Prosecution Of Frauds And Crimes In The C-Suite: What Can We Learn From These Cases And Trends?

The press, members of Congress, and judges have become increasingly vocal in condemning what they perceive to be inadequate criminal prosecution of executives responsible for corporate crimes. In response, U.S. Department of Justice (DOJ) officials have consistently stated that prosecuting such individuals is a high priority. The opposing views highlight the tension between public pressure to hold high-profile executives responsible, and DOJ's need to have evidence to support a conviction (based on proof beyond a reasonable doubt) before proceeding with a criminal prosecution.

In particular, the DOJ's increased use of Deferred Prosecution Agreements (DPAs), Non Prosecution Agreements (NPAs), and civil settlements to obtain record fines and penalties from corporate defendants has been highly controversial. Criticism and calls for more vigorous prosecution of executives have come from the press, members of Congress, and judges. The New York Times, Op Ed columnist, Joe Nocera wrote,

corporate executives need to be prosecuted when corporate crimes take place. It sends a signal to every other executive about what is — and is not — acceptable behavior. The threat of prison can change a culture faster and more effectively than even the heftiest fine.

"Prison is what makes the difference. Otherwise, it's only money." 1

In a similar vein, Senator Arlen Spector criticized the initial absence in 2010 of any individual prosecutions in the Siemens FCPA case, and demanded an explanation for why DOJ avoided charging individuals in the biggest FCPA case in history. Subsequently eight individuals were indicted; however none of the eight have been apprehended or prosecuted. 2

In another high-profile case involving HSBC, Senator Charles Grassley recently called the DOJ decision to forego individual criminal prosecutions inexcusable. He stated:

Even more concerning is the fact that the individuals responsible for these failures are not being held accountable. The Department has not prosecuted a single employee of HSBC—no executives, no directors, no AML compliance staff members, no one. By allowing these individuals to walk away without any real punishment, the Department is declaring that crime actually does pay. Functionally, HSBC has quite literally purchased a get-out-of-jail-free card for its employees for the price of 1.92 billion dollars. 3

Meanwhile in the judiciary, U.S. District Court Judge, Jed Rakoff, recently commented on his decision to deny the initial proposed Consent Judgment between the SEC and Bank of America (BAC). Judge Rakoff noted that among its flaws was "the fact that no individual was named for what the SEC asserted was a blatant fraud orchestrated from the very top." 4

Despite the public pressure, the DOJ necessarily remains constrained by the need to ensure that a prosecution is warranted by sufficient evidence, and is not merely undertaken as publicity grab. Federal prosecutors have an obligation to ensure that in exercising their discretion to prosecute or not, the decision "should promote the reasoned exercise of prosecutorial authority and contribute to the fair, evenhanded administration of the Federal criminal laws." 5 The Principles of Federal Prosecution state that prosecutors

should commence or recommend Federal prosecution if he/she believes that the person's conduct constitutes a Federal offense and that the admissible evidence will probably be sufficient to obtain and sustain a conviction, unless, in his/her judgment, prosecution should be declined because: No substantial Federal interest would be served by prosecution; The person is subject to effective prosecution in another jurisdiction; or There exists an adequate non-criminal alternative to prosecution. 6

The fact that a company has entered into a DPA or NPA does not mean, without more, that the DOJ will not prosecute responsible individuals. In fact, the standard DPA provisions require the company to cooperate with any investigation or prosecution of responsible individuals, including corporate executives. The standard DPA does not contain any agreement by the DOJ not to prosecute responsible individuals.

The continued drumbeat of public criticism, together with the DOJ's assurance that it will aggressively prosecute individuals when warranted by the evidence, portend more aggressive action to prosecute executives in the future. Recent prosecutions of C-suite executives suggest that the DOJ's public assurances are being backed up by action.

This paper offers an overview of cases and trends in the prosecution of fraud in the C-suite and in the post Enron era, and extracts from those proceedings what preventive measures corporations and executives can learn from these government enforcement actions. While increased prosecution of responsible individuals sends a strong deterrent message, prosecution by itself is not sufficient to prevent and detect fraud in the C-suite. The complex cases that are the basis for most DPAs and NPAs demonstrate a gap between those cases where C-suite executives actually committed and are prosecuted for fraud, and many other cases where executives may have condoned fraud or failed to inquire when presented with allegations or red flags of fraud, but in which the DOJ determined the evidence insufficient to successfully prosecute the executives.

The DOJ is attempting to address this gap proactively, by shifting the compliance posture of major companies, and thereby making it more difficult for senior executives to turn a blind eye to instances of fraud. The DOJ is pursuing this course through its DPA provisions, which typically require: (1) increased independence of the Chief Ethics and Compliance Officer (CECO); (2) tying executive bonuses to meeting compliance standards; and (3), implementation of "claw back" provisions related to deferred compensation bonuses of senior executives. As this trend in DPAs continues, corporate boards need to consider whether to implement such measures independently, even in companies not immediately at risk for prosecution. By doing so, boards can seek to improve...