Corporate crime and deterrence

Stanford Law Review

Volumn 61, Issue 2, 2008, Pages 271-310

  Hamdani, Assaf ^a   Klement, Alón ^b  

^a HEBREW UNIVERSITY OF JERUSALEM   (Israel)

^b INTERDISCIPLINARY CENTER   (Israel)

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[No Author keywords available]

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EID: 62549117850     PISSN: 00389765     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (176)

1. See, e.g., Brent Fisse, Reconstructing Corporate Criminal Law: Deterrence, Retribution, Fault, and Sanctions, 56 S. CAL. L. REV. 1141, 1183 (1983) (referring to corporate criminal liability jurisprudence as "the blackest hole in the theory of corporate criminal law").
2. See, e.g., Symposium, Corporate Criminality: Legal, Ethical, and Managerial Implications, 44 AM. CRIM.. L. REV. 1269 (2007);
3. see also Brandon L. Garrett, Structural Reform Prosecution, 93 VA. L. REV. 853, 854 (2007) ("In the past few years, federal prosecutions of organizations have sharply accelerated ....").
4. See, e.g., Sara Sun Beale, Is Corporate Criminal Liability Unique?, 44 AM. CRIM. L. REV. 1503, 1522 (2007).
5. This conviction was overturned by the Supreme Court in 2005. Arthur Andersen LLP v. United States, 544 U.S. 696 (2005).
6. See Elizabeth K. Ainslie, Indicting Corporations Revisited: Lessons of the Arthur Andersen Prosecution, 43 AM. CRIM. L. REV. 107, 107 (2006).
7. See COMM. ON CAPITAL MKTS. REGULATION, INTERIM REPORT, at xii (2006) ("[C]riminal enforcement against companies, in light of the experience of Arthur Andersen, should truly be a last resort....");
8. Ainslie, supra note 5, at 110 ("[C]riminal prosecution of business entities should be considered only when it is clear that no civil sanction... will suffice to deter the corporate misconduct.").
9. But see V.S. Khanna, Corporate Criminal Liability: What Purpose Does It Serve?, 109 HARV. L. REV. 1477, .1499-1512 (1996) (considering the extent to which reputational penalties could deter corporate crime).
10. See, e.g., 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, 1097 (2006) (referring to such penalties as providing "deterrence on a massive scale" (quoting Memorandum from Larry D. Thompson, Deputy Attorney Gen., to Heads of Dep't Components, U.S. Attorneys (Jan. 20, 2003), available at http://www.usdoj.gov/dag/cftf/corporate-guidelines.htm)).
11. It is difficult to find an economic justification for corporate sanctions that aim at putting firms out of business, as optimal deterrence requires that penalties equal, social harm (discounted by the probability of detection). See Gary S. Becker, Crime and Punishment: An Economic Approach, 76 J. POL. ECON. 169, 192 (1968). To be sure, an offense may be strictly undesirable from a social perspective, thereby justifying an attempt to secure full deterrence. Yet, legal economists believe that this objective should not dictate the magnitude of firm-level sanctions.
12. See Daniel R. Fischel & Alan O. Sykes, Corporate Crime, 25 J. LEGAL STUD. 3.19, 322-27 (1996).
13. See Garrett, supra note 2, at 859 ('The DOJ could seek to impose optimally deterrent fines, but the dire collateral consequences of such an approach make it highly undesirable.").
14. See Kathleen F. Brickey, Andersen's Fall from Grace, 81 WASH. U. L.Q. 917, 929 (2003) ("Under the respondeat superior rule applicable to federal criminal trials, the acts and intent of agents at any level of an entity's hierarchy-including those at the lower end of the organizational ladder-are imputable to the firm.").
15. For suggestions that imposing liability for misconduct committed by employees against corporate policy or without management's involvement is unfair, see William S. Laufer & Alan Strudler, Corporate Intentionality, Desert, and Variants of Vicarious Liability, 37 AM. CRIM. L. REV. 1285, 1297 (2000).
16. See Lisa Kern Griffin, Compelled Cooperation and the New Corporate Criminal Procedure, 82 N.Y.U. L. REV. 311, 331 (2007) (noting that the threat of indictment induces companies to hand over internal documents and rat out individual employees as targets for prosecution).
17. See also Julie Creswell, U.S. Indictment for Big Law Firm in Class Actions, N.Y. TIMES, May 19, 2006, at Al (reporting the federal indictment of Milberg Weiss Bershad & Schulman, a leading U.S. class-action law firm, for making illegal payments to clients);
18. Nathan Koppel, Fatal Vision: How a Bid to Boost Profits Led to a Law Firm's Demise, WALL ST. J., May 17, 2007, at Al (describing the demise of a prominent Dallas law firm as a result of an investigation concerning its role in marketing illegal tax shelters).
19. The profit-sharing quality of professional firms might also improve the monitoring incentives among partners. See, e.g., Armen A. Alchian & Harold Demsetz, Production, Information Costs, and Economic Organization, 62 AM. ECON. REV. 777, 786 (1972) (suggesting that profit-sharing induces monitoring of each employee by every other employee).
20. But see Eugene Kandel & Edward P. Lazear, Peer Pressure and Partnerships, 100 J. POL. ECON. 801, 813 (1992) (indicating that "there is little incentive to engage in mutual monitoring, even with profit sharing").
21. Henry Hansmann labels this effect of profit sharing "self monitoring." See Henry Hansmann, When Does Worker Ownership Work? ESOPs, Law Firms, Codetermination, and Economic Democracy, 99 YALE L.J. 1749, 1762 (1990).
22. See Poonam Puri, Judgment Proofing the Profession, 15 GEO. J. LEGAL ETHICS 1, 9-10 (2001) (listing rapid growth, globalization, and increased specialization as factors that explain the inability of law firms to monitor their members).
23. For a comprehensive analysis of collective sanctions, see Daryl J. Levinson, Collective Sanctions, 56 STAN. L. REV. 345 (2003).
24. See also Thomas J. Miceli & Kathleen Segerson, Punishing the Innocent Along with the Guilty: The Economics of Individual Versus Group Punishment, 36 J. LEGAL STUD. 81 (2007).
25. Economists have shown that, under certain conditions, it may be desirable to lower the sanctions on relatively light offenses in order to enhance the deterrence of more severe ones. See generally Dilip Mookherjee & I.P.L. Png, Marginal Deterrence in Enforcement of Law, 102 J. POL. ECON. 1039 (1994);
26. Steven Shavell, A Note on Marginal Deterrence, 12 INT'L REV. L. & ECON. 345 (1992).
27. See sources cited infra note 99.
28. See Memorandum from Larry D. Thompson, Deputy Attorney Gen., to Heads of Dep't Components, U.S. Attorneys, supra note 8.
29. See, e.g., Jonathan Macey & Hillary A. Sale, Observations on the Role of Commodification, Independence, and Governance in the Accounting Industry, 48 VILL. L. REV. 1167, 1181 (2003) (arguing that the shift to the LLP organization form deprived members of accounting firms of incentives to monitor their peers);
30. Deborah L. Rhode & Paul D. Paton, Lawyers, Ethics, and Enron, 8 STAN. J.L. BUS. & FIN. 9, 30-31 (2002) ("Reducing this insulation from accountability could give lawyers greater incentives to address collégial misconduct and to establish the internal oversight structures that can check abuses.").
31. See, e.g., Pamela H. Buey, Trends in Corporate Criminal Prosecutions, 44 AM. CRIM. L. REV. 1287, 1288 (2007) ("[T]here is no question that criminal prosecution of a corporation has a tremendous impact on the corporation and its community, employees, customers and lenders.");
32. Kern. Griffin, supra note 12, at 330 (noting that prosecutors may decide against prosecuting business organizations because they are "justifiably reluctant to cause such extensive economic harm");
33. Eric Holder, Op-Ed., Don't Indict WorldCom, WALL ST. J., July 30, 2002, at A14 ("[T]o ensure that even more innocent Americans are not harmed, prosecutors must not give in to the pressures of the day and feel compelled to indict more corporations simply because they can.").
34. U.S. SENTENCING GUIDELINES MANUAL § 8C1.1 (2008).
35. See Christopher A. Wray, Note, Corporate Probation Under the New Organizational Sentencing Guidelines, 101 YALE L.J. 2017, 2027 (1992).
36. See, e.g., Mitchell F. Crusto, Green Business: Should We Revoke Corporate Charters for Environmental Violations?, 63 LA. L. REV. 175, 189-92 (2003) (analyzing recent proposals to revoke the charter of corporations that committed crimes against the environment).
37. See, e.g., Thomas Linzey, Awakening a Sleeping Giant: Creating a Quasi-Private Cause of Action for Revoking Corporate Charters in Response to Environmental Violations, 13 PACE ENVTL. L. REV. 219, 221 (1995) ("The power... to revoke corporate charters, and thereby end the corporate life, may be the only effective deterrent for corporate polluters.").
38. See U.S. SENTENCING GUIDELINES MANUAL § 8C3.3.
39. See United States v. Eureka Labs., Inc., 103 F.3d 908, 910, 912 (9th Cir. 1996) (holding that the Sentencing Guidelines do not preclude courts from imposing a fine jeopardizing the firm's continued viability).
40. See Ainslie, supra note 5, at 107.
41. The SEC prohibits any accounting firm convicted of a felony from serving as the auditor of a publicly traded corporation. See 17 C.F.R. § 201.102(e)(2) (2008); Stephan Landsman, Death of an Accountant: The Jury Convicts Arthur Andersen of Obstruction of Justice, 78 CHI.- KENT L. REV. 1203, 1223-24 (2003).
42. See discussion infra Part IV.B.
43. See 12 U.S.C. § 93(d) (2000).
44. See Commodity Exchange Act, 7 U.S.C. § 12a (2000);
45. Federal Deposit Insurance Act, 12 U.S.C. § 1818(a)(2) (2000);
46. Securities Act of 1933, 15 U.S.C. § 77t(b) (2000);
47. Securities Exchange Act of 1934, 15 U.S.C. §§ 78o(b)(4)-(6), 78u(d)-(e) (2000);
48. Investment Advisers Act of 1940, 15 U.S.C. § 80b-3(e)-(f) (2000);
49. Social Security Act, 42 U.S.C. § 1320a-7 (2000).
50. See Pamela H. Buey, Civil Prosecution of Health Care Fraud, 30 WAKE FOREST L. REV. 693, 720-37 (1995) (discussing the exclusion remedy for health care fraud under which providers might become ineligible to receive any payment under Medicare or any state health care program).
51. See 48 C.F.R. § 9.406-2 (2008) (listing causes for debarment).
52. See Andrew T. Schutz, Comment, Too Little Too Late: An Analysis of the General Service Administration's Proposed Debarment of WorldCom, 56 ADMIN. L. REV. 1263, 1273 (2004) (discussing mandatory debarment).
53. Khanna, supra note 7, at 1499 ('The most powerful sanction that society can impose on a corporation is lost reputation or stigma.").
54. See, e.g., Preet Bharara, Corporations Cry Uncle and Their Employees Cry Foul: Rethinking Prosecutorial Pressure on Corporate Defendants, 44 AM. CRIM. L. REV. 53, 73 (2007) ("[Corporate defendants, subject as they are to market pressures, may not be able to survive indictment, much less conviction and sentencing.");
55. Pamela H. Buey, Organizational Sentencing Guidelines: The Cart Before the Horse, 71 WASH. U. L.Q. 329, 352 (1993) ("In some instances adverse publicity alone can cause corporate devastation ....").
56. See Khanna, supra note 37, at 1508-09.
57. For a thorough analysis of the indictment and its aftermath, see Bruce H. Kobayashi & Larry E. Ribstein, The Hypocrisy of the Milberg Indictment: The Need for a Coherent Framework on Paying for Cooperation in Litigation, 2 J. BUS. & TECH. L. 369, 372-75 (2007).
58. The firm agreed to pay $75 million to settle the criminal charges against it. See Jonathan D. Glater, Big Penalty Set for Law Firm, but Not a Trial, N.Y. TIMES, June 17, 2008, at A1.
59. See Nathan Koppel, Fatal Vision: How a Bid to Boost Profits Led. to a Law Firm's Demise, WALL ST. J., May 17, 2007, at Al (describing the demise of Jenkens & Gilchrist).
60. See Samuel W. Buell, The Blaming Function of Entity Criminal Liability, 81 IND. L.J. 473, 504 (2006) ("Managers and their counsel apparently do not see civil and criminal sanctions as substitutes....").
61. Id. at 505-07 (assessing the practice of firms waiving their procedural safeguards to avert an indictment); Kern Griffin, supra note 12, at 327 ("Because virtually no company will risk indictment, prosecutors have come to expect compliance with every government demand.").
62. See Brickey, supra note 11, at 929 ("Under the respondeat superior rule applicable to federal criminal trials, the acts and intent of agents at any level of an entity's hierarchyincluding those at the lower end of the organizational ladder-are imputable to the firm..").
63. Samuel W. Buell, Criminal Procedure Within the Firm, 59 STAN. L. REV. 1613, 1662 (2007) ("Under current law, a firm, faces criminal liability for virtually any criminal act by an agent.").
64. For suggestions that imposing liability for misconduct committed by employees against corporate policy or without management's involvement is unfair, see Laufer & Strudler, supra note 11, at 1297.
65. See infra text accompanying notes 85-86.
66. But see Note, Collective Sanctions and Large Law Firm Discipline, 118 HARV. L. REV. 2336, 2337 (2005) (arguing that the law should provide law firms with incentives to prevent wrongdoing by nonpartners).
67. See, e.g., Lewis A. Kornhauser, An Economic Analysis of the Choice Between Enterprise and Personal Liability for Accidents, 70 CAL. L. REV. 1345 (1982);
68. Reinier Kraakman, Corporate Liability Strategies and the Costs of Legal Controls, 93 YALE L.J. 857 (1984);
69. Alan O. Sykes, The Economics of Vicarious Liability, 93 YALE L.J. 1231 (1984).
70. Another common justification for entity-level liability is that wrongdoers might lack the financial resources to pay fines. See V.S. Khanna, Corporate Liability Standards: When Should Corporations Be Held Criminally Liable?, 37 AM. CRIM. L. REV. 1239, 1243-44 (2000). While it can justify the prevalence of vicarious liability in torts, the assumption that wrongdoers are judgment-proof cannot satisfactorily explain the decision to hold firms criminally liable. The government can overcome offenders' limited wealth by subjecting them to imprisonment. Indeed, the government's ability to impose jail sentences explains why personal liability is essential even under a regime of corporate criminal liability.
71. See A. Mitchell Polinsky & Steven Shavell, Should Employees Be Subject to Fines and Imprisonment Given the Existence of Corporate Liability?, 13 INT'L REV. L. & ECON. 239 (1993).
72. See Jennifer Arlen & Reinier Kraakman, Controlling Corporate Misconduct: An Analysis of Corporate Liability Regimes, 72 N.Y.U. L. REV. 687, 695-96 (1997).
73. See, e.g., Stacey Neumann Vu, Corporate Criminal Liability: Patchwork Verdicts and the Problem of Locating a Guilty Agent, 104 COLUM. L. REV. 459 (2004).
74. Subjecting firms to liability also might induce them to adopt an optimal scale of production. See Khanna, supra note 7, at 1496.
75. While commentators normally agree on the justification for firms' vicarious liability, there is disagreement whether this liability should be criminal or civil. See, e.g., id.
76. When members are held liable for their misconduct, the effect that we identify in this Part is less likely to take place, as each member will bear the cost of committing misconduct regardless of other members' conduct. As explained earlier, however, the difficulty of identifying culpable agents within the firm provides the principal justification for subjecting firms to liability.
77. This assumption is made for simplicity only. In a more realistic setting, this Part's analysis applies to the extent that monitoring is imperfect. We return to this issue when we consider the negligence standard. See infra Part IV.B. We also assume that firms cannot turn in wrongdoers after the offense has been committed in order to induce prosecutors to waive a criminal indictment.
78. We discuss such an example below. See infra Part IV.B.
79. The analysis assumes that the firm as such does not benefit from wrongdoing. In other words, we assume that corporate crime is to a large extent the byproduct of the socalled agency problem.. See, e.g., Jonathan R. Macey, Agency Theory and the Criminal Liability of Organizations, 71 B.U. L. REV. 315, 319 (1991) ("The real aim of criminal behavior by organizations is to advance the careers of the responsible corporate actors.").
80. For a critique of this perception of corporate crime, see generally Kimberly D. Krawiec, Organizational Misconduct: Beyond the Principal-Agent Model, 32 FLA. ST. U. L. REV. 571 (2005).
81. We assume for simplicity that the probabilities of conviction for each violation are statistically independent. Relaxing this assumption would not change our qualitative results.
82. John's loss when the firm unravels is 80. The probability that the firm, will unravel due to John's misconduct is 0.9. John's expected loss thus equals 0.9 × 80 = 72.
83. This probability equals 0.9 + (1 - 0.9) × 0.9.
84. By implied probability we mean the probability that a member will commit misconduct given that she will do so if and only if her benefit is higher than the threshold.
85. We thus restrict attention to symmetric equilibria only.
86. The same analysis can be applied for any other probability distribution of benefits. Note, however, that if the benefit could never exceed 80 (discounting for the probability of detection), the threat of putting the firm out of business would likely deter all members from committing misconduct.
87. It can be verified that at the maximum p=0.69, and that B*=27.64. The explanation for this result is that the strategic environment significantly reduces the magnitude of the effective penalty facing each member.
88. See Becker, supra note 9, at .176;
89. A. Mitchell Polinsky & Steven Shavell, The Optimal Tradeoff Between the Probability and the Magnitude of Fines, 69 AM. ECON. REV. 880 (1979).
90. See supra nots 18.
91. The entity-level fine is 80. Each member's share of the entity-level fine is 40. Since the probability of detection is 0.9, the expected liability cost for each member is 0.9 × 40 = 36.
92. For similar reasons, the pervasiveness standard may under certain conditions encourage wrongdoing. A member who believes that other members will always refrain from wrongdoing will expect her misconduct to go unpunished under this standard.
93. Deterrence theory predicts that entity liability will produce overdeterrence when the expected sanction exceeds the expected social harm..
94. See Arlen & Kraakman, supra note 52, at 696 & n.22.
95. The corporate death sanction might also adversely affect ex post measures. For example, a firm that is surely going out of business has no reason to impose private sanctions on culpable individuals.
96. Under the Federal Sentencing Guidelines for Business Organizations, firms' monitoring policies can affect the magnitude of the sanction imposed on the firm. See Krawiec, supra note 59, at 584 (noting that fines can be "reduc[ed] to as little as one-twentieth or increase[ed] by as much as four hundred percent" based on the presence of an internal compliance program). This mitigation, however, is unavailable when criminal liability triggers the firm's unraveling.
97. To focus on the impact of criminal liability on the incentives of firms, we assume in this Part that employees face no meaningful, threat of personal liability for their misconduct.
98. With a probability of 0.32, only one offense will take place and the firm will pay a fine of $100. With a probability of 0.64, two offenses will take place. Even if two offenses take place, the effective fine remains $100. The total expected cost under Moderate monitoring is thus 0.32 × 100 + 0.64 × 100.
99. With a probability of 0.5, only one offense will take place and the firm will pay a fine of $100. With a probability of 0.25, two offenses will take place. Again, even if two offenses take place, the effective fine remains $100. The total expected cost under Extensive monitoring is thus 0.5 × 100 + 0.25 × 100.
100. With a probability of 0.32, only one employee commits fraud, thereby subjecting the firm to a fine of 50. With a probability of 0.64, two employees will commit fraud, thereby subjecting the firm to a total fine of .100.
101. With a probability of 0.5, only one employee commits fraud, thereby subjecting the firm to a sanction of 50. With a probability of 0.25, two employees will commit fraud, thereby subjecting the firm to a total fine of 100.
102. Recall that the probability that two employees will commit fraud under Moderate monitoring is 0.64.
103. The probability that two employees will commit fraud under Extensive monitoring is 0.25.
104. A negligence standard also is likely to achieve this goal. See infra Part IV.B.
105. For some offenses, even a single offense can indicate that the firm did not monitor. We discuss this point below. See infra Part III.B.2.
106. See supra note 59.
107. See Alan C. Michaels, Fastow and Arthur Andersen: Some Reflections on Corporate Criminality, Victim Status, and Retribution, 1 OHIO ST. J. CRIM. L. 551, 554 (2004).
108. See Buell, supra note 46, at 1662 ("[C]ourts have all but read the 'intent to benefit' element out of the law.");
109. see also United States v. Potter, 463 F.3d 9, 25 (1st Cir. 2006).
110. See supra Part II.B.3.
111. Likewise, when the probability of detection is small, firms can benefit from imperfect monitoring by reducing the probability of a conviction.
112. See Garrett, supra note 2, at 879 ("[T]he DOJ can readily obtain convictions given broad respondeat superior liability and substantive criminal law.");
113. Gerard E. Lynch, The Role of Criminal Law in Policing Corporate Misconduct, 60 LAW & CONTEMP. PROBS. 23, 24 (1997) ("[T]here is often no distinction between what the prosecutor would have to prove to establish a crime and what the relevant administrative agency or a private plaintiff would have to prove to show civil liability.").
114. See supra text accompanying notes 51-53.
115. See, e.g., Note, supra note 49.
116. See Ainslie, supra note 5, at 109.
117. See United States ex rel. Porter v. Kroger Grocery & Baking Co., 163 F.2d 168, 177 (7th Cir. 1947) ("As the magnitude of a business increased, with its personal supervision further removed, we apprehend that the difficulties were correspondingly enhanced. Certainly 100% compliance could not be expected in any event; in fact, it would be impossible."). This is also evidenced by the blooming industry of compliance programs that apparently fail to eliminate misconduct.
118. See generally Kimberly D. Krawiec, Cosmetic Compliance and the Failure of Negotiated Governance, 81 WASH. U. L.Q. 487 (2003) (noting that internal compliance mechanisms fail to deter misconduct and merely reduce legal liability and improve market legitimacy).
119. For a comprehensive analysis, see generally Darryl K. Brown, Third Party Interests in Criminal Law, 80 TEX. L. REV. 1383 (2002) (assessing the implications of considering the collateral consequences of prosecution and punishment).
120. See Ted Schneyer, Professional Discipline for Law Firms?, 77 CORNELL L. REV. 1, 20-21 (1991) (arguing that dissolving law firms or temporarily shutting their doors for attorney misconduct would be inappropriate and ineffective).
121. See Ainslie, supra note 5, at 1.10 ("[Mandatory, automatic and drastic civil sanctions in the wake of criminal convictions are unnecessarily harsh and rigid.").
122. The debarment provisions, for example, permit excusing debarment if "the contractor had effective standards of conduct and internal control systems in place at the time of the activity which constitutes cause for debarment or had adopted such procedures prior to any Government investigation of the activity cited as a cause for debarment." 48 C.F.R. § 9.4064(a)(1) (2008).
123. See generally Fischel & Sykes, supra note 9 (arguing against criminal prosecution for corporate crimes);
124. V.S. Khanna, Is the Notion of Corporate Fault a Faulty Notion?: The Case of Corporate Mens Rea, 79 B.U. L. REV. 355 (1999) (considering when corporate mens rea is appropriate in prosecution and punishment).
125. See, e.g., Fischel & Sykes, supra note 9. Jennifer Arlen has shown that strict corporate liability might produce perverse incentives for firms to adopt measures that could increase the likelihood of detecting offenses.
126. See Jennifer Arlen, The Potentially Perverse Effects of Corporate Criminal Liability, 23 J. LEGAL STUD. 833 (1994). For a comprehensive analysis of modifications that may rectify these distortions,
127. see Arlen & Kraakman, supra note 52.
128. Another group of standards focuses on organizational measures of culpability, which can be loosely defined as corporate ethos or corporate culture. These standards of organizational culpability tend to be somewhat indeterminate. See, e.g., Pamela H. Bucy, Corporate Ethos: A Standard for Imposing Corporate Criminal Liability, 75 MINN. L. REV. 1095 (1991).
129. See MODEL PENAL CODE § 2.07(1)(c) (1985);
130. see also Commonwealth v. L.A.L. Corp., 511 N.E.2d 599, 602 (Mass. 1987) ("The Commonwealth must prove that the individual for whose conduct it seeks to charge the corporation criminally was placed in a position by the corporation where he had enough power, duty, responsibility and authority to act for and in behalf of the corporation to handle the particular business or operation or project. . . ." (emphasis omitted)).
131. For a survey of states that adopted various formulations of the MPC standard, see RICHARD S. GRUNER, CORPORATE CRIME AND SENTENCING §§ 7.025-.036 (2d. ed. .1997). Management's involvement also can dramatically affect the magnitude of sanctions under the federal sentencing guidelines.
132. See William S. Laufer, Corporate Liability, Risk Shifting, and the Paradox of Compliance, 52 VAND. L. REV. 1343, 1384-86 (1999).
133. See Fischel & Sykes, supra note 9, at 324-25.
134. See, e.g., Assaf Hamdani, Mens Rea and the Cost of Ignorance, 93 VA. L. REV. 415, 446-47 (2007) (explaining how the "responsible corporate officer" doctrine might discourage monitoring by officers).
135. For the general case against making the involvement of top management a factor in setting corporate sanctions, see Vikramaditya S. Khanna, Should the Behavior of Top Management Matter?, 91 GEO. L.J. 1215 (2003).
136. Steve Shavell has shown that negligence standards can be more effective than strict liability in inducing judgment-proof injurers to take care. See S. Shavell, The Judgment Proof Problem, 6 INT'L REV. L. & ECON. 45,47-48 ( 1986).
137. Firms' efforts to create the impression that they take the necessary steps to prevent misconduct have been referred to as the problem of cosmetic compliance. See Krawiec, supra note 93.
138. See Memorandum from Paul J. McNulty, Deputy Attorney Gen., to Heads of Dep't Components, U.S. Attorneys 4 (Dec. 2006) [hereinafter McNulty Memorandum], available at http://www.usdoj.gov/dag/speeches/2006/mcnulty- memo.pdf.
139. See id. at 6 ("[I]t may not be appropriate to impose liability upon a corporation, particularly one with a compliance program in place, under a strict respondeat superior theory for the single isolated act of a rogue employee.").
140. See, e.g., Laufer, supra note 101;
141. Wray & Hur, supra note 8, at 1187 (stressing the need for consistency in federal corporate crime enforcement).
142. On the difference between the federal regime of criminal liability and prosecution policy, see Darryl K. Brown, The Problematic and Faintly Promising Dynamics of Corporate Crime Enforcement, 1 OHIO ST. J. CRIM. L. 521, 542 (2004) (noting other ways in which prosecution policy and strict respondeat superior differ).
143. See supra Part III.B.
144. See supra Part III.B.
145. As we explained above, the corporate death penalty would not always undermine deterrence. When even a single offense is sufficiently indicative of the firm's failure to monitor, or when the probability of the government's detection is sufficiently low, there is little risk that the putting firms out of business for a single offense would undermine deterrence.
146. See generally William S. Laufer, Corporate Prosecution, Cooperation, and the Trading of Favors, 87 IOWA L. REV. 643, 647, 650-57 (2002) (questioning "the fairness of trading corporate cooperation for government-granted favors" and discussing "the dark side of guideline incentives");
147. Geraldine Szott Moohr, Prosecutorial Power in an Adversarial System: Lessons from Current White Collar Cases and the Inquisitorial Model, 8 BUFF. CRIM. L. REV. 165 (2004).
148. See McNulty Memorandum, supra note 107, at 16.
149. See, e.g., Jennifer H. Arlen & William J. Carney, Vicarious Liability for Fraud on Securities Markets: Theory and Evidence, 1992 U. III. L. REV. 691 (arguing that management-and not issuers-should be held liable for certain types of securities fraud);
150. Laufer, supra note 10.1, at 1346 ("[T]he evolution of corporate criminal law in the United States ... is understood best by examining the shifting risks of liability and loss between corporations and their agents . . . .").
151. For an insightful analysis of the considerations affecting the choice between entity and personal liability, see Kraakman, supra note 50.
152. See supra Part H.A.
153. See supra Part H.A.
154. See Kathleen F. Brickey, Enron's Legacy, 8 BUFF. CRIM. L. REV. 221, 273-74 (2004).
155. Id. at 272.
156. See Press Release, Dep't of Justice, Fact Sheet: President's Corporate Fraud Task Force Marks Five Years of Ensuring Corporate Integrity (July 17, 2007), available at http://www.usdoj.gov/opa/pr/2007/July/07- odag-507.html (reporting the fraud-related convictions of 214 CEOs and presidents, 53 chief financial officers, and 129 vice presidents).
157. David Reilly, Narrow Escape: How a Chastened KPMG Got By Tax-Shelter Crisis, WALL ST. J., Feb. 15, 2007, at A1.
158. See Carrie Johnson, 9 Charged over Tax Shelters in KPMG Case, WASH. POST, Aug. 30, 2005, at A1.
159. See Ben Hallman, Damage Control: Sidley Agrees to Pay $40 Million for a Rogue Partner's Tax Shelter Scliemes. But the Tab Is Still Running, AM. LAW., Nov. 2005, at 18.
160. See Lynnley Browning, Court Ruling Jeopardizes U.S. Tax Case, N.Y. TIMES, May 24, 2007, at C1.
161. See Buell, supra note 43, at 488-89 (reporting KPMG's admission that the conduct involved "dozens of KPMG partners and other personnel").
162. See Lynnley Browning, Top Tax Shelter Lawyer No Longer at a Big Firm, N.Y. TIMES, June 30, 2004, at C1.
163. Partners are still liable for their own wrongful acts under all limited liability statutes for professional firms. Some states also hold partners liable for the acts of those whom they supervise and control. See Jennifer J. Johnson, Limited Liability for Lawyers: General Partners Need Not Apply, 51 BUS. LAW. 85,94-95 (1995).
164. See generally Martin C. McWilliams, Jr., Who Bears the Costs of Lawyers' Mistakes?-Against Limited Liability, 36 ARIZ. ST. L.J. 885 (2004);
165. Puri, supra note 16.
166. See sources cited supra note 21.
167. See, e.g., Larry E. Ribstein, Ethical Rules, Agency Costs, and Law Firm Structure, 84 VA. L. REV. 1707, 1727 ( 1998) ("A public interest rationale for some form, of mandatory vicarious liability is that it increases monitoring beyond what lawyers otherwise would do in the absence of a mandatory rule.").
168. For a review of the arguments for unlimited liability of professional firms, see Larry E. Ribstein, Limited Liability of Professional Firms After Enron, 29 J. CORP. L. 427, 429 (2004).
169. See, e.g., Ribstein, supra note 130, at 1707-08 (asserting that limited liability allows law firms to grow larger).
170. See, e.g., Floyd Norris, Will Big Four Audit Firms Survive in a World of Unlimited Liability?, N.Y. TIMES, Sept. 10, 2004, at C1 (reporting a concern that auditor liability would cause audit firms to become insolvent). In theory, partners who are required to bear the cost associated with liability could recover from other partners. However, this is unlikely to provide a meaningful relief.
171. See Ribstein, supra note 131, at 435.
172. The literature typically depicts unlimited liability as inducing partners to intensify their own monitoring effort rather than increasing the amount that the firm expends on monitoring. See, e.g., Scott Baker & Kimberly D. Krawiec, The Economics of Limited Liability: An Empirical Study of New York Law Firms, 2005 U. ILL. L. REV. 107, 115 ("[U]nlimited liability encourages monitoring of each partner by every other partner.").
173. The problem might be mitigated, but not eliminated, to the extent that
174. See John Romley & Eric Talley, Uncorporated Professionals (U.S.C. CLEO Res. Paper No. C04-18, U.S.C. Law & Econ. Res. Paper No. 04-22), available at http://ssrn.com/abstract=587982.
175. For a description of the game's setup, see supra Part H.A.
176. For a definition of a Bayesian Nash Equilibrium, see DREW FUDENBERG & JEAN TIROLE, GAME THEORY 215 (1991).