By: Matthew Lowe
I. Introduction
In 2014, a University of Virginia Law Professor, Brandon L. Garrett, wrote a book entitled: Too Big to Jail: How Prosecutors Compromise with Corporations. In his book, Garrett inadvertently outlined a strategy for companies to follow, which would allow them to increase morale and productivity while also putting measures in place to avoid damaging litigation. Relying on the development and successful implementation of a healthy, viable corporate culture, the benefits of this strategy should serve as the catalyst for wide scale adoption.
II. Background
In the 1930s, a Republican attorney by the name of Conrad Printzlien left his position in the district attorney’s office in the Eastern District of New York to work as a probation officer.[1] While this voluntary career shift meant a 50% salary reduction, Printzlien accepted the position partially due to the urging of the court, but also because he was concerned over the plight of offenders.[2] Specifically, he recognized issues faced by young offenders who had a tendency to be socially stigmatized by prosecution and conviction.[3] Thus, in 1936, he proposed an idea to the district attorney to divert situational juvenile offenders from the criminal justice system before arraignment.[4] On April 26, 1937, the first referral of an arrested offender to the probation department was made.[5] It was at this point that this style of deferred prosecution, known as the “Brooklyn Plan”, truly became an optional feature of criminal litigation. The initial design of the Brooklyn Plan relied on the potential for rehabilitation for juvenile offenders and was conditional on the juvenile’s adherence to the following:
(a) to refrain from the violation of any state and federal penal laws; (b) to live a clean, honest, and temperate life; (c) to keep good company and good hours; (d) to keep away from all undesirable places; (e) to work regularly and, when out of work, to notify the probation supervisor at once; (f) to leave or stay away from the city or town where the juvenile resides only with permission of the probation supervisor and to notify the probation supervisor at once of any intended change of address; (g) to contribute regularly to the support of those for whom the juvenile is legally responsible; (h) to follow the probation supervisor’s instruction and advice; and (i) to report promptly on the date set forth in the probation supervisor’s instructions.[6]
Over six decades following the proposal of the Brooklyn Plan, another Republican would repurpose the Brooklyn Plan for matters pertaining to corporate oversight. In 2002, President George W. Bush created the Corporate Fraud Task Force[7], which would later become the Financial Fraud Enforcement Task Force[8] (“Task Force”). The Task Force is comprised of prosecutors who work with various U.S. Attorney’s offices around the country, regulators (e.g., Securities and Exchange Commission (“SEC”) and the Internal Revenue Service (“IRS”)), and some state prosecutors to coordinate investigation and prosecution of companies. Under this Task Force, a new strategy began to emerge that relied on the application of the basic tenets of the Brooklyn Plan to major corporations.[9] Following this strategy, the Task Force treats offending corporations like juveniles would be treated under the Brooklyn Plan, seen as “not entirely innocent, but mainly in need of guidance, rehabilitation, and supervision.”[10] As Garrett notes, the modern corporate culture revolution dates back to 1991 following the implementation of the U.S. Sentencing Guidelines, which emphasize rewarding a company for efforts to “promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.”[11]
In his book, Garrett notes that by 2003, “the overriding goal” of corporate prosecutions has been to “rehabilitate a firm’s culture, not to punish.”[12] This notably ambitious approach includes efforts to put systems in place to detect and prevent crime among a company’s employees and to foster a true culture of ethics inside of the economy.[13] Thus, it is imperative for large corporations to use this knowledge to their benefit and to construct prevention strategies around it in order to minimize exposure to costly litigation risks. “Costly” in this context does not equate solely to budgetary woes. “Costly” here takes into account all of the hits a company can take during the litigation process. For example, one of the biggest corporate downfalls in recent decades was that of one of the former “Big 5” accounting firms, Arthur Andersen.
On June 15, 2002, the lower courts found Andersen guilty of obstructing justice relating to the downfall of Enron.[14] As Garrett notes in his coverage of the Andersen catastrophe, before the unfavorable decision was handed down, Andersen was already smoldering in the flames of the ancillary impacts of litigation. Indeed, by the time the verdict to convict was handed down, Andersen had lost a quarter of its clients, laid off 7,000 of its employees, and had been forced to sell off many of its US practices.[15] This is not to suggest that the verdict’s ultimate effect was minimal. In fact, the verdict provided the kill shot. In illustrating the weapons the government has at its disposal, the verdict meant that, under SEC rules, Andersen had to stop doing accounting work for public companies — a demographic vital to the operations of the company.[16] Eventually, Andersen fell and became a cautionary tale.
III. Analysis
Corporate culture can be understood as the shared assumptions, values, and beliefs that guide the actions of a company’s members. The strategic benefits of building a strong corporate culture are myriad. On a fundamental performance level, culture can account for 20-30% of the differential in corporate performance when compared with ‘culturally unremarkable’ competitors.[17] But perhaps more importantly, a strong culture can be the difference between life and death for a company that finds itself under the prosecutorial gun for any number of reasons. However, a corporate culture is not born overnight: there are no quick and easy techniques for building a new organizational culture.[18] Thus, if it is to be incorporated into a business strategy and be maximally effective, companies should start developing their cultures long before fraud charges fall into their laps. While building a corporate culture from the ground up could be an overwhelming and time-consuming endeavor, from a legal perspective, a good defense can be simpler to construct. Prosecutors are concerned primarily with compliance with laws, so this aspect of corporate culture should be a main point of focus.
Some companies may forego an opportunity to build a particularly strong cultural defense, seeing as many large companies budget for anticipated legal costs.[19] This is ill advised. It is likely that a massive accounting firm like Arthur Andersen had such a budget, yet its ability to withstand the monetary costs of litigation were, as described above, not the dagger to its heart. In fact, even winning the type of case Andersen had to defend itself against does not guarantee survival.
In 2005, following the Fifth Circuit’s 2004 upholding of the lower court’s verdict to convict Andersen, the Supreme Court reversed.[20] However, by then, the damage was done, there was no way that Andersen could recover, and, alas, it never did. As the defense attorneys in this case commented: the win at the Supreme Court level may have been “an incredible triumph for the judicial system in America,” but at the end of the day, “the company has been destroyed and the employees are scattered to the winds.”[21] This illustrates a crucial lesson: throwing money at fire is simply not the best method of extinguishing it. In this arena, preventative measures are what are needed.
The keyword here is: compliance. Of course virtually every large corporation has compliance measures put in place, but perhaps it is best to reevaluate the efficacy of these measures. As Garrett advises, it is imperative that employees be engaged during training sessions and it would also help if they actually read their corporate ethics handbooks.[22] Tools that companies can and ought to utilize include: testing employees’ understanding of the rules, creating anonymous reporting hotlines, and performing random audits.[23] Adopting one or even all of these tools cannot guarantee that fraud claims, for example, will not slip through the cracks. There is no reasonable method of preventing against all exposure. However, the benefits of adopting these tools are not derived solely from direct outcomes. Adoption, instead, is a long-term strategy that has the potential to pay dividends if the SEC winds up knocking at the door. This is because prosecutors are, as the DOJ described, tasked with being “a force for positive change of corporate culture” and with “alter[ing] corporate behavior.”[24]
While punishment is a possible outcome when litigation against a company proceeds, it is not the only outcome and it is not the main goal of such proceedings. In fact, the central goal of prosecutors’ involvement, harking back to the Brooklyn Plan, is to rehabilitate corporations and make them better and more ethical, which is the foundation of the modern deferred prosecution agreement.[25] That being said, it is crucial to identify which companies are more likely to be offered governmental rehabilitation and which are not. When prosecution is threatened, the preferred route is rehabilitation. This is where strategic defense comes into play. This defense, predicated on a strong organizational culture, does not mean simply espousing slogans like Google’s classic: “Don’t be evil,” which drew attention to its ethical duties, while describing a bare minimum standard of ethics.[26]
At the end of the day, prosecutors and regulators (including the SEC) alike create incentives for self-policing by “giving credit for good compliance.”[27] However, prosecutors look at the history of a company up until the moment that it is investigated. This is, again, why putting those aforementioned tools in place is a company’s best route to receiving a deferred prosecution agreement. “[I]f an agency thinks a … corporation is being defiant or has violated the rules in an egregious way, it may decide that the case should be criminal.”[28] Demonstrating cooperation before an investigation begins is the most effective means of having the government see a company through rehabilitation. The benefits of which include: avoidance of litigation costs (monetary and non-monetary) and avoidance of bad public relations. With regards to the latter, a company will be seen as cooperative and working towards fixing a problem it helped to identify or, in a best-case scenario, a company may never even have to accept responsibility or admit guilt, thus keeping it out of the public eye entirely.[29]
IV. Conclusion
For large corporations, merely having a litigation budget is not a sufficient fail-safe when looking to protect against the severe damage that can be incurred from prosecution. Instead, companies should look to protect themselves by building strong corporate cultures to not only serve as a performance-enhancing perk, but to also establish a powerful defensive measure if the worst case comes to fruition.
[1] Stephen J. Rackmill, Printzlien’s Legacy, the Brooklyn Plan, A.K.A. Deferred Prosecution, Fed. Probation (1996)
[2] Id.
[3] Id.
[4] Id.
[5] Id.
[6] Id.
[7] Exec. Order No. 13271, 67 FR 46091
[8] Exec. Order No. 13519, 74 FR 60123
[9] Brandon L. Garrett, Too Big to Jail: How Prosecutors Compromise with Corporations (1st ed. 2014)
[10] Id.
[11] U.S. Sentencing Guidelines Manual (2011), §8B2.1(a)(3)
[12] Garrett, supra note 9
[13] Id.
[14] Luisa Beltran, et al., Andersen Guilty, CNN (2002)
[15] Id.
[16] Jonathan Weil, et al., Arthur Andersen Is Convicted On Obstruction-of-Justice Count, Wall Street Journal (2002)
[17] Deidre H. Campbell, What Great Companies Know About Culture, Harvard Business Review (2011)
[18] Barry D. Baysinger, Organizational Theory and the Criminal Liability of Organizations, Boston University Law Review (1991)
[19] Rebecca K. Myers, et al., What Good is a Litigation Budget?, LexisNexis (2010), available at http://www.lexisnexis.com/legalnewsroom/legal-business/b/finance/archive/2010/02/24/what-good-is-a-litigation-budget.aspx
[20] Arthur Andersen LLP v. United States, 544 U.S. 696 (2005)
[21] Mary Flood, Supreme Court Overturns Artur Andersen’s Enron Conviction, Houston Chronicle (2005)
[22] Garrett, supra note 9
[23] Id.
[24] Memorandum from Deputy Attorney General Larry D. Thompson, U.S. Department of Justice, to Heads of Department Components and U.S. Attorneys, Principles of Federal Prosecution of Business Organizations, January 20, 2003
[25] Garrett, supra note 9
[26] David Mayer, Why Google Was Smart to Drop Its ‘Don’t Be Evil’ Motto, Fast Company (2016)
[27] Garrett, supra note 9
[28] Id.
[29] Id.