The New Enforcement Paradigm: Indicting the Corporation

    When I first wrote about the 2003 "Thompson" memo (my article was published in Spring of 2004), many did not understand the memo's significance or even know that it existed.  All corporate lawyers do now.

     On January 20, 2003, then Deputy Attorney General Larry Thompson wrote a ten page memorandum circulated to Unites State Attorneys that recommended corporate entity level indictments if the corporation did not quickly and effectly cooperate with federal investigators in uncovering finanical fraud.  Cooperation is unequivocal:  companies must waive attorney/client privilege, turn over evidence on its own employees and not help its employees defend any charges (breaching indemnification agreements).  Mr. Thompson urged, among other things, that prosecutors use "deferred-prosecurtion agreements" even if corporations did offer their cooperation.  In a deferred prosecution agreement a company agrees not to contest a list of violations and agrees to help prosecutors find those insiders culpable for finanical fraud.  An independent monitor reports to prosecutors on whether the company has fully complied and, on a favorable report, the prosecutor sets aside the charges, after a designated period.

    The power in the threat is what happened to Arthur Anderson when a company in the financial services industry is indicted on criminal charges--company collapse. 

    This is a new enforcement paradigm.  There are several examples of the new paradigm in action.  The deferred prosecution of Computer Associates led to the firing and indictment of the company's CEO, Sanjay Kumar, and head of sales.  The threat is so effective that even deferred prosecution is no longer necessary, the companies capitulate and cooperate when prosecutors make a phone call.  The KPMG case on tax shelters and the Ahold NV case on inflated revenue figures are examples. 

   Prosecutors are delighted with the new form of coerced cooperation.  Corporate attorney's grumble but counsel firms to comply.  This powerful new weapon has obvious benefits but can be misused.  Evidence of misuse will come in the form of the frequency of scapegoats -- a conspiracy of prosecutor and firm to conviction of mid-level personnel to pad prosecutors statistics and get higher level executives off the hook.  There are some very suspicious examples already in the wind (e.g., Time Warner).  Time will tell.