Legislation is necessary for deferred prosecution of corporate crime.

• Author: Gallagher, John A.

"[T]here's been an erosion of confidence ... not only in the financial system, but in the justice system which failed to bring the bad actors to justice. Pay a fine, avoid jail. Promise you'll do better next time and no one gets prosecuted. The fine simply becomes the price of doing business.... [T]he captains of corporate America who did our nation wrong, look to the very justice system that's supposed to protect citizens, to bail themselves out. We're here today seeking legislation to help right the ship of justice.'" (1)

1. INTRODUCTION

   Corporate crime has plagued the American economy during the past two decades, causing staggering unemployment and destroying investor confidence in the stock market. (2) Typically involving complex financial schemes and sophisticated cover-ups, corporate crime is incredibly difficult to detect and prevent. (3) Corporate culture often embraces the criminal activity, so employees are less likely to report or refrain from wrongdoing. (4) Within the corporate setting, minor accounting or tax violations can quickly snowball into complex fraudulent schemes. (5) Most corporate crime entails methodical deceit and concealment by intelligent high-level executives who are familiar with and can anticipate and evade government regulation. (6) In addition, corporations hire experienced lawyers who conduct internal investigations to defend the corporation and utilize principles such as the attorney-client privilege and work-product protection to make the government's investigation more difficult. (7)

   on July 9, 2002, in response to the ever-growing problem of corporate crime, President Bush established the Corporate Fraud Task Force to strengthen prosecution of corporate crime by the Department of Justice (DOJ). (8) Additionally, Congress enacted the Sarbanes-Oxley Act in 2002 to expand the Securities and exchange Commission's ability to regulate corporate activity and increase compliance requirements for corporate accounting practices. (9) In 2003, Deputy Attorney General Larry D. Thompson issued a memorandum establishing new federal guidelines for the prosecution of business organizations. (10) While the legal community generally accepted Sarbanes-Oxley, many criticized the Thompson Memorandum for being unfairly prejudicial to corporations and individual defendants. (11)

   The criticism stemmed from the Thompson Memorandum's emphasis on genuine cooperation, which directed prosecutors to request that corporations waive attorney-client privilege and encourage employees to testify. (12) Although privilege waiver and witness testimony were traditionally difficult for the DOJ to obtain, most corporations complied with the DOJ requests because criminal prosecution causes severe reputational and monetary harm. (13) In exchange for cooperation, federal prosecutors offered many corporations deferred prosecution agreements to avoid the negative effects an indictment has on the corporation's innocent employees and shareholders, such as job loss and financial ruin. (14) Deferred prosecution agreements are essentially contracts with the DOJ, whereby the DOJ agrees not to pursue the charges filed against the corporation so long as the corporation fulfills certain requirements contained in the agreement. (15)

   In accordance with the Thompson Memorandum, federal prosecutors entered into numerous deferred prosecution agreements with corporations in return for the corporation's assistance in prosecuting individual employees. (16) With the corporation's assistance, federal prosecutors frequently bypassed the attorney-client privilege and work-product protection to obtain the corporate attorney's internal investigative records. (17) Although intended to guide prosecutors through corporate criminal charging decisions, the Thompson Memorandum caused some overzealous prosecutors to abuse their discretion. (18)

   In what has been called the "perfect storm" of cases, United States v. Stein (19) sent shockwaves through the legal community when the United States District Court for the Southern District of New York dismissed thirteen indictments against former KPMG executives due to prosecutorial misconduct. (20) KPMG, a Big Four accounting firm, entered into a deferred prosecution agreement with the DOJ in 2005 in connection with a tax fraud investigation, and, as part of the agreement, assisted the DOJ with its investigation of KPMG's former executives. (21) However, the district court dismissed the indictments against the former executives on the grounds that the federal prosecutors, acting under the guidance of the Thompson Memorandum, violated the defendants' Fifth Amendment right against self-incrimination and Sixth Amendment right to effective assistance of counsel. (22) The district court explained that, to defer prosecution, KPMG waived its attorney-client privilege, coerced its employees to testify, and ceased paying the legal fees for indicted employees. (23) In 2008, the Second Circuit affirmed the district court's decision that the federal prosecutor's use of the Thompson Memorandum unconstitutionally influenced KPMG's decision to stop paying the defendants' attorneys' fees, thereby depriving them of their Sixth Amendment right to effective assistance of counsel. (24)

   On August 28, 2008, the same day that the Second Circuit affirmed the district court's decision in United States v. Stein, Deputy Attorney General Mark R. Filip announced a revised set of guidelines for the prosecution of business organizations. (25) The new guidelines state that credit for cooperation will depend on the disclosure of relevant facts and not on the waiver of attorney-client privilege. (26) Furthermore, the Filip Memorandum instructs prosecutors not to take into account the payment of attorneys' fees when evaluating cooperation. (27) Despite a major victory for corporate defendants, the Filip Memorandum and the United States v. Stein decision have not significantly changed the DOJ's strategy for prosecuting corporate crime. (28)

   Part II.A of this Note will discuss the Fifth and Sixth Amendments, indemnification agreements, and the attorney-client privilege in the context of corporate crime. (29) Part II.B of this Note will then consider the role of the federal prosecutor in corporate criminal investigations. (30) Part II.C of this Note will discuss the purpose of deferred prosecution agreements and explore the effects deferred prosecution has on corporations and employees. (31) Part II.D of this Note will examine how the federal prosecutorial guidelines of business organizations have transformed prosecutorial discretion. (32) Finally, in Part III, this Note will analyze the limitations of the Filip Memorandum and promote the Attorney-Client Privilege Protection Act and the Accountability in Deferred Prosecution Act. (33)

2. HISTORY

   1. Practical and Constitutional Issues in Corporate Criminal Investigations

      1. The Fifth Amendment

         The Due Process Clause of the Fifth Amendment guarantees fairness to criminal defendants throughout criminal proceedings. (34) Under the Self-incrimination Clause of the Fifth Amendment, "[n]o person ... shall be compelled in any criminal case to be a witness against himself." (35) The Fifth Amendment Self-Incrimination Clause applies to corporate investigations, whether conducted internally by corporate counsel or externally by government agents, because the Fifth Amendment applies to any disclosure that may criminally implicate a declarant. (36) However, for the Fifth Amendment privilege against self-incrimination to apply in internal corporate investigations, there must be state action that compels the disclosure. (37)

         In most corporate internal investigations, employees must decide whether to cooperate with the company's investigation by answering questions or receive disciplinary action. (38) The pressure corporations put on employees during internal investigations is a direct result of the potential negative impact corporations face during state and federal investigations. (39) While the Fifth Amendment does not prevent employers from asking questions and terminating employees who refuse to answer, it does prohibit the in-court use of statements obtained under the threat of termination, if that threat derives from the government. (40)

      2. The Sixth Amendment

         The Sixth Amendment's Assistance of Counsel Clause provides that "[i]n all criminal prosecutions, the accused shall enjoy the right ... to have the Assistance of Counsel for his defence." (41) This guarantees more than the mere presence of a lawyer at a criminal trial; it protects, among other things, an individual's right to choose his or her own lawyer, to use his or her own funds, and to mount his or her own defense. (42) The Sixth Amendment protects a defendant's right to spend his own money--or money to which the defendant has a right--toward counsel of his choice. (43) In addition, the Supreme Court has held that the right to counsel is the right to "effective assistance of competent counsel." (44) The difficulty in most complex corporate criminal cases is that public defenders and general practitioners are unfit to represent defendants effectively because they do not posses adequate knowledge and experience in both business and criminal law. (45)

      3. Indemnification of Legal Fees

         Indemnification of legal fees has a long history in the United States and corporate law sanctions it in one form or another in every state. (46) Contrary to the belief that indemnifying officers and directors serves to protect corporate wrongdoers, indemnification agreements are designed to level the playing

         field. (47) Reimbursing corporate employees for legal expenses incurred while responding to government investigations is an essential element of good corporate governance. (48) Not surprisingly, many employment contracts provide for the payment of legal fees by the employer, although the defendant's right to legal fees may be based on the employer's...