The Yale Law Journal


The Organizational Guidelines: R.I.P.?

22 Mar 2007

In a recent issue of this Journal, Timothy A. Johnson argues that Congress may not make the Federal Sentencing Guidelines provisions on the sentencing of organizations (the “Organizational Guidelines”) mandatory because United States v. Booker guarantees the constitutional right of corporations to a jury trial. Johnson’s argument, while convincing, may be somewhat beside the point. The time has come to bury the Organizational Guidelines now that prosecutors can achieve the goal of reforming corporate cultures through deferred and non-prosecution agreements.

For better or worse, the mere threat of criminal prosecution is enough to cause even the largest corporation to cower. Few companies are willing to risk an indictment, much less a criminal trial, if an alternative exists. And alternatives do exist: deferred and non-prosecution agreements offer corporations the chance to avoid an indictment altogether. That new reality means that the Organizational Guidelines are largely irrelevant.

A principal benefit of the Organizational Guidelines was the structure they created to evaluate a corporation’s culture and the authenticity of its response to wrongdoing by its employees. Unlike much of current sentencing law, which makes retribution, or “just deserts,” the rationale for punishment, the focus of the Organizational Guidelines was on rehabilitation and prevention. The Organizational Guidelines’ goal was to change a corporation’s culture so that future misconduct would be less likely to occur, and to enable prosecutors to deal with it swiftly in the event that it happened. That goal is today accomplished through other means prosecutors have available.

The locus of corporate crime prosecutions has shifted to the pre-charge stage; the criminal penalty is secondary in many cases to prosecutors’ efforts to prevent future misconduct by changing a corporation’s culture through deferred and non-prosecution agreements. Now when deciding whether to indict an entity, prosecutors focus as much on cooperation and the organization’s response to reported wrongdoing as they do on the underlying misconduct.

The fines that may be imposed under the Organizational Guidelines are hardly the most important consideration for potential corporate defendants. The decision to indict can have a catastrophic effect on a business, driving away customers and potentially resulting in regulatory and licensing actions that will destroy the organization long before a case reaches sentencing. Nothing makes this clearer than the outcome of the Arthur Andersen prosecution—a virtual death penalty for the firm because of the collateral consequences of its conviction for obstruction of justice long before it was sentenced. The recent indictment of Milberg Weiss Bershad & Schulman LLP (a plaintiffs’ class-action firm) demonstrates again the disastrous effect that the mere filing of charges can have. Though the ultimate effect of that indictment cannot be immediately measured, a number of the firm’s lawyers have already decamped for other law firms, and Milberg Weiss has been removed as counsel in some pending cases. The possibility of a criminal fine is probably the least of the firm’s worries at this point, as any punishment imposed will be modest compared to the current effects of the indictment and the threat of conviction on the firm’s ability to continue representing clients.

Rather than relying on the deterrent value of punishment, the government now prefers to create a culture of compliance that will deter and detect future crime. In July 2002, after the collapse of Enron and WorldCom, Congress enacted the Sarbanes-Oxley Act to address the failure of public corporations to adequately detect and prevent financial and accounting misconduct within their organizations. One of the most controversial provisions of the Act is section 404, which requires the Securities and Exchange Commission (SEC) to adopt rules to require that issuers of securities assess the effectiveness of their internal controls to ensure proper financial reporting. Another provision directs the CEO and CFO of a corporation to certify their company’s quarterly and annual financial statements, and is enforceable by a criminal prosecution if the officer knowingly or willfully files a false certification. Even before the collapse of Enron, the Delaware courts recognized a fiduciary obligation of directors and management to ensure that a company has in place adequate systems to monitor and respond to employee misconduct.

On the prosecutorial side, in January 2003, the Department of Justice issued a policy statement entitled “Principles of Federal Prosecution of Business Organizations,” known more commonly as the Thompson Memo. The Department recently revised its policy in the McNulty Memo in response to criticism by corporations and defense lawyers that the Thompson Memo put too much emphasis on privilege waivers as the means to establish corporate cooperation to avoid an indictment. Even the revised approach demonstrates that cooperation with the government and prevention of future wrongdoing is the linchpin of the government’s decision to pursue criminal charges. Among the nine principles guiding the exercise of prosecutorial discretion in corporate crime investigations are “the corporation’s preexisting compliance program” and “the corporation’s remedial actions.” The McNulty Memo largely reflects the approach of the Organizational Guidelines by focusing primarily on a corporation’s compliance program and cooperation with governmental authorities.

Today, the McNulty Memo is much more important than the Organizational Guidelines for a corporation under investigation. Federal prosecutors use deferred and non-prosecution agreements to accomplish the Guidelines’ goals while avoiding the “Arthur Andersen effect”—the collateral damage from a conviction in which innocent employees unconnected to the wrongdoing lose their jobs and investments in the firm. These agreements usually require the appointment of an outside monitor, changes in corporate governance (some of which are quite substantial), and a promise not to engage in any additional criminal activity.

The punitive aspect has not disappeared completely, though it appears to be less important to the Department of Justice’s decisions today. The agreements usually require a corporation to pay an agreed-upon amount. That payment can be styled as a criminal fine, civil money penalty, or even a payment into a fund to settle shareholder litigation. For example, the accounting firm KPMG paid $456 million to avoid the fate of Arthur Andersen, while Bristol-Myers Squibb made a $300 million payment to a fund to compensate shareholders. The payment is the “pound of flesh” for past wrongdoing, but that cost has little lasting impact on the company compared to the changes in its internal corporate governance required by the agreements. In addition to its monetary penalty, for example, Bristol-Myers Squibb agreed to split the positions of CEO and Chair of the Board so that different individuals were at the top of the company—a significant alteration to its governance structure that was dictated by federal prosecutors. In July 2006, the company’s outside monitor effectively forced out the CEO because of unrelated problems that triggered a new criminal investigation. Corporations will thus dance to the government’s tune—accepting the terms of deferred and non-prosecution agreements with hardly a whimper—to avoid the impact of a criminal prosecution.

Deferred and non-prosecution agreements do not require judicial approval of the fairness of the terms or appropriateness of the monetary penalty, unlike a plea bargain. As deferred and non-prosecution agreements become the standard for concluding corporate criminal investigations, the issue of the jury trial right of corporations and the nature of the Organizational Guidelines as mandatory or advisory are being rendered largely irrelevant. Penalties imposed on corporations are now more a matter of bargaining before charges are ever filed and less an analysis of the proper punishment to be imposed to achieve the traditional criminal law goals of deterrence and retribution.

The purpose of corporate prosecutions is not to punish but instead to change corporate cultures through agreements that deal directly with internal governance. While it is questionable whether the government has the expertise to tell corporations how best to govern themselves, the focus on how businesses will operate in the future is now a central feature of corporate criminal investigations. That is outside the purview of the Organizational Guidelines, and the moment has arrived to put them to rest as a worthy effort whose time simply has passed.

Peter J. Henning is a Professor of Law at Wayne State University Law School. He is a co-author of White Collar Crime: Law & Practice (2d ed.) (with Israel, Podgor & Borman).

Preferred Citation: Peter J. Henning, The Organizational Guidelines: R.I.P.?, 116 Yale L.J. Pocket Part 312 (2007),