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.

…continue reading: Collateral Consequences of the UBS and RBS LIBOR Settlements

Anyone watching white collar and regulatory enforcement developments unfold during 2012 knows that the government’s appetite for bringing huge cases against major companies, including massive fines, extensive remedial undertakings, and extended monitorships, has continued unabated. It is, admittedly, a gloomy picture, and most commentators (and law firms) have tended to outdo each other in stressing the storm clouds and challenges.

In this treacherous environment, making investments that may help to avoid criminal problems is a wise strategy. We have previously written about the many elements of an effective corporate compliance program, and such programs can materially reduce the risk of a severe and potentially crippling white collar criminal or regulatory enforcement proceeding. In our experience, however, the single most important element of such a program is a searching and well-informed survey, conducted periodically, aimed at identifying potential compliance risks. Nowadays, virtually every well-run corporation has training programs, a code of conduct, and a comprehensive set of compliance policies; the real distinguishing features of the best programs, in our view, are the capacity of a firm to (1) spot intelligently and quickly potential risks inherent in its business and then timely implement appropriate preventive measures before serious problems arise, and (2) respond promptly and appropriately if such a program detects potential wrongdoing.

…continue reading: White Collar and Regulatory Enforcement: Emerging Trends

“Over the last decade, DPAs [Deferred Prosecution Agreements] have become a mainstay of white collar criminal law enforcement,” Lanny Breuer, the head of the U.S. Department of Justice’s Criminal Division, declared on September 13, 2012. Corporate Deferred Prosecution Agreements (“DPAs”) and Non-Prosecution Agreements (“NPAs”) (collectively, “agreements”) have, in Mr. Breuer’s words, ameliorated the “stark choice” that prosecutors faced: either to employ “the blunt instrument of criminal indictment” that he likened to using “a sledgehammer to crack a nut” or to “walk away” and decline prosecution outright. Mr. Breuer declared that DPAs and NPAs “have had a truly transformative effect on . . . corporate culture across the globe” resulting in “unequivocally[] far greater accountability for corporate wrongdoing–and a sea change in corporate compliance efforts.” Mr. Breuer’s comments are timely, coming in a year during which such agreements yielded a record level of monetary penalties and related payments totaling nearly $9.0 billion and are increasingly used to resolve front-page criminal matters.

This client alert, the ninth in our series of biannual updates on DPAs and NPAs, (1) summarizes the DPAs and NPAs from 2012, (2) considers detailed remarks from leading enforcement officials with the U.S. Department of Justice (“DOJ”) and the U.S. Securities and Exchange Commission (the “SEC”) regarding settlement agreements, (3) examines compliance measures presented in recent non-FCPA agreements as examples of DOJ-endorsed good practices in various industries, and (4) looks across the Atlantic to evaluate the United Kingdom’s prospective use of DPAs.

…continue reading: 2012 Year-End Update on Corporate Deferred Prosecution and Non-Prosecution Agreements

In the past 25 years, the size of settlements, fines and penalties for individual corporations found guilty of wrongdoing has escalated from millions of dollars, to tens of millions, to hundreds of millions, to billions. Think Siemens and widespread bribery — about $2 billion. Or, bigger yet, think BP and the gulf disaster — almost $20 billion to date, with another $20 billion-plus likely in the future.

But during this period, there has been another change: highly expensive scandals across business sectors, not just in single companies, and this is reflected in the January 7th agreement by major banks to pay $8.5 billion due to derelict mortgage and foreclosure processes.

These sectoral scandals raise profound issues for business leaders: in a highly competitive global economy, in which some sectors are flooded with money, how do you assess sector-wide integrity risks and achieve a culture of corporate accountability before, not after, bad behavior occurs?

…continue reading: Why Are Some Sectors (Ahem, Finance) So Scandal-Plagued?

Deferred Prosecution Agreements (“DPAs”) and Non-Prosecution Agreements (“NPAs”) (collectively, “agreements”) in recent years have become a primary tool of the U.S. Department of Justice (“DOJ”) for resolving allegations of corporate criminal wrongdoing. Since 2000, DOJ entities have entered into 230 reported agreements with corporate entities, extracting a total of $31.6 billion in fines, penalties, forfeitures, and related civil settlements. The U.S. Securities and Exchange Commission (“SEC”), which announced the adoption of DPAs and NPAs as part of its Cooperation Initiative in January 2010, has since entered into three NPAs without monetary penalties and one DPA, which included disgorgement. With these agreements, companies obtain finality and closure and agree not to commit further legal violations and to undertake specific cooperation and compliance obligations in exchange for DOJ or the SEC agreeing to forgo enforcement action. In the DOJ context, the two agreement types differ in one material respect: for DPAs, DOJ files a criminal information in federal court, while NPAs generally are not filed in court.

During the last 12 years, DOJ and the SEC have employed DPAs and NPAs in some of the most high-profile cases and continue to turn to them in cases where they believe criminal conduct may have occurred but for a variety of reasons, including a company’s extensive cooperation, internal management shakeups, or the grave risk of collateral consequences to the corporate entity, a conviction through a guilty plea would not be equitable. In the final analysis, DOJ’s increasing reliance on DPAs and NPAs demonstrates its recognition that they are precision instruments to resolve allegations of corporate wrongdoing. The SEC, which recently embraced DPAs and NPAs, and the United Kingdom, which appears to be in the process of doing so, recognize that these agreements can be fine-tuned to help reward cooperation and mitigate collateral consequences.

…continue reading: Update on Corporate Deferred Prosecution and Non-Prosecution Agreements

The last ten years have seen a continuous increase in white collar criminal and regulatory enforcement activity. 2011 was no exception, and we expect the trend to continue in 2012.

While not an entirely new phenomenon, the world of white collar and regulatory enforcement appears more politicized than ever. Corporations facing investigations in 2012 can expect extensive press scrutiny, serial leaks about the investigation, and, on occasion, parallel involvement of Congress and others at any stage of the matter. The credit a company can expect to receive for providing cooperation seems ever more uncertain, especially in cases receiving a high level of public focus, notwithstanding government protestations that cooperation will be rewarded. And, it is likely to get harder going forward to shepherd corporate resolutions of these kinds of cases through this politicized landscape. There is no simple solution to these challenges. But, as we discuss below, it remains critical for companies responding to multipronged investigations to keep clear lines of communication open with government investigators, to address questions candidly and with integrity, to correct identified problems promptly, and to build upon and strengthen investments made before the inquiry began in establishing a culture of compliance.

…continue reading: White Collar and Regulatory Enforcement

In our paper, “Do They Do It for the Money?” forthcoming in the Journal of Corporate Finance, we explore the motives for committing white collar crimes such as insider trading. The idea for the paper germinated when speaking with a prosecutor in the celebrated Enron case several years ago. He remarked that “they do it because they think they can get away with it.” We were skeptical. Being financial economists, our prior was that the strongest motivation for individuals to commit insider trading was for monetary gain.

In terms of anecdotes, the prosecutor seemed to be right. In 2001, Martha Stewart was charged in a civil case for insider trading. She avoided losses of $45,673, which was a paltry 1.7% of her $2,704,403 in legal compensation from (MSO) in 2001, and a miniscule .007% of her $650 million net worth at the time. Mark Cuban had a net worth of $1.3 billion when he was first charged with insider trading for avoiding losses of $750,000 in 2004. Don Tyson was one of the “Forbes Top 1,000 Richest” back in 1992 when he was convicted for making illegal trading profits of only $46,125.

…continue reading: Do They Do It for the Money?

Our chapter, “Corporate Crime,” (to appear in the handbook Criminal Law and Economics, edited by Nuno Garoupa, Edward Elgar, 2009) provides a new survey of the law and economics literature on corporate crime. We focus primarily on the relevant theoretical research but also touch on empirical research and policy issues.

We set the stage by updating some stylized facts about prosecuted firms. The data come from various tables in the U.S. Sentencing Commission’s Sourcebook of Federal Sentencing Statistics. Our descriptive analysis is similar to earlier studies using this data source, but we update these earlier studies with the most recent data. The most up-to-date of these earlier studies (Cohen 1996) used data for the 1984-90 period, while our analysis covers the period 2002-06. We also focus on facts that relate to the theory which we go on to survey.

We find that around a third of the cases involved fraud, 20 percent involved environmental violations, around 7 percent involved antitrust, and about an equal fraction involved a general “product” category which includes food, drugs, other consumer products, and agriculture. Around a third of the cases (40 percent in 2006) involved managerial tolerance of behavior of lower-level employees. This figure sheds some light on the theoretical and empirical controversy over whether criminal agents are acting in the interest or against the interest of principals higher up in the organization (firm owners or managers). The figure suggests that different models of corporate crime may apply to different cases. While there are some cases in which the criminal employee may have been acting as a maverick against the interests of the firm’s owners and upper-level management, in a substantial minority of cases the other cases the criminal agent may have been benefitted his principals (at least in the absence of sanctions).

We then proceed to a survey of the theoretical literature, organizing the discussion within a unified framework provided by the principal-agent model. Our model follows closely on Garoupa (2000), since his comprehensive analysis nests much of the previous work.

…continue reading: Corporate Crime