I have long wondered (see here for a prior post) about the “shelf life” of the Arthur Anderson prosecution. In other words, how long will the 2002 prosecution and related consequences (soon after it was convicted of a criminal charge, Arthur Anderson ceased being a viable business even though the Supreme Court overturned the verdict) guide DOJ corporate charging decisions?
Against this backdrop, I was happy to be contacted recently by Gabriel Markoff, a recent graduate of the University of Texas School of Law and current law clerk at the Southern District of Texas. Today’s post is from Markoff in which he describes his research findings and discusses a working draft of his article “Arthur Anderson and the Myth of the Corporate Death Penalty: Corporate Criminal Convictions in the Twenty-First Century” see here to download.
Arthur Andersen and the Myth of the Corporate Death Penalty
The conventional wisdom states that prosecuting even the largest and most established of corporations can subject them to terrible collateral consequences that risk putting them out of business, thereby causing massive social and economic harm. Under this viewpoint, which has come to dominate the literature following the demise of Arthur Andersen after that firm’s conviction in the wake of the Enron scandal, even a criminal indictment can be a “corporate death penalty.” In fact, no less of a legal luminary than Professor and former SEC Commissioner Joseph Grundfest has stated his belief that “prosecutors can bring down or cripple many of America’s leading corporations simply by indicting them on sufficiently serious charges. No trial is necessary.” Additionally, the Department of Justice (“DOJ”) has implicitly accepted this view by declining to prosecute many large companies in favor of using deferred and non-prosecution agreements (collectively, “DPAs”). Yet there has never been any empirical evidence to support the existence of the “Andersen Effect” and the much-hyped corporate death penalty, for no one has empirically studied what happens to companies after conviction. In my Article, I do just that, and I find that—much in opposition to the warnings of extreme collateral consequences that are continually repeated in both the popular and academic literature—no publicly traded company went out of business as the result of a federal criminal conviction in the years 2001 to 2010.
I began my study by deriving a list of publicly traded companies convicted in the years 2001 to 2010 from the organizational conviction database compiled by Professor Brandon Garrett and generously made available online at the University of Virginia Law School’s library website. Public companies were defined as those that had made SEC filings and were listed on a major domestic or foreign stock exchange at the time of conviction. Companies were counted as convicted if they had been found guilty of a federal felony or misdemeanor at trial or by guilty plea. Companies that entered into DPAs were not counted as convicted. Once I derived my list, I used Google searches of business news articles, supplemented by examinations of SEC filings where necessary, to determine what had happened to the companies after they were convicted. Next, for each company that was not still in existence under the same name on the same exchange, I determined whether it had merged with or been acquired by another company under favorable conditions, or if instead it had failed. I counted a company as having failed if it went defunct, entered insolvency proceedings, or was forced into a merger or acquisition under unfavorable conditions. For each company that failed, I performed additional searches to determine whether the conviction was causally related to the failure. Finally, when the relevant plea information was available, I noted each instance where a company agreed to implement a compliance program, corporate monitor, or cooperation regime as part of its plea agreement.
To briefly summarize my most important results, I found 51 convictions of public companies between 2001 and 2010, a number that roughly tracks the U.S. Sentencing Commission’s report that 63 “openly traded” companies were convicted between 2000 to 2009. All the convictions were obtained by plea agreement, and indictments were only filed in two cases. For 36 of the 51 convictions, the convicted companies are still active on their respective stock exchanges under the same tickers. An additional 11 companies merged with another company after their conviction under favorable conditions that indicated that their health was not notably harmed by the conviction. Finally, four companies suffered business failures at some point in time following their convictions. However, not a single one of the companies failed under circumstances that could reasonable be linked to their convictions, and, in fact, only one company—Japan Airlines International—failed within three years of the date of conviction. Finally, compliance programs were put in place by plea agreement in 13 of the convictions, corporate monitors in four, and cooperation agreements in 16.
Reasonable caveats such as the possibility of selective prosecution aside, the fact remains that, if the threat of collateral consequences is as terribly dire as it is made out to be, at least some of the public companies convicted in the years 2001 to 2010 should have gone out of business as a result of their convictions. But they did not. When that fact is combined with the corresponding reality that plea agreements can be used to obtain the implementation of compliance programs and monitors just as DPAs can, the two main justifications usually cited for preferring DPAs over convictions appear groundless. That is not to say that DPAs should never be used. It is certainly possible to imagine some unique situation where a DPA would be socially and economically preferable to a prosecution and resulting conviction. But the nearly indiscriminate use of DPAs with large corporations—in contrast to the DOJ’s continued tendency to prosecute and convict small companies—that predominates today is not supportable. The stronger deterrent value of conviction should make prosecution with the goal of obtaining guilty verdicts or plea agreements the DOJ’s default method of enforcing the federal criminal law against large corporations.
It may be that the debate over the proper extent of corporate criminal liability and the use of DPAs is bound to be politically and ideologically charged. But the least that can be done is for policymakers to make decisions based on the empirical evidence, rather than on the untested dogma that has dominated the debate over the past decade. It is my hope that the results I present in my Article can make a small contribution to moving the literature in that more pragmatic—and, ultimately, more sustainable—direction.
I am happy to answer any questions that any readers may have, and I may be reached here. Thank you to Professor Koehler for allowing me this opportunity to discuss my Article.