In Corporate Crimes, Individual Accountability Is Elusive
And this week, he pledged a renewed effort to bring cases against individuals responsible for financial fraud, calling on federal prosecutors to “try to develop cases against individuals and to report back in 90 days.”
Forgive me if I don’t hold my breath.Yes, plenty of people have been prosecuted for mortgage fraud and other financial crimes since the financial crisis: The Justice Department has charged over 4,000 people with mortgage fraud alone, according to a spokesman. And the department has filed 46,000 white-collar crime cases since 2009.
Yet almost all of these are low-level employees with little or no name recognition. Hardly any top executives at the financial firms paying multimillion- and billion-dollar-plus fines for engaging in criminal behavior have been charged or convicted. (One exception is Lee B. Farkas, former chairman of the mortgage firm Taylor, Bean & Whitaker, who is serving a 30-year prison term.)
Now, thanks to Brandon L. Garrett, a specialist in corporate prosecution at the University of Virginia law school and author of the recent book “Too Big to Jail,” we know the notion that the government has been lax on individual corporate wrongdoers isn’t just folk wisdom.
Professor Garrett analyzed 303 nonprosecution and deferred prosecution agreements with corporations from 2001 to 2014 in which companies avoided guilty pleas by paying fines and agreeing to other measures. It would seem axiomatic that in all of those cases, individuals actually committed the crimes, since corporations are legal entities and can’t be charged unless their employees engaged in wrongdoing. Yet Professor Garrett found that individuals were charged in only 34 percent of the cases. And of those, only 42 percent received any jail time.
“More often than not, when the largest corporations are prosecuted federally, individuals aren’t charged,” Professor Garrett said. Not only that, in most cases, those people are not even identified. In the S.&P. case, the Justice Department trumpeted that the company had admitted to a statement of facts, but it contains only vague references to a “client value manager,” a “managing director” and an “executive managing director.”
“Why not include their names in the statement of facts?” he asked. “The Justice Department could at least describe what happened and who did it.”
The S.&P. investigation is pending, so individual civil charges could still be forthcoming. But the track record in other big cases isn’t encouraging.
In the 2008 Siemens foreign bribery case, at the time the biggest bribery case ever, the German conglomerate pleaded guilty in a United States court and paid over $1.6 billion in fines. “Even though it was the biggest bribery case of all time, not a single individual has been convicted” in the United States, Professor Garrett noted. (Two lower-level employees were found guilty in Germany, but they were sentenced to probation. In the United States, eight individuals were charged but those cases have stalled.) No top official was held criminally accountable.
A particularly egregious example is Pfizer, the large pharmaceutical company, which appears to have been a serial offender despite a string of nonprosecution agreements and guilty pleas in which it promised to behave better. In the most recent instance, in 2009, a Pfizer subsidiary pleaded guilty and Pfizer paid $2.3 billion, including a criminal fine of $1.2 billion, for bribing doctors to prescribe an off-label painkiller and an antipsychotic drug. Despite the company’s recidivism, none of its senior executives have ever been charged or convicted. “They never seem to go up the chain when it involves big pharma,” Professor Garrett noted.
In an earlier column, I noted that Tyson Foods entered into a deferred prosecution agreement and paid a $4 million fine in 2011 after disclosing what would seem to be an open-and-shut case of bribery at its Mexican subsidiary. Not only were no individuals charged or even named, but the highest-ranking executive involved took early retirement and got a send-off that would be the envy of any law-abiding employee: $1 million in cash, a $3.6 million consulting deal, reimbursement of his country club dues and use of the corporate jet.
Reviewing Professor Garrett’s book in The New York Review of Books, Judge Jed S. Rakoff of Federal District Court, who has also criticized the paucity of individual prosecutions for corporate crime, observed that “the impact of sending a few guilty executives to prison for orchestrating corporate crimes might have a far greater effect than any compliance program in discouraging misconduct, at far less expense and without the unwanted collateral consequences of punishing innocent employees and shareholders.”
But diagnosing the problem may be easier than curing it. “Our responsibility is to bring cases when the evidence and the law support it, and we have done that in record numbers in the white-collar area over the last five years,” said Peter Carr, a Justice Department spokesman. “When the evidence and the law support it, we have not and will not hesitate to bring cases against anyone, regardless of his or her position. And if the evidence and the law do not support it, we will not bring charges, regardless of the popularity of such restraint.”
David A. O’Neil, a former head of the Justice Department’s criminal division, agreed.
“Every prosecutor would prefer to bring a charge against individuals than against corporations,” said Mr. O’Neil, who joined the law firm Debevoise & Plimpton in January. “It’s not that there’s a preference to go after corporations. That may be the reality due to the difficulties of particular cases, but every prosecutor would prefer to bring a charge against the culpable individual.”
There’s no question that many corporate cases pose unusual practical difficulties, especially in prosecuting high-level executives. The entire structure of a corporation is intended to protect and insulate high-ranking executives, who are often shielded from knowledge of wrongdoing, even if they have tacitly approved it. Many illegal acts take place in foreign jurisdictions, where evidence is difficult to obtain and individuals may be hard to extradite. Sometimes, by the time evidence is obtained, the statute of limitations has expired. Many corporations pay the legal expenses for employees accused of crimes, which means they have virtually unlimited resources to mount a defense and tie up prosecutions for years. And the Justice Department, large and powerful as it is, doesn’t have unlimited resources.
I asked Professor Garrett what he has been told. “I’ve talked off the record to prosecutors,” he said. “Some say they don’t have the resources. It’s one thing to settle with a big company and another thing to do serious investigations of dozens of people. Others say these aren’t really intentional crimes, or it’s difficult to establish intent in individual cases. Others just repeat the party line, which is, ‘We target individuals whenever we have the evidence.’ All of those are probably true to some extent.”
Attorney General Holder said this week: “To the extent that individuals have not been prosecuted, people should understand it’s not for lack of trying. These are the kinds of cases that people come to the Justice Department to make. Young people who want to be assistant U.S. attorneys in the Southern District of New York and Eastern District of Virginia, San Francisco, live for these big cases. The inability to make them, at least at this point, has not been as a result of a lack of effort.”
There are signs of progress. Late last year, Donald L. Blankenship, former chief executive and chairman of the coal producer Massey Coal, was indicted on multiple counts of violating mine safety standards after a 2010 explosion killed 29 miners in West Virginia. Criminal indictments of chief executives are rare, especially in the coal industry, prompting The Charleston Gazette to characterize the indictment as “momentous.” With so many of what look to be slam-dunk cases pending — the various rigging cases involving foreign currencies and interest rates to which banks have pleaded guilty or entered into settlement agreements, and the Walmart foreign bribery scandal, to name a few — the department has an opportunity to show some backbone.