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A.J. Smullen | January 4, 2011
James R. Copland, writing for the Manhattan Institute, suggests in this report that the doctrine of criminal prosecution of corporations has gotten out of hand. The doctrine, which was previously limited to a narrow range of cases, has expanded to a point that allows federal prosecutors unprecedented coercive control over major corporations.
The impact of criminal prosecution on a corporation is great. The report relates the story of Arthur Andersen, an accounting firm which formerly employed 85,000 people worldwide. The corporation was indicted for malfeasance relating to its representation of Enron. By the time the corporation’s criminal conviction was thrown out by the Supreme Court, Arthur Andersen had already folded and ceased to operate as a going concern. Ultimately, only one principal member of the massive firm was personally charged with any wrongdoing by the government. The firm folded not because of the criminal liability imposed – a meager $500,000 – but because of collateral regulations upon corporations facing criminal prosecutions. For example, the Securities and Exchange Commission forbids a convicted accounting firm from representing a publicly traded corporation, even during the pendency of the corporation’s direct appeal of its conviction.
In addition to the cost of defending itself in criminal proceedings, corporations which are merely indicted may face raised interest rates from creditors or terminated lines of credit. Even if the charges are later defeated, during their trial, indicted medical companies may be disqualified from being reimbursed by Medicare or Medicaid, indicted contractors may be barred from bidding for government contracts, and indicted brokers may be barred from participating on the stock exchange. Thus, it is possible that a corporation may be barred from pursuing any course of profitable business prior to its day in court and even if ultimately exonerated.
Because the repercussions of a mere indictment are so grave, the government uses delayed-prosecution agreements (DPAs) and non-prosecution agreements (NPAs) to coerce corporations to submit to the demands of prosecutors. Prosecutors have exacted major changes in corporate governing policy, personnel shakeups, and acquiescence to the oversight of prosecutor-approved monitors using the threat of possible prosecution. Copland calls these “ad hoc remedies for what may or may not be crimes.” The cost of negotiation and compliance may outweigh any potential benefit of these measures, especially in cases like Andersen’s, where only one stakeholder in a company of 85,000 was ever personally charged by the SEC.
While the penalties of prosecution are harsh, it is actually extraordinarily easy for corporations to find themselves in a prosecutor’s crosshairs. The modern body of corporate criminal law has deviated from its roots, now allowing corporations to be prosecuted under statutes that do not clearly implicate corporate liability and allowing prosecution for the malfeasance of even minor or peripheral employees, even in cases where the employees’ actions clearly deviate from corporate policy.
To combat the excessive use of “regulation via prosecution,” Copland recommends various policy changes. As suggested in the Model Penal Code – a proposed uniform code proposed by the American Law Institute – courts should only find a criminal statute applicable to a corporation if the statute contains a clear showing of congressional intent, prosecutions should be limited only to serious crimes, and only the actions of officers and high-level managers should open the corporation to liability. In addition, even if the corporation is indicted under this narrowed framework, it should be permitted to assert an affirmative defense of having made a good-faith effort to internally promote compliance with the law. Finally, legislatures should make sure that the most severe collateral penalties that can doom an innocent company attach after a conviction, as opposed to merely after an indictment.