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«Christopher A. Wray* Robert K. Hur** INTRODUCTION [P]rosecutors have exploited their virtually unchecked power to extract and coerce ever greater ...»

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CORPORATE CRIMINAL PROSECUTION IN A POST-ENRON

WORLD: THE THOMPSON MEMO IN THEORY AND PRACTICE

Christopher A. Wray*

Robert K. Hur**

INTRODUCTION

[P]rosecutors have exploited their virtually unchecked power to extract and

coerce ever greater concessions, jeopardizing the very nature of our adversary

system. It is destruction by accretion – a staged but seemingly inexorable concentration of power that has skewed the system. The net result has been the emasculation of the defense bar and the enforcement of the criminal law in a way that is often wildly out of proportion to the perceived wrongdoing.

It... often is... a state-sponsored shakedown scheme in which corporations are extorted to pay penalties grossly out of proportion to any actual misconduct. Criminal sanctions, administrative sanctions, and director liability make the payment of tribute to the federal government essentially a cost of doing business.1 The approach to law enforcement embodied in the Thompson Memorandum can fairly be described as moving the process governing the American system away from the form the Founders expressly meant it to take – an accusatorial system – and toward something they feared – an inquisitorial system.... The Thompson Memorandum... [has] move[d] the investigative, charging, and plea processes toward an inquisitorial system by shifting power from courts and juries to the Department of Justice and the U.S. Attorneys who work for it.2 * Christopher A. Wray served from 2003 to 2005 as the Assistant Attorney General of the Criminal Division, and from 2001 to 2003 as the Principal Associate Deputy Attorney General, in the United States Department of Justice. He is currently a partner and head of the Special Matters and Government Investigations Group of King & Spalding LLP in Washington, DC and Atlanta, GA.

** Robert K. Hur served from 2003 to 2005 as Counsel and Special Assistant to Assistant Attorney General Wray. He is currently an associate in the Special Matters and Government Investigations Group of King & Spalding LLP in Washington, DC.

The authors would like to thank the following colleagues at King & Spalding LLP for their valuable advice in the preparation of this article: Wick Sollers, Steve Cowen, Gary Grindler, Drew Hruska, Jim Griffin, John Bentivoglio, Russ Ryan, Eleanor Hill, Paul Murphy, Allen Barnes, Christine Savage, Zack Harmon and Jeff Telep.

The authors are also particularly grateful to Dave Mason, Helen Wray and Cara Hur for their own terrific assistance.

1. N. Richard Janis, Deputizing Company Counsel as Agents of the Federal Government: How Our Adversary System of Justice Is Being Destroyed, WASHINGTON LAW., March 2005, available at http://www.dcbar.org/ for_lawyers/washington_lawyer/march_2005/stand.cfm.

2. George Ellard, Making the Silent Speak and the Informed Wary, 42 AM. CRIM. L. REV. 985, 991-92 (2005).

See also United States v. Stein, No. S1 05 Crim. 0888 (S.D.N.Y. Apr. 12, 2006) (order granting limited discovery and evidentiary hearing on defendant’s claim “that the government, through the Thompson Memo... violated 1096 AMERICAN CRIMINAL LAW REVIEW [Vol. 43:1095 Q: Mr. Comey, overall, how do you think the [Thompson Memorandum] Principles are working?

A: I think they work very well. They have served the function of educating all DOJ attorneys about the need to give careful consideration to charging corporations, whose conduct can cause immense harm, and whose prosecution can result in enormous benefits, not only in restitution to victims, but in being a catalyst for tremendous changes for the good in many industries. They also instruct prosecutors to carefully consider a variety of critical mitigating factors, such as cooperation, collateral damage, and alternative remedies. In short, they provide a balanced framework for DOJ attorneys to make difficult decisions. In the process, they also greatly assist private counsel and corporations by spelling out the kinds of things that matter to prosecutors.3 On January 20, 2003, then-Deputy Attorney General Larry Thompson issued a policy memorandum to all Justice Department prosecutors entitled “Principles of Federal Prosecution of Business Organizations.”4 Also known as the “Thompson Memo,” this document memorialized the Justice Department’s current thinking on corporate criminal prosecutions and directed this approach for all prosecutors nationwide. The Memo explains that its “main focus... is increased emphasis on and scrutiny of the authenticity of a corporation’s cooperation.”5 Since its issuance, the Thompson Memo and the effects of its application have provoked strong reactions from critics and defenders alike. Some commentators, like the first two quoted above, lament that the Thompson Memo threatens the very foundation of our system of justice; others, like the third, venerate it as an effective way to save our market system from itself.6 We believe that the Memo has largely accomplished its objectives and that many of the criticisms are overwrought. But defendant’s [Sixth Amendment] right to counsel by improperly interfering with KPMG’s ability to choose to advance to defendants legal fees and other defense costs”), available at http://lawprofessors.typepad.com/ whitecollarcrime_blog/files/Order.pdf [hereinafter Order]; Editorial, Corporate Injustice, WALL ST. J., Apr. 6, 2006, at A14 (welcoming the district court order and opining that, by “expanding the threat of corporate capital punishment” through the Thompson Memo, the “Justice [Department] has also damaged the attorney-client privilege for white-collar defendants and thus the right to a fair trial”).





3. Interview with United States Attorney James B. Comey Regarding Department of Justice’s Policy on Requesting Corporations under Criminal Investigation to Waive the Attorney Client Privilege and Work Product Protection, 51 U.S. ATT’YS’ BULL. 1, 5 (Nov. 2003) [hereinafter Comey Interview]. At the time of this interview’s publication, then-Southern District of New York U.S. Attorney Comey had been nominated to succeed Larry D.

Thompson as Deputy Attorney General. He was confirmed shortly thereafter, on December 9, 2003.

4. Memorandum from Larry D. Thompson, Deputy Attorney General, to Heads of Department Components and United States Attorneys (Jan. 20, 2003), available at http://www.usdoj.gov/dag/cftf/corporate_guidelines.htm [hereinafter Thompson Memo].

5. Id. at preface.

6. Compare Janis, supra note 1, and Ellard, supra note 2, and Kathryn Kennealy & Kenneth M. Breen, The KPMG Deferred Prosecution: Warning Flags for Defense Rights (Nov. 2005), available at http://www.criminaljustice.org/public.nsf/0/63a17c1d1be6d973852570de0078fd34 with Comey Interview, supra note 3, and Mary Beth Buchanan, Effective Cooperation by Business Organizations and the Impact of Privilege Waivers, 39 WAKE FOREST L. REV. 587 (2004).

2006] CORPORATE CRIMINAL PROSECUTION 1097 the risks and tensions that the Memo fosters are real, and a healthy measure of caution in the Memo’s application is well warranted.

The spate of corporate scandals that began with Enron’s meltdown in 2001 prompted the Bush Administration to dramatically increase the federal government’s focus on rooting out corporate fraud and restoring public confidence in the integrity of our markets. The emphasis on these priorities has fundamentally changed the government’s relationship with industry and required companies to adapt accordingly.

One of the government’s most potent weapons in its fight against corporate crime is the ability to file criminal charges against companies themselves. Because indictment often amounts to a virtual death sentence for business entities, a corporate prosecution provides the government an “opportunity for deterrence on a massive scale.”7 This weapon is indispensable to the government when dealing with companies truly deserving of such severity. But like any dangerous weapon, corporate prosecutions must be handled with care.

The most notable recent example of “deterrence on a massive scale” is the indictment and conviction of Arthur Andersen.8 This case sent a clear and unmistakable message to Corporate America in general, and to the accounting profession in particular, that companies that deliberately try to block the government from investigating corporate misconduct will be punished swiftly and severely. But that conviction also effectively put the eighty-nine-year-old firm out of business and forced tens of thousands of people to find new jobs. It also had a dramatic effect on the accounting industry, by turning the “Big 5” into the “Big 4.”9 The Thompson Memo has had profound effects on the Justice Department’s enforcement efforts in a wide range of matters and the ways in which companies respond to government investigations of misconduct. The Memo set out two primary objectives in its prefatory statement: to increase focus on (1) the authenticity of corporate cooperation with investigations, and (2) corporate governance and compliance programs.10 The Memo’s critics and supporters alike agree that it has succeeded in achieving these objectives; the record since its issuance shows that both have, in fact, unmistakably occurred. As the Wall Street Journal recently observed, “there seems to be a sea change going on here – a maturation of American corporate governance.”11

7. Thompson Memo, supra note 4, at Part I.B.

8. In June 2002, a federal jury in Houston convicted Arthur Andersen of one felony count of obstructing the Securities and Exchange Commission’s investigation into the collapse of Enron Corporation.

9. Although the Andersen case is the most well-known example, post-Enron, of a corporate criminal prosecution, both the indictment and the conviction itself were actually obtained before the Thompson Memo’s issuance. See Arthur Andersen LLP v. United States, 125 S. Ct. 2129, 2134 (2005) (stating that the company was indicted in March 2002); Press Release, U.S. Dep’t of Justice, Statement of Deputy Attorney General Larry Thompson on the Arthur Andersen Verdict (June 15, 2002), available at http://www.usdoj.gov/opa/pr/2002/June/ 02_dag_356.htm.

10. Thompson Memo, supra note 4, at preface.

11. Alan Murray, Emboldened Boards Tackle Imperial CEOs, WALL ST. J., Mar. 16, 2005, at A2.

1098 AMERICAN CRIMINAL LAW REVIEW [Vol. 43:1095 But the effects of the Thompson Memo have not been uniformly positive or negative. On the one hand, by updating and clarifying the factors that prosecutors should consider, the Thompson Memo has prompted prosecutors to distinguish more readily between companies that deserve to be charged criminally and those that merit more lenient treatment. On the other hand, application of the Thompson Memo analysis without considering the potential unintended consequences and disincentives can ultimately thwart the Justice Department’s goals of rooting out criminal corporate conduct and encouraging companies to disclose violations voluntarily. Corporate counsel and government lawyers alike should be well aware of these potential hazards in order to protect their clients’ interests as ably as possible. For companies’ in-house and external counsel, a nuanced understanding of the Thompson Memo analysis is essential, enabling them to view the Memo not as a potential minefield, but rather as a roadmap of opportunities for effective advocacy and protection of companies’ long-term interests.

This article explores the Thompson Memo’s effects on corporate behavior and the government’s enforcement practices. First, in Part I, we set out briefly the history leading up to the Justice Department’s issuance of the Thompson Memo. In Part II, we compare and contrast other agencies’ policy guidelines for conducting enforcement actions against corporations. We also observe the ways in which the Thompson Memo is consistent with other agencies’ guidelines that both predate and postdate the Memo. Part III addresses the effects of the Thompson Memo, including companies’ increased levels of cooperation with government investigations and greater focus on corporate governance, especially in securities fraud and financial institution cases. In Part IV, we examine significant variations in corporate criminal enforcement among several different subject matters: antitrust offenses, environmental crimes, Foreign Corrupt Practices Act (FCPA), and health care fraud. Finally, in Part V, we assess specific criticisms and defenses of the Thompson Memo – including those that address the controversial issue of privilege waiver – and offer our own insights as to their relative merit.

I. BACKGROUND A. Corporate Criminal Liability: Premises and Policy As the Thompson Memo states, prosecutors will bring criminal charges against a corporation in only “a minority of cases” involving business crimes.12 Criminal prosecution of culpable individuals is more common and, as Larry Thompson himself has exhorted prosecutors, “I cannot stress strongly enough that the prosecution of guilty individuals should always take precedence over the prosecution of entities.”13

12. Thompson Memo, supra note 4, at preface.

13. Larry D. Thompson, Deputy Attorney General, Remarks at the Corporate Fraud Task Force Conference (Sept. 26, 2002), available at http://www.usdoj.gov/dag/speech/2002/092602dagremarks.htm [hereinafter Thompson Remarks].



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