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.


Dude, That’s My Lighter: Lacrosse, Suspensions, the Fourth Amendment and the White-Collar Thanatos of Zero Tolerance

Early adopters.

Early adopters.

The relationship between lacrosse and white-collar crime is not obvious, although for much of its 20th century history the sport was powered by mid-Atlantic and New England prep-school products whose high schools also provided several All-American rosters of white-collar defendants.  And even for perfectly lawful activities, there has long been a close relationship between lacrosse and Wall Street, as shown in this 2008 Wall Street Journal article about how On Lacrosse Fields, A Battered Bank Is Still a Player

The story of how these Maryland lacrosse players’ case moves into court  raises some curious insights, though, into matters of compliance and internal policing, not to mention Fourth and Fifth Amendment issues that can figure prominently in white-collar trials:

Families of two former Maryland high school lacrosse players have filed a federal civil rights lawsuit against school officials alleging that the teens were suspended for having dangerous weapons after an unconstitutional search of their equipment bags turned up two small knives and a lighter.

The lawsuit alleges that school officials in Talbot County, on Maryland’s Eastern Shore, violated the students’ constitutional rights to due process and their protections against unreasonable search and seizure in 2011 when they boarded the team bus to investigate a tip about alcohol and took action against the teenagers for items the students said they used to maintain their lacrosse equipment.

The Leatherman.

The Leatherman.

The items were a lighter and a knife.

Leftover from a Doobie Brothers concert (1978).

Left over from a Doobie Brothers concert (1978).

The suspensions were reversed by the state board of education, and the players filed a federal civil rights action:

The Maryland State Board of Education ruled against the school system in 2012 and ordered that the students’ records be cleared of the incident. The state’s decision was a rare reversal of student punishment and appeared to be in opposition to the zero-tolerance policies that have taken hold in schools across the country.

Lawyers with the nonprofit Rutherford Institute, a civil liberties advocacy firm, filed the lawsuit last month in U.S. District Court in Baltimore, seeking monetary damages from the Talbot County school board and four current or former school officials. It comes at a time when U.S. Education Secretary Arne Duncan has urged that out-of-school suspensions be used as a last resort for school-related incidents.

Before we recoil from the lighter and the knife, and begin to mutter about terrorism, consider this:

No alcohol was found, but during the search, Graham Dennis, then a 17-year-old junior, volunteered that he had a small knife, which he used to fix his lacrosse sticks, inside his gear bag.

School officials took the knife as well as a Leatherman tool they found and called police. The teenager was led away in handcuffs and suspended for 10 days.

A teammate, Casey Edsall, also a 17-year-old junior at the time, was suspended for having a lighter in his gear bag. The teenager said it was used to seal the frayed ends of strings on his lacrosse stick.

In its 2012 ruling, the Maryland board [i.e., the panel that reversed the school’s decision] said knives and lighters don’t belong at school but concluded that “this case is about context and about the appropriate exercise of discretion.”

The state board said the coaching staff had tacitly approved the use and possession of the items and that players had openly used them on the bus.

The facts are relatively obvious; their implications, less so.

High school varsity, but lacking Wi-Fi.

High school varsity, but lacking Wi-Fi.

First, students should not have lighters and knives at school.

Second, knives and lighters are frequently necessary to work on lacrosse heads and their stringing.  For a YouTube video on the subject by a mildly-hungover guide, try YouTube Burning String Tips

Third, the school — through the actions of the coaches — approved the open use of knives and lighters on the bus.

The decision of the Maryland state school board is appropriate.  For us, though, it is the board’s note about “context” and the “appropriate use of discretion” that is pertinent both for the thanatos of internal compliance and for the sometimes over-reaching character of white-collar criminal investigations and prosecutions.

(As a refresher: “Thanatos,” a minor Greek deity and the son of Nyx, was the personification of death.  The word now refers to an impulse towards death or self-destruction).

Whose street?  And, does the defendant live on it?

Whose street? And, does the defendant live on it?

First, both the sport and Wall Street have had bad press that at times have made them targets for politicians, activists and prosecutors of all stripes — sometimes with justification, sometimes not.

No doubt, lacrosse has had a tumultuous recent history, starting with the Duke lacrosse case  in which players were falsely accused of rape.

The burden of proof and a university's shameful behavior.

The burden of proof and a university’s shameful behavior.

That case ended with the prosecutor’s suspension and surrender of his license to practice law after an ethics complaint against him.

Prosecutor Michael Nifong

Prosecutor Michael Nifong

Separately, there was later a murder charge against the woman who falsely accused the Duke players, a charge of which she was convicted.  More recently, a member of the University of Virginia men’s lacrosse team murdered a member of the Virginia women’s team.

 

Second, “zero tolerance” is an antonym to “context.”  Context — the business, social, cultural and ethical landscape in which a person operates — is precisely what many compliance programs and white-collar investigations lack.  As in the Maryland lacrosse-suspensions matter, a policy of “zero tolerance” is a often a cover for something else (especially the fear of civil, administrative or criminal liability) other than solicitude for the people, institutions or values that are offered in justification of the policy.

Third, an appreciation of “context” would introduce the concept of proportionality, whether externally (for example, in grand jury investigations) or internally (for example, in compliance-program investigations).  The former investigations are distorted by the fact that many (perhaps most) of the folks at the levers of white-collar investigations have little or no experience of the industries, professions and services being investigated.  Without such experience and context, it is understandable that one tends to see a Red under every bed.

"Senator McCarthy, the compliance staff is ready to meet."

“Senator McCarthy, the compliance staff is ready to meet.”

The latter investigations are distorted by the business internal impulses and pressures under which they operate.  A compliance investigation that leaves significant risk on the table is a failed compliance investigation.

In fairness, though, at times the internal compliance investigation can suffer from over-familiarity, and can fail to see the customary as also potentially criminal.

Alger Hiss at the CrossFit breath-holding competition.

Alger Hiss at the CrossFit breath-holding competition.

And, of course, there are plenty of actual criminals, some of them of distinguished pedigree, even if those investigating and accusing them are clumsy.

Fourth, just as we have an odd body of Fourth Amendment law within the schoolhouse door, we have too casual a view within the corporate boardroom of Fourth Amendment protections.  Much as businesspeople shrink from asserting their Fifth Amendment rights, however wise such an assertion might be, they tend to think of the Fourth Amendment as the province of drug dealers, terrorists, pornographers and the faculty of Harvard Law School.  Both views arise from the otherwise common-sense notion that, “if you have nothing to hide,” why not testify, or be searched?  The “nothing to hide” rationale fails in the context of most white-collar crime, however, because what incriminates is intent, rather than the object or statement itself.  A loan application can contain an error, or it can be a false statement.  A check can be a commission or a kickback.

Burn here.  And here.  And there.

Burn here. And here. And there.

Such considerations come into play in most compliance and white-collar investigations, even those less important than burning the ends of the shooting strings on your lacrosse stick.

Dude.



The Border, Searches and the Digital Devices of Executives and Employees

Here’s a story (via @nytimes) about how the border is a back door for device searches.

There is, of course, a “border exception” to the Fourth Amendment, a constitutional doctrine that came of age when national physical borders were also, usually, information-borders as well.  Although the discussion in the article takes place in the national-security context, it’s worth American companies giving more careful thought to how they address the way their executives and employees work and travel.  Employees usually love using their own devices and storing company data in ways that are readily accessible to and productive for them.

At the border, though, all that corporate data is free game.

As the article notes:

TECS is a computer system used to screen travelers at the border, and includes records from law enforcement, immigration and antiterrorism databases. A report from the Department of Homeland Security about border searches of electronic devices says a traveler may be searched “because he is the subject of, or person-of-interest-in, an ongoing law enforcement investigation and was flagged by a law enforcement ‘lookout’ ” in the Immigration and Customs Enforcement computer system.

For now, the law remains murky about any limits on intrusive border inspections, including how long travelers can be detained, whether they are required to provide passwords for their devices . . . and whether they must answer any question an agent asks. Responses may be recorded in a traveler’s TECS file and shared with other government agencies.

Detention is an inconvenience.  To answer (or not answer) an agent’s question is another matter entirely, one that implicates both the company’s legal exposure and the individual’s Fifth Amendment rights.

If you find yourself in a lawsuit or prosecution based on a seizure at the border, it’s worth asking for this document from ICE: