Fund the Corporate Crime Police

Columbia Law School Professor John Coffee, Jr. is out with a new book titled – Corporate Crime and Punishment: The Crisis of Underenforcement (Penguin Random House, 2020).

It’s one of the better corporate crime books of recent years – up there with Brandon Garrett’s Too Big to Jail: How Prosecutors Compromise with Corporations (Harvard University Press, 2016) and Jesse Eisinger’s The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives (Simon & Schuster, 2017).

Coffee doesn’t just come out say – fund the corporate crime police. 

He puts it this way:

“Much of this book addresses the question of how regulators and prosecutors can obtain adequate resources to contest corporate misbehavior, given the reality that public bureaucracies are always constrained by budgetary limitations.”

And this way:

“The prosecution of complex corporate crime is characterized by underenforcement: that is, prosecutors rarely get to the top of the corporate hierarchy (or even near the top). A leading cause of this shortfall is that federal prosecutors must (and do) outsource their investigation of corporate misconduct to the defendant corporation. Not surprisingly, the resulting ‘internal investigation’ is necessarily compromised. Low-level employees may be detected and prosecuted, but the investigation rarely finds its way into the corporate headquarters. This outsourcing occurs because federal prosecutors lack the resources or staff to conduct a thorough investigation themselves.”

Coffee goes into great detail on the major corporate criminal investigations and prosecutions of our age – and why they failed.

And he doesn’t dodge the hard question at the end – what to do?

In fact, he delivers a ten point program that’s sure to give those at the top of the corporate crime lobby heartburn.

Let us count the ways.

Number 10: End the promiscuous use of deferred prosecution agreements.

“First and foremost, deferred prosecution agreements need to move from the presumptive disposition in the case of a corporate investigation to a more exceptional disposition that had to be truly earned.”

Number 9: Abolish non-prosecution agreements. 

“Plea bargains need to be subject to at least some judicial oversight.”

Number 8: Use stigma and shame to combat corporate crime. 

“Today, a deferred prosecution agreement reads like a corporate indenture drafted by skilled corporate lawyers, and no sense of guilt or culpability surrounds it.”

Number 7: Bring back corporate probation. 

“When the corporation pleads guilty to a crime, it should not only be fined but also sentenced to a term of probation (probably extending for five years). Presumptively, one probation condition would be the appointment of a corporate monitor, chosen by the court (possibly off a list of nominees submitted by the parties and with specific duties assigned to the monitor by the court).”

Number 6: As a condition of probation, restrict incentive compensation.

“Incentive compensation can be criminogenic. The toxic securitizations that caused a financial collapse in 2008 were packaged by financial executives who were intent on earning extraordinary bonuses.”

Number 5: Encourage corporations to turn on their top executives. 

“This could be done in a variety of ways. For example, if federal prosecutors would indict financial institutions for money laundering, the pressure to cooperate might become irresistible (because a conviction on that grounds could bar them from the banking industry).”

“Another means to this end would be the equity fine. Its use could conceivably threaten a bank with a loss to its shareholders (through dilution) of perhaps $20 billion in some cases, but the goal would be less to impose such a penalty than to make the bank an ‘offer it could not refuse’: cooperate or else.”

Number 4: Require prosecutors to negotiate not with top executives, but with an independent committee of the board of directors. 

“The rationale for prosecutors insisting that they must negotiate with a board committee (and not the corporation’s senior executives) is that the executives are conflicted. Even if there is no chance that the senior executives were personally involved in the misconduct, their future compensation and job security could still be affected by the outcome of the plea negotiations.”

Number 3: Encourage whistleblowers through bounties. 

“Today, only three agencies – the IRS, the SEC, and the CFTC – do this systematically, and this strategy is working well. Although bounties have a cost, this system funds itself out of the penalties paid by the defendant, thereby sparing the government most out-of-pocket costs.”

Number 2: Encourage the top civil enforcement agencies like the Securities and Exchange Commission to hire outside lawyers to litigate corporate enforcement cases.       

“This is the only feasible means of multiplying prosecutorial resources in the short run. Legislatures are simply not about to double their appropriations for enforcement, but prosecutorial manpower can be substantially increased by the use of private counsel paid on a contingent fee basis.”

Number 1: Address the growing problem of “the revolving door.”

“The key figures at the Department of Justice – Attorney General Eric Holder, Criminal Division chief Lanny Breuer –  and various Enforcement Division heads at the SEC all came from major law firms specializing in the representation of financial institutions. This is not to argue that they covered up anything or breached ethical duties but only that they were not inclined  – at Lehman, AIG, HSBC, and many other cases – to pursue investigations into the executive suite. Here, the best response is not a statute or rule but the mechanisms of political accountability.”

Coffee has no illusions about the political reality on the ground facing down his reform package.

“Of course, the business community will resist most of these proposals,” he writes. “So will the bar, as internal investigations have become its newest profit center. But equally intense opposition may come from the enforcement community. They are not used to criticism – particularly from academics, who should in their view serve as cheerleaders. Proposals, such as the use of private counsel to handle big cases, will be seen as a reproach by many at the SEC. Similarly, prosecutors may not want to risk becoming involved in internal investigations or experiment with new sanctions, such as the equity fine. These may make it harder to reach a settlement or a plea bargain.” 

“The simple truth is that old dogs do not learn new tricks – except under some compulsion. Bureaucracies persist in the old ways until they are forced to change. That may prove the largest obstacle to real reform.”

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