September 18, 2015 9:42AM

New Policy On White Collar Prosecution Risks Scapegoating

Last week, the Department of Justice announced a new policy regarding its approach to corporate criminal investigations.  Instead of focusing first on the company and, having resolved that portion of the investigation, turning to the task of identifying potential individual criminal suspects, prosecutors are now directed to build their cases against individual wrong doers from the start.  Media coverage of this policy statement has focused on criticism levied against the administration for being too soft on Wall Street and too cozy with corporate donors.  The New York Times trotted out the old complaint that no one went to jail in the wake of the financial crisis (even though, to my knowledge, no one has ever identified a criminal law the violation of which caused any part of the crisis).  While the administration’s rhetoric about equal justice before the law is admirable, the policy memo and its surrounding coverage have a distressing whiff of scapegoating about them. 

Deputy Attorney General Sally Yates asserted that the DOJ would not simply “accept…a company’s cooperation when they just offer up the vice president in charge of going to jail.”  Yet the incentives inherent in the new policy risk provoking just that response.  It is clearly the intent of the new policy to procure more criminal charges against individuals.  Prosecuting attorneys will therefore be under pressure to find individuals to charge.  Additionally, the first principle stated in the memo is “To be eligible for any cooperation credit, corporations must provide to the Department all relevant facts about the individuals involved in corporate misconduct.”   Companies therefore will be highly incentivized to identify at least one individual and provide as much information as possible, as quickly as possible, to the DOJ on that person’s conduct.  Despite the memo’s insistence that the company identify all individuals involved in the alleged misconduct, “regardless of their position, status or seniority,” company management, knowing that at least one individual is likely to face criminal charges, will be motivated to point fingers at anyone but themselves.  The more quickly their accusations can coalesce around one individual – the Chief Going to Jail Officer – the more quickly the DOJ may end its “send individuals to prison” phase and turn to settling up with the corporation itself.  As the memo acknowledges, corporate criminality is difficult to prove, especially “[i]n large corporations, where responsibility can be diffuse and decisions are made at various levels[.]”  In these circumstances, “it can be difficult to determine if someone possessed the knowledge and criminal intent necessary to establish their guilt beyond a reasonable doubt.”  All the more reason, if management is convinced someone is headed to prison, to ensure the arrows all point at one culpable and easily convictable individual, saving the skins of everyone else. 

It may be, however, that the incentives of criminal prosecution will always include finger-pointing and scape-goating.  As I said, the argument that “[t]he public needs to have confidence there is one system of justice and it applies equally regardless of whether that crime occurs on a street corner or in a boardroom” is a compelling one.  I would add, however, that we should also have confidence that the laws apply equally whether the boardroom is a large expensive one or a shabby little one.  Companies facing a government investigation will often hire a law firm to complete an internal investigation on the company’s own dime.  The investigation, yes, may be ordered to fulfill the directors’ duty to the company and to compliance with the law, but is also almost always intended to help smooth the company’s negotiations with the government.  These investigations therefore occupy an uneasy space.  First, they encourage the corporation to, in effect, inform against itself.  Second, they provide the opportunity for a better settlement for the companies wealthy enough to afford the investigation.  Internal investigations are not cheap.  To be effective, they must be thorough and thoroughness is expensive.  It requires a large quantity of attorney hours to ensure that the investigation is conducted methodically, carefully documented, and that all leads are run to ground.  When the DOJ says that “providing all relevant facts” is the “threshold requirement” for eligibility to have its cooperation considered as a mitigating factor and that cooperation credit will be assessed based on factors such as “timeliness…diligence, thoroughness, and speed,” it suggests that companies with the money to pay for a high caliber firm to conduct the investigation is likely to get the best deal.  While this is not anything new, it nonetheless contradicts the stated purpose of the new policy: ensuring equal treatment under the law.

Charging executives individually may well encourage them to exercise more diligence in keeping on the right side of the law.  However, it would be irresponsible to ignore the potential side-effects of any policy whose intent is to put more individuals behind bars.  This is especially true when the policy appears to have been developed in reaction to public clamor that “someone” needs to pay.  No just law was ever written to placate witch hunters.