By Michael D. Ricciuti, Clarence H. Brown and Leanne E. Hartmann
With the advent of the credit crisis, the Department of Justice (DOJ) – and particularly the Federal Bureau of Investigation (FBI) and the United States Attorneys’ Offices – is faced with a daunting challenge at a time of decreasing budgets and strained resources. DOJ’s resource shortage presents an enhanced strategic opportunity to corporations who suspect that they are at risk for investigation or prosecution for criminal activity – or have been victimized by it. In brief, sometimes the distinction between a criminally culpable company and one that has been victimized is in the eyes of the beholder. Emphasizing the latter status serves as an opportunity.
Background. After the events of September 11, 2001, DOJ and the FBI made national security their top priority, but with a more refined focus. No longer was it enough for DOJ to investigate and prosecute terrorists. Instead, DOJ now seeks to prevent acts of terrorism – a far more difficult task than merely prosecuting terrorism, which are among the most challenging criminal cases. Unsurprisingly, to fulfill this aggressive mission, a huge portion of the resources of the FBI and DOJ were redeployed to fight terrorism. Now, with the massive credit crisis to contend with, DOJ and FBI have opened a series of financial investigations, reportedly involving Freddie Mac, Fannie Mae, Lehman Brothers, and AIG, among approximately 1,500 others. Reports indicate that the FBI plans to double the number of agents focusing on financial crime, but also make clear that the FBI has hundreds fewer agents focused on this work than it did during the financial crisis involving savings and loans in the 1980s. It will be extremely challenging for the government to find the resources to handle these new complex and difficult cases.
Internal Investigations: Defensive Use. As discussed in the previous Global Financial Markets Group newsletter, the government has wide authority to bring charges in the corporate criminal context, but its own policies restrict its power to do so. In brief, a corporation may be criminally liable for the conduct (or omissions) of its agents committed within the scope of their duties and intended, at least in part, to benefit the corporation. This means that, as a matter of law, the crimes of any employee in the organization, regardless of his or her position on the organization chart, may be attributable to the company and the company could thus be charged criminally for them. DOJ has the discretion to bring a criminal case against the company under these circumstances – or not to do so. Whether DOJ exercises its discretion not to charge a company depends upon its analysis of the factors under DOJ’s Principles of Federal Prosecution of Business Organizations (“the Principles”). The Principles put a premium on a company’s cooperation in helping DOJ investigate the alleged crime – exactly the type of cooperation DOJ sorely needs now that it is facing a global financial crisis and its own resource shortage.
Revised this past August, the Principles recognize that corporate crime is more difficult to investigate than crimes committed by individuals. As the Principles note:
In investigating wrongdoing by or within a corporation, a prosecutor is likely to encounter several obstacles resulting from the nature of the corporation itself. It will often be difficult to determine which individual took which action on behalf of the corporation. Lines of authority and responsibility may be shared among operating divisions or departments, and records and personnel may be spread throughout the United States or even among several countries. Where the criminal conduct continued over an extended period of time, the culpable or knowledgeable personnel may have been promoted, transferred or fired, or they may have quit or retired.
Because of these difficulties, the Principles acknowledge that “a corporation’s cooperation may be critical in identifying potentially relevant actors and locating relevant evidence, among other things, and in doing so expeditiously.” (For more information regarding the Principles, see the United States Attorney’s Manual, Title 9, Chapter 9-28.700 et seq.)
From a defensive perspective, then, the company may seek to curry favor from DOJ and avoid being criminally charged through its cooperation. In cooperating under the Principles, a company with a good track record of compliance seeks, in essence, to demonstrate to the government that it should not be charged criminally on the basis of an employee’s criminal acts because that employee’s activities are inconsistent with the company’s otherwise positive compliance record, among other factors. Typically, conducting an independent internal investigation is a critical initial element in the company seeking credit for cooperation. Through an investigation of itself, the company discovers the relevant facts and – if it chooses to do so – can provide DOJ with a roadmap of the potential case from it. From DOJ’s perspective, cooperation credit is awarded where the corporation “timely disclosed the relevant facts about the putative misconduct” – and can result in DOJ not seeking to prosecute an otherwise well-run, compliant company because of its cooperation, among other factors.
There are significant risks to providing this cooperation. For instance, preparing an internal investigation develops a factual record which private litigants may later use to assert claims against the company and its officers and directors. Even so, with DOJ in short supply of agents to perform detailed investigations, providing this cooperation may be at a premium for the government – and may earn companies significant consideration when DOJ decides whether to bring criminal charges against the corporation. With an internal investigation in hand, companies can also often reap other benefits, such as identifying personnel who should be terminated for misconduct and deficient systems and procedures that need improvement, preparing earlier for shareholder and third-party litigation, and permitting the company to more effectively assist its board members, officers and employees in preparing for and giving testimony.
Internal Investigations: Offensive Use. There is also an offensive aspect to the use of internal investigations that is often overlooked. A company that suffers from the criminal conduct of an employee may be a defendant in a resulting prosecution – but may also be a victim of the wayward employee’s criminal acts. The company’s status as a victim is a fact on which the government does not always focus. A company thus should consider whether to use an internal investigation to proactively prod the United States Attorney’s Office to bring a criminal case against the employee wrongdoer. When the government is strapped for resources, it will often look favorably on a completed investigation that shows readily provable criminal wrongdoing, which will increase the likelihood that the government will take the case and prosecute it. Offensive use of the internal investigation accomplishes at least three goals:
First, it makes it clear to DOJ that the company should not be viewed as a potential defendant but rather as a victim, and, as such, is entitled to victim’s rights, to include the right to restitution from the employee. In a fraud case, where an employee has made off with company funds, a court in sentencing a convicted employee wrongdoer is empowered to order restitution as an element of the criminal judgment – forcing the employee to repay the company through a restitution order enforced by the Probation Department, U.S. Attorney’s Office, and the Court. Such an order saves the company from pursuing repayment from the employee civilly, often an expensive and fruitless endeavor.
Second, seeking prosecution from the government is often relatively inexpensive. Once the internal investigation is done by the company, and the government accepts the case for prosecution, it is the government that bears the costs of the prosecution. The company only needs to cooperate with the government, typically far cheaper than defending itself and its employees in a criminal probe.
Third, a prosecution of a criminal employee sends a very clear message to other employees and to the government that the company will not tolerate criminal wrongdoing and will take very aggressive action against those who violate the rules. There can be no clearer zero-tolerance approach for criminal activity.
Conclusion. With DOJ facing a likely crush of new financial crimes cases, companies with potential exposure need to consider their options strategically. One important option is a credible, independent internal investigation done early and proactively, which can provide the company with both defensive and offensive benefits.
