Hats Off to Judge Rakoff

Hats Off to Judge Rakoff

 This article was reprinted with permission from FCPA Professor

My 2010 Senate Foreign Corrupt Practices Act testimony focused on two things.

First, the general lack of individual enforcement actions in connection with most corporate FCPA enforcement actions.

Second, how this dynamic (far from the “but nobody was charged” claim)  could best be explained by the quality and legitimacy of the corporate enforcement action in the first place given the prevalent use of non-prosecution and deferred prosecution agreements to resolve corporate FCPA enforcement actions.  For more, see my article “The Facade of FCPA Enforcement.”

Recent statistics I calculated (here) provide a relevant data point concerning the quality and legitimacy of many corporate FCPA enforcement actions resolved via NPAs or DPAs.  In short, if a corporate DOJ FCPA enforcement action is the result of a criminal indictment or resulted in a guilty plea by the corporate entity to FCPA violations, there is a 83% chance that related criminal charges will be brought against a company employee.  However, if a corporate DOJ FCPA enforcement action is resolved solely with an NPA or DPA, there is a 6.5% chance that criminal charges will be brought against a company employee.  As noted in the previous post, if these statistics do not cause you to question the quality and legitimacy of many corporate FCPA enforcement actions, no empirical data ever will.

I’ve long argued that use of NPAs and DPAs to resolve alleged corporate criminal liability in the FCPA context presents two distinct, yet equally problematic public policy issues.  The first is that such vehicles, because they do not result in any actual charges filed against a company, and thus do not require the company to plead to any charges, allow egregious instances of corporate conduct to be resolved too lightly without adequate sanctions and without achieving maximum deterrence.  The second is that such vehicles, because of the “carrots” and “sticks’ relevant to resolving a DOJ enforcement action, often nudge companies to agree to these vehicles for reasons of risk-aversion and efficiency and not necessarily because the conduct at issue actually violates the law.  Thus, use of NPAs or DPAs allow “under-prosecution” of egregious instance of corporate conduct while at the same time facilitate the “over-prosecution” of business conduct.

It is for this reason why I have long termed NPAs and DPAs toxic resolution vehicles that ought to be abolished in the FCPA context.  The passionate defense former Assistant Attorney General Lanny Breuer made of NPAs and DPAs in a September 2012 policy speech (see here for the prior post) was – to use the cliché as the basketball season begins - an airball.

The above is all relevant background information for why I tip my hat – once again – to U.S. District Court Judge Jed Rakoff (S.D.N.Y.).

In a recent speech to a New York bar audience titled “Why Have No High Level Executives Been Prosecuted in Connection with the Financial Crisis,” Judge Rakoff hit on many of the same issues discussed above.  In answering his own question, Judge Rakoff offered that “one possibility … is that no fraud was committed.  This possibility should not be discounted.”

Rhetorically asking “so … what’s really going on here,” Judge Rakoff offered various “influences” which “have had the effect of limiting such prosecutions” including the “most important” which he said was the “shift that has occurred over the past 30 years or more from focusing on prosecuting high-level individuals to focusing on prosecuting companies and other institutions.”

Judge Rakoff stated:

“It is true that prosecutors have brought criminal charges against companies for well over a hundred years, but, until recently, such prosecutions were the exception, and prosecutions of companies without simultaneous prosecutions of their managerial agents were even rarer.  These reasons were obvious.  Companies do not commit crimes; only their agents do […] so why not prosecute the agent who actually committed the crime?

In recent decades, however, prosecutors have been increasingly attracted to prosecuting companies, often even without indicting a single individual.  This shift has often been rationalized as part of an attempt to transform ‘corporate cultures,’ so as to prevent future such crimes; and, as a result, it has taken the form of ‘deferred prosecution agreements; or even ‘non-prosecution agreements,’ in which the company, under threat of criminal prosecution, agrees to take various prophylactic measures to prevent future wrongdoing.  But in practice, I suggest, it has led to some lax and dubious behavior on the part of prosecutors, with deleterious results.”

In contrast to a situation in which a prosecutor is attempting to discover the individuals responsible for alleged misconduct, Judge Rakoff stated that if a prosecutor’s “priority is prosecuting a company,” the following scenario occurs.

“Early in the investigation, [the prosecutor] invites in counsel to the company and explains to him or why [the prosecutor] suspects fraud.  [Counsel] responds by assuring [the prosecutor] that the company wants to cooperate and do the right thing, and to that end the company has hired a former Assistant U.S. Attorney, now a partner at a respected law firm, to do an internal investigation.  The company’s counsel asks [the prosecutor] to defer [the prosecutor’s] investigation until the company’s own internal investigation is completed, on the condition that the company will share its results with [the prosecutor].  In order to save time and resources, [the prosecutor] agrees.  Six months later the company’s counsel returns, with a detailed report showing that mistakes were made but that the company is now intent on correcting them.  [The prosecutor] and the company then agree that the company will enter into a deferred prosecution agreement that couples some immediate fines with the imposition of expensive but internal prophylactic measures.  For all practical purposes the case is now over.  [The prosecutor] is happy because [he/she] believes that [he/she] has helped prevent future crimes; the company is happy because it has avoided a devastating indictment; and perhaps the happiest of all are the executives, or former executives, who actually committed the underlying misconduct, for they are left untouched.”

“I suggest that this is not the best way to proceed.  Although it is supposedly justified in terms of preventing future crimes, I suggest that the future deterrent value of successfully prosecuting individuals far outweighs the prophylactic benefits of imposing internal compliance measures that are often little more than window-dressing.  Just going after the company is also both technically and morally suspect.  It is technically suspect because, under the law, you should not indict or threaten to indict a company unless you can prove beyond a reasonable doubt  that some managerial agent of the company committed the alleged crime; and if you can prove that, why not indict the manager?  And from a moral standpoint, punishing a company and its many innocent employees and shareholders for the crimes committed by some unprosecuted individuals seems contrary to elementary notions of moral responsibility.”

Read more articles on the FCPA by Mike Koehler at FCPA Professor.

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