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Summary

In a recent internal memorandum on the subject of corporate crime, the Justice Department has revised its advice to federal prosecutors deciding whether to prosecute a business organization. The revisions are significant because they require heightened scrutiny of the "authenticity" of an organization's willingness to cooperate in the investigation as well as a more searching assessment of the independence of an organization's board of directors and internal auditors. The memorandum re-emphasizes the Department's determination to be aggressive in using the criminal law to change corporate behavior.

According to the Department, as a matter of law, a business organization can be charged and convicted of a crime whenever any of its directors, officers, employees or agents commits an illegal act within the scope of his duties and the act was intended, at least in part, to benefit the business organization. Thus, a business organization is exposed to the potential threat of criminal prosecution even when a low-level employee, acting without any supervisory authorization, commits a crime which slightly benefits the organization.

As a matter of discretion, a federal prosecutor will consider many factors in deciding whether the business organization - in addition to, or instead of, the responsible individual(s) - will be prosecuted. These factors include:

• The nature and seriousness of the offense, including the risk of harm to the public.
  
• Whether management was involved in, or condoned, the illegal activity.
  
• Whether there exist adequate non-criminal remedies, such as civil or regulatory enforcement proceedings.
  
• Whether prosecution of the responsible individuals is sufficient to vindicate the federal interest at stake.
  
• The nature and extent of the collateral consequences to prosecution of the business organization, such as loss of state licenses, federal contract debarment, and disproportionate harm to shareholders, employees and pension recipients.
  
• The remedial steps taken by the organization following discovery of the illegal conduct, such as discipline or discharge of the responsible person(s), implementation, or improvement, of a compliance program, and prompt payment of restitution.

Three additional factors to be considered by federal prosecutors are more provocative:

• The business organization's timely and voluntary disclosure of the wrong doing and its willingness to cooperate in the criminal investigation of the responsible individuals, including identifying the culprits, making witnesses available and waiving the organization's attorney-client and work-product privileges. Thus, the federal prosecutor will be looking for the organization to disclose its internal investigation in order to avoid prosecution. Because such a waiver could extend to subsequent civil litigation arising out of the illegal activity, the collateral financial consequences of making such a waiver could be substantial.
  
  In addition, federal prosecutors are now advised to consider whether, although purporting to cooperate, the organization in fact has impeded the federal investigation by engaging in such conduct as making "overly broad assertions of corporate representation of employees or former employees"; giving "inappropriate directions to employees or their counsel, such as directions not to cooperate openly and fully with the investigation including, for example, the direction to decline to be interviewed"; "making presentations or submissions [to the prosecutor] that contain misleading assertions or omissions"; and providing "incomplete or delayed production of records."
  
• The adequacy of an organization's existing compliance program. In this regard, federal prosecutors are now advised to look behind the program as it exists on paper and to make assessments about the independence of the organization's board of directors, the independence of the organization's internal auditors, and the methods by which material information is provided by the organization to its board and management so they can comply with the law, and whether such information is provided in a timely fashion.
  
• The organization's history of similar wrongdoing, including prior criminal, civil, and regulatory enforcement actions against it. Because many organizations have some kind of prior track record with federal or state government regulators, such as environmental or OSHA violations, or they may have settled a securities enforcement action via a consent order which may or may not include an injunction, this history factor may make the prosecutor decide to go criminal with the next similar infraction. In addition, when an organization considers settlement of a regulatory enforcement action, thought should be given to the effect the settlement may have on a federal prosecutor considering a future similar infraction.
  

For More Information

Should our clients become the subject of a criminal investigation, we can help them understand the nature and scope of the investigation and provide counsel on the formulation of an effective defense strategy. We advise businesses on internal corporate investigations for potential violations of federal and state criminal laws; on the development of antitrust compliance programs that may lead to reduced fines and penalties under the federal sentencing guidelines; and on responding to investigative demands from federal and state enforcement officials. We represent businesses under investigation for, or charged with, securities, bank, health care, customs, government contract or insurance fraud, tax evasionor violations of environmental laws and other crimes; in civil RICO, false claims, forfeiture and various civil enforcement proceedings; before grand juries investigating price-fixing, bid-rigging and other violations of the federal antitrust laws; and indicted for violations of the federal antitrust laws.

Please contact Norman A. Bloch, Barry M. Block, or Stephen J. Butler or any member of our Antitrust, Competition & Distribution practice group for more information.

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This advisory may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgement of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel. This document may be considered attorney advertising in some jurisdictions. Some of the design images and photographs in this document may be of actors depicting fictional scenes.