client Privilege, 60 BUS. LAW. 1029, 1043-46 (2005);
125. Earl J. Silbert & Demme Doufekias Joannou, Under Pressure to Catch the Crooks: The Impact of Corporate Privilege Waiver on the Adversarial System, 43 AM. CRIM. L. REV. 1225, 1238 (2006).
126. On September 13, 2006, Paul McNulty, then Deputy Attorney General, announced during testimony before the Judiciary Committee (then headed by Specter) that the Department of Justice was reviewing its internal charging memorandum in light of the criticism of the KPMG case. See Lynnley Browning, Justice Department is Reviewing Corporate Prosecution Guidelines, N.Y. TIMES, Sept. 13, 2006, at C3.
127. McNulty Memo, supra note 19, at 8. In order to obtain such approval, the individual prosecutor must demonstrate a "legitimate need" for such documents, which in turn depends on: (a) the likelihood the privileged information will assist the government's investigation; (b) whether alternate means of obtaining the information exist; (c) the completeness of the organization's voluntary disclosure; and (d) the collateral consequences of waiver to the corporation. Id. at 9.
128. "Prosecutors generally should not take into account whether a corporation is advancing attorneys' fees to employees or agents under investigation and indictment." Id. at 11. A footnote suggests, however, that such payments may be taken into account if it appears that the corporation is behaving in such a manner as to obstruct the investigation. Id. at 11 n.3. It is unclear what the DOJ means by this footnote since any payment of fees is "obstructive" insofar as it assists a target in leveraging his defense.
129. The first DOJ memo to set forth the government's position on charging corporations for their employees' crimes was released by Deputy Attorney General Eric Holder in 1999. The Holder Memo, which originally was not released to the public, was intended only as a summary of "best" practices that different United States Attorneys' Offices had adopted, partly in response to the Organizational Sentencing Guidelines, which also employed a similar "carrot and stick" approach. Finder & McConnell, supra note 14, at 3, 6-9.
130. Memorandum from Larry D. Thompson, Deputy Attorney General, to United States Attorneys, Principles of Federal Prosecution of Business Organizations (Jan. 20, 2003), available at http://www.usdoj.gov/dag/ cftf/business_organizations.pdf [hereinafter Thompson Memo]; McNulty Memo, supra note 19, at 2;
131. see also Christopher J. Christie & Robert M. Hanna, A Push Down the Road of Good Corporate Citizenship: The Deferred Prosecution Agreement Between the U.S. Attorney for the District of New Jersey and Bristol-Meyers Squibb Co., 43 AM. CRIM. L. REV. 1043, 1045 (2006) (noting that the Thompson Memo's "analytical framework applies in all corporate fraud investigations").
132. McNulty Memo, supra note 19, at 4; Thompson Memo, supra note 105, at 3-4. Those nine factors are: (1) the nature and seriousness of the offense; (2) the "pervasiveness of wrongdoing within the organization; (3) the organization's history of similar conduct; (4) the organization's "timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents" including willingness to waive the attorney-client privilege; (5) the "existence and adequacy of the corporation's compliance program"; (6) remedial actions, including any efforts to implement an "effective" corporate compliance program or to improve an existing one or to replace, discipline, or terminate "wrongdoers"; (7) collateral consequences and impact on the public arising from the prosecution; (8) the adequacy of the prosecution of individuals responsible for the corporation's malfeasance; and (9) the adequacy of civil or regulatory enforcement actions. Id.
133. McNulty Memo, supra note 19, at 1.
134. See Sarbanes-Oxley Act of 2002, Pub. L. 107-204, 116 Stat. 745 (2002).
135. McNulty Memo, supra note 19, at 2; Thompson Memo, supra note 105, at 1.
136. E.g., Pamela H. Bucy, Corporate Ethos: A Standard for Imposing Corporate Criminal Liability, 75 MINN. L. REV. 1095, 1099 (1991); Buell, supra note 39.
137. According to Professor Brown: Criminal law has well established ways to address conduct that wrongly compels others to commit crimes - for example, liability for coercion and duress defenses - or wrongly encourages or aids others in crime commission - for example, complicity and accomplice liability. And when another's influence on an actor's conduct falls short of complicity . . . no liability follows, even though it may be a real influence. Darryl K. Brown, Street Crime, Corporate Crime and the Contingency of Criminal Liability, 149 U. PA. L. REV. 1295, 1318 (2001).
138. See ADOLF A. BERLE & GARDINER C. MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY (1932).
139. Agency costs are the costs that arise when managers' interests diverge from those of the principals (shareholders) on whose behalf they act. See Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure, 3 J. FIN. ECON. 305 (1976). Agency costs have often been described as "one of the central problems organizing the field of corporate law."
140. Steven P. Croley, Vicarious Liability in Tort: On the Sources and Limits of Employee Reasonableness, 69 S. CAL. L. REV. 1705, 1715 (1996).
141. As explained by Dean Oakes: The truth is that organizational failure is caused by more than a failure in coordination, planning or information processing. There are micro-economic rewards and punishments within the organization and varying levels of leadership and employee motivation. The corporate setting is even more complicated by concepts and practices such as team production, work groups, independent departmental profit and loss calculations, etc. Richard T. Oakes, Anthropomorphic Projection and Chapter Eight of the Federal Sentencing Guidelines: Punishing the Good Organization When It Does Evil, 22 HAMLINE L. REV. 749, 759 (1999); see also Croley, supra note 113, at 1706 ("[R]eal firms are not monolithic actors . . . [rather,] they are networks of many semi-autonomous actors whose behavior is related in many complicated and contingent ways.").
142. For a similar criticism of enterprise liability for fraud on the market, see Jennifer H. Arlen & William J. Carney, Vicarious Liability for Fraud on Security Markets: Theory and Evidence, 1992 U. ILL. L. REV. 691, 693 (1992): [S]hareholders face collective action problems because they are too numerous to manage the firm . . . . They therefore hire agents (directors) to manage it for them. These directors, not the firm's owners, decide how the firm will deter wrongful acts by its agents. . . . [But] [t]hese directors may not impose optimal sanctions on the firm's agents. This possibility introduces an additional level of agency costs [and] . . . is particularly important in Fraud on the Market cases, because Fraud on the Market is generally committed by some of the very directors and senior officers hired to manage the firm and to deter fraud. Id. (citation omitted);
143. see also John C. Coffee, Reforming the Securities Class Action: An Essay on Deterrence and Its Implementation, 106 COLUM. L. REV. 1534, 1537 (2006) ("To punish the corporation and its shareholders in such a case is much like seeking to deter burglary by imposing penalties on the victim for having suffered a burglary.").
144. McNulty Memo, supra note 19, at 2. This deterrence argument nevertheless rests in part on a belief that government can improve the moral fiber of individuals who run corporate firms. SEC officials, for example, have claimed an obligation to improve the "moral DNA" of corporate executives. See Cristie L. Ford, Toward a New Model for Securities Law Enforcement, 57 ADMIN. L. REV. 757, 773 (2005) (quoting then-SEC Chairman William Donaldson's 2004 speech to the Practicing Law Institute).
145. Indeed, the DOJ's attempt to define good corporate governance is in stark contrast to the business judgment rule, which ordinarily leaves the internal affairs of the corporation to its board of directors. See Del. Code Ann. tit. 8, § 141(a) (2007); Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985). The corollary to this rule is that shareholders are best served when board members are not unduly risk averse (i.e., when they are free to make decisions that later on turn out to be wrong). See, e.g., Gagliardi v. Trifoods Int'l, 683 A.2d 1049, 1052 (Del. Ch. 1996).
146. "In many of the cases we have seen in the past couple of years, two of the most important factors we've focused on are the corporation's culture, and the authenticity of the company's cooperation. Those two factors are, in some sense, two sides of the same coin." Christopher Wray, Assistant Attorney General, Criminal Division, Department of Justice, Remarks at the 22nd Annual Corporate Counsel Institute (Dec. 12, 2003) 5, available at http://www.usdoj.gov/criminal/pr/speeches/2003/12/ 2003_2986_rmrk121203Corprtconslinst.pdf.
147. McNulty Memo, supra note 19, at 14; Thompson Memo, supra note 105, at 7.
148. McNulty Memo, supra note 19, at 14; Thompson Memo, supra note 105, at 7.
149. In contrast, the Delaware Chancery Court's decision in In re Caremark International, Inc., 698 A.2d 959 (Del. Ch. 1996), which both Memos cite, simply held that directors should ensure that some method of measuring compliance or internal controls existed within the firm. In fact, the Caremark court stressed that "the level of detail that is appropriate for [a legal compliance] system is a question of business judgment" and that, at least as Delaware law was concerned, board members should not be held civilly liable for trusting their employees "absent grounds to suspect deception." Id. at 970. Many of the compliance programs that are the source of federal scrutiny would meet the standard laid out by Chancellor Allen in Caremark.
150. See Paul Rose, The Corporate Governance Industry, 32 J. CORP. L. 887, 908 ("A review of recent finance literature suggests that a number of the governance metrics selected [by rating agencies] do not reliably predict firm performance.").
151. See generally Neal Kumar Katyal, Deterrence's Difficulty, 95 MICH. L. REV. 2385, 2387 (1997);
152. Chris W. Sanchirico, Detection Avoidance, 81 N.Y.U. L. REV. 1331, 1352-60 (2006) (discussing detection avoidance costs).
153. See Sanchirico, supra note 123, at 1368-69.
154. See Katyal, supra note 123, at 2387.
155. Id. at 2387; Sanchirico, supra note 123, at 1337.
156. Imagine at a given time T, a crime produces a Benefit, B, of 10, with a 1% Probability of Detection, p, and Sanction, s, of 100. Under such conditions, B is greater than the expected value of the penalty (p multiplied by s) and the rational criminal will commit the crime. If, sometime during or following the commission of the crime, at T1, Company X increases its enforcement efforts such that expected penalty increases to 20 (either by increasing sanctions or probability of detection), then the costs of the conduct outweigh the benefits since 20 obviously exceeds 10. Criminals who have not yet committed the crime will be deterred. Criminals who have committed prior crimes and who are committed to engaging in future crimes in order to cover up the initial crimes (such as fraudulent financial reports for public companies) are much less likely to be deterred, however, because the benefit now includes the foregone sanction from the prior crime assuming cessation of criminal conduct increases the probability of detection to 100%. Or, 10 + 100 [the benefit plus the foregone sanction] > 20 [the expected value of the new penalty] For a more in depth discussion of this timing problem, see Miriam H. Baer, Linkage and the Deterrence of Corporate Fraud, 94 VA. L. REV. (2008) (forthcoming).
157. Katyal, supra note 123, at 2415.
158. Id. at 2414 (pointing out that equal detection rates may bring down the overall crime rate but encourage the proliferation of "particularly heinous" crimes).
159. See Steven Shavell, Criminal Law and the Optimal Use of Nonmonetary Sanctions as a Deterrent, 85 COLUM. L. REV. 1232, 1245-46 (1985) (explaining that uniformly high sanctions eliminate marginal deterrence for varying crimes).
160. See Katyal, supra note 123, at 2414-15 (discussing problems when range of sanctions is limited).
161. "Cleave another violation with a sanction and you discourage it. Cleave detection avoidance, and like the hydra, it grows another head." Sanchirico, supra note 123, at 1367.
162. See generally Christine Jolls, Cass R. Sunstein & Richard H. Thaler, A Behavioral Approach to Law and Economics, in BEHAVIORAL LAW AND ECONOMICS 38-39 (Cass R. Sunstein ed., 2000) (discussing hindsight bias in the context of negligence determinations by juries). These biases and heuristics apply informatively to prosecutors.
163. See Alafair S. Burke, Improving Prosecutorial Decision Making: Some Lessons of Cognitive Science, 47 WM. & MARY L. REV. 1587, 1590-91 (2006);
164. Keith A. Findley & Michael S. Scott, The Multiple Dimensions of Tunnel Vision in Criminal Cases, 2006 WIS. L. REV. 291 (2006) (discussing hindsight bias as it applies to criminal prosecutions);
165. Rachel E. Barkow & Kathleen M. O'Neill, Delegating Punitive Power: The Political Economy of Sentencing Commission and Guideline Formation, 84 TEX. L. REV. 1973, 1981-82 & n.35 (2006);
166. Sara Sun Beale, What's Law Got to Do With It? The Political, Social, Psychological and Other Non-Legal Factors Influencing the Development of (Federal) Criminal Law, 1 BUFF. CRIM. L. REV. 23 (1997) (discussing accessibility).
167. McNulty Memo, supra note 19, at 7-12; Thompson Memo, supra note 105, at 5-6.
168. Cf. William J. Stuntz, The Pathological Politics of Criminal Law, 100 MICH. L. REV. 505, 535-37 (2001) (describing local prosecutors' incentives to preserve resources through plea bargaining procedures).
169. See generally Michael A. Simons, Prosecutorial Discretion and Prosecution Guidelines: A Case Study in Controlling Federalization, 75 N.Y.U. L. REV. 893, 932-33 (2000) ("[I]t is at least the perception in United States Attorney's Offices that those offices that bring increasing numbers of prosecutions will be 'rewarded' with increasing allocations of resources (i.e., more positions for prosecutors, investigators, and support staff) and that those offices that bring decreasing numbers of prosecutions will be 'penalized' by the Department of Justice through corresponding reductions in resources."). Simons concludes that this perception leads prosecutors to prosecute crimes that could otherwise be prosecuted in state courts. Id. at 933. The perception, however, just as easily supports the hypothesis that prosecutors will extract maximum convictions and maximum terms from corporate defendants.
170. Additionally, prosecutors may be unduly influenced by personal interests such as self promotion or ego. See generally Kenneth Bresler, "I Never Lost a Trial:" When Prosecutors Keep Score of Criminal Convictions, 9 GEO. J. LEGAL ETHICS 537, 541 (1996) (criticizing prosecutors who maintain win-loss tallies).
171. Daniel Richman, Institutional Competence and Organizational Prosecutions, 93 VA. L. REV. IN BRIEF 115, 116 (2007), http//:www.virginialawreview.org/inbrief/2007/06/18/richman.pdf ("[P]rosecutors rarely act alone, and are unlikely to do so in a sustained white collar investigation.").
172. Plea bargaining in general reduces transparency in the enforcement of criminal law, with negative effects on public legitimacy. See Stephanos Bibas, Transparency and Participation in Criminal Procedure, 81 N.Y.U. L. REV. 911 (2006).
173. "If the legal standard is uncertain, even actors who behave 'optimally' in terms of overall social welfare will face some chance of being held liable because of the unpredictability of the legal rule. More important, these actors can usually reduce that chance by 'overcomplying,' that is, modifying their behavior beyond the point that would be socially optimal." John E. Calfee & Richard Craswell, Some Effects of Uncertainty on Compliance with Legal Standards, 70 VA. L. REV. 965, 966 (1984).
174. This is a common problem that can render standards (which are defined ex post) more costly than rules (which are defined ex ante) for regulated entities. See Ehud Kamar, A Regulatory Competition Theory of Indeterminacy In Corporate Law, 98 COLUM. L. REV. 1908, 1919 (1998) (concluding that indeterminate laws increase costs of obtaining legal advice and risk of litigation); Louis Kaplow, Rules Versus Standards: An Economic Analysis, 42 DUKE L.J. 557, 569 (1992).
175. An exception to this rule is the government's prosecution of KPMG, which resulted in a DPA and the government's indictment of former KPMG employees. Jonathan D. Glater, 8 Former Partners of KPMG Are Indicted, N.Y. TIMES, Aug. 30, 2005, at C1. It should be noted, however, that the entity itself did not challenge the government's behavior in court; rather, the individual defendants who were the subject of the government's prosecution brought the government's conduct to the attention of the court.
176. Because these negotiations occur before charges are filed and outside the judicial system, they too lack transparency and, in many instances, accountability for the negotiating parties. See Stephanos Bibas, Transparency and Participation in Criminal Procedure, 81 N.Y.U. L. REV. 911, 938 (2006).
177. See generally Bierschbach & Stein, supra note 40, at 1749-51 (discussing collateral consequences in terms of "market spillovers"); Creamer, supra note 54, at 35-37 (describing effects).
178. Federal Acquisition Regulation (FAR), 48 C.F.R. §§ 9.406-2, -5(a) (2006). For a more in-depth discussion of debarment, see H. Lowell Brown, The Corporate Director's Compliance Oversight Responsibility in the Post-Caremark Era, 26 DEL. J. CORP. L. 1, 93-102 (2001).
179. Creamer, supra note 54, at 35.
180. See Greenblum, supra note 41, at 1885-86 (cataloguing consequences of criminal convictions).
181. For a recent empirical study of losses suffered by managers upon the disclosure of corporate financial misconduct, see Jonathan M. Karpoff, D. Scott Lee & Gerald S. Martin, The Consequences to Managers for Financial Misrepresentation (April 16, 2007), available at http://ssrn.com/ abstract=972607 at 30-34 (describing combination of job losses and civil and criminal penalties).
182. Reputation losses are also discussed at length in Cindy R Alexander, On the Nature of the Reputational Penalty for Corporate Crime: Evidence, 42 J.L. & ECON. 489 (1999);
183. Mark A. Cohen, Corporate Crime and Punishment: An Update on Sentencing Practice in the Federal Courts, 1988-1990, 71 B.U. L. REV. 247, 266-67 (1991);
184. Jonathan M. Karpoff & John R. Lott, Jr., The Reputational Penalty Firms Bear from Committing Criminal Fraud, 36 J.L. & ECON. 757 (1993);
185. Dennis Recca, Note, Reputational Penalties For Corporations and the Federal Sentencing Guidelines, 2004 COLUM. BUS. L. REV. 879.
186. "'[A] wrongful indictment . . . works a grievous, irreparable injury to the person indicted' resulting in damage to the person's reputation which, because the public remembers the accusation and suspects guilt, can not be simply cured by a subsequent finding of not guilty." Stolt-Nielsen, S.A. v. United States, 352 F. Supp. 2d 553, 560 n.8 (E.D. Pa. 2005) (quoting In re Fried, 161 F.2d 453, 458-59 (2d Cir. 1947)), rev'd, 442 F.3d 177 (3rd Cir. 2006).
187. Arthur Andersen LLP v. United States, 544 U.S. 696 (2005). The government declined to retry Andersen.
188. Although the following comments on overdeterrence were not made in regard to corporate criminal liability, they are nevertheless particularly apt: "If there is a risk either of accidental violation of the criminal law or of legal error, an expected penalty will induce innocent people to forgo socially desirable activities at the borderline of criminal activity. The effect is magnified if people are risk averse and penalties are severe." Richard A. Posner, An Economic Theory of the Criminal Law, 85 COLUM. L. REV. 1193, 1206 (1985).
189. It is also possible that some organizations underpay for corporate crime by creating cosmetic compliance programs and/or designating certain employees as corporate scapegoats for criminal conduct that was sanctioned more broadly. Because the facts supporting these agreements (and indeed, many of the agreements themselves) are not public, it is difficult to test these theories. Nevertheless, recent reports regarding the negotiation of agreements with KPMG and Bristol Myers Squibb suggest an overpayment rather than an underpayment scenario.
190. See Gilbert Geis & Joseph F.C. DiMento, Empirical Evidence and the Legal Doctrine of Corporate Criminal Liability, 29 AM. J. CRIM. L. 341 (2002) (observing dearth of proof of corporate criminal liability's effectiveness and suggesting topics for further empirical inquiry).
191. Professor Krawiec has questioned whether compliance programs are effective at all. Krawiec, supra note 34, at 591-596. Krawiec hypothesizes that compliance programs remain popular because of political influence exerted by the business lobby and compliance professionals. Id. at 610-12. Krawiec further develops her public choice theory in another recent article. Cosmetic Compliance and the Failure of Negotiated Governance, 81 WASH. U. L.Q. 487 (2003) (concluding that business professionals would rather pay for "cosmetic" compliance programs than affect real organizational change).
192. See McNulty Memo, supra note 19, at 14. Some agencies have filled in this gap. See, e.g., OIG Compliance Program Guidance for Pharmaceutical Manufacturers, Department of Health and Human Services, 68 Fed. Reg. 23, 731 (May 5, 2003).
193. The McNulty and Thompson Memos include both rules and standards as those terms have been defined by Louis Kaplow. Because key terms such as "effective compliance program" and "sufficient cooperation" are only partially defined ex ante, they are best viewed as "standards." See Kaplow, supra note 141, at 559-60 & n.2. Kaplow theorizes that when activity is infrequent or affects few individuals, standards are preferable to rules because the promulgation costs of defining a rule ex ante are high. Id. at 573. By contrast, "the greater the frequency with which a legal command will apply, the more desirable rules tend to be relative to standards. This result arises because promulgation costs are borne only once, whereas efforts to comply with and action to enforce the law may occur rarely or often. Rules cost more to promulgate; standards cost more to enforce." Id. at 577. Corporate crime and entity-based liability questions are neither infrequent nor so heterogeneous to render ex ante rules infeasible. Moreover, if one considers corporate criminal liability to affect all shareholders and stakeholders (employees, customers, etc.), corporate criminal liability affects potentially millions of people. Given the foregoing, we should expect the government to promulgate rules instead of standards. Kaplow nevertheless concedes the possibility that political motivations may cause a governing authority to prefer standards even though rules appear more efficient. Id. at 609.
194. Cunningham, supra note 56, at 286 n.74 (suggesting that regulation in this context may in fact be involuntary).
195. See Laufer, supra note 18, at 1343 (describing "elaborate cottage industry" of experts who "lay claim to dramatically reducing the likelihood of criminal liability"); Rose, supra note 122, at 925-26 (criticizing "homogenization" of corporate governance industry); Linda Klebe Trevino, Out of Touch: The CEO's Role in Corporate Misbehavior, 70 BROOK. L. REV. 1195, 1196-97 (2005) (noting that Ethics Officers in charge of compliance programs "meet regularly to benchmark and discuss best practices in ethics and legal compliance management").
196. Zaring defines "best practices" as a form of regulation that encourages regulated parties' input and experimentation instead of handing down distinct rules. David Zaring, Best Practices, 81 N.Y.U. L. REV. 294, 297 (2006). Regulation is "horizontal" instead of "hierarchical" insofar as organizations look to each other for the content of rules. Id. Zaring observes that although best practices "might suggest a rather democratic form of regulatory experimentalism, " wherein organizations learn from each other and regulators publicize their successes, "best practices usually fall short of this ideal. They are not a panacea, not always horizontal, and often, at least in effect, not really voluntary. In short, although best practices purport to be 'best,' there is nothing particularly 'best' about them. The rulemaking technique is a way of obtaining common practices, not ideal ones." Id. at 297-98 (emphasis in original).
197. Christopher A. Wray & Robert K. Hur, Corporate Criminal Prosecution in a Post-Enron World: The Thompson Memo in Theory and Practice, 43 AM. CRIM. L. REV. 1095, 1185 (2006).
198. Rachel E. Barkow, Separation of Powers and the Criminal Law, 58 STAN. L. REV. 989, 1024-25 (2006) (arguing for greater oversight of prosecutor's plea bargaining power). See also Garrett, supra note 10, at 861-69 (observing that the government's agreement with KPMG effectively regulates the manner in which accounting firms provide certain tax planning advice).
199. Although Christopher Wray and Robert Hur agree that the proliferation of corporate prosecutions raises the possibility that the government will inconsistently enforce corporate governance standards, their proposed solution is for DOJ officials to watch for inconsistency and, if necessary, impose a more centralized system. See Wray & Hur, supra note 160, at 1187-88.
200. In contrast, Ayers and Braithwaite assumed that the "enforced self-regulatory" model of compliance would include an individualized ex ante review of the corporation's compliance program before wrongdoing was detected. IAN AYERS & JOHN BRAITHEWAITE, RESPONSIVE REGULATION: TRANSCENDING THE DEREGULATION DEBATE 106 (1992). "Under enforced self-regulation, the government would compel each company to write a set of rules tailored to the unique set of contingencies facing that firm. A regulatory agency would either approve these rules or send them back for revision if they were insufficiently stringent." Id.
201. See Tom E. Tyler, Promoting Employee Policy Adherence and Rule Following in Work Settings: The Value of Self-Regulatory Approaches, 70 BROOK. L. REV. 1287, 1301-02 (2005) (command-and-control systems "consume organizational resources. Even if they work, these strategies are costly and inefficient").
202. Langevoort, supra note 37, at 75-76 (stating that lawyers are primary "compliance engineers" in many firms).
203. Ironically, the DOJ's "flexible" standards encourage firms to adopt command-and-control internal compliance regimes. See Cunningham, supra note 56, at 307; Langevoort, supra note 37, at 73.
204. Langevoort hypothesizes that lawyers in particular prefer rules and command-and-control based systems. See Langevoort, supra note 37, at 118.
205. Tyler, supra note 164, at 1300-01 (arguing that the "self-regulatory" approach is preferable to command-and-control systems because employees are more likely to follow rules that conform to their ethical values and are promulgated by institutions they view as fair).
206. See Cunningham, supra note 56, at 307-09.
207. For an overview of these arguments, see Bharara, supra note 2, at 96-97 (describing pressure on organizations to waive privilege).
208. In Stolt-Nielsen, an antitrust case, the corporation's counsel (a former DOJ antitrust attorney) initiated an internal investigation after he had already contacted the government and had advised it of possible illegal conduct. See Stolt-Nielsen S.A. v. United States, 352 F. Supp. 2d. 553, 556-57 (E.D. Pa. 2005) (internal counsel purposely notified government prior to completing investigation in order to preserve marker for company), rev'd, 442 F.3d 177 (3rd Cir. 2006). He contacted the DOJ prior to completing his investigation because he wished to preserve his client's chances of obtaining amnesty under the Antitrust Division's Amnesty program. The Antitrust Division employs a corporate leniency program that immunizes the first entity that discloses illegal conduct. For a general discussion of the program and its effect on enforcement of antitrust violations, see Bruce H. Kobayashi, Antitrust, Agency, and Amnesty: An Economic Analysis of the Criminal Enforcement of the Antitrust Laws Against Corporations, 69 GEO. WASH. L. REV. 715 (2001) (arguing that excessive fines and "first to cooperate" amnesty policy may lead to overdeterrence within firms).
209. Professor Laufer has argued that the company might purposely scapegoat an innocent employee in order to gain the government's good will and obtain a DPA. See Laufer, supra note 18, at 1413-14.
210. Wray & Hur, supra note 160, at 1182.
211. The power exercised by way of the "flip" is also unnecessary in the corporate context because the organization is already obligated to answer government queries for information and documents. See Hale v. Henkel, 201 U.S. 43 (1906).
212. Boeing entered into an agreement with the DOJ that explicitly stated that future crimes by low-level employees would not be considered a violation by Boeing. Peter Lattman, Boeing's Non-Non Prosecution Agreement, WALL ST. J. LAW BLOG, July 6, 2006, http://blogs.wsj.com/law/2006/07/06/boeings-non-non-prosecution-agreement. This provision, however, has not been widely used. In another prosecution, Stolt-Nielsen became a victim of its lack of information when prosecutors in the Antitrust Division, having learned that one of Stolt's employees lied to Antitrust investigators about the date he terminated his conduct in a price-fixing cartel, withdrew their prior leniency agreement and decided to indict the company, despite its prior cooperation efforts. See Stolt-Nielsen, S.A. v. United States, 442 F.3d 177 (3rd Cir. 2006) (company cannot attempt to enforce leniency agreement until after government obtains grand jury indictment), cert. denied, 127 S. Ct. 494 (2006); Press Release, Dept. of Justice, Stolt-Nielsen S.A. Indicted on Customer Allocation, Price Fixing, and Bid-Rigging Charges for its Role in an Int'l Parcel Tanker Shipping Cartel (Sept. 6, 2006), available at http://www.usdoj.gov/atr/ public/press_releases/2006/218199.pdf.
213. One of the few articles addressing this topic is Brandon Garrett's Structural Reform Prosecution, which analyzes DPAs and concludes that the DOJ has "consistently pursued compliance" through monitors and other structural reforms. Garrett, supra note 10, at 860. For two recent discussions of issues created by corporate monitoring, see Jennifer O'Hare, The Use of the Corporate Monitor in SEC Enforcement Actions, 1 BROOK. J. CORP. FIN. & COM. L. 89 (2006); Vikramaditya Khanna & Timothy L. Dickinson, The Corporate Monitor: The New Corporate Czar, 105 MICH. L. REV. 1713 (2007).
214. See JAMES JACOBS, MOBSTERS, UNIONS, AND FEDS: THE MAFIA AND THE AMERICAN LABOR MOVEMENT 138-60 (discussing the use of federal monitors in the context of civil RICO suits filed by DOJ against various unions). Borrowing a page from bank regulation, Professor James Fanto has proposed that the SEC hire, train, and pay yearly salaries to corporate monitors who would "engage in a constant dialogue with management of the public firm and alert officers and directors at an early stage to problematic transactions and SEC concerns." James Fanto, Paternalistic Regulation of Public Company Management: Lessons from Bank Regulation, 58 FLA. L. REV. 859, 915 (2006). Although Fanto's proposal alleviates some of the overbilling concerns discussed infra in the text, it does not solve the confidentiality and authority issues that a monitor poses for the board and the corporation's management. Similar problems plague Cristie Ford's proposal for independent "third party" monitors to report to the SEC on corporate governance issues within firms. See Cristie L. Ford, Toward a New Model for Securities Law Enforcement, 57 ADMIN. L. REV. 757, 798 (2005).
215. One notable exception to the lack of oversight problem is Richard Breeden's oversight of MCI, which occurred in the context of the MCI bankruptcy and was overseen by the district court supervising the bankruptcy process.
216. Craig Morford, Acting Deputy Attorney General, Selection and Use of Monitors in Deferred Prosecution Agreements and Non-Prosecution Agreements with Corporations, March 7, 2008, available at http://lawprofessors.typepad. com/whitecollarcrime_blog/files/doj_principles.pdf [hereinafter Morford Memo] The Morford Memo was released in advance of a March 11, 2008, House Hearing on deferred prosecution agreements and corporate monitors. See U.S. House of Representatives, Committee on the Judiciary, Hearing on Deferred Prosecution: Should Corporate Settlement Agreements Be Without Guidelines?, http://judiciary.house.gov/oversight.aspx?ID=425.
217. Although the monitor has no legal obligation to report to the corporation's board, management, or shareholders, the DOJ's newly-released Morford Memo recognizes that the monitor may wish to communicate with both the Government and the "corporation." Morford Memo, supra note 179, at 6. The same Memo, however, also implies that it may be appropriate to communicate solely with the Government about the corporation's progress in meeting the terms of its DPA. Id.
218. I am not suggesting that the monitor will intentionally defraud the corporation. Without any market restraints or significant oversight, he either may provide excessive services or charge in excess of their value.
219. Prosecutors who are supported by attenuated yearly budgets are least likely to be sensitive to these costs.
220. The Delaware judiciary has criticized and overturned agreements in which the board abdicates its judgment to legal advisors in the context of a merger agreement. See ACE Limited v. Capital Re Corp., 747 A.2d 95, 106-07 (Del. Ch. 1999) (criticizing contract provision that delegated a merger decision to outside lawyer's legal opinion: "does it make sense for the board to be able to hide behind its lawyers?").
221. Bristol-Myers Squib, Deferred Prosecution Agreement (June 15, 2006), http://www.Bristol-Myers.com/static/pdf/dpa.pdf.
222. Following his appointment as monitor, Lacey and members of his law firm, LeBoef, Lamb, Greene & MacRae "became regular fixtures at Bristol-Myers" and provided the United States Attorneys Office with quarterly reports of 400 to 500 pages that were unavailable to the public. See Stephanie Saul, A Corporate Nanny Turns Assertive, N.Y. TIMES, Sept. 19, 2006, at C1.
223. Christie & Hanna, supra note 105, at 1044.
224. See Saul, supra note 185.
225. For discussion of the facts leading up to BMS's guilty plea, see Bristol-Myers Faces Charges, L.A. TIMES, May 31, 2007, at C6; Press Release, U.S. Department of Justice, Bristol-Myers Squibb Pleads Guilty to Lying to the Federal Government About Deal Involving Blood-Thinning Drug (May 30, 2007), available at http://www.usdoj.gov/atr/public/press_releases/ 2007/223634.pdf.
226. John Carreyrou, Bristol-Myers Settles Probe of Apotex Deal, WALL ST. J., May 11, 2007, at B2; Press Release, Bristol-Myers Squibb, (June 11, 2007), available at http://newsroom.bms.com/index.php? s=press_releases&item=271.
227. BMS's press release states in pertinent part: The company acknowledge[s] that a former Bristol-Myers Squibb senior executive made oral representations to Apotex for the purpose of causing Apotex to conclude that [BMS] would not launch an authorized generic in the event that the parties reached a final revised settlement agreement. Those representations included the former senior executive's statement that he expected to oppose personally the launch of an authorized generic in the future, his statement that he expected to advocate against such a launch, and his implied suggestion that the company's former CEO shared his views. . . . The company acknowledged in court today its responsibility for the conduct of the former senior officer. The company continues to believe that there was no "side agreement" with Apotex. Press Release, Bristol-Myers Squibb, (June 11, 2007), available at http://newsroom.bms.com/index.php?s=press_releases&item=271.
228. Carreyrou, supra note 189.
229. Bodnar's resignation was announced on May 14, 2007. See Shannon Pettypiece, Shakers: Business Personalities in the News, INT'L HERALD TRIB., May 14, 2007, http://www.iht.com/articles/2007/ 05/13/business/bxshake.php
230. Significantly, the Antitrust Division, which initiated the investigation, has not filed any charges against BMS and its two former top executives.
231. See Buell, supra note 39, at 532 (arguing that liability should attach only when it was employee's primary intent to benefit employer).
232. See Bierschbach & Stein, supra note 40, at 1775.
233. Greenblum, supra note 41, at 1898.
234. See Bharara, supra note 2, at 112 (arguing that Congress and the courts should develop "clear and expert standards" in order to shift discretion away from prosecutors).
235. Buell, supra note 39, at 532.
236. Id. at 477. "The truth is that institutions do produce wrongdoing." Id. at 493.
237. Buell praises reputation effects as a means of disciplining firms. See Buell, supra note 39, at 535.
238. Model Penal Code § 2.07(1) (2001); Ainslie, supra note 18, at 120-21.
239. Stuntz, supra note 135, at 529 ("Legislators presumably want to stay in office, and perhaps to position themselves for higher office. To do those things, legislators must please their constituents.").
240. Andrew Weissman & David Newman, Rethinking Criminal Corporate Liability, 82 IND. L.J. 411, 414 (2007).
241. See supra text accompanying notes 74-76.
242. Greenblum, supra note 41, at 1865.
243. Bierschbach & Stein, supra note 40, at 1776.
244. Greenblum, supra note 41, at 1865; see also Garrett, supra note 10, at 924 (arguing courts could impose " reasonableness" review on DPA process).
245. This would require that all agreements be filed in court. See Greenblum, supra note 41, at 1900.
246. See Ainslie, supra note 18, at 110-15 ("civil sanctions can generally be shaped far more precisely to meet the targeted evil"); Khanna, supra note 34, at 1275-76 ("Most, if not all, of the advantages of corporate criminal liability can be achieved by various forms of civil liability at lower cost to the government and society."); Fischel & Sykes, supra note 2, at 322-24: "[economic deterrence arguments] are not arguments for corporate criminal liability in particular, but, rather, arguments for a set of monetary penalties, properly calibrated in light of the social harm caused by the criminal acts of corporate agents.").
247. Fischel & Sykes, supra note 2, at 321.
248. "[A] total penalty equal to the social cost of crime, discounted by the probability of nondetection, is an appropriate rule of thumb to use in setting the penalty." Fischel & Sykes, supra note 2, at 325-26. Additional factors, such as the penalty's effect on enforcement costs or likelihood of detection may also affect the penalty. Id. at 326. In addition, a proper system should also consider the penalties imposed on the individual employee - apart from those imposed on the organization - because the individual employee presumably will demand greater compensation ex ante to make up for the ex post damages he may suffer. Id.; see also Ronald Coase, The Problem of Social Cost, 3 J.L. ECON. 1 (1960). This Coasian shift is rather uneven. When liability is aimed primarily at the corporation and not the manager, the corporation will have a difficult time shifting liability back to the manager because negotiation with management is not arm's length. Khanna, supra note 34, at 1255. This problem, however, would seem to be limited to top managers and not all employees.
249. According to Professor Stuntz, this tendency toward criminalization is shared and supported by prosecutors. See Stuntz, supra note 135, at 534 ("[A]t the most basic level, elected legislators and elected prosecutors are natural allies."). Although Stuntz was referring to elected prosecutors, this alliance should extend to political appointees as well.
250. "[B]ecause the costs of excessive monitoring must be recovered through prices, improperly high penalties create additional inefficiencies because the price of goods or services produced by corporations will exceed their social costs." Fischel & Sykes, supra note 2, at 324.
251. See Cunningham, supra note 56, at 308-09 (discussing perception gap between legal culture's expectation of "absolute assurance" and reality of leakiness); Fischel & Sykes, supra note 2, at 346 (compliance at all costs not desirable); Langevoort, supra note 37, at 73 (perfection not possible).
252. Jonathan Macey, Agency Theory and the Criminal Liability of Organizations, 71 B.U. L. Rev. 315, 326-32 (1991) (describing three primary causes of corporate crime). For further discussion of how corporate culture allegedly causes crime, see generally Ford, supra note 116, at 762.
253. Baysinger argues that corporate compliance programs should be judged like any other corporate output: "Like other aspects of production, the outputs of compliance programs must be judged realistically: no system that is cost effective and otherwise tolerable to live with can be absolutely foolproof." Barry Baysinger, Organization Theory and the Criminal Liability of Organizations, 71 B.U. L. Rev. 341, 367-68 (1991).
254. Because of the uncertainties about whether and how a market would function, my proposal presumes that the program would be optional for a defined period of time. After the market was established, the regime could become mandatory for organizations above a certain size in terms of capitalization or employees. Cf. Richard Epstein, Imperfect Liability Regimes: Individual and Corporate Issues, 53 S.C.L. REV. 1153, 1160-61 (2002) (discussing benefits of mandatory insurance tort regime for small corporations). Whether compulsory compliance insurance is necessary or advisable, however, is beyond the scope of this article.
255. By "insurance," I mean the company's purchase of insurance from an insurance carrier, who pools and aggregates the risks of multiple organizations. I do not mean "self-insurance," which the current regime of corporate criminal liability effectively requires. See Laufer, supra note 18, at 1349 (explaining how corporate compliance has become "a carefully conceived and arguably overpriced form of risk management that serves as an insurance function").
256. Admittedly, the process for devising a schedule of minimum coverage could itself become quite complex and/or inefficient, particularly if the regulator who set a mandatory schedule of minimum insurance set amounts too high or too low as a result of making incorrect assumptions or becoming politically captured by one or more parties. See Hanson & Logue, supra note 95, at 1267 (discussing information inefficiencies of performance-based regulation). If the schedule were transparent, however, and subject to the ordinary rule-making notice and comment procedures outlined by the APA, the inefficiencies would likely be less than those caused by the processes described in Part I of this Article.
257. See Griffith, supra note 44, at 1167-68. Coverage under Side A (referred to as Insurance Clause 1 in some policies) provides coverage to individual insureds where the company is legally or financially unable to indemnify them. Coverage under Side B (or Insuring Clause 2 in some policies) provides corporate reimbursement coverage to the extent the company indemnifies the individual directors and officers, usually in excess of a large deductible. Finally, many traditional D&O policies today also include Side C coverage that provides entity coverage for securities claims, again in excess of a large deductible. John C. Tanner and David E. Howard, Blowing Whistles & Climbing Ladders, 23 No. 4. ACC Docket 32 (April 2005) at 50. Professor Coffee has explained that Side C coverage came about because of allocation issues that arose when both the corporation and managers were sued in class action suits. Carriers would "demand an allocation of the defense costs between their clients [the individual directors and officers] and the corporation...[and] thereby plac[e] the individual defendants at risk for these payments." Accordingly, in or about 1996, carriers began to extend entity-based coverage, "which directly reimbursed the corporation for its own litigation expenses, its own settlement payments in securities cases, and certain other forms of litigation." Coffee, supra note 115, at 1569-70.
258. Entity-based policies do not currently cover losses caused by fraudulent or dishonest conduct. See David T. Case and Matthew L. Jacobs, Insurance Coverage for Governmental Investigations of Financial Institutions, 123 BANKING L.J. 256, 260 (2006); supra note 127.
259. Ronen, supra note 44, at 48 ("We need to create ... an agency relationship between the auditor and an appropriate principal - one whose economic interests are aligned with those of investors, who are the ultimate intended beneficiaries of the auditor's attestation.... [I]nsurance carriers are an eminently reasonable candidate."). See also Lawrence A. Cunningham, Too Big to Fail: Moral Hazard in Auditing and the Need to Restructure the Industry Before It Unravels, 106 COLUM. L. REV. 1698, 1738-47 (2006) [hereinafter Cunningham, Too Big To Fail]; Cunningham, supra note 44; Lawrence A. Cunningham, A Model Financial Statement Insurance Act, 11 CONN. INS. L.J. 69 (2004). Other scholars have called for the imposition of limited strict liability to force auditors to behave "more like insurers." Frank Partnoy, Strict Liability For Gatekeepers: A Reply to Professor Coffee, 84 B.U. L. REV. 365, 375 (2004); see also Frank Partnoy, Barbarians at the Gatekeepers?: A Proposal for a Modified Strict Liability Regime, 79 WASH. U. L.Q. 491 (2001); Coffee, Gatekeeper Reform, supra note 45, at 349.
260. See Cunningham, Too Big to Fail, supra note 222, at 1742. In his latest article, Cunningham suggests that FSI should be mandatory instead of optional. Id. at 1738.
261. "[T]he criminal law prohibits while the civil law prices." Coffee, supra note 58, at 1884 (criticizing legislative habit of criminalizing violations of agency-promulgated regulations).
262. Under Ronen's proposal, instead of paying auditors to audit the corporation's financial statements, corporate managers would purchase financial statement insurance from insurance carriers. To assess their risk of payout, insurance carriers would employ auditors to review the corporate books. This alters the agency cost problem because auditors are no longer paid by the very party (corporate managers) that they are auditing. Ronen, supra note 44, at 48-49.
263. A D&O policy covers directors, officers, and insured entities for litigation against directors and officers for violations of fiduciary duty. D&O policies are most often paid out for shareholder litigation.
264. Insurance carriers already perform some of these tasks when assessing risks for D&O policies. See Tom Baker & Sean Griffith, Predicting Governance Risk: Evidence From the Directors' and Officers' Liability Insurance Market, 74 CHI. L. REV. 487 (2007) [hereinafter Baker & Griffith, Predicting Governance Risk];
265. James Cox, Private Litigation and the Deterrence of Corporate Misconduct, 60 L. & CONTEMP. PROBS. 1, 31-32 (Fall 1997); Griffith, supra note 44, at 1175.
266. Because compliance risk would include matters known to internal counsel, Underwriter U might request privileged information and/or access to C Corp's privileged documents. A similar issue has already been flagged with regard to auditors who review financial statements. See ABA TASK FORCE REPORT, supra note 19, at 1052. As a result of the Sarbanes-Oxley Act, auditors have begun to demand from corporate clients documents that historically were considered covered by the attorney-client privilege. Id. at 1052-53. Although the ABA Task Force did not take a formal position on the issue, it noted with apparent approval the suggestion that Congress enact selective waiver legislation that would permit corporations to supply materials to auditors but maintain the attorney-client privilege or work product protection with regard to other parties. Id. at 1055 & n.106. Similar legislation could apply to compliance insurance.
267. Critics will argue that the federal regulator who sets the schedule will likely reintroduce inefficiencies into the system. Cf. Hanson & Logue, supra note 95, at 1281 ("[The process] place[s] huge information demands on regulators . . . . Without perfect information, regulators will set prices too high or too low, and they will be unable to respond properly to changes in the amount of harm a product does."). However, assuming the regulator published the schedule and its factors every year and made this schedule available for notice and comment, it would be far more transparent and still less inefficient than the current system.
268. Some might argue that this system makes sense only for economic crimes (which are the bulk of crimes that occur within corporate settings) and not those employee crimes that lack a readily quantifiable value, such as obstruction of justice. (I am thankful for Steve Schulhofer's comment on this distinction). Although certain crimes may cause valuation problems, those problems would persist regardless of whether the underlying crime resulted in either criminal or civil fines imposed on the entity.
269. Since this system presupposes the elimination of corporate criminal liability, the insurance carriers would take on the organization's liability in tort for all civil fines and penalties assessed as a result of the organization's employees' criminal misconduct.
270. Since some criminal statutes do not have a civil or regulatory component, Congress might enact an omnibus statute permitting civil government lawsuits on behalf of victims against corporations whose employees were found guilty of federal crimes. This would ensure that the federal government had the same ability to pursue corporate entities civilly for the same crimes that previously would have triggered corporate criminal liability. The difference, of course, is that corporations would be forced to insure the liability, and the collateral consequences of criminal indictment (and the leverage accruing to the prosecutor as a result of those consequences) would drop out.
271. This article presumes that corporations would continue to be held strictly liable (albeit with some encouragement for self-reporting) for their employees' crimes. I choose strict liability as a baseline because: (a) employees may be insolvent and therefore entity liability will prevent the employee's moral hazard; and (b) the costs and errors associated with discerning negligent monitoring outweigh the value of a negligence scheme.
272. The expected value would be a multiple of the expected criminal penalty for a given crime multiplied by the probability of detection.
273. See Arlen & Kraakman, supra note 33, at 707-09. Although presumably the same problem should plague D&O liability (whereby increased corporate governance leads to greater detection but not a sufficient decrease in actual wrongdoing), Griffith does not address it. See Griffith, supra note 44, at 1181 ("By continually optimizing its governance structure, a corporation ought to find that it pays consistently less for D&O insurance than its competitors.").
274. I am grateful to Professor Krawiec for bringing up this point.
275. See generally Tom Baker, On the Geneaology of Moral Hazard, 75 TEX. L. REV. 237, 270 (1996).
276. See Nw. Nat'l Cas. Co. v. McNulty, 307 F.2d 432, 440 (5th Cir. 1962) (proclaiming insurance against criminal penalties void and against public policy in deciding against insurability of punitive damages); see also Catherine M. Sharkey, Revisiting the Noninsurable Costs of Accidents, 64 MD. L. REV. 409, 421-32 (2005) (discussing debate over insurability of punitive damages and suggesting that insurability should fall along lines of whether conduct was intentional instead of whether given relief is labeled compensatory or punitive).
277. Sharkey, supra note 238, at 428-29 ("Most of the states that prohibit insurance for punitive damages on public policy grounds nonetheless permit that insurance when punitive damages are vicariously (as opposed to directly) assessed against a defendant."). See also Deborah Travis, Comment, Broker Churning: Who is Punished? Vicariously Assessed Punitive Damages in the Context of Brokerage Houses and Their Agents, 30 HOUS. L. REV. 1775, 1812 (1994) (explaining that as of 1988, all but three states permitted insurance of vicarious punitive damages).
278. This at least provides a doctrinal backdrop to the otherwise completely intuitive notion that management's participation in a criminal act should result in greater penalties for the organization. See generally Khanna, supra note 34.
279. See Michael A. Pope, Punitive Damages: When, Where and How They Are Covered, 62 DEF. COUNSEL J. 539, 541 (1995) ("If the persons responsible for the corporation's misconduct are officers or directors of the corporation, the misconduct is generally attributed directly to the corporation.").
280. Cf Sharkey, supra note 238, at 432 (criticizing label-based approach to deciding availability of insurance for punitive damages). The resistance to insuring criminal liability - even liability that is vicarious in nature - may stem from the historical fears that insurance fuels crime. See Baker, supra note 237, at 259 (explaining that morality of insurance is linked to exclusion of criminals and those "linked with" criminals).
281. It might increase overall investment in corporations if shareholders believe an insurance system results in less waste and uncertainty than under a corporate criminal liability regime.
282. This in fact has become the problem with D&O insurance. The corporation not only purchases D&O insurance for the directors and officers, but it also purchases Side C coverage for entity-level penalties incurred during securities litigation. Because one insurer covers everything, directors and officers need not worry about allocation or contribution, except where the penalties exceed coverage. Coffee, supra note 115, at 1567 ("[I]f the settlement is fully covered by the corporation's own liability insurance . . . the board has little reason to resist a settlement that involves no contribution by the individual defendants.").
283. Bernard Black, Brian Cheffins & Michael Klausner, Outside Director Liability, 58 STAN. L. REV. 1055, 1087 (2006) ("[P]olicies are now widely available that provide for full severability with respect to both conduct exclusions and the insurer's right to rescind the policy.").
284. Id.
285. One way to shore up an ownership rule is to require that all insurance contracts are negotiated and approved by independent directors. Cf. Coffee, supra note 115, at 1575 (suggesting that SEC require independent directors to examine proposed class action settlements to prevent self-dealing).
286. See United States v. Se. Underwriters Ass'n, 322 U.S. 533 (1944).
287. 15 U.S.C. § 1011 (2000): Congress hereby declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States. Over the years, commentators have periodically called for a repeal of the McCarran-Ferguson Act on various grounds. See Susan Randall, Insurance Regulation in the United States: Regulatory Federalism and the National Association of Insurance Commissioners, 26 FLA. ST. U. L. REV. 625, 641-44 (1998) (discussing Congressional criticism of state regulation of insurance). Following the terrorist attacks on September 11, 2001, Congress partially preempted state regulation of insurance with the passage of the Terrorism Risk Insurance Act of 2002. Terrorism Risk Insurance Act of 2002, Pub. L. No. 107-297, 116 Stat. 2322.
288. Under this analysis, partnerships ordinarily would be ineligible for such insurance as well.
289. There is some evidence that auditors charge higher fees to issuers with higher liability risks. See Coffee, Gatekeeper Reform, supra note 45, at 348-49 (expressing concern that auditor screening may drive law-abiding firms from the market); Partnoy, supra note 222, at 374 (citing Ronald A. Dye, Auditing Standards, Legal Liability, and Auditor Wealth, 101 J. POL. ECON. 887, 908 (1993)).
290. D&O carriers do not assume defense of claims, which unfortunately permits greater ex post loss. In other words, management will settle any claim that does not exceed the coverage amount. Tom Baker & Sean J. Griffith, The Missing Monitor in Corporate Governance: The Directors' and Officers' Liability Insurer, 95 GEO. L.J. 1795, 1813-17 (2007) [hereinafter Baker & Griffith, Missing Monitor]; see also Baker, supra note 227, at 270 (discussing ex post losses and moral hazard). In other insurance contexts, such as commercial liability, carriers take over the entire defense of the claim. Baker & Griffith, Missing Monitor, supra at 1814. It is unclear how compliance insurance would function in this context. Again, if the insurance contracts were negotiated and approved by outside directors, carriers might obtain the right to defend the claim, rather than reimburse the corporation for its own defense.
291. Assuming a strict liability regime, litigation costs should be lower than current costs under a criminal regime. Ideally, compliance insurance would assume some of the characteristics of "first party insurance" in that the finder of fact should not focus time and energy on how or why the crime was committed by the given employee. Cf. MARK GEISTFELD, PRINCIPLES OF PRODUCTS LIABILITY 55-56 (2006).
292. As the role of criminal prosecutors decreased, regulatory agencies might see their role increase under this system. Overall, this should be a good result. See Gerard E. Lynch, The Role of Criminal Law in Policing Corporate Misconduct, 60 LAW & CONTEMP. PROBS. 23, 35 (1997) (preferring "expert regulators" to criminal prosecutors in field of corporate crime). However, inefficient aspects of the criminal process, such as overly intrusive unbonded monitors, might reappear through civil and regulatory settlements. I leave these worries for future consideration.
293. See Cox, supra note 227, at 33 (criticizing the fact that D&O insurance is on a claims made and not occurrence basis).
294. Griffith theorizes that disclosure of D&O premiums creates an additional incentive to reduce the premiums and improve governance. See Griffith, supra note 44, at 1181-82.
295. Griffith raises similar arguments in his proposal for D&O disclosure. See id. at 1182-85.
296. Ronen also proposes disclosure for Financial Statement Insurance. Ronen, supra note 44, at 48-49 (describing "flight to quality" that occurs when companies realize that their policies will signal quality of their financial statements and controls).
297. See Bharara, supra note 2, at 107. "[T]he elimination of all criminal liability for business entities would completely eviscerate prosecutors' leverage against corporations to obtain incriminating information about individual miscreants." Id.
298. 18 U.S.C. § 3 states in pertinent part: Whoever, knowing that an offense against the United States has been committed, receives, relieves, comforts or assists the offender in order to hinder or prevent his apprehension, trial or punishment, is an accessory after the fact. . . . [A]n accessory after the fact shall be imprisoned not more than one-half the maximum term of imprisonment or . . . fined not more than one-half the maximum fine prescribed for the punishment of the principal. 18 U.S.C. § 4 states in pertinent part: Whoever, having knowledge of the actual commission of a felony cognizable by a court of the United States, conceals and does not as soon as possible make known the same to some judge or other person in civil or military authority under the United States, shall be fined under this title or imprisoned not more than three years, or both.
299. See Julie Creswell, Ex-Partner at Milberg Pleads Guilty to Conspiracy, N.Y. TIMES, July 10, 2007, at C1. For the plea agreement, see Plea Agreement for Defendant David J. Bershad, No. CR 05-587(B) JFW (C.A.C.D. July 9, 2007), available at http://www.nylawyer.com/adgifs/ decisions/071007bershad_agreement.pdf. Bershad's plea agreement was followed by William Lerach's and Melvin Weiss' guilty pleas. See Anthony Lin, Weiss Agrees to Plead Guilty to Role in Kickback Scheme, NEW YORK L.J., March 21, 2008, at 1.
300. Smaller organizations, however, may not need compliance insurance. Cf. Clifford G. Holderness, Liability Insurers as Corporate Monitors, 10 INT'L REV. L. & ECON. 115, 124 (1990) (finding from review of 1979 data that smaller closely-held organizations and partnerships do not purchase D&O insurance).
301. Cunningham, Too Big to Fail, supra note 222, at 1743 ("Most insurance underwriting exercises involve classifying risks using general actuarial tools rather than specific investigation.").
302. Id. at 1743-44 (listing other products in which carriers rely on specific investigation).
303. For example, for FSI, Professor Cunningham presumes that insurers would hire external auditors to assess the reliability of the corporation's financial statements. Id. at 1744.
304. Indeed, we might learn through a compliance insurance regime that it is simply impossible to reduce certain risks of employee crime in certain sectors or industries beyond a certain point. If so, the costs of that crime should simply be internalized and expressed as a cost of doing business, rather than cited as cause for moral shame and massive penalties.
305. Id. at 1740.
306. Baker & Griffith, Predicting Governance Risk, supra note 227, at 489.
307. Baker & Griffith, Missing Monitor, supra note 252, at 1813.
308. According to Baker and Griffith, the one carrier of which they were aware that made an attempt to specialize in loss prevention could not demonstrate the value of their services and eventually left the D&O market. Id. at 1810-11.
309. Id. at 1822.
310. Id. at 1833-34.
311. Id. at 1840-41.
312. See supra note 235 and accompanying text.
313. Another possibility is that shareholders want their agents to purchase D&O insurance-minus-monitoring because: (1) they know that their agents inflate the company's books; and (2) they believe that they will, on average, benefit from their agents' fraud. If they believe that they will benefit from such fraud, they will prefer a policy that caps wealth transfers to loser shareholders, but still permits their agents the latitude to continue inflating the books. By contrast, portfolio diversification zeroes out the shareholders' wins and losses. D&O insurance-minus-monitoring preserves benefits for "winner" shareholders, which they willingly share with their agents. Although this theory would undermine some of my arguments against corporate criminal liability (shareholders are usually viewed as innocents), it does not seem particularly plausible beyond a small portion of traders who are particularly savvy and enjoy risk.
314. See Sean M. Fitzpatrick, Fear is the Key: A Behavioral Guide to Underwriting Cycles, 10 CONN. INS. L. J. 255, 259 (2004) ("[P]ricing volatility and periodic constrictions of supply will be inevitable in the insurance market, as insurers react to unforeseen changes in the underlying liability environment that affect policies written in earlier periods, or simply to having 'guessed wrong' in their pricing in a stable liability environment.").
315. Coffee, supra note 115, at 1550 (explaining that the corporate entity and the insurer ordinarily pay entire amount in securities litigation). In fact, one of the exceptions to this rule is when individual defendants have been prosecuted criminally. Id. at 1551.
316. Officers, however, do sometimes face civil liabilities in excess of their insurance coverage. Id. at 1577.
317. See Baker & Griffith, Predicting Governance Risk, supra note 227, at 504 (describing "towers" of coverage, which are essentially "separate layers of insurance policies stacked to reach a desired total amount of insurance coverage"). According to Baker and Griffith, the layering of coverage may decrease each carrier's incentive to monitor the insured's corporate governance practices because the costs of the monitoring are borne solely by the monitoring carrier while the benefits are spread to all layers of insurance. Baker & Griffith, Missing Monitor, supra note 252, at 1811 n.72, 1839.
318. See Baker & Griffith, Missing Monitor, supra note 252, at 1833-34.
319. Indeed, this is why they are the preferred monitor. See id. at 1834-35.
320. Baker & Griffith, Predicting Governance Risk, supra note 227, at 516-25.
321. Ronen, supra note 44, at 47.
322. See Title II of Sarbanes-Oxley Act of 2002, Pub. L. 107-204, 116 Stat. 745 (2002).
323. Moreover, one might argue that auditors systematically ignored risks because the "capital" they gave up-their reputation-was hard to define or calculate. See Coffee, Gatekeeper Reform, supra note 45, at 326.
324. Professor Griffith has argued: Insurance companies are experts at assessing risk. Because the success of an insurer's business depends upon taking in more capital than it pays out, the insurer must develop an ability to assess the probable payout obligations of each exposure and then charge an appropriate premium for the risk. . . . D&O underwriters therefore ought to develop categories of high risk corporate governance and low risk corporate governance and, in a well-working insurance market, seek to price and sell their policies at least partly on that basis. Griffith, supra note 44, at 1174.
325. Moreover, carriers already evaluate compliance risk insofar as they may be liable under D&O policies for the follow-on civil suits that are filed after the announcement of criminal charges.
326. Coverage disputes between insureds and carriers would further increase these costs. See Cox, supra note 227, at 32 (discussing D&O coverage disputes and their effect on management).