The criminal class action.

Author:Zimmerman, Adam S.
 
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Over the past ten years, in a variety of high-profile corporate scandals, prosecutors have sought billions of dollars in restitution for crimes ranging from environmental dumping and consumer scams to financial fraud. In what we call "criminal class action" settlements, prosecutors distribute that money to groups of victims as in a civil class action while continuing to pursue the traditional criminal justice goals of retribution and deterrence.

Unlike civil class actions, however, the emerging criminal class action lacks critical safeguards for victims entitled to compensation. While prosecutors are encouraged, and even required by statute, to seek victim restitution, they lack adequate rules requiring them to (1) coordinate with other civil lawsuits that seek the same relief for victims, (2) hear victims' claims, (3) identify conflicts between different parties, and (4) divide the award among victims. We argue that prosecutors should continue to play a role in compensating victims for widespread harm. However, when prosecutors compensate multiple victims in a criminal class action, prosecutors should adopt rules similar to those that exist in private litigation to ensure that the victims receive fair and efficient compensation.

We propose four solutions to give victims more voice in their own redress while preserving prosecutorial discretion: (1) that prosecutors and courts coordinate overlapping settlements before a single federal judge, (2) that prosecutors involve representative stakeholders in settlement discussions through a mediation-like process, (3) that courts subject prosecutors' distribution plans to independent review to police potential conflicts of interest, and (4) that prosecutors adopt the distribution guidelines the American Law Institute developed for large-scale civil litigation to balance victims' competing interests.

INTRODUCTION I. THE GROWING PHENOMENON OF THE CRIMINAL CLASS ACTION A. The Definition of a Criminal Class Action B. The Origins of the Criminal Class Action 1. Prosecutors as Compensators 2. Prosecutors as Regulators II. COMPENSATION THROUGH CLASS ACTION SETTLEMENTS A. Common Goals of Civil and Criminal Class Action Settlements B. Criminal Class Action Settlement Problems 1. Should Criminal Class Actions Exist? 2. No Rules to Coordinate with Other Actions 3. No Rules to Ensure Victims Meaningfully Participate 4. No Rules to Protect Victims from Potential Conflicts of Interest 5. No Rules to Distribute Awards Equitably III. TOWARD A NEW CRIMINAL CLASS ACTION A. Coordination of Civil and Criminal Class Actions 1. Complementary Criminal Class Action Settlements 2. Formal and Informal Multidistrict Coordination B. Criminal "Negotiated Rulemaking" to Improve Participation C. "Hard Look" Judicial Review to Police Conflicts D. Distribution Guidelines for Criminal Class Actions CONCLUSION INTRODUCTION

The past decade has witnessed the rise of new, massive settlements forged not out of civil litigation but on the periphery of the criminal justice system. Since 2003, prosecutors have demanded that defendants in a variety of high-profile corporate scandals set up multimillion-dollar restitution funds for victims to settle criminal charges. Yet few rules exist for the prosecutors who create and distribute these complex settlements. Consider three examples:

(1) In September 2004, software giant Computer Associates conceded that it had unlawfully inflated its quarterly earnings reports by using shadow accounting practices that effectively backdated lucrative licensing contracts. (1) As part of its agreement with the U.S. Attorney's Office, Computer Associates agreed to establish a $225 million restitution fund to compensate shareholders injured by the scandal. (2) Months after the fund was announced, however, not a single shareholder had come forward with a proposal for how to dispense the money in a fair and appropriate manner. (3)

(2) Shortly after Bernard Madoff committed the largest criminal fraud in United States history, (4) federal prosecutors sought to compensate victims with his seized assets. (5) In what some have called "reality-show kind of fighting," (6) Madoff's victims sharply contested the distribution of his property. Because of the nature of the fraud, some long term investors lost their life savings. Others, who withdrew funds over time, made less than they thought, but actually profited from the scheme. Still others lost millions through "feeder funds" without ever investing with Madoff directly. (7) Prosecutors, however, lacked any rules to hear and resolve victims' competing claims to Madoff's estate.

(3) After the pharmaceutical company Eli Lilly reached a $1.2 billion settlement with 30,000 plaintiffs for side effects associated with its antipsychotic drug Zyprexa, (8) federal prosecutors launched a separate criminal case to recover $1.4 billion in resututlon. (9) Although both actions sought overlapping monetary damages against the same defendant and for the same conduct, no formal procedures existed to ensure that victims were not doubly compensated or to prevent defendants from being punished twice for the same misconduct. (10)

Had all three cases proceeded only in civil litigation, the result would have been decidedly different. From the start, counsel for the shareholders in Computer Associates, guided in part by the strength of their legal claims, would have negotiated and participated in the discussions over the amount and distribution of the settlement. (11) The Madoff victims would have been entitled to an array of procedural protections, separate attorney representation, and payouts based on their different statuses and needs. (12) The Zyprexa cases would have been centralized before a single federal judge for pretrial coordination and review. (13)

For years, private lawsuits in the United States have been the primary tool to ensure people pay damages to those they harm. (14) When many people are hurt, special litigation procedures exist for defendants to compensate victims comprehensively. (15) Although those procedures are far from perfect, class action, bankruptcy, and other multiparty litigation rules try to accomplish at least three things: (1) to ensure parties meaningfully participate in a process that affects their substantive rights, (2) to empower judges to police conflicts of interest between injured parties and their representatives, and (3) to facilitate a final resolution of the dispute accurately and efficiently. (16)

Recently, another body of law--criminal law--has begun to assume the same compensatory role as the large private lawsuit. Since 2003, federal prosecutors increasingly have sought to settle charges with corporate defendants in exchange for multimillion dollar victim restitution funds (17)--or what we call "criminal class actions." (18) Despite the fact that victims are not technically parties to the case, these criminal settlements (19) include massive restitution awards that appear to mimic civil class actions. Like class action settlements, criminal class action agreements take advantage of economies of scale by efficiently compensating multiple people through a single, comprehensive scheme. And while prosecutors, rather than private attorneys, negotiate the size of the award, the end result is typically a large fund managed by the very same private administrators who oversee civil class action settlements. (20)

Unlike civil class actions, however, criminal class action settlements lack procedures to hear victims' claims. No rules guarantee that an attorney or representative will advocate on behalf of different stakeholders as to the appropriate size and distribution of the award. No court or administrative process exists to check conflicts of interest among victim groups. To complicate matters further, a prosecutor may target the same wrongdoer, for the same funds, and on behalf of the same set of victims as parties to a privately initiated lawsuit. (21) Even so, few guidelines instruct prosecutors on how to properly coordinate with private lawsuits. (22) Finally, virtually no guidelines exist for how prosecutors, or their appointed agents, should divide these multimillion-dollar awards among victims.

Many have observed that prosecutors and private litigants increasingly use the threat of litigation to regulate the same kinds of conduct. (23) Some have gone so far as to characterize prosecutors' use of criminal settlement agreements as a form of "structural reform litigation," (24) a term that describes the use of civil litigation to improve institutional behavior. However, few have addressed criminal law's new role--one historically performed by private litigation--as a provider of compensation to large groups of people. (25) No commentator has examined the procedures that prosecutors should follow and the principles that should guide a criminal class action.

This Article argues that prosecutors can and should continue to compensate victims of widespread harm. However, prosecutors should act only when the government is in a unique position to facilitate such compensation. Moreover, prosecutors should adopt internal administrative procedures to hear from representatives of victim groups with competing interests and to formulate guidelines for payment. (26) Finally, where possible, courts should review criminal class action settlements with a "hard look" (27) to ensure that the distribution scheme adequately balances the conflicting interests between various parties and the prosecutor.

We note that there are significant differences between class action settlements and criminal restitution funds, but those differences should not be overstated. Because victims are not legal parties to a criminal case, they are not entitled to the due process rights they would otherwise enjoy in civil litigation. (28) However, as discussed below, victims have an array of statutory rights that entitle them not only to...

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