Money Can Be Paid – But Time Must Be Served

By February 23rd, 2015

Blog No. 56

February 24, 2015

Money Can Be Paid – But Time Must Be Served –

The Misuse of “Deferred Prosecution Agreements”

and

How Guilty Corporate Executives Avoid Prosecution and Incarceration

Excerpt from forthcoming Second Edition of

The Relevance of Reason – Business and Politics (2d Edition) (Release Date – 2016)

By Mack W. Borgen.

 University of California at Berkeley (With Honors, Economics); Harvard Law School.

Author of The Relevance of Reason – The Hard Facts and Real Data About the State of Current America – Business and Politics (Vol. 1)(408 pp)(2013) and  – Society and Culture (Vol 2)(438 pp)(2013)

Recipient of Four National Book Awards.

Author’s Notes: The following article draws upon a number of sources, but in particular the recent fine article entitled “Justice Deferred Is Justice Denied” by Jed S. Rakoff (The New York Review of Books, February 19, 2015) in which he reviews Brandon Garrett’s book Too Big to Jail: How Prosecutors Compromise with Corporations (365pp) (2015). See also, e.g. The Harvard Law School Forum on Corporate Governance and Financial Regulation (blogs.law.harvard.edu) which contains numerous articles and considerable data regarding the use of deferred prosecution and non-prosecution agreements, and gibsondunn.com (“2013 Year-End Update for Corporate Non-Prosecution Agreements and Deferred Prosecution Agreements”). The article below focuses upon deferred prosecution agreements which must be judicially approved. However, parallel arguments and reasoning apply to what are known as non-prosecution agreements which are entered into between the prosecutor and the defendant but which do not require judicial approval.

        Innocent-sounding, “deferred prosecution agreements” are agreements entered into between a prosecuting agency or department and a defendant. Under such  agreements prosecutors agree (a) to defer prosecution of criminal charges, and (b) to later dismiss the charges against the defendant altogether after a designated period so long as the person or company pays a fine and complies with the negotiated terms and conditions of their Deferred Prosecution Agreement (“DPA”). Oftentimes the prosecutors such as the Department of Justice (the “DOJ”) or the Securities and Exchange Commission (which has also started using DPAs) require the defendant company to admit to the accuracy of certain facts and findings as set forth in the DPA as well.

       DPAs were initially and innocently developed in the 1930s as a means to help juvenile criminal offenders. However, especially since the early 1990s DPAs have been more extensively used in the context of prosecuting corporate crimes. As noted above, the payment of a substantial fine is a normal pre-condition of the use of such DPAs to forestall criminal prosecutions.

      Part of the theory is that DPAs can be used to change the corporate culture of the defendant by requiring it to implement in-house reforms, to provide ethics training, and to institute various internal compliance programs. The use of DPAs has continued to grow since the 1990s. Since 2005 the DOJ has entered into 273 publicly-disclosed DPAs (and non-prosecution agreements), and between 2007 and 2012 as many as thirty-five DPAs a year were entered into between the government and corporate entities. gibsondunn.com (June 7, 2014).

       One of the most important consequences of the use of DPAs is that corporate managers or employees who commit or knowingly condone corporate crimes are not held personally accountable. Nevertheless, a strong argument can be made that the imprisonment of such corporate managers and employees would send a far louder and more sustaining message to the corporate world and would be a far more efficient means of altering corporate cultures.

        One example of the use of DPAs was in the context of the DOJ’s planned prosecution of J.P. Morgan Chase & Co and a number of other financial institutions in the context of their sale of mortgage-backed securities and for other corporate crimes leading up to the 2008 financiual collapse.

         A far more pathetic example of the use of these highly-ineffective agreements was the series of four (!!!) serial DPAs used in the repeated non-prosecution of Pfizer’s illegal actions in 2002 (bribes to managed care company), in 2004 (similiar illegal marketing in promotion of its products), in 2007 (illegal promotion of off-label uses of some of its drugs), and again in 2012 (bribes to government official in Bulgaria, Russia, and other countries). Because of Pfizer’s repeated wrongful acts, it seems that none of these DPAs between Pfizer and the DOJ had any material effect. This ineffectiveness may be partly attributable to the fact that “neither the (DOJ) nor any other governmental entity keeps detailed and complete records of how such (DPAs) are implemented over time.” Rakoff, J., “Justice Deferred Is Justice Denied,” The New York Review of Books, February 19, 2015 review of Garrett, Brandon L., Too Big to Fail: How Prosecutors Compromise with Corporations (365 pp) (2015).

       In the opinion of this author, however, there are two far more likely reasons for the ineffectiveness of DPAs. First, corporate cultures – and especially those of large, international enterprises — are not easily changed, and they certainly will not be meaningfully changed by the mere addition of do-good, governmentally-mandated ethics classes or by the implementation of non-surpervised, non-audited internal controls. Secondly, corporations and their managers will not feel themselves burdened by deterrence or fear so long as the punishment for criminal activity has been monetized.

          It has been my honor for decades to work with devoted, honest, and brilliant corporate managers; however, when corporate managers commit (or through their words, actions or willful ignorance encourage, condone or tolerate) corporate crimes, then everything changes. Prosecution is then necessary. Upon conviction, incarceration is then appropriate. There should be few benevolent exceptions.

         The “cost” of corporate criminal misconduct should not be allowed to be reduced to a mere cost-of-doing-business. Criminal misconduct should not be allowed to be written off like some line-item charges; buried within the corporate financial statements. To the contrary, it is personal incarceration that carries the sting. It is  the fear of one’s own incarceration that bring fear to the table. Money can be paid. But time must be served — the old-fashioned way — one day at a time.

          The United States finds itself, once again, largely alone. Excepting the U.K. which adopted DPA-authorizing legislation in 2014, the United States is one of the few c0untries that focuses upon corporations rather than individuals in the context of corporate crimes  Most nations have long concluded that it is “more appropriate to prosecute the responsible employees than the entity that employed them.” Rakoff, J., “Justice Deferred Is Justice Denied,” The New York Review of Books, February 19, 2015.

       Look at it this way — away from the big words and thick theories. Millions of Americans have been exhorted for decades to “work hard and live by the rules.” Prosecution, conviction, and incarceration are intended to punish criminals and to send a warning that personal accountability will be imposed upon those who commit crimes. The social culture, everybody’s-doing-it defense are not available to convenience stores thieves or drug dealers. The corporate culture, everybody’s-doing-it defense should not be available to white collar criminals. Wrong is wrong. Lying is lying. Theft is theft. Only after serving their time, should corporate officers who commit crimes have access to a “deferred prosecution” arrangement———you know, the simpler kind.

      It’s called parole. 

 

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