White Collar Crime Prof Blog

Food for Thought re Last Week’s Peanut Sentencing in Georgia

Just over a year ago, Stewart Parnell, the former CEO of Peanut Corporation of America (PCA), was convicted by a jury in the Middle District of Georgia of charges related to a deadly nationwide salmonella outbreak.  The matter came to the government’s attention in late 2008 when people began falling ill across the country.  The illnesses were eventually linked back to PCA’s peanut processing plant in Georgia.  As investigators continued to examine the salmonella outbreak, they discovered that the case involved potential criminal misconduct by Parnell and others who allegedly knew about the contamination, attempted to cover it up, and continued to ship contaminated and potentially contaminated product.  In one now infamous email from 2007, after being informed that batch test results were not back from the lab, Parnell wrote, “Just ship it.”  The outbreak killed nine people and injured thousands more.  Eventually, Parnell and others were charged in a 76-count indictment that alleged mail and wire fraud, introducing adulterated and misbranded food into interstate commerce, conspiracy, and obstruction of justice.  A jury found Parnell guilty of 67 of the 68 charges against him on September 19, 2014. 

On Monday of last week, U.S. District Court Judge W. Louis Sands sentenced Parnell to 28 years in federal prison.  One interesting aspect of the sentencing is that because authorities charged this case as a “white collar” matter involving fraud, rather than a homicide case, the most significant factor driving the guideline sentencing range was not the deaths of nine people, but the loss of over $100 million by the various food companies that were forced to recall their products because of Parnell’s actions.

According to last week’s DOJ press release:

Judge Sands took into account the fraud loss of PCA’s corporate victims when imposing today’s sentence.  The court found that Stewart Parnell and Mary Wilkerson should be held accountable for more than $100 million but less than $200 million in losses, and Michael Parnell should be held accountable for more than $20 million but less than $50 million in losses.  The court also found the government established evidence that Stewart Parnell and Mary Wilkerson should be accountable for harming more than 250 victims, and Michael Parnell should be accountable under federal sentencing guidelines for harming more than 50 victims.  The court additionally found that the Parnells should have known that their actions presented a reckless risk of death or serious bodily injury.

Looking at the applicable 2009 Federal Sentencing Guidelines (the Guidelines in place at the time of the offense conduct), one finds the following point allocations:

• Base Offense – 7 points
• Loss of more than $100 million – 26 points
• 250 or more victims – 6 points
• Risk of death – 2 points
• TOTAL: 41 points

While there were likely other applicable sentencing points, such as obstruction of justice and role in the offense, the above point allocations alone result in 41 total points.  This translates into a guideline sentencing range of 324-405 months (27.00 – 33.75 years) for a defendant with no criminal history.  Steward received 336 months (28 years).

To highlight the importance of the loss amount in the Guideline’s calculation, note that if this case had involved nine deaths, but no financial loss to food companies, the sentencing range under section 2B1.1 of the Federal Sentencing Guidelines would have dropped to 18-24 months in the above calculation.  Obviously, this would have been a grossly unreasonable sentence given the devastating harm caused by Parnell.

I don’t know why this case was charged as a fraud and not a homicide.  Perhaps it was to send a clearer message about national food safety by bringing federal charges, including charges directly related to the introduction of adulterated and misbranded food into interstate commerce.  One additional item to note, however, as we think about the way this case proceeded, is that federal white collar sentences in high loss cases can often dwarf sentences for other crimes, including homicide.  Consider that involuntary manslaughter in Georgia carries a maximum sentence of ten years in prison.  Georgia also has automatic parole eligibility for most inmates.  By comparison, Parnell received 28 years in prison using federal fraud statutes and their applicable sentencing guidelines.  Further, there is no parole in the federal system.    

Federal fraud offenses are often attractive to prosecutors because they are broad enough to apply in all manner of situations and carry potentially significant sentences.  It should be no surprise, therefore, that we continue to see these statutes used in many cases that do not fit neatly into our traditional definitions of “white collar crime.”  For a further discussion of the way “white collar offenses” are used in a vast array of cases, many of which do not involve traditional white collar criminal activity, see “White Collar Crime”: Still Hazy After All These Years, 50 Georgia Law Review Issue 3 (Lead Article) (forthcoming).

(LED)

Just Who is Under that DOJ Bus?

You are the CEO, General Counsel, or Audit Committee of a big publicly traded company. Some whistleblower dimes the company out to the SEC and DOJ. It seems very likely that a crime has been committed. Class action lawsuits, qui tam complaints, and DOJ and SEC investigations are a foregone conclusion. What are you gonna do? Tell the SEC and DOJ to f... off? No, you are going to commence your own internal investigation and promise to cooperate with the government by sharing your Investigative Report's essential findings. And if the internal investigation reveals that some of your employees acted illegally, you will promise to serve them up to the DOJ. This is the reality in today's business and legal environment. A corporate entity owes no particular duty to an employee who commits fraud. Professor Podgor's complaint here and here that both the old (Filip) and new (Yates) DOJ policies encourage companies to throw their employees under the bus is certainly true. But to the companies involved it makes a lot of sense. Tell the DOJ that it's on its own and what will happen? You will still get hit with costly and onerous document requests and a federal criminal investigation that you cannot control. The publicity is awful and when it all hits the fan you can't even say that you are cooperating with DOJ. You've got a real mess and a pissed off prosecutor. To some extent, becoming a government quasi-agent is inevitable in this scenario.

The more interesting question to me is: "Who gets thrown under the bus?" Former SEC Enforcement Chief Robert Khuzami complained years ago that too many outside counsel with longstanding ties to a given corporation's leadership are willing to sacrifice mid-level employees to the government sledgehammer, letting the big boys go scot-free. That was true then. It's true now. Until the DOJ shows a willingness and ability to seriously investigate and prosecute a company's top leadership, when it is clearly called for, no memos, speeches, or other fanfare will mean diddly squat.

Yes, the occasional CEO finds himself/herself in the crosshairs and the occasional internal investigation results in a CEO resignation. But in the vast majority of cases it is middle management that gets slow roasted by both the company and an all-too-willing DOJ. Trust me. It happens. If the policies announced in the Yates Memo have any chance of changing this dynamic, so much the better.

Meanwhile, are there any concrete things the Department can do to change the situation? More on that in a future post.

(wisenberg)

No "Fowl" Play: Fifth Circuit Overturns Migratory Bird Treaty Act Convictions

Guest Blogger - Erin Okuno Foreman Biodiversity Fellow, Institute of Biodiversity Law and Policy, Stetson University College of Law

Recently, the U.S. Court of Appeals for the Fifth Circuit overturned convictions under the Migratory Bird Treaty Act ("MBTA") and the Clean Air Act ("CAA") in the case of United States of America v. CITGO Petroleum Corp., Case No. 14-40128 (5th Cir. Sept. 9, 2015). The U.S. District Court for the Southern District of Texas had previously found CITGO Petroleum Corp. and CITGO Refining and Chemicals Company, L.P. ("CITGO") guilty of three counts of violating the MBTA for "taking" migratory birds because birds (including pelicans, ducks, and cormorants) had died in uncovered equalization tanks at CITGO’s petroleum refinery. A jury had also found CITGO guilty on two CAA counts. The district court issued a $15,000 fine for each violation of the MBTA and a $2 million fine for the CAA violations. CITGO appealed, and the Fifth Circuit reversed the MBTA and CAA convictions.

In reversing the MBTA convictions, the Fifth Circuit focused largely on the definition of "take" under the MBTA and concluded that "the MBTA’s ban on ‘takings’ only prohibits intentional acts (not omissions) that directly (not indirectly or accidentally) kill migratory birds." As noted by the court, under the MBTA, it is "‘unlawful at any time, by any means or in any manner, to pursue, hunt, take, capture, kill, attempt to take, capture, or kill . . . any migratory bird,’ in violation of regulations and permits." The Fifth Circuit reasoned that while Congress had expanded the definition of "take" in both the Endangered Species Act ("ESA") and the Marine Mammal Protection Act ("MMPA"), it had not done so in the MBTA. A "take" under the ESA and the MMPA includes terms ("harm" and "harass") that encompass negligent acts or omissions, but these terms are not included in the MBTA’s "take" definition. Instead, the Fifth Circuit determined that the MBTA applies a more limited common law definition of "take."

Those who violate the MBTA are subject to strict liability, but a circuit (and district) split exists about the scope of liability under the act. The Fifth Circuit joined the Eighth and Ninth Circuits by focusing on the meaning of "take" and concluding that "a ‘taking’ is limited to deliberate acts done directly and intentionally to migratory birds." The court chose not to follow the Second and Tenth Circuits’ broader interpretations, which did not focus on the meaning of "take": the Fifth Circuit disagreed "that because misdemeanor MBTA violations are strict liability crimes, a 'take' includes acts (or omissions) that indirectly or accidently kill migratory birds." It was the Fifth Circuit’s position that the Second and Tenth Circuits had confused mens rea and actus reus. As the court explained, a strict liability crime does not require mens rea, but an actus reus is still required to hold a defendant criminally liable.

The district court had also distinguished this case from other MBTA oil field cases because CITGO’s underlying conduct violated the CAA and state law. The Fifth Circuit rejected this argument, explaining that the MBTA provides no basis for such an argument, but even if it did, the Fifth Circuit held that CITGO had not committed a CAA violation (and CITGO was not charged or convicted of any state law crimes). The court concluded its MBTA discussion by suggesting that a broader interpretation of the statute would lead to absurd results, such that people who own windows, power lines, cars, and domestic cats could be potentially liable for misdemeanors under the MBTA. Interpreting the statute more narrowly and relying on a limited common law meaning of "take," the Fifth Circuit reversed CITGO’s MBTA convictions.

A few thoughts:

• The Fifth Circuit’s decision about the scope of criminal liability under the MBTA further contributes to the split on this issue. The Fifth Circuit may have interpreted the MBTA narrowly, but other circuits have been, and may be, willing to interpret the statute more broadly, which could have serious implications for companies operating in those circuits. The statute’s effectiveness in preserving migratory birds could also vary circuit to circuit.
•  What effect might the Fifth Circuit’s interpretation of "take" under the MBTA have on other courts’ interpretations of the term under the ESA and the MMPA? Although the Fifth Circuit distinguished the use of the term in the MBTA from the ESA and the MMPA, it is conceivable (although probably unlikely) that another court could find the Fifth Circuit’s reasoning persuasive and interpret the term under the ESA and MMPA a bit more narrowly. Conversely, a court could also use the Fifth Circuit’s distinction to bolster an even broader interpretation of the term under the ESA and MMPA.
•  Will the Fifth Circuit’s reasoning about strict liability and the mens rea/actus reus distinction have any implications for other environmental statutes that contain strict liability provisions, such as the Clean Water Act?

(eo)

GM Deferred Prosecution Agreement and the "New" DOJ Corporate Prosecution Policy

Just days ago, DOJ came down with a new corporate directive (discussed here) describing a shift in investigation policy.  The new focus would be on the prosecution of individuals within the entity.  It states:

"2. Both criminal and civil corporate investigations should focus on individuals from the inception of the investigation.

Both criminal and civil attorneys should focus on individual wrongdoing from the very beginning of any investigation of corporate misconduct. By focusing on building cases against individual wrongdoers from the inception of an investigation, we accomplish multiple goals. . . . "

So much for this new policy, as the GM Deferred Prosecution Agreement comes before any individual prosecutions. (see Corporate Crime Reporter here).  It has the company paying $900 million, accepting responsibility, agreeing to cooperate, and providing information to the government.  

Both the old DOJ approach and this new one, that seems to exist only on paper and not in practice, have problems.  Both have the company serving as "agents" of the government.  Both have the company doing the investigative work for the DOJ.  Both have the company "throwing employees under the bus." And both show a disrespect for individual attorney-client relations.  

Corporate and individual criminal actions are a problem that needs to be corrected.  But as previously said, pitting the entity against its constituents will not correct misconduct.  And telling the public that you intend to take a different approach and just days after you do the opposite fosters a lack of trust. It also demonstrates the importance of Congressional action as opposed to reliance on DOJ internal guidelines.

(esp)

Upcoming Event -Overcriminalization

Striking the Right Balance: Criminal v. Civil Law Sanctions 

National Association of Criminal Defense Lawyers (NACDL), Foundation of Criminal Justice (FCJ), Constitution Project (TCP)

Moderator Professor Lucian Dervan (Southern Illinois School of Law)

Panelists - Adeel Bashir (Office of the Federal Defender, Middle District of Florida), John Lauro (Lauro Law Firm), & Marjorie Peerce (Ballard Spahr)

Wednesday, September 16, 2015 from 12:00 PM to 1:15 PM (EDT)  For more information see here.

(esp)                               

In the News & Around the Blogosphere

Sue Reisinger, Corporate Counsel, AG Lynch Sounds Warning Bell, Says FIFA Probes Expand

(esp)

Sentencing the Wolf of Wall Street

I have just released a new article discussing the sentencing of Jordan Belfort, better known as the "Wolf of Wall Street."  I use this case as a mechanism for considering how white collar sentencing has evolved from the 1980s until today.  In particular, the article examines the growth in uncertainty and inconsistency in sentences received by major white collar offenders over this period of time and considers some of the reasons for this trend.  The article also examines the impact of recent amendments adopted by the U.S. Sentencing Commission on white collar sentences.

Lucian E. Dervan, Sentencing the Wolf of Wall Street: From Leniency to Uncertainty, 61 Wayne Law Review -- (2015).

Abstract:

This Symposium Article, based on a presentation given by Professor Dervan at the 2014 Wayne Law Review Symposium entitled "Sentencing White Collar Defendants: How Much is Enough," examines the Jordan Belfort (“Wolf of Wall Street”) prosecution as a vehicle for analyzing sentencing in major white-collar criminal cases from the 1980s until today. In Part II, the Article examines the Belfort case and his relatively lenient prison sentence for engaging in a major fraud. This section goes on to examine additional cases from the 1980s, 1990s, and 2000s to consider the results of reforms aimed at “getting tough” on white-collar offenders. In concluding this initial examination, the Article discusses three observed trends. First, today, as might be expected, it appears there are much longer sentences for major white-collar offenders as compared to the 1980s and 1990s. Second, today, there also appears to be greater uncertainty and inconsistency regarding the sentences received by major white-collar offenders when compared with sentences from the 1980s and 1990s. Third, there appear to have been much smaller sentencing increases for less significant and more common white-collar offenders over this same period of time. In Part III, the Article examines some of the possible reasons for these observed trends, including amendments to the Federal Sentencing Guidelines, increased statutory maximums, and judicial discretion. In concluding, the Article offers some observations regarding what the perceived uncertainty and inconsistency in sentencing major white-collar offenders today might indicate about white-collar sentencing more broadly. In considering this issue, the Article also briefly examines recent amendments adopted by the U.S. Sentencing Commission and proposed reforms to white-collar sentencing offered by the American Bar Association.

(LED)

It's Official - Throw the Employees Under the Bus

The new DOJ Policy (see here for the NYTimes story that includes DOJ Policy) makes the current practice of corporations "throwing employees under the bus," official. It states, "[t]o be eligible of any cooperation credit, corporations must provide to the Department all relevant facts about the individuals involved in corporate misconduct."  Corporations have received deferred and non-prosecution agreements (DPAs and NPAs) that often provide for the corporation cooperating with the government in the investigation of alleged criminally culpable individuals.  Now it is clear that to obtain "any" cooperation credit it will be necessary to provide the evidence against these individuals. 

Three concerns here: 

1) what is meant by providing "all relevant facts"?  Does this mean only information that is relevant to the government's case against the individuals?  Will the government also be asking for Brady material that might be exculpatory for the individuals? Does this mean that the corporation now is officially a member of the government team?  

2) what does this mean for the corporate culture?  The concept of the individuals in the company working together, asking for legal advice from corporate counsel, and working to resolve problems in an open environment may now be officially over.  This policy pits the corporation against the individual.  Is this a wise approach to correcting business misconduct?

3) does this make it more important that there be fairness in internal investigations?  See here for a discussion of the importance of fairness in internal investigations.

Interestingly, the new policy calls for starting with the individual and also calls for sharing information between civil and criminal attorneys. It also requires "a clear plan to resolve related individual cases before the statute of limitations expires and declinations as to individuals in such cases must be memorialized." This is a clear message that individual prosecutions are now a priority.

The message to white collar criminal defense attorneys - corporate prosecutions may no longer be the focus.  Get ready for more prosecutions against individuals.

(esp) 

White Collar Crime as DOJ Priority

Check out the NY Times article, Matt Apuzzo & Ben Protess, New Justice Dept. Rules Aimed at Prosecuting Corporate Executives .

(esp)

Registration Open for Global White Collar Crime Institute

Registration is now open for the Inaugural ABA Criminal Justice Section Global White Collar Crime Institute, which will take place November 19-20, 2015 at the Ritz-Carlton Shanghai Pudong in Shanghai, China.  The event is done in collaboration with the KoGuan Law School of the Shanghai Jiao Tong University.  I am honored to serve as the Institute Chair and hope to see many of our blog readers at the event.

This conference will be an incredible opportunity to interact with prosecutors, judges, defense counsel, accountants, in-house counsel, and academics from the U.S., China, and other parts of the world as they convene to discuss the complexities of international white collar crime.  

More from the registration website:

The goal of the conference is to bring the energy and excitement of our previous international white collar crime conferences to Asia and create unique opportunities for our participants to network and explore the legal complexities of white collar crime in the growing Chinese legal market. Conference topics will include: 

• General Counsels’ Roundtable
• Enforcers' Roundtable
• How to Conduct an International Internal Investigation
• Recent Developments in Global Antitrust Cartel Enforcement and Anticipated Implications for China and Asia
• Comparative Legal Systems & Special Enforcement Issues in China, the US & Beyond
• Year in Review: Lessons Learned from Recent White Collar Crimes Prosecutions in China & the US
• Trends Regarding Anti-Corruption Enforcement in China & the US
• Cyber Crime & Virtual Currencies
• Social Responsibility of Corporations

LUNCHEON KEYNOTE SPEAKER – November 19

Sung-Hee Suh, U.S. Deputy Assistant Attorney General  

Suh was appointed in Sept. 2014 as the U.S. Department of Justice's Deputy Assistant Attorney General overseeing the Criminal Division's Fraud, Appellate and Capital Case Sections.  She re-joined the Department after 15 years in private practice at Schulte Roth & Zabel LLP in New York, where she was a partner in the Litigation group and focused on representing institutions and individuals in financial fraud, securities regulatory, Foreign Corrupt Practices Act, anti-money laundering and sanctions matters.  

The complete program is also now available on the ABA CJS registration website. 

(LED)

Privilege and Internal Investigations

Earlier this year, the Wall Street Journal ran an interesting story about several cases in which U.S. courts refused to recognize the attorney-client privilege for communications between in-house counsel and overseas companies.  The article focused on two cases in particular – Wultz et al. v. Bank of China Limited and Anwar et al. v. Fairfield Greenwich Limited. 

Just recently, Janet Levine, Gail Zirkelbach, Derek Hahn, and Danielle Rowan wrote an article in the Summer 2015 edition of the ABA CJS Criminal Justice magazine on the topic of The Evolving Landscape of Legal Privilege in Internal Investigations.  Along with the Bank of China case, the article provides summaries of three other cases involving the privilege issue during internal investigations – In re Kellogg Brown & Root, Inc. (KBR) (previously discussed on this blog here and here), Wal-Mart Stores, Inc. v. Ind. Elec. Workers Pension Trust Fund IBEW (previously discussed on this blog), and Paterno v. NCAA).

As an update to the above excellent reads, it is important to note that the U.S. Court of Appeals for the District of Columbia recently released another opinion in the KBR matter.  This opinion vacated additional orders by the District Court that would have required KBR to turn over the materials at issue in the case.  See In re Kellogg Brown & Root, Inc., -- F.3d –, 2015 WL 4727411 (August 11, 2015).

According to the appellate court in the new KBR opinion:

More than three decades ago, the Supreme Court held that the attorney-client privilege protects confidential employee communications made during a business’s internal investigation led by company lawyers. See Upjohn Co. v. United States, 449 U.S. 383, 101 S. Ct. 677, 66 L. Ed. 2d 584 (1981). In this case, the District Court denied the protection of the privilege to a company that had conducted just such an internal investigation. The District Court’s decision has generated substantial uncertainty about the scope of the attorney-client privilege in the business setting. We conclude that the District Court’s decision is irreconcilable with Upjohn. We therefore grant KBR's petition for a writ of mandamus and vacate the District Court's March 6 document production order. 

The issue of attorney-client privilege in the internal investigation context is one that is growing in both complexity and significance.  Keep an eye out for more court decisions on this issue in the future as companies, attorneys, and courts struggle to find a balance in today’s complex legal and business environment.

(LED)