An Important and Timely Book: John C. Coffee, Jr.’s Corporate Crime and Punishment

During the last 15 years, a consequential U-turn occurred in federal white-collar criminal enforcement. Federal enforcement of white-collar crimes all but collapsed in the period of 2000 to 2007. In the first 11 months of 2008, the SEC prosecuted 133 cases compared with 437 in 2000 and 513 in 2002. Justice Department prosecution of financial fraud cases based on SEC referrals would decline from 69 cases in 2000 to nine in 2007. Throughout the 2008-2009 financial meltdown, virtually no senior corporate executives were prosecuted. Journalist Jesse Eisinger in 2014 would report that only one top banker went to jail as a result of the 2008-2009 financial meltdown.1

Jack Coffee’s book, Corporate Crime and Punishment: The Crisis of Underenforcement2, explores why deterrence all but died during this period and what should be done to reverse the crisis of under-deterrence.

Coffee largely dismisses widely-held theories of why there have been so few criminal enforcement actions during the past decade as simplistic, such as capture by the regulated firms, the revolving door between attorneys at the Justice Department and SEC and the firms they regulate, or the occurrence of what many people considered just a “perfect storm, a bubble, not a fraud.”3 Instead, Jack emphasizes quite different themes to explain why federal enforcement programs flounder.

The ecosystem of white-collar crime enforcement had fundamentally changed. Federal financial regulators lack adequate resources to respond to the “nearly unlimited capacity of the large corporation to resist and delay.” Coffee describes the magnitude of this “logistical mismatch” by comparing the securities fraud unit of the United States Attorney’s Office for the Southern District of New York, long regarded as the nation’s premier criminal enforcement agency with a securities fraud unit of 15 to 20 attorneys in normal times and a caseload of several cases, with the 130 Jenner & Block attorneys that worked on the Lehman Brothers bankruptcy over a 14-month period. Jenner & Block would prepare a 2200 page report for which it dutifully charged $53.5 million.4

The Department of Justice, SEC, and other programs also became gun shy, particularly after the Arthur Andersen loss in the United States Supreme Court in 2005.5  Before the Justice Department and SEC began pursuing cases against two of its audit clients, Enron and WorldCom, Arthur Andersen had been one of the Big Five accounting firms, with more than 85,000 employees in 2001.  These two major audit failures, which led to multiple criminal indictments and convictions of Enron and WorldCom senior executives.  would ruin Arthur Andersen’s reputation and cause the firm to shrink to 3000 employees by 2002. Civil actions against Enron and WorldCom soon followed, resulting in some $15 billion in class action settlements. Andersen would pay little towards these settlements, but the firm would cease to perform audits.6

From the start, the Department of Justice declined to indict Arthur Andersen for its substantial role in the financial frauds that were the basis of prosecutors’ individual cases against such senior Enron executives as Kenneth Lay and Jeffrey Skilling. There was anxiety that the cases would be too complicated for a jury to follow despite the extraordinarily detailed documentation of fraud involving Andersen contained in the Powers Report, which was prepared for the Enron board of directors by recently appointed director William Powers, dean of the University of Texas Law School.7 The Justice Department chose to focus its criminal case against Andersen on its shredding of documents after the SEC opened an investigation on October 17, 2001, under a by-then superseded criminal statute, 18 U.S.C. § 1512(b). A unanimous United States Supreme Court reversed the conviction of Andersen because of the failure of a jury instruction to require the Department of Justice to prove consciousness of guilt, instead including the statement, “even if [Andersen] honestly and sincerely believed its conduct was lawful, you may find [Andersen] guilty.”

The Department of Justice took some heat for the failure of its case against Andersen, which probably was undeserved given the damage inflicted on the firm by the besmirching of its reputation. But the fear of driving companies into insolvency has led some courts to be unduly lenient on corporate defendants. The fear of federal regulators that they would be blamed for innocents bearing the costs of corporate crimes contributed to the reluctance of the Department of Justice in cases such as that of HSBC money laundering in 2012, which made popular the phrase, “too big to jail.”8

Of particular consequence to Coffee’s narrative was the Justice Department’s subsequently greater use of deferred prosecution agreements, or DPAs, which were less likely than a criminal indictment to prompt the collapse of a firm such as Arthur Andersen or a ruinous run on a bank. A deferred prosecution agreement is an agreement with the defendant for the Justice Department to forego a criminal trial in favor of a written plea under which the defendant corporation agrees to pay a fine, accept a period of probation, and typically a monitor. If these conditions are satisfied, the conviction is expunged. Usually, the Justice Department agrees that the defendant corporation can outsource the investigation to a law firm of its own choosing. DPAs “effectively [allow] the defendant to select its investigator (within some limits). In truth, these internal investigations were quite thorough (and staggeringly expensive), but they seldom, if ever, discovered responsibilities at the higher levels within the corporation.” 9

But here is the rub: “The only goal that the DPA did not achieve for prosecutors was the generation of meaningful deterrence.” Coffee is hardly alone in this assessment. Professor Brandon Garrett, in his book Too Big to Jail: How Prosecutors Compromise with Corporations, reported that many public corporations, despite repeated violations, were able to escape criminal prosecution through the use of DPAs – “in effect,” Coffee added, “surviving as serial and unpunished recidivists.” Garrett found that between 2002 and 2016, the Justice Department entered into 419 DPA and non-prosecution agreements, as opposed to only 18 in the preceding 10 years.  Between 2001 and 2014, criminal cases were eventually brought against only 34 percent of companies that had initially entered into a DPA.  “Of those individuals charged, most were not higher ups… but rather middle managers of one kind or another and also some quite low individuals.”10

In 2015, Deputy U.S. Attorney General Sally Yates issued an official statement, “Individual Accountability for Corporate Wrongdoing,” popularly known as the Yates Memorandum. This memorandum required a corporation seeking to qualify for a DPA to satisfy a number of conditions, including that “the company must completely disclose to the Department [of Justice] all relevant facts about individual misconduct.” The corporate bar protested that requiring defense counsel to search for all documents, including emails, related to the involvement of individual executives would make them agents of the prosecution, which was precisely the point. To secure a DPA, the Yates Memorandum pushed towards the standard where the Department of Justice could be confident that it knew the relevant facts. The Yates Memorandum in its original “all or nothing” form was relaxed and modified in November 2018 by Deputy U.S. Attorney General Rod Rosenstein. “Our revised policy . . . make[s] clear that any company seeking cooperation credit in criminal cases must identify every individual who was substantially involved in or responsible for the criminal conduct.” In Coffee’s damning prose:

How important is this revision? To the ear of the corporate lawyer, Rosenstein’s focus ‘on the individuals who play significant roles in setting a company on the course of criminal conduct’ would not include a CEO or CFO who learned about it after the fact.11

Coffee is skeptical that most corporate financial penalties deter, either because they were set too low, or, after the United States Sentencing Commission introduced its Organizational Sentencing Guidelines in 1991, because even larger penalties do not tend to exceed the actual probable gain from a financial crime.  Coffee instead makes the case for equity fines, which would be paid in stock rather than cash. This would dilute the value of existing shareholders’ stock but not affect creditors, employees, or other nonculpable constituencies.12

The greatest contribution that Corporate Crime and Punishment makes is to propose a comprehensive program to resurrect federal criminal enforcement of white-collar crime as an effective deterrent.  Professor Coffee begins with two premises:

First, it is necessary (and certainly more realistic) to focus on the individual executive.  But such a focus requires that prosecutors enlist the corporation as a cooperating ally.  As much as the corporation may not want to inform on its employees, it wants even less to be convicted when serious sanctions are threatened. The law can make cooperation the path of least resistance for the corporation.  Second, to the extent that we need to deter the corporate entity, different threats (such as the equity fine or even the remote threat of charter revocation) should be utilized, particularly when they do not fall on nonshareholder constituencies. Such threats would only rarely be employed, but their impact should cause the corporate entity to inform on its agents and employees and cooperate with the prosecution.13

Tough stuff. But Professor Coffee provides a 10-point plan for achieving a far superior system of enforcement.

The most far reaching change that Coffee proposes is for agencies to regularly employ experienced private counsel to fill any gaps in their investigative and enforcement resources. Private counsel working for a federal regulatory agency would be paid a contingent fee:

What would the administrative agency gain from using an attorney that it retains from the private plaintiff’s bar in a big case? First, there are huge cost savings. The agency would pay virtually nothing out of its own budget, as the retained attorney would look only to the recovery as the source for his or her legal fees.14

Every two years, our national and state elections create an opportunity to rethink existing approaches.  So do national emergencies. Professor Coffee has written a proposal that someday, perhaps soon, will be given the attention it deserves. He has deliberately written this as a non-academic book to ensure that it is accessible to the widest possible audience. For this he too deserves credit. Corporate Crime and Punishment represents a type of valedictory statement by one who has spent decades studying our nation’s business and white-collar laws and knows how they can be far better. This is an important and timely book.


1   Eisinger, Why Only One Top Banker Went to Jail for the Financial Crisis, N.Y. Times Magazine, Pr. 20, 2014, cited in Coffee, supra at 155 n.3.

2   John C. Coffee Jr., Corporate Crime and Punishment (Berrett-Koehler Pub. 2020).

3   Id. at 3-5.

4   Id. at 27-30.

5   Arthur Andersen LLP v. United States, 544 U.S. 696 (2005).

6   Coffee, supra n. 2, at 18-20.

7   Powers Report quoted in Joel Seligman, The Transformation of Wall Street: A History of the Securities and Exchange Commission and Modern Corporate Finance 730-731 (Aspen Pub. 3d ed. 2003).

8   Coffee, supra n. 2, at 31-32.

9   Id. at 19-20.

10 Id. at 8-9, 38-39, 49-52.

11 Id. at 46-47.

12 Id. at 89-90.

13 Id. at 92.

14 Id. at 101, 149-150.

This post comes to us from Joel Seligman, dean emeritus and professor at the Washington University School of Law and president emeritus and university professor at the University of Rochester.