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In the early common law, corporations were not subject to criminal liability. In America, as business corporations came to dominate the private-sector economy, corporate criminal liability emerged, first with respect to strict-liability offenses, then more generally. Public companies, in particular, have been attractive targets for prosecutors. Prosecutions of public companies receive prominence in the news media, and thereby serve the general deterrent. Because a corporation has no Fifth Amendment privilege and because the actions of its employees acting within the scope of their employment and for the benefit of the corporation generally are attributable to the corporation, it usually is far easier for prosecutors to develop sufficient evidence against a corporation than against individual corporate officers and employees. A corporation cannot testify in its own defense but must rely on individuals, who may not be available to it (because, for example, they are asserting their Fifth Amendment privilege). Generally, juries are likely to be less sympathetic to a corporation than to an individual. Although corporations cannot be imprisoned they can be ordered to pay large fines, which can justify expanded budgets for prosecutors’ offices. The pendency of a criminal charge creates uncertainty, which the securities markets punish, and therefore public companies facing a large fine are more likely to plead guilty than are individuals facing lengthy imprisonment. Thus, it was recently reported that, of the 30 companies in the Dow Jones Industrial Average-the elite among American public companies-nine (30%) have criminal convictions. Corporate Crime Reporter, June 27, 2005 at 3. Reasons not to prosecute corporations Prosecutions of public companies and resulting convictions (generally by plea), however, commonly cause serious and unjust collateral damage to innocent parties. They harm all or some of the companies’ innocent constituencies: employees, retirees and other creditors (if the weakened company becomes bankrupt), shareholders (who may not have benefited from the wrongdoing, or whose unknowing benefit may already have been wiped out by disclosure of the wrongdoing), those customers particularly dependent on the company (if it can no longer meet their needs), and communities where the company had facilities that will be closed due to the criminal conviction (because, for example, the company can no longer sell to the government). The clearest example of collateral damage from prosecution of an institution is Arthur Andersen, which was not a public company or even a corporation, but an LLP. The prosecution destroyed the firm, put out of work thousands of Andersen employees who had no involvement in the conduct that led to the prosecution, and significantly reduced the number of large accounting firms available to meet the needs of large corporations. In general, prosecutions of public companies weaken institutions that, if properly managed and operated, are important to the efficient performance of our economy and to the livelihoods of many people. The Justice Department’s position is that although “[v]irtually every conviction of a corporation, like virtually every conviction of an individual, will have an impact on innocent third parties, and the mere existence of such an effect is not sufficient to preclude prosecution of the corporation,” “collateral consequences, including disproportionate harm to shareholders, pension holders and employees not proven personally culpable and impact on the public arising from the prosecution” are one of nine factors to be considered “in reaching a decision as to the proper treatment of a corporate target.” Memorandum from Deputy Attorney General Larry D. Thompson to Heads of Department Components and U.S. Attorneys 3, 12, (Jan. 20, 2003). In most cases, there is an enormous difference in scale between the collateral damage from prosecution of an individual and that from prosecution of a public company. In recent years, the department has increasingly applied to public companies the technique of deferring prosecution. The government and the defendant company enter into a deferred prosecution agreement. The agreement provides for the filing of a criminal information against the company, which is to be held in abeyance for a specified period during which the company is to carry out undertakings set forth in the agreement. The district court in which the criminal information is filed approves the agreement under 18 U.S.C. � 3161(h)(2), retains jurisdiction, and, then, on motion of the government after the end of the specified period, dismisses the information with prejudice if all the undertakings have been performed. For an example of such an agreement, see: http://www.usdoj.gov/usao/mss/documents/-pressreleases/octo-ber2004/was15759061.pdf. The heart of the agreement is the set of undertakings to be performed by the company. Commonly, they include acknowledgement of responsibility for the conduct charged in the information, a monetary payment to the government, cooperation with the government in its investigation of individuals, payment of at least some restitution, avoidance of criminal conduct during the deferral period and changes in corporate governance intended to prevent future misconduct. From agreement to agreement, these types of provisions vary in scope and severity. For a recent example with elaborate provisions, see: http:// www.bms.com/static/pdf/dpa.pdf. Through a deferred prosecution agreement, the government can achieve essentially everything it could achieve through a successful prosecution and some things it could not-except a formal adjudication of guilt and judgment of conviction. Because it is not extracting from the company a guilty plea, the government presumably is extracting other provisions as compensation. Indeed, it is likely that, to protect their own reputations for making good judgments about disposition of criminal cases, prosecutors will demand more stringent corporate-governance provisions in deferred prosecution agreements than in plea agreements, in order to maximize the likelihood that a company will avoid further crimes. The company gives up at least as much as it would in a plea agreement- except the plea, itself, and the resulting judgment of conviction. Moreover, the prosecution can be reinstated (with the company’s admissions) if, during the deferral period, the undertakings are not performed fully. Thus, the company and its constituencies bear all the burdens, and suffer all the harms, that would flow from a plea agreement, and the additional risk of reactivation of the deferred prosecution-except those that would flow from a plea and conviction. For a company, is there a material difference between a deferred prosecution agreement and a plea agreement? Sometimes yes; sometimes no. Professor Henry M. Hart Jr. emphasized that the formal societal condemnation of wrongdoer and conduct is the primary sanction of the criminal law, from which the other sanctions (e.g., fine, imprisonment) follow. For some companies, avoidance of that formal condemnation may result in institutional survival rather than destruction. In some circumstances, avoidance of a conviction is avoidance of a debarment or disqualification that, as a matter of law, necessarily follows from a criminal conviction. In other circumstances, however, the company’s public admission of the conduct described in the information may have the same practical effect as a formal plea and conviction: massive loss of business through discretionary debarment or otherwise, and/or massive civil liability, and destruction of the company. In some fields of activity, a reputation for probity is so important that survival of the company may depend on resolution of a criminal investigation through a nonprosecution agreement, perhaps with civil remedies. Advantages of a deferred prosecution agreement As compared to a plea agreement, a deferred prosecution agreement may offer some advantages. The very fact that the government has not demanded a plea invites an inference that the prosecutors have concluded that the company’s conduct, though wrongful, was not so egregious as to warrant full prosecution, and that the company is neither pervasively criminal nor incorrigible. The reputations of the latter may benefit from that difference. Finally, the corporate-governance provisions in a deferred prosecution agreement may help reassure markets and others that a recurrence of criminal conduct at the company is very unlikely. Corporate governance provisions in a plea agreement are merely part of the punishment, part of the negotiated price the company has to pay to terminate the matter. No one has, in effect, made a bet that they will prevent future misconduct. In approving a deferred prosecution agreement, however, both the prosecutors and the company’s management and board presumably are of the view that they will prevent a recurrence during the deferral period. Because a failure of the governance provisions to prevent criminal conduct during that period would result in reinstitution of the prosecution (and prosecution for any new crimes), the prosecutors and the company are betting that they will not fail. The company’s willingness to make that bet and its incentive to make sure that the bet succeeds may provide some extra measure of comfort to outsiders evaluating the company. Although the company bears the risk of the bet failing (a risk a company that pleads does not bear), the prosecutors’ participation in the agreement invites an inference that they think the risk small (otherwise they would not have agreed to defer their prosecution). Richard M. Cooper is a partner at Williams & Connolly of Washington. He can be reached via e-mail at [email protected].

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