The era of large corporate penalties certainly looks to be over, and it is an open question whether we will continue to see companies pleading guilty or settling cases with deferred prosecution agreements. The notion of not imposing costs on “innocent” shareholders has taken hold, so the large fines extracted from banks in the wake of the financial crisis and manipulation of benchmarks like LIBOR are likely a relic of a bygone era.
Whether that is good or bad is a different question, and there are reasonable arguments that corporate criminal liability is a poor way to regulate business behavior. Scaling it back substantially, however, may well send a message to companies that they need not be too worried about government enforcement imposing significant costs on the enterprise, and so executives can foster a culture that pushes the limits of the law with little fear of the consequences.
So what will ensure that corporations follow the law? The new emphasis has been on targeting the individuals responsible for a company’s violations. Send a few managers to prison, the thinking goes, and companies will straighten up and fly right. Thus, the Justice Department issued the Yates Memo in September 2015 to shift the emphasis toward individual prosecutions rather than the corporate resolutions we were used to seeing in the wake of the financial crisis.
A key feature of the new approach in the Yates Memo was that “[t]o be eligible for any cooperation credit, corporations must provide to the Department all relevant facts about the individuals involved in corporate misconduct.” Federal prosecutors were told that investigations into corporate misconduct must start by identifying individuals involved in any violations, and resolutions that did not include the prosecution of those individuals “must be memorialized and approved” by senior management in the Justice Department. Federal prosecutors are not alone in focusing on individuals. Jay Clayton, the new chairman of the Securities and Exchange Commission, said at his confirmation hearing, “I firmly believe that individual accountability drives behavior more than corporate accountability.”
Relying mainly on prosecuting individuals to police corporate misconduct assumes that someone high enough in a company to change its culture and decision-making can be charged and convicted. Even if it is possible to hold executives responsible for encouraging or at least failing to prevent misconduct, that may not deter their counterparts at other companies or in other industries.
It is, in fact, unlikely that more executives will be held accountable for corporate misconduct, which means large companies may well act with impunity. Although we may see a few mid-level executives charged with crimes, they will be far from the C-Suite. In an article published recently in the Vermont Law Review, “Why It Is Getting Harder to Prosecute Executives for Corporate Misconduct,” I raised the issue this way: “Does the shift to emphasizing individual culpability mean there will be an upsurge of prosecutions of corporate executives who oversee companies that engage in misconduct? The short answer is no.” There are any number of reasons why top management is largely immune from prosecution. The most important may be that executives who set the direction of an organization but don’t implement corporate policy or transactions have little to do with day-to-day conduct that might violate the law. The days are probably gone for seeing a chief executive like Bernie Ebbers or Jeff Skilling on trial for accounting fraud or mismarking the value of assets. Professor Samuel W. Buell, a member of the task force that prosecuted the Enron executives, recently described this as the “responsibility gap” in holding executives accountable in criminal prosecutions for corporate misconduct. These individuals cannot be convicted, except in increasingly rare cases, because for the most part they fail to take the steps necessary to ensure a corporate culture that complies with the law. As a result, “settled criminal law does not contain tools to punish this sort of thing.”
It is not just that executives are hard to reach through the criminal law. More frustrating is that senior management rarely pays a price when the company finally agrees to resolve a case. A recent article by Professor Brandon L. Garrett, whose work is well known on this Blog, and two co-authors points out that the impact on chief executives may be exactly the opposite when a company pleads guilty or otherwise settles a criminal prosecution. They note that, while some CEOs lose their jobs, “for the prosecuted firms that did not have CEO turnover after prosecution, there is little evidence of a reduction in compensation. Indeed, we observed a spike in CEO bonuses in the year of prosecution—confirming concerns expressed by judges, prosecutors, lawmakers, and academics that corporate prosecutions do not sufficiently impact high-level decision-makers like CEOs.” How often do we see a company’s stock price increase when it announces a settlement with the government, reflecting Wall Street’s desire for certainty in assessing future corporate returns rather than punishing misdeeds?
Another issue is whether we will see fewer corporate prosecutions under the new leadership of the Justice Department. No one, of course, will come out in favor of corporate misconduct, and claiming that it is equally important to punish white-collar offenses and street crime is a staple of any discussion of prosecutorial priorities. Thus, in a speech on April 24, 2017, Attorney General Jeff Sessions told an ethics and compliance conference that “under my leadership, the Department of Justice remains committed to enforcing all the laws. That includes laws regarding corporate misconduct, fraud, foreign corruption and other types of white-collar crime.”
Reassuring words, to be sure, but as our mothers and teachers used to say, “Actions speak louder than words.” And those actions do not foretell a continuing focus on corporate criminal liability. The budget request for the next fiscal year seeks a $1.1 billion cut in Justice Department funding, with a shift in emphasis to combating violent crimes and immigration-related offenses. The proposal does call for 300 new prosecutors, but they will be used to prosecute violent offenders and “to protect our borders and restore our sovereignty by prosecuting immigration law violations.” Does anyone want to hazard a guess at where the impact of the budget cuts will be felt? White collar investigations are lengthy and resource-intensive, so cutting back on them when there is push for quick results will be an easy option.
We may already be witnessing how companies that were trying to resolve investigations may shift instead toward a more aggressive stance in the hope of receiving more favorable outcomes. The New York Times reported that Devon Energy decided to re-evaluate its desire to settle environmental violations after new leadership at the Environmental Protection Agency signaled a rollback of some regulations so that it would not take as hard a line on violations. Walmart has been enmeshed in a long-running investigation of possible bribery in Mexico and elsewhere in violation of the Foreign Corrupt Practices Act, and objected to a proposed settlement with the Justice Department of as much as $1 billion. Now, the settlement amount appears to be only $300 million. That is still a lot, but for a company with annual net income of over $10 billion, it looks like a parking ticket.
Antipathy toward Wall Street remains a staple of political discourse, although a cabinet boasting billionaires and Goldman Sachs alumni and defenders in the administration suggests this is more rhetoric than an expression of actual concern with corporate misconduct. The talk has not changed, but walking back from aggressive oversight of corporations through criminal prosecution and perhaps even civil enforcement seems to be upon us.
 The actual title of the memorandum is “Individual Accountability for Corporate Wrongdoing,” and like numerous predecessors was named for the Deputy Attorney General, in this instance Sally Q. Yates. https://www.justice.gov/archives/dag/file/769036/download.
 Dave Michaels and Andrew Ackerman, “SEC Chairman Nominee Jay Clayton Calls for Scaling Back Regulations to Encourage IPOs,” Wall St. J., March 23, 2017 at 5:19 p.m., https://www.wsj.com/articles/sec-chairman-nominee-jay-clayton-says-past-wall-street-work-is-a-strength-1490281093.
 41 Vt. L. Rev. 503 (2017), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2974429.
 Samuel W. Buell, “The Responsibility Gap in Corporate Crime, Criminal Law and Philosophy (2017), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2975537.
 Brandon L. Garrett, Nan Li, and Shivaram Rajgopal, “Do Heads Roll? An Empirical Analysis of CEO Turnover and Pay When the Corporation is Federally Prosecuted,” available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2975537. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2966823.
 U.S. Dept. of Justice, “Attorney General Jeff Sessions Delivers Remarks at Ethics and Compliance Initiative Annual Conference,” April 24, 2017, available at https://www.justice.gov/opa/speech/attorney-general-jeff-sessions-delivers-remarks-ethics-and-compliance-initiative-annual.
 U.S. Dept. of Justice, FY 2018 Budget Request, available at https://www.justice.gov/jmd/page/file/968216/download.
 Hiroko Tabuchi and Eric Lipton, “How Rollbacks at Scott Pruitt’s E.P.A. Are a Boon to Oil and Gas,” N.Y. Times, May 20, 2017, available at https://www.nytimes.com/2017/05/20/business/energy-environment/devon-energy.html.
This post comes to us from Professor Peter Henning at Wayne State University Law School. It is based on recent article, “Why It Is Getting Harder to Prosecute Executives for Corporate Misconduct,” available here.