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TOO BIG TO FAIL OR JAIL

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By Brandon L Garrett

“There is no such thing as too big to jail,” then-Attorney General Eric Holder assured us last May in a stern video message.  I was then finishing a book that explores corporation prosecutions, which I had titled “Too Big to Jail.” I was not convinced that the problem was imaginary, and kept the book title.  Over the past decade, the Department of Justice has garnered record-setting fines against major corporations and banks.  Billion dollar corporate fines used to be unheard of.  Now they are a regular occurrence, and not a month goes by without a major corporate prosecution settled.  Those dollar figures are potentially misleading, however; the corporate executives and employees who committed the crimes do not pay the fines.  Some of those fines may not be fines at all and may even be tax deductible for the company.  And no individuals may be prosecuted in those cases; the biggest companies can buy the most expensive get out of jail free cards ever conceived.  Without more meaningful reforms in the way we prosecute corporate crime, I believe that “too big to jail” will endure.

A corporate prosecution is like a battle between David and Goliath.  Normally, the federal prosecutor would play the role of Goliath.  In a corporate prosecution, a company can spend hundreds of millions of dollars and hire entire law firms in its defense.  My book is the first to take a close look at what happens when a company is prosecuted in the United States. In my book, I presented data collected from more than a decade of cases to show what really happens when prosecutors pursue corporate crime.  I located plea agreements with companies by the thousands and hundred more out-of-court deals with companies as well.  They are all available online in a massive corporate crime registry that I have created with the help of the UVA Law Library, if you are interested in reading more about the prosecution of your favorite corporation.  These corporations include household names and Fortune 500 and Global 500 firms, such as the likes of AIG, Barclays, Bristol-Myers Squibb, BP, GlaxoSmithKline, Google, HealthSouth, JPMorgan, KPMG, Merrill Lynch, Monsanto, Pfizer, Siemens, and Toyota.  After collecting all of these prosecution agreements, I then examined the terms of the deals that prosecutors now negotiate with companies.  I wanted to understand how prosecutors fine companies to punish them, and what changes companies must make to prevent future crimes, and whether prosecutors pursue individual employees.

Over the past decade, federal prosecutors have embraced a new approach, using what are called deferred prosecution agreements and non-prosecution agreements in their biggest corporate prosecution cases. Normally, such agreements were entered with low-level first-time offenders or juveniles, to allow them to rehabilitate themselves without getting a criminal record.  It was a bold and creative move to offer those same types of deals to the largest corporate criminals. With no criminal record, what is the consequence for the company when it enters this type of deal?  The company must show “good conduct,” usually by paying a fine and by cooperating in the investigation, but also by improving its compliance and corporate governance, and sometimes by subjecting itself to oversight by independent monitors. This leniency approach to corporate prosecutions is not just about the Wall Street banks or the Global Financial Crisis.  It extends broadly to corporate prosecutions brought against a wide range of companies. Prosecutors are trying to rehabilitate companies rather than just punishing them for crimes their officers or employees committed, but I also question how serious prosecutors are about rehabilitating companies.  The fines may not give companies strong incentives to clean house.  The fines are typically highly reduced.  When prosecutors explain their calculations, the fines are typically at the bottom of what could be imposed under the relevant sentencing guidelines.  I was also surprised to see that almost half of the companies receiving out of court deals paid no fine to prosecutors at all.  Interestingly, foreign corporations paid far larger fines on average than domestic companies.  I was also surprised how lenient the compliance related terms of the deals were. 

Supposedly prosecutors want to fix a broken corporate culture in these cases.  Yet few of the cases required that compliance be carefully audited to be sure the changes at the company are actually working.  To be sure, it could take a real staff to oversee compliance at a major public corporation, something that resource strapped federal prosecutors cannot possibly be expected to take on.  One creative solution prosecutors have come up with is to require companies to hire an independent monitor, an outsider paid by the company (and often paid quite well) to scrutinize the compliance measures.  Yet three-quarters of the cases do not require oversight by any corporate monitor: who is checking whether the company complies in those cases?  Almost one-third of the agreements said nothing about compliance at all, and even those that did often said vague things about the need to use “best practices.” 

There is another important goal of prosecutors in these cases: to get the company to cooperate in investigating the officers and employees who engaged in the wrongdoing.  After all, individual people had to commit the crimes, and unlike the corporation, they can actually go to jail.  Yet, in about two-thirds of the corporate cases settled with out of court deals, no individual people are even charged.  Even when officers and employees are charged, few actually go to jail, and very few are higher-ups like CEOs or CFOs or Presidents. 

So how is this new kid-gloves approach to corporate crime working out?  The corporate executives do not pay the eye-catching fines and they typically go scot free.  As for the companies, the shareholders may bear the brunt of those record fines, but do prosecutions fundamentally change the culture, or will crimes remain a cost of doing business? We are starting to see companies act like career criminals, getting themselves prosecuted every few years, despite their promises to rehabilitate and adopt better compliance.  Each time they pay a fine and no one does time.  For example, the largest banks have been repeatedly prosecuted over the past decade, some two or three times.  Ordinary people face far greater punishment each time they are caught committing crimes.  Federal sentences go up dramatically based on prior convictions.  But under the new leniency approach, a company that enters non-prosecution or deferred prosecutions has no criminal record: it can say it is no recidivist.

This past year, the Department of Justice has warned that it is getting more serious about corporate crime.  Prosecutors have refused to offer deferred prosecution agreements and they have instead sought and obtained guilty pleas in a series of major cases involving banks.  They are creating a new position at DOJ that will focus on examining compliance more carefully.  Prosecutors say they “will not hesitate to tear up” corporate settlements if they are violated.  All of these are signs that improvements may be on the way, although we would feel more confident if they were reflected in clear policy or rules.  Despite remarkable successes and a real acceleration in the size corporate prosecution fines, prosecutors still have to dig themselves out of the approach that they have settled into over the past decade, where, for example, the largest banks have avoided convictions and sentences, entering into deferred and non-prosecution agreements with prosecutors, and sometimes multiple times—and some were treated more leniently the second or third time around.  Companies can complain that they are not receiving the favorable treatment that their counterparts received in the past.

Too put too big to jail concerns to rest for good, corporate convictions should be put on the record: corporations should routinely be convicted for serious crimes, as Credit Suisse and BNP Paribas were last year.  If banks are convicted, a judge can punish a recidivist for violating probation. Judges can also simply decline to approve deferred prosecution deals for recidivist banks.  Prosecutors should not be so allergic to judicial review in the most serious corporate crime cases.  A second solution is for federal prosecutors to strictly hold banks to task for violating earlier agreements.  Clear DOJ policy should require more severe sanctions for a recidivist bank or corporation, just as for individuals.  A third solution would be legislation or sentencing guidelines to adopt clearer and stricter rules for deferred prosecutions and for corporate recidivism.  None of these reforms, and others I discuss in my book, can completely level the playing field, where prosecutors are up against the most Goliath corporations.  More resources for corporate prosecutions will also be crucial, and there is no sign that more are on the way. 

Although I have criticized the current approach towards corporate prosecutions in the U.S., it is because I care deeply about improving the remarkable work that our prosecutors do in these oversized cases.  No other county in the world has taken on corporate crime more effectively than federal prosecutors in the U.S. have done.  There are major crimes by multinational companies that went unpunished for years until cases were brought in the U.S.  We in the U.S. are a role model as other counties across the globe grapple with the difficult problem of holding corporations more accountable.  Corporate crime can be so damaging and on so vast a scale, that it is crucial that we get corporate prosecutions right.  As I say when I conclude my book, the problem is so important that corporate prosecutions are themselves too big to fail.