The Power of the Corporate Charging Decision over Corporate Conduct
Timothy Johnson argues that the organizational sentencing guidelines should remain advisory because these guidelines, when mandatory, were no better at shaping companies’ behavior than they are now. Long before a company faces sentencing at the hands of a judge, though, it has already confronted another government decision that influences corporate conduct even more fundamentally: the federal prosecutor’s initial decision to bring criminal charges against the company. In this Essay, we describe the Justice Department’s efforts to make prosecutors’ charging decisions more consistent, transparent, and predictable, and we suggest that the initial threat of corporate criminal charges has far broader and deeper effects on American businesses’ behavior than does the prospect of sentencing itself.
Months—perhaps years—before sentencing, the very fact of a company’s indictment has already done severe damage to its reputation in the marketplace and to the interests of its shareholders. The grim consequences of corporate criminal charges alone—which often amount to a virtual death sentence for business entities—exert a powerful influence on executives and directors to keep their houses in order and to cooperate with prosecutors should they ever come knocking. Compared to the organizational sentencing guidelines, the principles that guide prosecutors in making corporate charging decisions have much greater influence in deterring criminal behavior, encouraging cooperation with government investigations, and promoting the adoption of effective compliance programs to prevent, detect, and report legal and regulatory violations.
In the years since the Enron meltdown in 2001, companies have responded to the government’s increased focus on rooting out corporate fraud by examining and strengthening their compliance programs and other corporate governance measures. Fostering a genuine culture of compliance within a company requires its management and board to devote significant time, thought, and resources to the cause. In deciding to undertake this task, corporate leaders are not driven primarily by fear of the penalties threatened by the organizational sentencing guidelines should their companies actually be charged with and convicted of crimes. (Of course, collateral consequences—especially the loss of licenses, the prospect of suspension, debarment, or exclusion from federal programs, and analogous administrative effects on the company’s core business—loom large, especially for the most regulated corporations.) Rather, corporate leaders adopt compliance programs to avert the conduct that invites government investigations and prosecutions in the first place. Because relatively few companies are actually charged, convicted, and sentenced, many corporate executives may dismiss corporate sentencing itself as an unlikely hypothetical. In contrast, many more companies have at least had brushes with government investigations. Those brushes may be as minor as receiving subpoenas issued in connection with the investigation of some other company, or as serious as negotiating a deferred prosecution agreement. And those experiences tend to focus executives’ minds on the uncomfortably real possibility of landing within prosecutors’ sights.
Like organizational sentencing decisions, corporate charging decisions have such weighty consequences—not only for the corporate defendant, its employees and shareholders, but potentially for an entire industry sector—that these decisions should be fair, consistent, and predictable.Companies are typically very rational actors and adjust their behavior efficiently to signals sent—intentionally or not—by regulators and enforcement authorities. For that reason, wildly varying and apparently contradictory charging and sentencing practices may hamper deterrence and reform even more than overly aggressive (yet consistent) ones will. Most companies want to figure out, as quickly as possible, how to maximize their profits within the bounds of the law and conform their behavior accordingly; this becomes dangerously difficult when the government sends murky or conflicting messages.
A straightforward way to promote consistency and predictability in decision-making is to establish a common set of relevant factors for all decision-makers to consider. Common-law courts have applied this approach for centuries: much of our appellate case law sets out “multi-part tests” for lower courts to apply in deciding questions of law. Jury instructions seek to ensure that all jurors base their decisions on common and permissible grounds. The federal Sentencing Commission took this approach in setting out sentencing guidelines for both individuals and organizations. Likewise, the Justice Department brought greater analytical rigor to corporate charging decisions nationwide by instructing all federal prosecutors to apply the analysis set forth in the Principles of Federal Prosecution of Business Organizations, known informally as the “McNulty Memo” (so named for the Deputy Attorney General who recently revised and re-issued the directive).
Federal prosecutors were not always required to apply a common analysis to their corporate charging decisions. Although corporate criminal liability has been blackletter law since at least 1909, the Justice Department had no consistent policy on corporate prosecution until June 1999, when then-Deputy Attorney General Eric Holder issued a policy memorandum synthesizing pre-existing Justice Department practices and titled Federal Prosecution of Corporations (also known as the “Holder Memo”). Before then, while prosecutors were bound by policies governing federal prosecutions generally, they could consider whatever additional factors they believed relevant in deciding whether to bring criminal charges against companies. Even after the Holder Memo was issued, prosecutors remained free to disregard its analysis because it offered only “guidance” that “federal prosecutors [were] not required to reference.”
This changed in January 2003, when then-Deputy Attorney General Larry Thompson issued a revised policy document known as the “Thompson Memo.” This document made consideration of its factors—but not the weight afforded them—mandatory for all federal prosecutors across the country. Finally, in December 2006, Deputy Attorney General Paul McNulty again revised and re-issued the memorandum. While the substance of the relevant factors remain largely uncharged, the McNulty Memo builds in additional specific safeguards, requiring prosecutors to obtain certain approvals before asking companies to waive their attorney-client privilege and share confidential, protected information with the government. (We discuss these revisions at greater length below.)
Of course, setting out a common analytical framework does not, and should not, guarantee wholesale and lockstep uniformity among the decisions that result. Two courts applying the same legal test to similar facts can (and often do) arrive at different answers. Likewise, two prosecutors applying the McNulty Memo analysis to similar facts might well come to different conclusions about whether to prosecute a particular company. Prosecutors making charging decisions require a measure of discretion in these matters, for no analytical framework can capture all of the potential variables that may influence their decisions. Nonetheless, prosecutors make these decisions with greater fairness and predictability—and companies can more easily and efficiently adapt their behavior—when the basic analytical framework employed is made public for all to see and understand. By building such transparency into prosecutors’ deliberative process, the Thompson and McNulty Memos have increased the fairness, discipline, and consistency of that process by forcing decision-makers to justify discrepancies more rationally and persuasively.
The value of such transparency and consistency has been recognized by a majority of federal appellate courts in the context of sentencing individuals after the Supreme Court’s decision in United States v. Booker. Though Booker renders the Sentencing Guidelines “advisory” when applied to individuals, at least six circuits have held that sentences falling within these guidelines are presumptively reasonable. (The Supreme Court will soon decide whether this position is correct.) This presumption credits the tendency of a thoughtful, studied, and standardized analysis to “creat[e] a fair and uniform sentencing regime across the country.” The same is true in the context of corporate charging decisions: while the potential certainly exists for unjustified disparities among prosecutors’ charging practices, consideration of a common set of factors promotes greater convergence among these practices.
The McNulty Memo’s recent revisions reflect the Justice Department’s judgment that certain procedural safeguards are necessary to maintain consistency and fairness in the way that prosecutors encourage companies to cooperate with government investigations. Specifically, prosecutors must obtain approval from their U.S. Attorneys, from the Assistant Attorney General in charge of the Justice Department’s Criminal Division, and in some cases from the Deputy Attorney General himself, before asking company management to share different types of information protected by the attorney-client privilege. Prosecutors must also obtain the Deputy Attorney General’s approval before penalizing companies for advancing legal fees to employees who are themselves under investigation. Such prior approval requirements are intended, like the substance of the McNulty Memo analysis itself, to promote circumspection among prosecutors and consistency in their approaches to corporate investigations and prosecutions. Time will tell how effectively these revisions further these objectives.
The organizational sentencing guidelines and the McNulty Memo both seek to foster good corporate citizenship. The latter’s influence on companies’ behavior so outweighs that of the former, though, that rendering the guidelines advisory will not have a significant impact on corporate conduct in America. Highlighting the McNulty Memo’s importance also underscores the need for consistency and fairness in its application—and makes thoughtful discussion of how best to achieve these goals well warranted.
Christopher A. Wray and Robert K. Hur are attorneys at King & Spalding LLP in Washington, DC. Before joining King & Spalding, Mr. Wray served from 2003 to 2005 as the Assistant Attorney General in charge of the Criminal Division in the U.S. Department of Justice. Mr. Hur served from 2003 to 2005 as Counsel and Special Assistant to Assistant Attorney General Wray.
Preferred Citation: Christopher A. Wray & Robert K. Hur, The Power of the Corporate Charging Decision over Corporate Conduct, 116 Yale L.J. Pocket Part 306 (2007), http://yalelawjournal.org/forum/the-power-of-the-corporate-charging-decision-over-corporate-conduct.