Friday, December 1, 2006
The Committee on Capital Markets Regulation, a blue-ribbon panel encouraged by Secretary of the Treasury Paulson, delivered its Interim Report (here) on how to improve the competitiveness of the U.S. financial system and its regulation. Most of the report is devoted to the civil side of the ledger, including the expected push against Sarbanes-Oxley Act Section 404 that mandates extensive internal control mechanisms in public corporations that are arguably burdensome and too expensive for the benefit gained. In the criminal law area, the main proposals are to limit the criminal prosecution of corporations and to eliminate from the Thompson Memo any consideration of whether a corporation pays the attorney's fees for its directors and employees in an investigation.
The proposal to limit the prosecution of corporations to situations that are "exceptional" is bare-bones, saying little more than such prosecutions should not be filed except as a last resort but with no real explanation of when that circumstance will exist except if wrongdoing is "pervasive." Moreover, the recommendation contains incorrect factual assertions that may undermine the strength of its message. The Interim Report states:
Except in truly exceptional cases, there is no independent benefit to be gained from indicting what is in fact an artificial entity. As the demise of Arthur Andersen attests, criminal indictments of entire companies—especially those in the financial services industry where reputation is so crucial—effectively results in the liquidation of the entire firm; with this comes the attendant disruption of the lives of many employees and stakeholders who are totally innocent of wrongdoing.
Extant guidelines of the U.S. Department of Justice (the “Thompson Memorandum”) on whether to prosecute a firm fail to take account of the damage to innocent employees and shareholders and, in some cases, to the entire economy. The Committee recommends that the Justice Department revise its prosecutorial guidelines so that firms are only prosecuted in exceptional circumstances of pervasive culpability throughout all offices and ranks.
The assertion that a criminal indictment "effectively results in the liquidation of the entire firm" is simply incorrect. The demise of Arthur Andersen is certainly striking, and appears to be the guiding, and indeed only, example of a corporate criminal prosecution relied upon for this conclusion. The Report even muddles that point when it asserts that "[t]he almost instantaneous demise of Arthur Andersen at the indictment stage underscored how in the financial world a defendant can be financially ruined long before conviction." While the indictment of Andersen certainly harmed its business, it was the conviction, and resulting loss of its accounting licenses, that resulted in the firm going out of business.
To assert that every corporation indicted for a crime immediately goes out of business ignores the many prosecutions (and convictions) of companies in the environmental and health care fields, among others, that do not result in the company ceasing operations. Certainly for a privately-held company the consequence of an indictment is usually its demise, but that is often as much a function of its controlling shareholders also being charged with a crime. Any number of companies have been charged with violating the Foreign Corrupt Practices Act and remain in business, paying the fine and agreeing to make the necessary changes to prevent future wrongdoing.
While there are certainly good arguments that vicarious liability for corporations may be economically unsound and not a fair reflection of the principles of due process, it is not the case that an indictment results in the immediate destruction of a company. Heating up the rhetoric to make it sound like many corporations are on the precipice of disaster at the prosecutor's whim is not a good way to advance the debate about corporate criminal liability. (ph)