Corporate criminal liability: When does it make sense?

American Criminal Law Review

Volumn 46, Issue 4, 2009, Pages 1437-1457

  Bucy, Pamela H ^a  

^a UNIVERSITY OF ALABAMA   (United States)

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EID: 76849086215     PISSN: 01640364     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (78)

1. This article uses the terms "fictional entities" and "corporations" interchangeably.
2. Cf. Krulewitch v. United States, 336 U. S. 440, 448 (1949) (Jackson, J., concurring) (regarding the merits of the conspiracy offense: "the basic conspiracy principle... to unite... the strength, opportunities and resources of many is obviously more dangerous and more difficult to police than the efforts of a lone wrongdoer").
3. Cf. Pamela H. Bucy, Corporate Ethos: A Standard for Imposing Corporate Criminal Liability, 75 MINN. L. REV. 1095, 1121-1128 (1991) (discussing scholarship on organizational structure and the commission of corporate crime).
4. Jennifer Arlen, Corporate Criminal Liability in the United States: Using Prosecutorial Discretion to Induce Corporations to Join the War Against Crime, in PROSECUTORS IN THE BOARDROOM: CORPORATIONS AND CRIMINAL JUSTICE: PAST AND FUTURE (forthcoming 2009).
5. For a discussion of "deferred prosecution agreements" and "non-prosecution agreements", see Jennifer Arlen, Removing Prosecutors from the Boardroom: Deterring Crime Without Prosecutor Interference in Corporate Governance, in PROSECUTORS IN THE BOARDROOM: USING CRIMINAL LAW TO REGULATE CORPORATE CONDUCT (forthcoming 2009).
6. Developments in the Law - Corporate Crime: Regulating Corporate Behavior Through Criminal Sanctions, 92 HARV. L. REV. 1227, 1247 (1979).
7. 467 F.2d 1000 (9th Cir. 1972).
8. Id. at 1002.
9. Id. at 1004.
10. Id.
11. Id. at 1007.
12. See generally United States v. Hilton Hotel Corp., 467 F.2d 1004 (9th Cir. 1972).
13. The United States Sentencing Commission (U. S. S. C.) was created under the Sentencing Reform Act of 1984, 28 U. S. C. §§ 991-998 (Supp. I 2009).
14. U. S. SENTENCING GUIDELINES MANUAL (U. S. S. G.) ch. 8 (2008).
15. U. S. S. G. ch. 8, introductory cmt.
16. U. S. S. G. §8B2.1.
17. UNITED STATES DEPARTMENT OF JUSTICE, UNITED STATES ATTORNEYS' MANUAL, § 9-28.000 to 9-281300 (2008). [hereinafter Principles of Federal Prosecution].
18. Id. § 9-28.300.
19. Id. § 9-28.800.
20. Public Company Accounting Reform and Investor Protection Act of 2002 (Sarbanes-Oxley Act of 2002), Pub. L. 107-204, 116 Stat. 745 (2002).
21. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, § 302 (a) (4), 116 Stat. 745, 777 (2002) (codified as amended at 15 U. S. C. § 7241 (a) (4) (Supp. 2009)) ;
22. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, § 906 (a), 116 Stat. 745, 806 (2002) (codified as amended at 18 U. S. C. § 1350 (a) (Supp. 2009)) ; Certification of Companies' Quarterly and Annual Reports No. 33-8124 (August 28, 2002).
23. 18 U. S. C. § 1350 (c) (Supp. 2009).
24. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204 § 404, 116 Stat. 745, 789 (2002) (codified as amended at 15 U. S. C. § 7262 (Supp. 2009)) ;
25. Public Company Accounting Oversight Board, SEC Interpretive Guidance, Release No. 34-55912 (June 12, 2007) ;
26. PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD, AUDITING STANDARD NO. 5 (2009), available at http://www.pcaobus.org/Rules/Rules-of-the-Board/Auditing- Standard-5.pdf (last visited Sept. 18, 2009).
27. 18 U. S. C. §§ 1512 (a) (1) (C), 1519 (Supp. 2009).
28. Id. at § 1519 (emphasis added).
29. Id. at § 1512 (a) (2) (C) (emphasis added).
30. Id. at § 1519 (emphasis added).
31. Id. at § 1512 (a) (2) (C) (emphasis added).
32. 698 A.2d 959 (Del. Ch. 1996).
33. Id. at 970.
34. See, e.g., Notice of Filing and Immediate Effectiveness of Proposed Rule Change by the NYSE, SR-NYSE-2002-03, 68 Fed. Reg. 10, 560, 10, 561 (Mar. 5, 2003) ;
35. Order Granting Partial Approval of a Proposed Rule Change, SR-NASD-2002-141, 68 Fed. Reg. 68, 440, 68, 441 (Dec. 8, 2003) ;
36. Notice of Filing of Proposed Rule Change by the National Association of Securities Dealers, Inc., SR-NASD 2002-77, 68 Fed. Reg. 41, 191, 41, 192 (July 10, 2003) ;
37. Notice of Filing and Immediate Effectiveness of Proposed Rule Change, SR-NASD 2002-80, 69 Fed. Reg. 10, 285, 10, 285 (Mar. 4, 2004) ;
38. Notice of Filing of Proposed Rule Change by the National Association of Securities Dealers, Inc., SR-NASD-2002-138, 68 Fed. Reg. 41, 193, 41, 193 (July 10, 2003) ;
39. Notice of Filing of Proposed Rule Change, SR-NASD-2002-139, 68 Fed. Reg. 41, 194, 41, 194 (July 10, 2003). The SEC also encourages SROs to adopt a corporate compliance plan.
40. See NASD and NYSE Rulemaking: Relating to Corporate Governance, Release No. 34-4875 (Nov. 4, 2003), available at http://www.sec.gov/ rules/sro/34-487445.htm ("The Commission believes that requiring listed issuers to adopt a code of conduct should help to foster the ethical behavior of directors, officers, and employees....").
41. See IAN YOUNGMAN, DIRECTORS' AND OFFICERS' LIABILITY INSURANCE: A GUIDE TO INTERNATIONAL PRACTICE 131 (Woodhead Publishing Ltd., 2d ed. 1999) (explaining that insurers seek to improve overall risk by "helping to develop and encourage regulation of appropriate standards and guidelines for directors and employees").
42. See generally Pamela H. Bucy, Indemnification of Corporate Executives Who Have Been Convicted of Crimes, 24 IND. L. REV. 279 (1991).
43. Hilton Hotel, 467 F.2d at 1004.
44. Currently, Federal Rule of Criminal Procedure 12.4 deals with disclosure statements by nongovernmental corporate parties. As a matter of organization and clarity, current Rule 12.4 should be redesignated as Rule 12.5. This would keep all affirmative defenses together as Rules 12.1 through 12.4.
45. Excellent resources on the components of corporate compliance plans include ETHICS AND COMPLIANCE OFFICER ASSOCIATION FOUNDATION, THE ETHICS AND COMPLIANCE HANDBOOK (2008) ;
46. ANTHONY TARANTINO, THE GOVERNANCE, RISK AND COMPLIANCE HANDBOOK: TECHNOLOGY, FINANCE, ENVIRONMENTAL AND INTERNAL GUIDANCE AND BEST PRACTICES (John Wiley & Sons 2008) ;
47. MICHAEL G. SILVERMAN, COMPLIANCE MANAGEMENT FOR PUBLIC, PRIVATE AND NON-PROFIT ORGANIZATIONS (McGraw-Hill 2008).
48. For an example, see Emergency Medical Treatment and Active Labor Law (EMTALA), 42 U. S. C. § 1395dd (2006) (stating screening requirements in an emergency department).
49. See ROBERT FABRIKANT, PAUL E. KALB, MARK D. HOPSON & PAMELA H. BUCY, HEALTH CARE FRAUD: ENFORCEMENT AND COMPLIANCE § 2.02 (Law Journal Press 2008) (discussing issues such as unbundling, secondary insurance fraud, double-billing, inadequate documentation, etc.).
50. See 42 U. S. C. § 1395nn (2006) (covering issues of limitation on certain physician referrals (STARK)) ;
51. 42 U. S. C. § 1320a-7b (2006) (discussing criminal penalties for acts involving Federal health care programs (Anti-kickback)).
52. See also ALA. CODE § 22-1-11 (1975), D. C. CODE ANN. § 4-802, FLA STAT. § 395.0185 (1992), and FLA STAT. § 456.054 (2006) (addressing similar concerns on a state level).
53. See generally INTERNAL CORPORATE INVESTIGATIONS (Barry F. McNeil & Brad D. Brian eds., American Bar Association 2008) ;
54. CORPORATE INTERNAL INVESTIGATIONS: AN INTERNATIONAL GUIDE (Paul Lomas & Daniel J. Kramer eds., Oxford University Press 2008) (providing an overview of the process of an internal corporate investigation).
55. U. S. DEP'T OF JUSTICE, U. S. ATTORNEY'S MANUAL § § 9-28.300, 9-28.700, 9-28.720 (2008). The United States Department of Justice began developing Title 9-28, Principles of Federal Prosecution of Business Organizations, almost twenty years ago to guide federal prosecutors in determining whether to charge a fictional entity with a crime. Until 2008, the Principles of Federal Prosecution instructed federal prosecutors to request in certain circumstances corporate waiver of attorney-client and work product privileges and to consider such waiver favorably when determining whether to indict a company which otherwise met the standard for corporate criminal liability.
56. See Memorandum from Deputy Attorney General Paul J. McNulty to United States Attorneys (Dec. 2006), http://www.usdoj.gov/dag/speeches/2006/ mcnulty-memo.pdf, ("[a] corporation's response to the government's request for waiver of privilege... may be considered in determining whether a corporation has cooperated in the government's investigation"). In August, 2008, however, after coming under fire from courts and the American Bar Association among others, the Department of Justice revised its Principles of Federal Prosecution stating "prosecutors should not ask for such waivers and are directed not to do so." U. S. ATTORNEY'S MANUAL § 9.28.710 (2008). However, Title 9-28 notes that, "[e]veryone agrees that a corporation may freely waive its own privileges if it chooses to do so", and that federal prosecutors may continue to consider "whether the corporation made a voluntary and timely disclosure, and the corporation's willingness to provide relevant information and evidence and identify relevant actors within and outside the corporation, including senior executives."
57. Id. Thus, it appears that full disclosure, without assertion of attorney-client and work product privileges may still be rewarded by the U. S. DOJ. It is also significant to note before leaving this topic that businesses in heavily regulated industries such as financial services and health care are often required by regulatory agencies to fully disclose and open their books and records, thereby effectively preventing such businesses from asserting attorney-client and work product privileges.
58. U. S. S. G. ch. 8, introductory cmt. (2008) ("[F]actors that mitigate the ultimate punishment of an organization are... the existence of an effective compliance and ethics program[,] and... self-reporting, cooperation, or acceptance of responsibility.").
59. See, e.g., Spinelli v. United States, 393 U. S. 410 (1969) ;
60. Illinois v. Gates, 462 U. S. 213, 230 (1983) (setting forth the required standard law enforcement must employ to secure a search warrant).
61. For example, reasonable steps corporate counsel should take to protect the client while still cooperating with agents should include obtaining a copy of the search warrant. The warrant will list what the agents are searching for and are authorized to seize. The agents should provide the company and counsel with a copy of the warrant when they arrive. If possible, counsel should also obtain a copy of the affidavit supporting the warrant. The affidavit potentially is a great source of information about the company's possible legal vulnerability. It is also one of the few ways a company can figure out to what prosecutors are looking. Because there is almost no discovery in the criminal justice system (generally no interrogatories or depositions), access to the details in a search warrant affidavit may be the most information a company can get about an investigation until indictment. The affidavit may be under seal and on file with the court that issued the warrant, and not available to anyone until the seal is lifted. In this situation, counsel should move the court for "partial unsealing", which releases the affidavit to the company only. If the allegations are expected to be damaging to the company, counsel should not seek a complete unsealing of the affidavit since doing so gives the public and press access to all details in the affidavit. During execution of the search warrant, counsel should also consider permitting non-essential employees to leave for the rest of the day. Law enforcement agents executing a search warrant generally seek to interview any willing employees while they are executing a search warrant. Care should be taken, however, that allowing employees to leave is not viewed as obstruction of justice, or evidence of concealment, or a sign of criminal intent. During execution of the search warrant, counsel should decide if filming the process is feasible and if so, appropriate. Knowledge that their behavior is being memorialized on film may have a calming influence on everyone. However, filming the execution of a search warrant will also document possibly inappropriate behavior by nervous or ill-prepared company personnel. In such instances, memorialization may not be in a business's best interest. Counsel will have to assess the volatility of a situation when making the decision whether to have the process filmed. Lastly, counsel should seek to negotiate with the agents who are executing the warrant as to what the agents will actually seize. For two reasons, negotiation and dialog between counsel and the agents executing the warrant can be invaluable. First, it can facilitate cooperation. The agents may be willing to take less than all items listed on the warrant. They may also be willing, or required, to provide back-up data of computers or documents they are authorized to remove. Company personnel may need to work closely with the agents during the execution of the warrant, perhaps for hours, for this to occur. Second, such interaction may be an opportunity for counsel to learn more about the investigation and the company's potential liability. As noted, since discovery in criminal investigations is essentially non-existent, this interaction becomes all the more valuable.
62. For example, "Inspector General" subpoenas are issued by Offices of Inspectors General in federal departments to investigate suspected criminal or civil fraud involving that Department.
63. See, e.g. 42 C. F. R. § 1006.1 (a). "Certificates of Demand" (CID), also known as "Authorized Investigative Demands" (AID), may be issued by the United States Attorney General, or authorized designee, to investigate suspected violations of specific statutes.
64. See, e.g. 31 U. S. C. § 3733 (2006) (regarding the Federal False Claims Act).
65. For a discussion of these types of administrative subpoenas, see FABRIKANT, supra note 36 at §§ 6.04 -.05.
66. Pamela H. Bucy, Indemnification of Corporate Executives Who have Been Convicted of Crimes, 24 IND. L. REV. 279 (1991) ;
67. IAN YOUNGMAN, DIRECTORS' AND OFFICERS' LIABILITY INSURANCE: A GUIDE TO INTERNATIONAL PRACTICE (Woodhead Publishing Ltd., 2nd ed. 1999).
68. For example, according to the American Bar Association's MODEL RULE OF PROF'L CONDUCT R.4.2 (2002), [i]n representing a client, a lawyer shall not communicate about the subject of the representation with a person the lawyer knows to be represented by another lawyer in the matter, unless the lawyer has the consent of the other lawyer or is authorized to do so by law or a court order.
69. The Upjohn Co. v. United States test, 449 U. S. 383 (1981), determines whose communications within the company are privileged. Privileged documents should be clearly identified as attorney-client communications or attorney work product, and segregated as such. A company ultimately may decide not to invoke attorney-client or work product privileges because in some heavily regulated industries such as health care or banking, regulators have full access to a provider's records as part of the credentialing process. However, steps should be maintained from the beginning of an investigation to keep open the option of invocation.
70. Many businesses have obligations to maintain privacy of records in the course of its business, such as health care data on patients or financial records for customers. Care should be taken that these records are adequately segregated and protected as required by applicable laws and regulations.
71. See Health Insurance Portability and Accountability Act (HIPAA), 42 U. S. C. § 1301 (2006) ;
72. 45 C. F. R. §§ 160-164 (regarding personal health information) ;
73. and 42 U. S. C. § 290dd-2 (medical records relating to treatment of drug and alcohol abuse).
74. See, e.g., Arthur Andersen LLP v. United States, 544 U. S. 696 (2005) (explaining the problem with the document retention policy of Enron's auditor Arthur Andersen LLP that led to the destruction of evidence).
75. See, e.g., 18 U. S. C. §§ 1512, 1519 (2006).
76. This is part of the Sarbanes-Oxley Act (SOX) passed in 2002 which, inter alia, prohibited the destruction of documents with the intent to impede an investigation.
77. See Pub. L. No. 107-204, Title VIII, § 802 (a), 2002 U. S. C. CA. N. (116 Stat.) 800 (to be codified as 18 U. S. C. 1519).
78. It is beyond the scope of this article to address the complex issues raised by internal investigations, briefly, however, there are the three key decisions for a company's counsel. The first decision is whether an internal investigation should be conducted by in-house counsel or outside counsel. It will be more cost-efficient and probably less disruptive to the business for in-house counsel to conduct the investigation. However, if there is a question as to whether in-house counsel may have some involvement, wittingly or unwittingly, in the event of noncompliance, or if the investigation is likely to require considerable time and divert in-house counsel from other duties, a company should retain outside counsel to do the internal investigation. The second set of decisions concerns how the internal investigation should be conducted. Are interviews necessary? If so, with whom and in what order? What record should be made during the interviews and who should make that record? When company counsel (in-house or outside) interviews company personnel, counsel should inform each person that counsel represents the company and not the individual. If the individual is entitled to counsel according to company policy (or as a matter of strategy if providing legal assistance is not required), the individual should be informed that the company will provide counsel. Opinions among experts differ as to whether counsel should also give a version of Miranda rights, 384 U. S. 436 (1966), informing the individual that the company will decide whether it will disclose the findings of its internal investigation to law enforcement or other regulatory authorities, including the individual's comments during the interview. The final decision may be the hardest: what to do with the findings of the internal investigation. Should a written report be made? If so, what level of detail is appropriate? Should the findings be disclosed to relevant regulators? Should the company assert attorney-client or work product privileges? Should the company identify "culpable" individuals? What should the company do with the culpable individuals? What changes in the existing corporate compliance plan, including in the corporate leadership, may be needed? Each situation is different and will require a fresh assessment of these issues.