In the early 2000s, an isolated event occurred which caused the DOJ to reconsider its traditional approach to resolving alleged instances of corporate criminal liability.
Upon being criminally indicted, Arthur Andersen exercised its constitutional right to a jury trial and put the DOJ to its burden of proof and in 2002 the jury criminally convicted the business organization of obstruction of justice. As a result of the criminal charges and criminal conviction, Arthur Andersen suffered numerous collateral consequences, including the loss of its certified public accounting license and the resulting inability to audit public companies.
In short order, Arthur Andersen laid off thousands of employees and effectively went out of business in 2002. Ultimately in 2005 the Supreme Court unanimously reversed Arthur Andersen’s conviction; however, the near immediate negative consequences of the criminal charges and conviction had already occurred and could not be reversed.
The perceived “Arthur Andersen effect” (i.e. that criminal charges alone, and certainly criminal convictions, could be the death sentence of a business organization) caused the DOJ to reconsider its historical binary option (charge or not charge) to resolving alleged instances of corporate criminal liability.
The non-prosecution agreement and deferred prosecution agreement thus began.
The DOJ’s implicit policy assertion that NPAs and DPAs were needed to avert another “Arthur Andersen effect” was quickly embraced by the legal practitioners — perhaps because they stood to benefit from NPAs and DPAs because the agreements expanded the market for legal services — and the “Arthur Andersen effect” became accepted as a sort of gospel truth.
Even as the isolated 2002 Arthur Andersen demise faded into history, the DOJ continued, over a decade later, to keep the perceived “Arthur Andersen effect” alive to justify its use of NPAs and DPAs.
For instance, in 2012 then Assistant Attorney General Lanny Breuer stated:
“I personally feel that it’s my duty to consider whether individual employees with no responsibility for, or knowledge of, misconduct committed by others in the same company are going to lose their livelihood if we indict the corporation. In large multi-national companies, the jobs of tens of thousands of employees can be at stake. And, in some cases, the health of an industry or the markets are a real factor. Those are the kinds of considerations in white collar crime cases that literally keep me up at night, and which must play a role in responsible enforcement.”
However, DOJ officials could have slept better at night because the “Arthur Andersen effect” that served as the DOJ’s primary policy justification for using NPAs and DPAs for over a decade was a fallacy and was debunked in an excellent 2012 article titled “Arthur Anderson and the Myth of the Corporate Death Penalty.” (See here for the prior post).
The “Arthur Anderson effect” not only guided the DOJ’s behavior, but also the behavior of the corporate community as excessive risk aversion became the name-of-the-game in corporate boardrooms across America.
After all, if a business organization became the subject of criminal scrutiny, yet disagreed with the DOJ’s view of the facts or legal positions, the business organization – per the prevailing “Arthur Andersen effect” theory – could not aggressively mount a legal defense because the company would suffer a sure corporate death upon being criminally indicted.
Most all corporate decisions makers – often guided by counsel who were the products of the cooperate and settle culture – rolled over and played dead and forked over millions of dollars in shareholder money to make the DOJ go away. The DOJ extracted it “pound of flesh” and the company could legitimately say that it was never criminally prosecuted because the resolution vehicle was an NPA or DPA.
The open question however from this game was whether the company even engaged in criminal conduct and whether the DOJ would have ever prevailed if put to its burden of proof.
In July 2014 the DOJ criminally charged FedEx, a large publicly-traded corporation, “with conspiracies to traffic in controlled substances and misbranded prescription drugs for its role in distributing controlled substances and prescription drugs for illegal Internet pharmacies.” Soon thereafter, the DOJ added money laundering charges.
In response, FedEx issued a statement which stated, in pertinent part, as follows.
“FedEx is innocent of the charges brought today by the Department of Justice. We will plead not guilty. We will defend against this attack on the integrity and good name of FedEx and its employees.”
While the FedEx enforcement action was outside the Foreign Corrupt Practices Act context, it was closely followed on FCPA Professor.
As noted in this July 2014 post, upon being indicted – and contrary to the Arthur Anderson effect – FedEx stock was still trading, it was still employing people, and it was still operating its business.
The message to corporate boards, audit committees, and other corporate leaders should have been clear.
Yes, there are “carrots” and “sticks” which motivate risk-adverse business organizations to do things regardless of the law or facts in any particular matter. However, fighting back against what the company perceives to be aggressive and overzealous DOJ theories is an acceptable and viable option in many cases despite speculative doomsday scenarios to the contrary.
I noted back in July 2014 that if more companies would do what FedEx is doing in the FCPA context. and thereby expose certain DOJ and SEC theories of enforcement, I am confident of one thing. This “new era” of FCPA enforcement would look different than it does today.
In this regard, I stated that the business community is, at least in part, responsible for the current aggressive FCPA enforcement climate. Indeed, as Homer Moyer, a dean of the FCPA bar, observed:
“One reality is the enforcement agencies’ [FCPA] views on issues and enforcement policies, positions on which they are rarely challenged in court. The other is what knowledgeable counsel believe the government could sustain in court, should their interpretations or positions be challenged. The two may not be the same. The operative rules of the game are the agencies’ views unless a company is prepared to go to court or to mount a serious challenge within the agencies.”
In July 2014, I tipped my hat to FedEx, its board, counsel and corporate leaders for having the courage of conviction and not rolling over and playing dead in the face of DOJ scrutiny.
I tip my hat once again.
Earlier this week the DOJ’s criminal trial began. (Even before the trial began, U.S. District Court Judge Charles Breyer (N.D.Cal.) dismissed several of the criminal charges on statute of limitations grounds).
FedEx waived its right to a jury trial opting instead for a bench trial before Judge Breyer.
Early in the trial, it was reported that Judge Breyer said FedEx was “factually innocent.”
As has been widely reported (see here, here and here for example), the case then took a stunning turn as earlier today the DOJ dropped all criminal charges against FedEx.
According to reports, Judge Breyer stated: “The dismissal is an act, in the court’s view, entirely consistent with the government’s overarching obligation to seek justice even at the expense of some embarrassment.”
FedEx issued this release which states, in pertinent part, as follows.
“FedEx is and has always been innocent,” said Patrick Fitzgerald, Senior Vice President, Marketing and Communications, FedEx. “The case should never have been brought. The government should take a very hard look at how they made the tremendously poor decision to file these charges. Many companies would not have had the courage or the resources to defend themselves against false charges. The power of the government was greatly misused when the case was initiated, but the government’s integrity was redeemed by the decision to dismiss the charges today.”
R.I.P. Arthur Anderson effect.
The message to corporate boards, audit committees, and other corporate leaders should have been clear.
Yes, there are “carrots” and “sticks” which motivate risk-adverse business organizations to do things regardless of the law or facts in any particular matter. However, fighting back against what the company perceives to be aggressive and overzealous DOJ theories is an acceptable and viable option and the “Arthur Anderson effect” is dead.
In the FCPA context, if more companies would do what FedEx did, and thereby expose certain DOJ and SEC theories of enforcement, the current FCPA enforcement landscape would look much different.
*****
Another enforcement action that FCPA Professor has been following involves Pacific Gas & Electric Corporation (PG&E). As highlighted in this post, in April 2014 the publicly-traded company was criminally charged with multiple violations of the Natural Gas Pipeline Safety Act. Shortly thereafter, the DOJ brought additional criminal charges for obstruction of the investigation of the National Transportation Safety Board, as well as additional violations of the Natural Gas Pipeline Safety Act.
Yesterday, also in the N.D. of California, the criminal trial began.
