Duke Law Professor Samuel Buell on the Limits of Individual Prosecutions in Deterring Corporate Crime

Endless calls from Congress, the media, the public, many scholars, and even the Justice Department itself, to recommit, over and over, to locking up more managers and executives to deter corporate wrongdoing portray the problem as relatively straightforward and blame legislative and executive failure of will. 

Professor Samuel Buell
Duke Law School

Duke Law Professor Samuel Buell now weighs in with – not so fast.

Through examination of the litigation record from over 100 prosecutions spanning the period from the 2008 financial crisis to the present, Buell presents evidence that relying on individual prosecutions to deter the most significant corporate crimes, especially those involving fraud in the financial sector, is less promising than believed. 

In an article titled – The Limits of Individual Prosecutions in Deterring Corporate Fraud – Buell finds that structural features of crimes in the largest corporate organizations have made securing individual convictions and imprisonment, especially at senior levels, a chancy project for prosecutors. 

He then argues that this “evidence relating both to failure rates and causes of those failures should point policymakers and enforcers beyond hackneyed calls for perp walks and prison and towards deeper thinking about a full suite of preventive tools, especially regulatory design.”

“There has been a lot of argument over the theory of deterring crime within large organizations by holding more individuals criminally liable, particularly at the management and more senior level,” Buell told Corporate Crime Reporter in an interview last month. “As a matter of theory, that isn’t a position that can be argued with. It makes all the sense in the world. But there hasn’t been enough work looking at the question of what is involved in bringing those prosecutions in the big ticket cases.”

“I looked at the cases that the Department of Justice has actually been prosecuting. It’s not true that they have been ignoring individuals. You can argue that they should be bringing more cases. But nobody has looked in detail at the cases themselves.”

“I did that over about a thirteen year period. I tried to focus on the types of cases that people seem to care about the most. And the article is a deep dive into the litigation record to try and show the reader what it is about these cases that makes it difficult to obtain convictions and to try and get people to be a little more realistic about the idea that just indicting more people might produce more deterrence.”

We’ve been covering the Boeing criminal case, which you address in your article. The families are angry about the Boeing prosecution. You are a former federal prosecutor. In looking at that case, how would you have handled it differently?

“I would have started where the Department of Justice started – and that is with the individuals who were dealing directly with the Federal Aviation Administration (FAA). You have to start where the rubber meets the road. As I understand the Boeing facts, the issue revolved around the company’s efforts to get the government to approve the lower level of retraining. And that can be pretty causally linked to the two crashes. You have to start there.”

“The Department of Justice went after one individual and the jury acquitted him. Once you have an acquittal at that level, it’s difficult to see how you move higher within the organization.”

“Now what we don’t know is what kind of discovery was available to the Department of Justice with respect to communication that occurred from that individual’s level up or among those at a higher level. In the ordinary course, those communications would have been produced by Boeing as part of the company’s communication with the Department of Justice. I haven’t seen any allegation with regard to hidden evidence. That tends to lead to the inference that so-called smoking guns were lacking.”

We don’t know about the discovery. And there are red flags in this case. The U.S. Attorney who brought this case and entered into the deferred prosecution agreement with Boeing soon thereafter went to work as a partner at the law firm representing Boeing. 

Also, in the civil cases brought by the families, there is a gag order over the discovery as they settle the cases – and the majority of the cases have now been settled. 

And the other thing about the Boeing case was that it was hastily settled right before President Trump left office.

What you are saying in your article is that the Justice Department is trying to bring these individual cases, but they are difficult cases to prove.

But what about the impact of the revolving door and political pressures when it comes to these cases?

“With regard to Boeing, there are some red flags with regard to the issue of whether the investigation was conducted thoroughly enough. It might have been a case where it would have been worthwhile for the new administration to take another look at that case in terms of the evidence. With Boeing under the deferred prosecution agreement, they were under a continuing obligation to cooperate and produce evidence. I don’t know whether the Justice Department did that at all. Maybe there were resource issues or personnel issues – I don’t know. But I agree there is enough there to merit a second, harder look.” 

“But I would still be pessimistic, given the track record in some of these other cases, of being able to produce really solid trial evidence that could convict senior managers in that case. And without the line level people involved agreeing to testify and fill in the blanks, it can be extremely difficult.”

“And here’s another thing about the Boeing case. We arguably don’t have an appropriate law to deal with a case like the Boeing case. We keep having corporate crimes that result in deaths, sometimes large numbers of deaths, maybe never more than in the Boeing case. And yet the settlements and prosecutions are premised on legal theories that have to do with deceiving regulators or clever tricks to get around regulatory regimes. And to say the least, those do not capture the essence of the problems in the case.”

“We don’t have a homicide law that is widely used by federal prosecutors in corporate crime states. There was a homicide charge in the BP case because of its maritime law connections. But in general, the GM case, the Boeing case, Upper Big Branch mine – there is no ability to bring homicide charges at the federal level.”

“That can’t be easily fixed by throwing a corporate homicide bill on the books. You would have to think through the question about what the culpability level would need to be for managers for there to be corporate homicide liability. Are you going to premise criminal liability on negligence? That would be the big question because in most of these cases that would be the best legal theory you would think a prosecutor might find viable in a case like Boeing.”

I’m driving down a two lane highway, I check my cell phone, get distracted, cross the center line and kill someone. I’m going to prison for my recklessness or negligence. And there have been prosecutions at the state level for corporations for major corporate crimes in the past. 

“When you say – there have been cases – the ones that come to mind are the ones that involve smaller businesses – “

I’m just talking about major corporations. A trial I covered forty-five years ago was the homicide prosecution by the state of Indiana against Ford Motor Company for the deaths of three teenaged girls riding their Ford Pinto when it was rear ended at slow speeds and they all were burned to death. 

So yes, it is possible to bring that kind of prosecution. Unfortunately state prosecutors don’t have the resources to face off against a multinational corporation.

“Yes, and politics are also involved. But at the federal level, as the size of the company grows, and the products become more complex, it becomes harder to define negligence. I’m not arguing against this. I’m arguing for it. We should have a debate on how we might craft an appropriately specific federal corporate homicide or manslaughter statute. I have some instincts that there are going to be challenges. But that doesn’t mean it’s not worth trying.”

You say in your paper that one way to look at these issues of corporate crime is the failure of regulation. With failed or weak regulation, you get more of these types of corporate crime. And that seems true in the Boeing case. If the FAA had not been captured by Boeing, maybe these crashes would not have happened and the lives would not have been lost.

“Yes. And I want to write an article about the relationship between regulation and corporate crime. It’s not just that every time we have one of these corporate disasters, the regulators aren’t doing what they should be doing. It’s in some ways worse than that. You look at these cases and the corporate conduct that’s problematic is designed in the shadow of the regulatory regime and how it’s enforced to outsmart the regulators. It doesn’t seem to be that hard to outsmart the regulators. They look at the regulatory regime, at who is enforcing it and how it’s being enforced, and then they come up with a strategy to undermine it.” 

“In Volkswagen, it was almost a joke as to how easy it was for VW to get away with their emissions cheating. It was designed to defeat the EPA’s testing regime. And in Boeing, there was the famous statement by the Boeing test pilot – these regulators are like dogs watching television. And we see it on Wall Street over and over again with novel financial products that are explicitly designed to fall into some gap that will require less disclosure or less investor protection.” 

“You see this happening over and over again. And it raises the question – what is it about the way we are doing regulation that produces this dynamic and fails so badly.” 

The Department loves it when corporations self report. The company is doing the investigative work for you. And that seems to be the majority of corporate crime cases. 

“The self reporting incentives are there because they can’t send out FBI agents to do surveillance on corporations. There are regulatory mechanisms that are supposed to flag suspicious actions. But the best way to find out what’s really going on with regard to a crime is if somebody in the corporation tells you about it – whether it’s the corporation reporting itself or a whistleblower or someone who gets arrested and cooperates.” 

“I understand why the Department wants to rely on incentives to self-report. But that’s supposed to be followed by investigations that produce the evidence of individual wrongdoing and then followed by prosecutions. That’s the whole point of having that system. It’s not just to say – oh great, now we know what happened.”

“In the paper, I’m pointing to the failure rate of individual prosecutions when they do happen. The LIBOR example is the most dramatic one. At the front end, they would have concluded that the prosecutors finally got their smoking guns and a straightforward legal theory. And still the government failed. Many of the prosecutions didn’t result in convictions. And now there is a legal theory that has been blessed by the Second Circuit that is being used to try and overturn everybody’s conviction.”

“You can imagine the impact that has on a prosecutor’s calculation about whether to spend a whole team’s work for two years on a case. There is going to be an incentive to be cautious.”

In your paper, you write this:

Across the three most prominent and widespread banking scandals since 2010 – mortgage backed securities, LIBOR, and Forex – prosecutors in the US and UK obtained and upheld only 19 convictions out of 58 prosecutions, with only 13 of the convicted individuals sentenced to imprisonment.

Prosecutors have both tried and struggled to impose criminal punishment on persons dealing in securities products within large institutions. The evidence of what occurred in litigation of these cases casts doubt on the idea that more determined and resourced investigative and prosecution campaigns in the financial sector could have produced significantly better results and much greater deterrent effects.

“When you consider that the overall and accurate impression of the federal criminal justice system in our country is that almost everyone who is charged is convicted,” Buell said. “It approaches a 100 percent conviction level. In general, you win against the Justice Department – hardly ever.”

For street crimes. But for corporate crimes, it seems to flip.

“If you want to look at the overall data, you have to go to databases like TRAC. It goes by statute and looks at the cases prosecuted under a particular law which nets all kinds of cases that have nothing to do with corporations and corporate crime or even white-collar crime.” 

“We are talking about the cases involving large public companies or very large private companies. Nobody keeps that data separately. My paper looks at all the cases from a group of scandals. I don’t want to oversell that somehow that percentage generalizes across the whole system. That’s not the point.”

Corporate Prosecution Registry and Violation Tracker are primarily large corporations. Those are two good databases that give a snapshot of large corporate misbehavior.

And in those cases, you have a revolving door system where young prosecutors seem to be auditioning for their multi-million careers at large law firms. There are exceptions with prosecutors who go into academia, like yourself. But with that revolving door in place, it seems as if you get systemic bias that favors the corporation and a system that results in increased use of deferred and non prosecution agreements, decreasing use of monitors, fewer corporate guilty pleas. 

An alternative system would be guilty pleas and corporate probation officers, with a dedicated corporate probation office in the Justice Department. 

“I like the idea of a corporate probation office. I like the idea of more cases going to actual sentencing at the corporate level and having the judiciary involved in setting the terms of probation. But my sense is that the judiciary in general might not really mind that these cases are being settled between the parties. The judges worry about their capacity of dealing with ongoing oversight when they are trying to manage their dockets.”

“These cases tend to be brought in the federal districts that have the busier dockets. There is a judicial resources issue that you would need to deal with. But I do think that a more formal supervisory structure with experienced personnel sounds like a good idea.”

“And yes, there is probably some revolving door dynamic. There is no question that cultures of the bar influence how lawyers behave. And there is a culture of the bar around this practice. It’s not corruption per se. People aren’t horse trading over cases. But there is a culture and there are norms about how to handle cases in a certain way.” 

“That arose in the first instance not because anyone was intentionally trying to create that culture, but there was a concern that many of these companies have economic value. And the government is shy about a sanction response that might unnecessarily destroy economic value, whether it has to do with shareholders or employees, creditors, or counterparties.”

“That’s a view that deserves a bit more examination. Is it really on balance overly costly to occasionally prosecute a firm to bankruptcy and get whatever deterrent effect that may have? That needs to be looked at. And what should be the process for determining when it might be appropriate to prosecute a company all the way through? Right now that process would be just appeals through the Department of Justice hierarchy. It’s basically senior lawyers making the decision. The Department probably has some feeling that they are not supposed to be doing economic policy. If the lawyers in the government decide that for deterrence reasons they need to pursue a company and that pursuit might put the company out of business, the government doesn’t have a structure to work that out. That’s made it so that the Department is extremely reluctant to do that. But maybe we should be doing that.”

Columbia Law Professor John Coffee told us years ago that Arthur Andersen “committed suicide – it was not murdered by prosecutors.”

“It was a case of a company that was much too eagerly in pursuit of consulting income to focus on its central job of auditing. I believe the company was already dead before the prosecution,” Coffee said. “Remember, an auditor is in an exposed position. You are being brought in so that shareholders will trust the company’s financial statements. If you bring in a company that has become notorious for Enron, that doesn’t enhance the shareholder trust. It probably diminishes it. There was negative value to Arthur Andersen’s name at that point. And that destroyed it. The brand was simply killed.”

“I’m glad he said that,” Buell said. “I worked on that case. And we were told for years and years that we “put Arthur Andersen out of business” simply by deciding to return an indictment. And I never thought that was true. The partners were running for the exits even as we were trying to negotiate a deferred prosecution agreement, which they turned down. Ultimately, the decision went up to Michael Chertoff, who was the Assistant Attorney General, and Larry Thompson, who was the Deputy Attorney General at that time.” 

Back to prosecuting individual executives. Part of the game here is – get the cooperation of the company and go after the individuals. That seems to put the company and the Justice Department on one side and individuals on the other. If you look at criminal prosecution of major corporations as a political power game, doesn’t that dynamic fit well within the company’s interest?

“Not necessarily. It depends who the individuals are, what level they are within the company and how influential they are in the company. Public companies in general are not leaping to throw their most senior managers to the Justice Department when they get in trouble. And on the front end, when you are looking at these cases, you don’t know whether there is senior management involvement and what the nature of the wrongdoing might be.” 

“It’s rare for a company at the beginning of a problem to immediately say – okay before we even do the investigation, we have to throw everybody out and clean house. The board of directors isn’t going to do that. The people who are strategizing about the company’s legal response can themselves be reputationally implicated. The incentive is to say – this is more like a civil matter, or this is very technical, no one acted with criminal intent here. 

[For the complete q/a format Interview with Samuel Buell, see 38 Corporate Crime Reporter 17(12), April 22, 2024, print edition only.]

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