In 2002, Arthur Andersen LLP collapsed in the wake of an obstruction of justice conviction. Since then, conventional wisdom has been that the U.S. Department of Justice (DOJ) resists filing criminal charges against large business entities because of fears of another similar failure. Indeed, the DOJ has consistently acknowledged that it considers such risks, and the U.S. Attorneys’ Manual expressly identifies “collateral consequences” as a factor that should be weighed in making charging decisions. In the wake of the Great Recession, however, the DOJ has been faced with competing pressures, especially with respect to financial institutions. On the one hand, the Lehman Brothers bankruptcy, among other bank failures and near-failures, suggested vulnerability on the part of some financial institutions and illustrated the potentially grave consequences that the collapse of a financial institution can have on the broader economy. The DOJ clearly does not want to cause a financial institution to fail. On the other hand, there is a pervasive public sentiment that large financial institutions were responsible for the economic collapse from which the country is only now emerging. Particularly in recent months, the DOJ has been criticized for its decision not to bring criminal charges against any major financial entity.
It is too soon to say that increased criticism (or any other factor) has led to a sea change in the DOJ’s approach to charging corporations: the DOJ still appears to be deeply and justifiably concerned with the potential implications of indicting a major corporation or forcing it to take a guilty plea. However, the DOJ recently filed criminal charges against two major financial-sector entities—subsidiaries of UBS and RBS—both of which pled guilty. Recent press reports assert that these prosecutions are the beginning of a broader strategy by the DOJ to obtain corporate convictions without jeopardizing those entities’ survival. If there is, in fact, such a strategic rethinking and if the UBS and RBS subsidiaries weather prosecution without significant harm, the DOJ may well pursue this approach on a wider scale. Successful prosecutions of subsidiaries may also cause the DOJ to scrutinize more closely arguments concerning “collateral consequences” made on behalf of parent entities and, in turn, may open the door to the prosecution of those entities. In short, corporations and the lawyers who advise them would be well-served to monitor the fates of the UBS and RBS subsidiaries. In the end, their success may make reliance on a “collateral consequences” argument to avoid criminal charges more difficult.
The Holder Memo, The Arthur Andersen Prosecution, and Growing Fears of “Collateral Consequences”
The 1988 guilty plea of Drexel Burnham Lambert, Inc. for insider trading marked the beginning of an era in which corporate prosecutions became more common. Following Drexel, other financial firms were prosecuted in the 1990s. For instance, Daiwa Bank Ltd. of Japan was indicted and, after initially contesting the charges against it, pled guilty in 1996 to multiple felony counts related to a cover-up of trading losses. A few years later, Bankers Trust Co. pled guilty in 1999 to federal charges related to a scheme that falsely boosted the bank’s performance by diverting millions of dollars in unclaimed customer funds.
In the aftermath of these prosecutions, the key terms for today’s debate were articulated in 1999, when then-Deputy Attorney General Eric Holder set out the DOJ’s first formal guidelines for “Federal Prosecution of Corporations.” In the course of various iterations, these guidelines eventually evolved into the U.S. Attorneys’ Manual’s “Principles of Federal Prosecution of Business Organizations.” The so-called “Holder Memo” and its progeny acknowledged the unique, even conflicting, considerations that affect decisions to bring criminal charges against corporate entities. For example, the Holder Memo explained, “Corporations should not be treated leniently because of their artificial nature nor should they be subject to harsher treatment. Vigorous enforcement of the criminal laws against corporate wrongdoers, where appropriate, results in great benefits for law enforcement and the public, particularly in the area of white collar crime. Indicting corporations for wrongdoing enables the government to address and be a force for positive change of corporate culture, alter corporate behavior, and prevent, discover and punish white collar crime.” Notwithstanding this strong statement, the Holder Memo also specifically directed prosecutors to consider “collateral consequences” when deciding whether to bring charges. Although the “mere existence” of such collateral consequences is not enough to preclude prosecution, the DOJ recognized that innocent shareholders, employees and others may be seriously harmed by a corporate prosecution.
Not long after the Holder Memo, the DOJ was presented with what eventually became the poster child for the “collateral consequences” of corporate prosecutions. Arthur Andersen LLP, one of the “Big 5” accounting firms, was an almost 90-year old company with 28,000 employees. Arthur Andersen, of course, served as the outside auditor for Enron Corporation, a Texas-based energy company that engaged in a scheme to inflate its revenues and understate its liabilities. Arthur Andersen partners and other employees destroyed documents that the government alleged were related to Enron’s accounting fraud and confirmed that various Arthur Andersen employees knew of and possibly assisted in Enron’s criminal misdeeds. Arthur Andersen rejected the government’s offer of a deferred prosecution agreement because this would have required an admission of wrongdoing. Arthur Andersen stated that such an admission would have jeopardized its ability to audit public companies. After negotiations broke down, Arthur Andersen was indicted on one count of obstruction of justice and was convicted by a jury in 2002.The firm effectively collapsed almost immediately afterwards.
Arthur Andersen’s demise profoundly affected the public debate about charging business entities. Certainly, Arthur Andersen had unique qualities that may have made it especially vulnerable to the collateral consequences of an indictment. Arthur Andersen’s principal assets were its partners and its credibility. The partners were highly portable, and there was little to keep them from walking out the door—with the firm’s clients—once the firm’s credibility was impugned by a criminal charge, let alone a conviction. However, the complete collapse of the firm, the suffering of its employees, and the deleterious effects of its disappearance on the accounting industry as a whole were largely unprecedented. Sentiment also moved more strongly against such prosecutions when the DOJ opted not to retry Arthur Anderson after the Supreme Court reversed the conviction because of faulty jury instructions.
In the end, many commentators – both inside and outside the government – concluded that one important lesson from the Arthur Anderson prosecution was that a federal indictment could cripple even a strong, well-established company. Many drew the further lesson that the government should not, in most situations, indict a company precisely because of the risk of these significant collateral consequences.
The Great Recession: The High Water Mark of the Arthur Andersen Effect
After Arthur Andersen’s collapse, the DOJ’s corporate enforcement efforts largely shifted away from indictments and guilty pleas. The DOJ instead focused on deferred or non-prosecution agreements that used fines and imposed programs to improve compliance programs. In the following decade, including throughout the financial crisis, this approach became the norm. Indeed, the hesitancy to prosecute corporations continued through the latter part of 2012. Even though the financial system had stabilized significantly (at least compared to 2008 to 2010), the DOJ continued to discuss its ongoing concerns about the stability of the economy and the potential consequences of a prosecution.
A September 2012 speech is particularly telling. Last September, then-Assistant Attorney General Lanny Breuer delivered a speech to the New York City Bar Association in which he extolled the virtues of deferred and non-prosecution agreements. Breuer said that such agreements had become a mainstay of the DOJ’s arsenal because they had the “same punitive, deterrent, and rehabilitative effect as a guilty plea.” As Breuer explained, corporations and their lawyers frequently try to dissuade federal prosecutors from filing charges based on the fear that the collateral effects would doom those clients to Arthur Andersen’s fate. Companies have similarly argued that a guilty plea could result in loss of licenses and, in the case of those with government contracts, debarment (which is effectively a ban from seeking such contracts). Deferred and non-prosecution agreements, however, enable companies to avoid such dire consequences and are frequently proposed as an alternative to prosecution.
Breuer’s comments also confirmed that the Great Recession has amplified the DOJ’s concerns about collateral consequences. Breuer confessed that he was “ke[pt] up at night” by concerns about a prosecution leading to the failure of a company, because such a failure would affect not only the “innocent employees and shareholders” but also “entire industries” and “global markets.”
The December 2012 settlement with British bank HSBC provided a particularly vivid example of the DOJ’s approach. In its settlement papers, HSBC admitted that it had served as a conduit for illegal money laundering transactions with foreign drug cartels and sanctioned countries, including Iran. Nonetheless, the DOJ accepted a deferred prosecution without a guilty plea. In press coverage of the HSBC settlement, the U.S. Treasury Department acknowledged that the DOJ had recently asked about the consequences on the broader economy of prosecuting “a large financial institution.” The press speculated that potential collateral consequences had significantly influenced the DOJ’s decision not to charge HSBC.
The Guilty Pleas of UBS and RBS Subsidiaries: Potential Harbingers of Change?
At the same time, the public appetite for criminal sanctions against companies and individuals became more pronounced; this was particularly true for conduct perceived to be the cause of the financial crisis. This public criticism diagnosed distinct problems and advocated conflicting approaches. For instance, outgoing Congressman Barney Frank—himself the co-sponsor of the omnibus Dodd-Frank Wall Street Reform and Consumer Protection Act— wrote an open letter to Attorney General Holder on December 18, 2012, in which he noted the lack of criminal charges against financial institutions. Congressman Frank acknowledged that an indictment or criminal conviction of one of those institutions could have a “destabilizing effect” and, therefore, asked that the DOJ increase prosecution of culpable individuals. In contrast, on January 29, 2013, Senators Chuck Grassley and Sherrod Brown wrote their own open letter to Attorney General Holder in which they quoted former Assistant Attorney General Breuer; they asked whether these comments meant that the DOJ followed a “too big to jail” policy and questioned its apparent decision not to prosecute corporations. Similarly, at a Senate Banking Committee meeting on February 14, 2013, Senator Elizabeth Warren expressed her “concern” to the heads of various federal banking agencies, including the Securities and Exchange Commission, that the apparent absence of any recent trials against banks in favor of settlements meant that “too-big-to-fail has become too-big-for-trial.”
These competing pressures and different policy prescriptions make it difficult to predict future DOJ approaches. Some changes, though, may have been revealed in recent weeks. Most significantly, Japanese subsidiaries of UBS and RBS pled guilty to wire fraud on December 19, 2012 and February 6, 2013 respectively. These two subsidiaries admitted that they had participated in fraudulent manipulation of the London Interbank Offered Rate (LIBOR), used in a wide array of financial transactions, from the mundane to the esoteric. Along with the guilty pleas of the subsidiaries, the UBS parent entity entered into a non-prosecution agreement, and the RBS parent company entered into a deferred prosecution agreement. Together, the UBS and RBS parents and subsidiaries paid over one billion dollars in aggregate fines to the DOJ and other regulators. Tellingly, in announcing the UBS settlement, former Assistant Attorney General Breuer rejected a questioner’s suggestion that the DOJ had let the parent company off lightly, contending that this was a “criminal plea of a major financial institution.”
This “middle way” may allow the DOJ to minimize collateral consequences while still obtaining corporate convictions. Indeed, it is not a completely new approach, as analogous resolutions have been reached in other contexts in the past, particularly (but not exclusively) in Foreign Corrupt Practices Act (“FCPA”) matters. Prosecution of a subsidiary is particularly useful if there are unique risks of collateral consequences associated with convicting a parent. For example, prosecutors have reached similar deals with drug companies, which face the possibility of debarment if they are convicted. One example of such a resolution was the 2012 guilty plea by a U.S. subsidiary of GlaxoSmithKline for, among other things, unlawful promotion of certain prescription drugs for off-label uses. The government did not prosecute the foreign parent but instead entered into a non-prosecution agreement side letter. This approach resulted in a conviction but nonetheless protected the parent company from possible debarment from Medicare and other government programs. In the same way, the guilty pleas of Japanese subsidiaries of UBS and RBS do not affect the parent banks’ charters and, thus, their ability to do business in the U.S. In short, by demanding guilty pleas by the subsidiaries and significant fines and penalties by the parent, the DOJ may have found a way to have its cake and eat it, too.
The UBS and RBS guilty pleas and settlements obviously do not mean that the DOJ is completely disregarding the collateral consequences of charging a significant corporate entity. Even aside from the significant counterexample found in HSBC, the DOJ has made clear that it still very much considered these issues. During the UBS settlement announcement, Attorney General Holder expressly noted the importance of evaluating collateral consequences as first outlined in his seminal 1999 memo. Similarly, then-Assistant Attorney General Breuer stated: “Our goal here is not to destroy a major financial institution.”
Nonetheless, the criminal charges against the UBS and RBS subsidiaries suggest that changes may be afoot in the corporate prosecution environment. Moreover, there have been reports contending that the DOJ is effectively using the RBS and UBS prosecutions as “test cases” for a “new model for prosecuting big banks.”According to these reports, which rely on unnamed DOJ officials, this approach is intended to “shield the parent company from losing its license, but still send a warning to the financial industry.”That is, assuming the sources are correct, the DOJ is attempting to avoid the risk of an Arthur Anderson-style collapse while still obtaining the benefits—symbolic and otherwise—of a conviction.
Assuming that the DOJ is, in fact, pursuing a new model, it is likely that collateral consequences arguments will be subjected to increased scrutiny. Notably, post-plea, anonymous DOJ sources were purportedly “heartened by the lack of a negative reaction in the markets and among regulators around the world to UBS’s [subsidiary’s] guilty plea.” If the UBS and RBS subsidiaries continue to thrive, prosecutions of other subsidiaries may be viewed as a viable way to balance enforcement efforts with concerns about corporate health. Their success may also cause the DOJ to apply additional scrutiny to “collateral consequences” arguments made on behalf of corporate parents and, by extension, put prosecutions of corporate parents back on the table. In light of these possibilities, corporations that are under investigation by the DOJ and defense counsel would be well-advised to pay even greater attention and care to the development of collateral consequences arguments.
It would be premature to base a defense strategy solely on the UBS and RBS prosecutions, but it would be equally unwise to ignore them. Corporations and their subsidiaries that are under investigation by the DOJ should consider and monitor this evolving environment, particularly if they intend to rely on a collateral consequences argument in an effort to avoid prosecution.