The Myth of the Corporate Death Penalty

The Department of Justice, more often than not, enters into deferred and non prosecution agreements with major American corporate criminals, instead of forcing them to plead guilty.

The usual explanation is that a criminal conviction would risk putting these companies out of business.

The collateral consequences of a conviction are too great. The convicted companies would go the way of Arthur Andersen. Shareholders would lose millions of dollars. Thousands of workers would be thrown out of work. In short, a corporate criminal conviction is the equivalent of the corporate death penalty.

Not so, says Gabriel Markoff in a paper titled Arthur Andersen and the Myth of the Corporate Death Penalty: Corporate Criminal Convictions in the Twenty-First Century. Markoff is sending the paper out to law reviews for publication.

Markoff is a 2012 graduate of the University of Texas Law School. He’s currently clerking in Houston for U.S. District Court Judge Gregg Costa.

Markoff found 51 publicly traded companies that were convicted between 2001 and 2010.

Of the 51, 36 are still in business, still listed on the same stock exchange that they were listed on at the time of their conviction, and they have not undergone a merger, acquisition, or name change.

Eleven companies merged with or were acquired by another company under favorable circumstances that did not implicate a business failure.

Markoff found that only four of the 51 companies “suffered fates that could reasonably be described as business failures.”

But none of the four “could reasonably be said to have resulted from the companies’ convictions.”

In light of his findings, Markoff says that both the Department of Justice and corporate defense counsel “should change their respective strategies.”

He urges the Department to “radically revamp its much-criticized program of using deferred prosecution agreements by increasing its willingness to demand guilty pleas of corporate defendants, and, if necessary, to issue indictments.”

Markoff says that the Department should take into account whether a company’s core business is threatened by a conviction – and treat those companies separately.

“By basing its actions on the knowledge that most corporations will not go out of business if convicted, and by using the core business model to predict which corporations might be at risk, the Department can confidently prosecute more corporations without fear of creating another Andersen-style catastrophe,” he writes. “The Department of Justice should continue to use deferred prosecution agreements only in those instances where the core business model predicts that a prosecution might actually threaten a company’s core business.”

“Such a shift towards increased prosecutions and away from deferred prosecution agreements would both increase deterrence of corporate wrongdoing and comport with the interests of justice. My data show that the two main reasons for using deferred prosecution agreements – a widely applicable Andersen Effect and the ability to gain compliance programs and structural reforms through deferred prosecution agreements are largely invalid. The core business model can be used to help predict those rare situations where business failures may occur, and the data show that plea agreements may be used to obtain structural reforms just as deferred prosecution agreements can.”

“With this new information, there is little justification for using deferred prosecution agreements in most cases. Prosecutors should seek convictions where they can, use deferred prosecution agreements only where they absolutely must, and decline to prosecute where they have a weak case that can only be successfully prosecuted by improperly pressuring a defendant.”

“Likewise, defense counsel should recognize that the effects of corporate convictions have been widely overstated and that the core business model may be used to predict which offenses a defendant can safely plead to,” he writes. “Though a guilty plea will necessarily involve admitting to a crime and accepting the stigma that comes with that admission, pleading guilty may be the preferable option in some cases, particularly if doing so would allow the defendant to avoid agreeing to certain onerous structural reforms that might be attached to a deferred prosecution agreement. And in some cases, if the prosecution has a particularly weak case but still demands a harsh deferred prosecution agreement, it may even be preferable to roll the dice and go to trial.”

Markoff says that it’s “no exaggeration to say that corporate crime – and the struggle to counteract it – has become one of the most pressing legal issues of the new millennium.”

But we’re dealing with the wave of corporate crime with deferred prosecution agreements, which Markoff says have “have spectacularly failed at preventing corporate recidivism.”

“The criminal prosecution of the corporate entity itself has been fundamentally misunderstood by scholars, commentators, and policymakers,” he concludes. “The Department of Justice should favor corporate prosecutions over deferred prosecution agreements.”

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