Corporate criminal prosecution in a post-Enron world: the Thompson Memo in theory and practice.

• Author: Wray, Christopher A.

INTRODUCTION

[P]rosecutors have exploited their virtually unchecked power to extract and coerce ever greater concessions, jeopardizing the very nature of our adversary system. It is destruction by accretion--a staged but seemingly inexorable concentration of power that has skewed the system. The net result has been the emasculation of the defense bar and the enforcement of the criminal law in a way that is often wildly out of proportion to the perceived wrongdoing. It ... often is ... a state-sponsored shakedown scheme in which corporations are extorted to pay penalties grossly out of proportion to any actual misconduct. Criminal sanctions, administrative sanctions, and director liability make the payment of tribute to the federal government essentially a cost of doing business. (1) The approach to law enforcement embodied in the Thompson Memorandum can fairly be described as moving the process governing the American system away from the form the Founders expressly meant it to take--an accusatorial system--and toward something they feared--an inquisitorial system.... The Thompson Memorandum ... [has] move[d] the investigative, charging, and plea processes toward an inquisitorial system by shifting power from courts and juries to the Department of Justice and the U.S. Attorneys who work for it. (2) Q: Mr. Comey, overall, how do you think the [Thompson Memorandum] Principles are working?

A: I think they work very well. They have served the function of educating all DOJ attorneys about the need to give careful consideration to charging corporations, whose conduct can cause immense harm, and whose prosecution can result in enormous benefits, not only in restitution to victims, but in being a catalyst for tremendous changes for the good in many industries. They also instruct prosecutors to carefully consider a variety of critical mitigating factors, such as cooperation, collateral damage, and alternative remedies. In short, they provide a balanced framework for DOJ attorneys to make difficult decisions. In the process, they also greatly assist private counsel and corporations by spelling out the kinds of things that matter to prosecutors. (3)

On January 20, 2003, then-Deputy Attorney General Larry Thompson issued a policy memorandum to all Justice Department prosecutors entitled "Principles of Federal Prosecution of Business Organizations." (4) Also known as the "Thompson Memo," this document memorialized the Justice Department's current thinking on corporate criminal prosecutions and directed this approach for all prosecutors nationwide. The Memo explains that its "main focus ... is increased emphasis on and scrutiny of the authenticity of a corporation's cooperation." (5) Since its issuance, the Thompson Memo and the effects of its application have provoked strong reactions from critics and defenders alike. Some commentators, like the first two quoted above, lament that the Thompson Memo threatens the very foundation of our system of justice; others, like the third, venerate it as an effective way to save our market system from itself. (6) We believe that the Memo has largely accomplished its objectives and that many of the criticisms are overwrought. But the risks and tensions that the Memo fosters are real, and a healthy measure of caution in the Memo's application is well warranted.

The spate of corporate scandals that began with Enron's meltdown in 2001 prompted the Bush Administration to dramatically increase the federal government's focus on rooting out corporate fraud and restoring public confidence in the integrity of our markets. The emphasis on these priorities has fundamentally changed the government's relationship with industry and required companies to adapt accordingly.

One of the government's most potent weapons in its fight against corporate crime is the ability to file criminal charges against companies themselves. Because indictment often amounts to a virtual death sentence for business entities, a corporate prosecution provides the government an "opportunity for deterrence on a massive scale." (7) This weapon is indispensable to the government when dealing with companies truly deserving of such severity. But like any dangerous weapon, corporate prosecutions must be handled with care.

The most notable recent example of "deterrence on a massive scale" is the indictment and conviction of Arthur Andersen. (8) This case sent a clear and unmistakable message to Corporate America in general, and to the accounting profession in particular, that companies that deliberately try to block the government from investigating corporate misconduct will be punished swiftly and severely. But that conviction also effectively put the eighty-nine-year-old film out of business and forced tens of thousands of people to find new jobs. It also had a dramatic effect on the accounting industry, by turning the "Big 5" into the "Big 4." (9)

The Thompson Memo has had profound effects on the Justice Department's enforcement efforts in a wide range of matters and the ways in which companies respond to government investigations of misconduct. The Memo set out two primary objectives in its prefatory statement: to increase focus on (1) the authenticity of corporate cooperation with investigations, and (2) corporate governance and compliance programs. (10) The Memo's critics and supporters alike agree that it has succeeded in achieving these objectives; the record since its issuance shows that both have, in fact, unmistakably occurred. As the Wall Street Journal recently observed, "there seems to be a sea change going on here--a maturation of American corporate governance." (11)

But the effects of the Thompson Memo have not been uniformly positive or negative. On the one hand, by updating and clarifying the factors that prosecutors should consider, the Thompson Memo has prompted prosecutors to distinguish more readily between companies that deserve to be charged criminally and those that merit more lenient treatment. On the other hand, application of the Thompson Memo analysis without considering the potential unintended consequences and disincentives can ultimately thwart the Justice Department's goals of rooting out criminal corporate conduct and encouraging companies to disclose violations voluntarily. Corporate counsel and government lawyers alike should be well aware of these potential hazards in order to protect their clients' interests as ably as possible. For companies' in-house and external counsel, a nuanced understanding of the Thompson Memo analysis is essential, enabling them to view the Memo not as a potential minefield, but rather as a roadmap of opportunities for effective advocacy and protection of companies' long-term interests.

This article explores the Thompson Memo's effects on corporate behavior and the government's enforcement practices. First, in Part I, we set out briefly the history leading up to the Justice Department's issuance of the Thompson Memo. In Part II, we compare and contrast other agencies' policy guidelines for conducting enforcement actions against corporations. We also observe the ways in which the Thompson Memo is consistent with other agencies' guidelines that both predate and postdate the Memo. Part III addresses the effects of the Thompson Memo, including companies' increased levels of cooperation with government investigations and greater focus on corporate governance, especially in securities fraud and financial institution cases. In Part IV, we examine significant variations in corporate criminal enforcement among several different subject matters: antitrust offenses, environmental crimes, Foreign Corrupt Practices Act (FCPA), and health care fraud. Finally, in Part V, we assess specific criticisms and defenses of the Thompson Memo--including those that address the controversial issue of privilege waiver--and offer our own insights as to their relative merit.

1. BACKGROUND

   A. Corporate Criminal Liability: Premises and Policy

   As the Thompson Memo states, prosecutors will bring criminal charges against a corporation in only "a minority of cases" involving business crimes. (12) Criminal prosecution of culpable individuals is more common and, as Larry Thompson himself has exhorted prosecutors, "I cannot stress strongly enough that the prosecution of guilty individuals should always take precedence over the prosecution of entities." (13)

   But the principles set out in the Thompson Memo are based on the premise that sometimes, bringing criminal charges against a corporation is the only fair and effective way to deal with a corporate culture that has been corrupted to the point that it tolerates and even encourages criminal activity. For example, the culture at Reliant Energy Services, indicted in April 2004 for engaging in fraudulent and manipulative trading practices during the California energy crisis of 2000-01, fostered such pervasive criminal activity that prosecutors felt they had to charge the company as well as individual executives. (14) The Memo's namesake has said that without corporate criminal liability, a company could simply appoint a "Vice-President in Charge of Going to Jail," who would be a scapegoat for the collective acts that ought to be attributed to the company itself. (15) Moreover, due to their collateral consequences and greater stigma, corporate criminal penalties have much greater power than do civil sanctions to reform corporate culture. While cautioning that corporations should not "be subject to harsher treatment" as artificial entities, the Thompson Memo states as a general principle that "[i]ndicting 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." (16)

   1. The "Holder Memo"

      Although corporate criminal liability has been black letter law since at least 1909, (17) the Justice Department had no...