With all of the discussion about Special Counsel Robert Mueller and his “cooperators,” now is an appropriate time to revisit the basics of “cooperation” in white-collar investigations.
“Cooperation” is a complex concept for individuals and businesses caught up in white-collar criminal cases, compliance reviews and breakdowns of business ethics. As with the more obscure or corrupt Winter Olympic events, there are ways to demystify the complexity, but it is not easy.
In David Lean’s 1957 film The Bridge On The River Kwai, we see cross-currents of duty, vainglory, cooperation, resistance, collaboration and death. (We also hear some great whistling, but that is another matter). All of these ideas and emotions come into play when a colleague, an employee or a corporate officer or director is faced with the question: “Do I [or we] cooperate with [the Government, the Audit Committee Special counsel, the court-appointed corporate monitor, etc.]?
Remember that, in the sense in which we use the term, “cooperate” is not exactly the opposite of “be obstreperous.” Rather, we mean to work together with whatever authority is opposed to us, in the hopes of a better outcome, rather than going down another path.
So, before we choose whichever path, a few observations to guide those of us — internal counsel, internal audit, compliance, risk management and outside counsel — charged in turn with guiding the unfortunates who must actually make the decision.
Cooperation Is A Shock To The Potential Cooperator. An innocent-minded employee or corporate officer will see cooperation as natural — What do I have to hide? — until he or she appreciates the necessary condition: a cooperator has something to cooperate about. He or she has something to offer in exchange for lenient treatment. If you have something to cooperate about, odds are you have done something to put yourself in that position. At a minimum, everyone will believe you did. (We have written earlier about motive and otherwise apparently innocent-minded people, here: Good People, Bad Acts and Intent).
This shock-effect is a close cousin to the reluctance of most businesspeople to invoke their rights under the Fifth Amendment. We have discussed that reluctance before — Salinas and The Fifth Amendment — and it can be fatal.
Cooperation Is Not A Sign Of Guilt Or Weakness, Nor Is Fighting Proof Of Innocence Or Strength. Shock may lead to misapprehension of the nature of cooperation. Cooperation is an economic transaction, not a moral one. The cooperator offers something of value (information or action) in order to receive something of value (leniency or favor). We must help our client, employee or colleague understand the transactional nature of cooperation.
Cooperation Is Not Explanation, Or Putting The Story In Context. The innocent-minded may conclude, especially on first blush, that “If I can just tell my story and put things in context, the problem will vanish.” This is a canard. (“Canard” is French for “duck,” and I double-majored in political science and French, so I sometimes like to say things like that). Whatever the external, outside force we are facing — a government investigation, say — its representatives are only tangentially interested in the “truth,” at least in an objective fashion. Rather, they are assessing a case, fulfilling a mandate or looking to preserve or advance a higher good. To the FBI or Homeland Security agent, the effort to contextualize will likely be misunderstood and, if understood, then perceived to be an effort to minimize wrongdoing. They don’t really care.
Cooperation Has Benefits, But The Burdens Can Run For A Long Time. For some of the reasons set out below, cooperation can bring benefits, but the extent and duration of cooperation can come as an unpleasant surprise. You are not selling your soul, but you are putting your conscience and your sleep out on a long-term lease to someone else.
Early Cooperators Do Better. This is conventional wisdom, but it is almost always true. Is it ever too late to cooperate? Here’s a thoughtful piece Why Didn’t Martoma Cooperate? And Is It Too Late? by Lawrence S. Goldman at the White Collar Crime Prof blog.
Cooperation, Resolution and Disclosure
Cooperation can play a significant role in settlement (of a civil enforcement action) or in a plea deal (in a criminal prosecution). The relationship between cooperation and resolution is not precise. As Professor Peter J. Henning points out in a recent note on the subject — For Settlements, Companies Sketch Contours of a Black Box — it is difficult even to figure out how the government arrives at tan acceptable dollar figure for resolution:
The government is taking an increasingly hard line in seeking large settlements, as shown by the litigation reserves companies are required to set up once they have determined the cost of resolving a case. What we don’t really know, however, is what goes into the process of assessing a penalty and how it relates to the harm caused by a violation.
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Accounting rules require a company to disclose a material loss because of litigation once it is both probable and the amount can be reasonably estimated. When that line is crossed is a matter of judgment, but once the parameters of a deal with the government are in place, a company can be expected to disclose how much it thinks it will have to pay.
How the two sides arrive at the penalty remains something of a mystery to the general public. Companies rarely disclose what happened in the negotiations, as Avon did.
Federal statutes provide the maximum fine for a violation, but that is only for a single violation. Corporate crime often involves hundreds, or even thousands, of separate offenses, so the total potential fine could be enormous.
The federal sentencing guidelines provide a set of factors to be considered when a court determines a financial penalty. The list includes whether a company cooperated in the investigation and the involvement of senior management in the crime.
But few cases involving large corporations ever see the inside of a courtroom. Instead, the Justice Department usually resolves corporate investigations through deferred and nonprosecution agreements, along with civil settlements, that do not require judicial approval of any penalty assessed against a company. So it is often unclear how the government determined the amount to be paid as the punishment for a violation.
The Sentencing Guidelines: Cooperation, Resolution and Dollars
Professor Henning mentions the federal Sentencing Guidelines, and it is worth a brief review here as they relate to cooperation, settlement and the amount of a financial penalty.
A primary source, of course, is the United States Sentencing Commission’s 2010 FEDERAL SENTENCING GUIDELINES MANUAL CHAPTER EIGHT – SENTENCING OF ORGANIZATIONS, which sets out in great detail the Commission’s view of organizational sentencing. In particular, the Commission sets out four general principles, with “cooperation” being one [emphasis added]:
First, the court must, whenever practicable, order the organization to remedy any harm caused by the offense. The resources expended to remedy the harm should not be viewed as punishment, but rather as a means of making victims whole for the harm caused.
Second, if the organization operated primarily for a criminal purpose or primarily by criminal means, the fine should be set sufficiently high to divest the organization of all its assets.
Third, the fine range for any other organization should be based on the seriousness of the offense and the culpability of the organization. The seriousness of the offense generally will be reflected by the greatest of the pecuniary gain, the pecuniary loss, or the amount in a guideline offense level fine table. Culpability generally will be determined by six factors that the sentencing court must consider. The four factors that increase the ultimate punishment of an organization are: (i) the involvement in or tolerance of criminal activity; (ii) the prior history of the organization; (iii) the violation of an order; and (iv) the obstruction of justice. The two factors that mitigate the ultimate punishment of an organization are: (i) the existence of an effective compliance and ethics program; and (ii) self-reporting, cooperation, or acceptance of responsibility.
Fourth, probation is an appropriate sentence for an organizational defendant when needed to ensure that another sanction will be fully implemented, or to ensure that steps will be taken within the organization to reduce the likelihood of future criminal conduct.
These principles have taken on urgency for companies that do business in the United Kingdom. As we see here — U.K. Issues New Sentencing Guidelines for Corporate Fraud — the new guidelines are intended to be implemented alongside the UK’s deployment of American-style deferred-prosecution agreements.
The other key document to have to hand is a copy of DOJ’s Principles of Federal Prosecution of Business Organizations, essentially a set of charging guidelines for prosecutors. They have discretion. Try to leverage it in your favor.
Speaking of discretion, we leave you with a note from Matthew 5:23-26:
So if you are offering your gift at the altar and there remember that your brother has something against you, leave your gift there before the altar and go. First be reconciled to your brother, and then come and offer your gift. Come to terms quickly with your accuser while you are going with him to court, lest your accuser hand you over to the judge, and the judge to the guard, and you be put in prison. Truly, I say to you, you will never get out until you have paid the last penny.