The Winter Olympics of Cooperation: The Bridge On The River Kwai, White-Collar Self-Image and Federal Sentencing

“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.

The Bridge On The River Kwai (1957).

The Bridge On The River Kwai (1957).

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.

Not your everyday Saturday morning cartoon about cooperation.

Not your everyday Saturday morning cartoon about cooperation.

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.

Rejecting the proposed plea agreement.

Rejecting the proposed plea agreement.

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.

 

"Sure, I falsified a couple of wastewater reports, but who knew it's make that much mess?"

“Sure, I falsified a couple of wastewater reports, but who knew it’d make that much mess?”

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.

Testifying in the grand jury on Christmas Eve.

Testifying in the grand jury on Christmas Eve.

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.

Sharpen your pencils.

Sharpen your pencils.

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.

* * * *

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

Contemplating a Guidelines recalculation.

Contemplating a Guidelines recalculation.

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.


Martoma and Harvard Law School (Again)

Forgery and bad-movie posters.

Forgery and bad-movie posters.

We recently addressed the ongoing Mathew Martoma trial “Harvard Law School fraud” story: The Martoma Trial and Character Evidence in White-Collar Trials

From Professor Susan Brenner, who blogs at Cyb3rCrim3, here’s a detailed analysis of the Court’s ruling not on the substantive issue — whether the government can discuss his HLS misdeeds at trial — but rather on Martoma’s motion to seal the discussion: The Law Student, Forgery and the Motion in Limine



New DOJ Cases From the Financial Crisis? Look For This Criminal/Civil Hybrid

A good summary by Peter Henning, here —   DOJ Financial Crisis Cases?  — about possible future cases arising from the financial crisis and the Government’s use of a FIRREA provision.  In part:

But pursuing criminal cases from the financial crisis gets increasingly difficult, especially against individuals, because unlike a good bottle of wine, evidence does not age well. Memories dim and the chance of finding the “smoking gun” e-mail or recording that can help implicate a defendant in a fraudulent scheme becomes less likely with the passage of time.

Mr. Holder will more likely pursue charges under a civil statute that has become the Justice Department’s favorite tool of late against banks: 12 U.S.C. 1833a. The statute provides for civil penalties for violations “affecting a financial institution” of up to $5.5 million or the amount the defendant gained from the misconduct.

Congress enacted this provision in 1989 during the savings and loan crisis as part of the Financial Institutions Reform, Recovery and Enforcement Act to give prosecutors another tool to pursue cases involving fraud and other misconduct at banks.

The law is a hybrid: it requires prosecutors to establish that criminal conduct occurred while using the lower civil burden of proof to establish the violation. That makes it easier for the Justice Department to make its case and can even allow a court to make a favorable ruling based solely on written evidence without a trial.

Section 1833a contains other favorable measures for the government. The law extended the statute of limitations for a host of banking crimes to 10 years from the usual 5-year period, so the Justice Department faces little time pressure in pursuing cases involving the mortgage market during the lead up to the financial crisis.

The statute only requires that the violation affect a financial institution, a term that has been broadly construed in recent district court decisions. Last week, Judge Jed S. Rakoff of Federal District Court in Manhattan rejected a challenge by Bank of America to a lawsuit involving the sale of faulty mortgages by its Countrywide Financial subsidiary. He found that the financial institution affected by the fraud could be Bank of America itself, so that even a self-inflicted wound could be the basis for pursuing a civil penalty action.

 


Complimentary One-Day Financial Services CLE SuperCourse in NYC

If you are in the New York area, this is an excellent source of free CLE: Network of Trial Law Firms Financial Services CLE Supercourse

When?  Friday, September 20, when experienced financial services practitioners from across the U.S. and Canada convene in New York City.  Breakfast and lunch at the City Bar Building (44th St. near Sixth Ave.) are included.  Presentations are short (20 minutes each).

Sign-up?  on-line.

Why? I admit it —  I’m speaking (actually, I’m leading a breakout session on “White-Collar Crime.”).

Topics:

  • Litigating against FINRA and the SEC
  • 18 USC 1519: The Changing Face of Obstruction
  • Traditional and Alternative Products: Suitability and Supervisory Issues
  • FINRA Arbitration – Panel Selection
  • Whether Non-Member Registered Investment Advisors (“RIAs”) Should Voluntary Agree to FINRA Arbitration
  • Regulatory Trends for RIAs
  • Federal Preemption of State Securities Law Claims
  • Impact of Canadian Class Actions on the US Capital Market
  • Discovery in FINRA Arbitration
  • Panel: Chief Compliance Officers Under Siege
  • Regulatory and Enforcement Actions Arising from Fiduciary Relationships
  • Continued Erosion of Rule 10b-5
  • Data Breach and Cyber Liability
  • Erosion of Over-Broad Class Actions

 

Breakout Discussion Sections (with coursebook materials) on:

  • Developments in Securities Liability of Attorneys, CPA’s and Other Professionals
  • FINRA Arbitrations
  • White Collar Crime
  • Litigating Customer Disputes

 

Hope to see you there.

 

 



A Prosecutorial Campaign In The Media

Mr. Bharara’s comments are measured, but a prosecutorial campaign in the media is always disquieting (as a defendant’s media campaign can be troubling): Prosecutor Hits The Media Trail.  And, although it’s true that “sometimes it’s the case that conduct is so pervasive and there’s so much that shouldn’t be going on that is going on, that the only way that justice can be done is by indicting the entire institution,” very few American businesses — even those with some very bad apples —are actually run as criminal enterprises.  Rather, the threat of a company indictment is often simply a tool to achieve other prosecutorial ends.




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Jack Sharman