The Tyranny of Deferred Prosecution Agreements

Granted, most people aren’t particularly sympathetic to the problem of fabulously profitable multinational institutions being prosecuted. If anything, many demand to know why financial institutions haven’t been brought to their knees following the revelations of the housing meltdown, when it became obvious they were selling repackaged underwater mortgages as prime investments.  Where were the corporate heads that were supposed to roll?

At PrawfsBlawg, an explanation is offered:

To paraphrase, the problem is that many regulated firms are effectively judgment proof.  We may threaten sanctions against accounting firms that commit fraud, or chemical firms that dump waste into the river, or banks that swindle their counter-parties.  The problem is that the typical criminal sanction is too big, since indictment triggers a run on the firm by its employees, trading partners, and (eventually) creditors.  Prosecutors have therefore basically stopped indicting, leading to the rise of deferred-prosecution agreements.

Brings a tear to your eye, right?  This variation on too big to fail, too big to prosecute, reveals a political decision made in the basement of Main Justice that they don’t want another Arthur Andersen, an indictment of a huge firm that leads to its swift demise, the loss of thousand of jobs, huge disruption and loss of confidence in the stability of institutions.  If Arthur Andersen can collapse from an indictment, any big business could.

Much as the government might want to punish the corporation, the fallout did more harm than the punishment did good.  This is the “over-deterrence” problem, where every prosecution ends in the “death penalty.”

It’s like the problem of medieval justice: if the sentence for every crime is hanging, bandits have no marginal incentive to avoid killing their victims.

Rather than indict, DoJ chose to use deferred prosecution agreements.  For a price, a deal was struck that would avoid indictment, effectively fine the corporation, and allow everyone to get back to business.  But that wasn’t quite enough:

[T]he deferred prosecution agreement is too wimpy.  Since firms know that the government won’t indict, they have no reason to cave, leading to quite defendant-friendly deals.  This leads to under-deterrence.

Cue Goldilocks.  Or in this case, Elizabeth Warren, channeled through Matty Yglesias at Vox.

Warren says these deals “were originally created to deal with low-level, nonviolent individual offenders” but have now “transformed beyond recognition to create get-out-of-jail-free cards for the biggest corporations in the world.”

She proposes a number of efforts to increase enforcement, including critical remarks in the direction of the Securities and Exchange Commission, but the biggest idea here is a “two strikes and you’re out” policy for the Justice Department.

“No firm should be allowed to enter into a deferred prosecution or nonprosecution agreement if it is already operating under such an agreement — period,” she says.

Two strikes, because three strikes worked so well.

Should big banks really get a free pass? It’s true that the stakes are higher in shutting one down, but the stakes are higher in their misconduct, as well.

“It’s time to stop recidivism in financial crimes and to end the ‘slap on the wrist’ culture that exists at the Justice Department and the SEC,” Warren says.

Of course, Warren’s “tough on corporations” approach has the virtue of not requiring congressional approval, thus avoiding its inability to accomplish much of anything.  On the other hand, it would bring back the Arthur Andersen problem.  But on the third hand, Warren properly notes that deferred prosecution agreements just don’t have the heft to bring corporations to their knees to beg for forgiveness.

There is always the side deal of tossing a few executives under the bus to make a show for public consumption of how tough the DoJ can be and how much corporations want to save Piping Plovers as they rob you blind.  This, of course, is just ritualistic sacrifice, of utterly no lasting consequence, and performed to sate the appetite of the groundlings. Executives are replaceable. The corporation must live on.

Do you get the sense that there’s something missing here, that no one has strayed much from the bottom line assumption that the government can micromanage corporations the way they do individuals, and twist the criminal justice system into knots trying to make it work?

There is, of course, an entirely different approach to the problem that isn’t on the table: Decide what corporate crimes deserve the death penalty, and prosecute them.  If a corporation goes all Arthur Andersen on society, then so be it. The crime was that bad that the corporation deserved to go under.

But if the offense isn’t worthy of the havoc prosecution wreaks on a corporation, than get it out of the criminal justice system altogether. The regulatory control over corporations, because everyone knows that assistant United States attorneys know far better how to run business than businesses do, dictates how many sheets of toilet paper an executive vice president is allowed to use per flush.

The question isn’t whether huge corporations engage in some monumentally harmful fraud and abuse, but that criminal sanctions exist for the trivial, and even the dubiously non-criminal choices that only smell bad because someone in Congress met a cute lobbyist for the competition, as well as the serious.

Between Congress and executive agencies, there are few aspects of corporate governance that aren’t subject to absurd regulation.  Ironically, little of it has done much good in making corporations better citizens, but that’s largely because these rules defy the reality of business.  Don’t forget that if a business doesn’t make a profit, it disappears.

So decide what’s worth causing the collapse of a big business, regardless of what industry it’s in, and if the corporation has engaged in such bad conduct, take the sucker down.  Otherwise, keep the DoJ out of it, and stop threatening the death penalty every time a corporation burps.

And before anyone reminds me how evil corporations can be, I’m well aware that they suck. But without them, millions of people would be unemployed, the goods we buy regularly would be far more expensive, research and development would be limited to things we can build in a garage and there would be no one to build the infrastructure that allows them to sell us overpriced and underperforming goods and services.  So I hate them as much as anyone, but I also realize that we would still be farming the back 40 without them.

13 thoughts on “The Tyranny of Deferred Prosecution Agreements

  1. Scott Morrell

    So are you suggesting to reduce corporate regulations on the big banks and investment firms, and if they commit a crime, then prosecute them?

    On the one hand, you suggest that corporations need to make a profit to stay in business, and over burdensome regulations inhibit that from occurring. On the other hand, too little regulations – the lack thereof which caused the financial meltdown with credit swap derivatives – would be a calamity for the entire economy.

    It is a conundrum. How do we put in place big enough disincentives to prevent the ‘too big to fail corporations” from committing crimes without stifling corporate incentives to maximize profits?

    Maybe it is simply time to redefine the term “monopoly” and break up these huge companies before they cause irrevocable harm. This way there will be no need for absurd regulations.

    1. SHG Post author

      There was once a time when banks were, you know, banks. The problem arises when we go down the slippery slope of drawing bright lines beyond which corporations cannot go, and creating 35,000 regulations covering every aspect of their existence to be enforced via criminal sanctions.

      Criminal law is a bludgeon, and when it has disastrous unintended consequences, its proponents invariably assert that the solution is yet more of the same, creating yet more disastrous unintended consequences. What’s missing from this experiment is the idea that maybe the answer lies in far more limited use of law as the path to Nirvana, and bear the consequences that are beyond the government’s ability to control.

      1. Scott Morrell

        But your solution still leaves the big banks and investment firms operating freely with too much risk to our economy. Wouldn’t the correct compromise be a means test, whereby big institutions “too big to fail” must be broken up rather than operate under an arcane regulatory system?

        1. SHG Post author

          If I was a communist, yes. But I’m not. On the other hand, our “big institutions” compete with other country’s “big institutions,” who wouldn’t be under our jurisdiction in any event. Pick your poison.

          1. Scott Morrell

            I see your point. So are there no good options? It seems like a zero sum game against the taxpayers. The super powerful win all the time. The big institutions do not have to take the full risk, yet receive a massive reward commensurate to the real risk. Does not sound like Adam Smith’s invisible hand at play. It actually feels anti-Capitalism.

            Where do I go to get a loan from a bank with no collateral and very high risk, and if I fail, the bank wlll go into their vault and loan me the same amount of money on the same terms?

            What a deal!

            1. SHG Post author

              Not entirely. Point remains that a line gets drawn and, if they go over the line, they get prosecuted for real (including the individuals involved) and the outcome could be catastrophic. We just need to delineate what’s worthy of death and what’s not.

              As an aside, this is where constitutional rights piss people off. We love ’em until they get in the way of something we really want to get done. Then they suck and it’s all wrong. We have to take the good with the bad. There is no perfect world, and all efforts to create one invariably create new, unanticipated problems.

            2. Scott Morrell

              True. There are no utopian economic systems. Not sure i see the constitutional dilemma (I am not a lawyer). It seems you are advocating an economic principle rather than a “rights” principle. Advocating against the “death penalty bludgeon” on these big institutions is a blend of socialistic and capitalistic models. An efficient capitalistic economy would allow these banks to fail while limiting their power with anti-trust laws. Your point regarding competing with other economies around the world that are supported by their governments is true, but don’t those institutions ultimately fail due to their allocative inefficiencies on their societies?

              I guess it is hard to accept that the best solution is crony capitalism!

              Nice debate though and something to ponder.

  2. Peter Orlowicz

    “If a corporation goes all Arthur Andersen on society, then so be it. The crime was that bad that the corporation deserved to go under.”

    Does it matter in this context that the jury verdict was set aside because of faulty jury instructions that didn’t require a finding of mens rea?

    1. SHG Post author

      The back end irony of the Arthur Andersen prosecution reflects that criminal laws were never meant to apply to corporations, and don’t work well. All the more reason to be far more circumspect about how many thousands of crimes exist, and how trivial so many of them are.

      1. John Barleycorn

        Cheers to that! I reckon we could even go a step further and get by with a few hundred guide lines and a handful of “crimes” even. But what about all the jobs that would be lost if we took that approach and what about all those pension plans?

        Well at least you weren’t trying to get your Jean Rostand on with your entire last paragraph or were you? “Kill one man, and you are a murderer. Kill millions of men, and you are a conqueror. Kill them all, and you are a god.”

        Define the crime, sanctions and punishment or get your small “a” anarchist overalls pressed and ready for the dance.

        But, but, there are millions of jobs that will be lost and we won’t be able to buy nice things…. is complete bullshit.

        Markets clear if you allow them to be markets esteemed one and for that matter there nothing wrong with wearing a pair of pressed overalls to the dance.

        P.S. Did you not learn anything about tractors when you were in Finland?

    2. Bartleby the Scrivener

      While I am generally on the side defending corporations against their accusers and cannot speak to the legality of what Arthur Andersen did, the stuff Enron was doing (and Arthur Andersen supported) was, from an accounting and finance perspective, horrendous…and AA should’ve known better and done a proper job in their audits. While I don’t say they should’ve been convicted (I’ll go ahead and defer to the Supreme Court on that one), but I’m not sorry Arthur Andersen as an organization is largely gone (and yes, I know about Accenture).

    1. John Barleycorn

      Capitol crimes & capitol punishment before the lose capitol runs amuck?

      Just the top few majority share holders and the board officers or the lot of them?

      You might be on to something here but what to do about all those pension plan members and individual mutual fund holders that own a piece?

      Think I should dig deep and employ me a few lobbyists to do some buying in the halls of congress and then get busy with breaking ground on a coliseum or two in South Dakota, Nevada, and Delaware?

      Let the games begin just in time for the next election circus too. Think of all the money to be made…

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