Corporations Just Don’t Behave Like Other Defendants

Mike at Crime & Federalism raises fascinating issues when corporations rather than individuals become embroiled in the criminal justice system, via this Cato Institute White Paper by N. Richard Janis.

From Janis’ synopsis:

To avoid the potential catastrophe of a federal indictment, business firms are taking extraordinary steps to placate federal prosecutors. And those prosecutors now regularly insist on the following:

  • That business firms surrender or “waive” their attorney-client privilege,
  • That firms must pressure their employees to waive their constitutional right against self-incrimination,
  • That firms facing indictment refuse to advance legal fees to employees under investigation — even if a firm concludes that an employee was just following directions or is otherwise innocent of any wrongdoing, and
  • That embattled firms must discharge certain employees at the direction of the government — even if a firm concludes that an employee was just following directions or is otherwise innocent of any wrongdoing.

Any organization that balks at the government’s demands risks months of negative publicity as prosecutors characterize a legal defense as “impeding” or “obstructing” the investigation. It is no overstatement to say that the enforcement of the criminal law, at least insofar as it applies to investigations of organizations, amounts to a state-sponsored shakedown scheme in which business firms are extorted to pay penalties that are grossly out of proportion to any actual misconduct.

While this may be something of an overstatement, it captures the general sense of what it means to be a corporation under the Justice Department’s gun, and includes the various weapons that can be threatened, and brought to bear, on the corporate defendant.

When an individual becomes a target, there are usually three basic differences: The government quietly investigates first and the targets first notice is the 6:30 a.m. knock on the door when he’s arrested.  Second, the individual has but one interest at this point: not going to prison.  Third, the decision-making is done by a committee of one.

The structure of prosecutorial pressure applies in an entirely different way to a corporate entity.  First, the “corporation” doesn’t worry about going to prison, but rather about adverse publicity and loss of profits.  While some individuals may end up in cells, other individuals within the corporate structure are not at risk and are fully prepared to jettison their former lunch-mates for the “good of the business,” which is directly connected to their stock options.

The corporation learns of its target status via its general counsel, a lawyer for the corporation but not for any individual within it.  So we begin with an inherent conflict, since corp counsel is a part of the target entity, may potentially have his butt on the line, and his love and devotion to the business is now contrasted with his love of family and lifestyle.  As counsel, he becomes the first mind tapped for answers, often drawing upon his former prosecutor status as expertise.  Guess what his advice will be?

But corporations are run by committee, which take a sudden interest when their livelihood is at stake.  They are faced with what superficially appears to be two clear choices, one very hard and dangerous and the other very easy and smooth.  Moreover, most of the committee members are fully vested in the “system”, meaning that they see themselves as the good guys and want to stay that way.  Good guys work with the government.  Bad guys fight the government.  If there’s some bad guys in the corporation, then root out the evil and cleanse the business of those who would cause its destruction.  Clean and smooth. 

Corporations are risk-averse by nature, and want nothing to do with anything perceived as a low-percentage play.  Even when they’ve done nothing wrong, or at least have acted in accordance with accepted industry standards and practices, the possibility of threatened ruin is all it takes to make bold men quiver.  Men in neckties are poorly suited for a prison camp. 

The sum of these parts is a very large, very powerful, very wealthy beast that is afraid of its own shadow.  The government plays “divide and conquer,” and the corporation begs to be allowed the opportunity to give itself up, at its own expense.  Anything to save the corporation, even if it has to sell out a bunch of highly paid executives in the process.  But most of all, it’s a business decision to buy itself out of the government’s sights, and the rest is just a matter of negotiation.

For the government, this is like shooting fish in a barrel.  No matter how big and strong the target may be, its structure and goals make it functionally impossible to mount a fight.  Corporations lack both the will and the way.

Just in case the target pushes back a bit, the government then pulls out the heavier artillery by arguing that resistance itself is criminal, or that supporting the fight by individuals within the corporation is unlawful.  At each level, the government challenges the corporation to see just how strong their will is, since each effort will bring new potential harm to the corporation.

As Janis correctly notes, this empowers the government to dictate to corporations what they must do to cleanse themselves in the eyes of the government, and regardless of whether the government is right, regardless of whether the corporation agrees, the committees succumb to the pressure rather than risk it all in their fear of the government’s power.

As Mike correctly notes, the Arthur Andersen saga shows what the government can do to a business, even when it committed no crimes.  Indeed, I suspect that a significant number of government investigations into corporations involve monumental overreaching or, at best, criminal prosecutions for questionable civil wrongs.  Many federal prosecutors and agents assume a level of knowledge and understanding about commerce, practice and crime that is well over their heads, but they believe they know and that’s all it takes.

While it’s hard for many to muster much sympathy for large corporations, the by-product of these prosecutions is reduced availability of products and services, increased costs (since they naturally need to pass along these huge fines to customers and consumers) and encouragement to the government to go after the next easy target.  And then there are all those loyal employees who suffer when the big guys get scared.

I look forward to more of Mike’s analysis of the Cato White Paper.  But until the decision-makers in corporations start thinking like individual defendants and standing up against the government, they will continue to be easy targets and cave to the government’s threats.