Half-Baked Justice

Bruce A. Green in Law.com, February 01, 2011

Media Source

by Sue Reisinger

The initials BP are by now a household word. It is a name that in the public mind at least has become synonymous with longtime legal, environmental, and safety issues. The story starts two days after Christmas in 1965, when the oil rig Sea Gem collapsed and killed 13 crew members in the icy waters of the North Sea. Then came 40 years of toxic waste dumping, and oil and gas price manipulations, followed by the disastrous Texas City oil refinery blast of 2005 that left 15 workers dead and 270 injured.

The federal government ordered the company to fix some 300 safety problems at the refinery. BP paid a record $21 million fine and hired a new chief executive who vowed to make safety his top priority. But in 2009 the government cited BP again for failing to repair more than 200 of those violations and imposed another record fine. Then, last April, faulty equipment at the refinery allowed thousands of pounds of cancer-causing chemicals to leak into the air for 40 days. Worse, no one told residents in the surrounding communities—or even BP's own workers—that they were breathing toxic air.

Then came what may be its worst and most costly disaster yet. Last spring, BP's Macondo oil well exploded in the Gulf of Mexico, killing 11 workers and causing the largest marine oil spill in history. Now the British company formally known as BP p.l.c. faces a criminal investigation and more than 300 civil suits over the spill. And that's not all—a growing chorus of victims, their families, and their lawyers are calling for executives to be jailed and the company shut down if it doesn't change.

BP North America general counsel John "Jack" Lynch declined to be interviewed for this story. But Lynch previously committed BP to take responsibility for the cleanup. The company also has set aside a $20 billion fund to pay damages claims, and it may sue other contractors on the rig for their alleged negligence.

Through the years BP has operated in an endless cycle of accidents, promises to do better, and record financial penalties. But the promises and costly punishment haven't seemed to change how BP runs. That leaves legal scholars and prosecutors pondering: How should the criminal justice system punish—or reform—the BPs of the world?

The answer is critical to in-house counsel. That's because when companies keep doing bad things, Congress generally steps in to "fix" the problem by imposing more work on the lawyers and costly reforms on their companies. That's what happened in 1989, when Congress reacted to the savings and loan crisis by passing the Financial Institutions Reform, Recovery and Enforcement Act that dramatically changed the industry and its regulation. It happened again after the Enron Corp. scandal, when Congress passed the Sarbanes-Oxley Act of 2002, which set enhanced standards for all U.S. public companies and accounting firms. More recently, in 2010, Congress reacted to the financial meltdown and its excesses by passing the sweeping Dodd-Frank Wall Street Reform and Consumer Protection Act, parts of which also apply to all public companies, not just banks in trouble.

And that's an issue that in-house counsel must bear. Larry Thompson, general counsel for PepsiCo, Inc., and former deputy attorney general in the U.S. Department of Justice, recently spoke at a legal symposium where he noted that reactive laws punish the innocent companies along with the guilty. "No matter how gold-plated your compliance efforts, no matter how hard one tries, large corporations today are walking targets for criminal liability," Thompson complained.

But Houston lawyer Brent Coon doesn't see it that way. The founder of Brent Coon & Associates represented plaintiffs in the BP refinery blast, and now represents others in the Gulf oil spill. And he is outraged that the company keeps doing business as usual. "Throw some of these bastards in jail, and in particular the corporate executives that make the decisions," he urges.

Just to be clear, BP isn't the only repeat offender. For example, before American International Group, Inc.'s risky behavior helped throw the world's economy into chaos in 2008, the government knew that AIG was a company operating on the legal edge. It had already reached two settlements with prosecutors over wrongdoing—including a nonprosecution agreement in 2006 following a deferred prosecution deal in 2004, both of which imposed a corporate monitor, for all the good it did.

Former AIG chief executive Maurice "Hank" Greenberg, who was kicked out, always denied any wrongdoing. The New York attorney general's office criminally charged Greenberg, but later dropped the charges in favor of civil litigation. He agreed to pay a $15 million civil penalty.

Then there's GlaxoSmithKline plc. A Glaxo associate general counsel was indicted in November on charges related to off-label drug use [see "A Depressing Case," page 20]. Before that the drug giant had already reached at least three separate settlements with prosecutors for alleged wrongdoing in 2003, 2005, and as late as October. In the October deal, which cost Glaxo $750 million in penalties, a subsidiary in Puerto Rico also pleaded guilty to a criminal charge for manufacturing contaminated drugs. The government has periodically imposed corporate integrity agreements on the drug company, without altering its behavior.

After the October settlement, Elpidio "PD" Villarreal, GSK's head of global litigation, said Glaxo regrets how it operated its manufacturing facility. "Our commitment to compliance is demonstrated by the fact that we have not received an FDA warning letter at any plant since the [now-closed] facility was cited in July 2002," Villarreal said. Three weeks later, the asso­ciate GC was indicted.

There are dozens of other examples of recidivist companies. But the pattern is clear. From fatal explosions to global financial meltdowns to health threats tied to drug company wrongdoing, prosecutors have settled for huge financial penalties and paper promises. Then the company returns to business as usual. Meanwhile, innocent companies are caught up in the consumer and government reactions.

So far, there is little evidence to show that higher fines and stricter monitoring are making the too-big-to-fail corporations change their behavior. And now, driven by recent corporate scandals and their consequences, critics are coming at the Justice Department from all sides.

The inability of prosecutors to figure out what to do with the worst offenders has created a tug-of-war in the legal world. On one side are corporate critics like Coon who feel the government isn't doing enough to prosecute crimes by these huge businesses. On the other are lawyers like Thompson who believe the government has overreacted to a few bad actors by "overcriminalizing" corporate conduct.

On the not-tough-enough side are many plaintiffs attorneys, along with a handful of federal judges like Jed Rakoff in Manhattan. Rakoff ticked off enforcement lawyers at the Securities and Exchange Commission after they settled for large financial penalties against Bank of America Corp. while filing no charges against individuals. Rakoff called the settlement "half-baked justice." But at least two other federal judges have followed Rakoff's lead and questioned and delayed proposed SEC settlements.

That's not enough for Coon, who wants to see executives scrutinized when they become "risk-takers" with other people's lives. "It is much cheaper for them to violate the law, negotiate fines, show contrition, and then go on about their business" rather than to comply with the law, he argues.

Now joining this group is Senator Arlen Specter, a Democrat from Pennsylvania. In a November 30 Senate subcommittee hearing on enforcement of the Foreign Corrupt Practices Act, Specter came down clearly on the side of jailing individuals. "Large fines are added to the cost of doing business, and are paid by the shareholders," Specter said at the hearing. "I am convinced that the only impact that matters in this sort [of egregious cases] is a jail sentence. It is the only effective deterrent."

Siding in part with the Coon/Rakoff/Specter group are some criminal defense attorneys and law professors who believe that large corporations receive special treatment. These critics say that government has created a two-tiered system of justice in America, with the richest corporations on top buying their way out of trouble; and ordinary citizens and small businesses on the bottom. For example, contrast BP's treatment for repeated and fatal safety violations with that of Michael and Paul Brassington, two brothers who for one year ran a small luxury charter jet service. After an overloaded plane aborted takeoff and crashed, injuring 20 passengers, the U.S. attorney in Newark indicted them for violating safety rules and trying to cover up the violations. A jury found them guilty last November 15, and they are to be sentenced in March. They could receive up to 30 years in prison.

U.S. Attorney Paul Fishman said in a statement, "The defendants chose to commit crimes in the pursuit of profits over public safety. . . . [The guilty] verdict confirms that there are consequences when you break the law to boost your bottom line." But do those consequences apply equally to all?

Duke law professor Sara Sun Beale worries that the lower tier of criminals are being disproportionately punished. Beale spoke with Thompson at the November symposium on "overcriminalization" of the law, sponsored by George Mason University School of Law and the Journal of Law, Economics and Policy.

Any study of overcriminalization needs to include prosecutions of drug, gun, and immigration violations, she said, not just corporate crime. And she warned against pulling back from prosecuting bad companies. "Corporations yield enormous power and have potential to wreak havoc on our society," Beale said, so "we can't just fold up our tents and go home. We need to stay on this."

Disagreeing are those critics who say that Congress and prosecutors have gone too far in criminalizing behavior of corporations, both large and small. This group covers the political spectrum, including the conservative think tank The Heritage Foundation and the liberal National Association of Criminal Defense Lawyers. Both have joined in a report accusing Congress of "reckless overcriminalization" of the law, especially in the wake of the financial meltdown.

The NACDL and The Heritage Foundation, among others, fiercely criticize the Dodd-Frank Act as vague and overreaching. They issued a statement saying, "Passage of an over-2,315-page bill, containing at least two dozen criminal offenses, absent Judiciary Committee oversight, is simply unacceptable."

The overcriminalization coalition also criticizes prosecutors who intimidate corporations into settlements. The companies cave in because they fear that being charged with a crime could irreparably damage their business. The resulting deals hide the legal process, leave novel prosecution theories untested, and fail to expose possible prosecutorial misconduct. Southern Illinois University law professor Lucian Dervan spoke to this point at the symposium. "Plea bargains have drifted into unconstitutional areas, based on staggering differences in sentencing options," Dervan complained. "No one is left to challenge because everyone has pleaded guilty" or accepted nonprosecution agreements.

Another lament of overcriminalization groups is the lack of criminal intent, or mens rea, requirements in new laws, particularly those aimed at corporate misconduct. The NACDL/Heritage coalition won bipartisan support on the House crime subcommittee for its 2010 report, "Without Intent: How Congress Is Eroding the Criminal Intent Requirement in Federal Law." Now they intend to push for legal reforms in 2011.

Judge Rakoff, who also spoke at the symposium, agreed that there is room for improvement in writing and enforcing criminal laws. But he questioned whether overcriminalization is really a serious problem. "In 15 years I've been a judge, I haven't seen examples of overcriminalization in my court," Rakoff said. "That makes me a little hopeful that the sky is not falling quite to the extent that has been suggested."

With passionate supporters on both sides, the debate leaves federal prosecutors in a conundrum. How should they proceed against recidivist corporations?

So far the government's actions against BP have mainly involved ratcheting up the fines in hopes of getting BP's attention. For example, in September 2005, the Occupational Safety and Health Administration fined the company $21 million over the refinery explosion—a record fine at the time. In addition, the U.S. attorney in Houston charged BP with one felony count; it pled guilty in 2007 and paid a $50 million criminal fine. When BP failed to fix hundreds of the safety violations by October 2009, OSHA fined it a whopping $87 million. The company appealed, and the two sides reached a deal in which BP promised major reforms and would pay only $50 million, still a record amount.

For the 2005 blast, the company ended up paying a total of $121 million in fines, plus $1.6 billion to the victims' families. Meanwhile, BP made $16.5 billion in profits in 2009, the latest full year available at this writing.

In reply to a question about how to deal with repeat violators like BP, Thompson, the GC, said to conferees, "What is the appropriate remedy? Is it just to say to BP that you no longer exist? It's a tough issue . . . but let's try to get a measured response, because our companies are competing out there on a global scale."

A better solution, Thompson suggested, is a combination of civil fine against the corporation and criminal prosecution of guilty individuals. "In most cases," Thompson said, "there is no good or sound policy reason for corporate criminal prosecutions."

This comes from the lawyer, you'll recall, who played a key role in the decision to prosecute Arthur Andersen LLP—a decision that led to the accounting firm's demise. He subsequently wrote the so-called Thompson Memo of 2003 that outlined which factors prosecutors should consider in charging a corporation with a crime, including collateral consequences to shareholders and innocent employees. The memo has been enhanced, but still stands as a basic guide. And the death of the Arthur Andersen firm still haunts him.

In his speech, Thompson suggested that prosecutors ask themselves if corporate criminal prosecution is really necessary. "Does it serve the goals of deterrence and retribution? If so, does the benefit of a conviction outweigh the costs . . . to shareholders, to the economy, to employees, to the government?"

Coon, the plaintiffs lawyer, would agree with Thompson on one point—that prosecutors should hold guilty individuals accountable. But Coon also believes that if a company is a habitual offender, it should be criminally charged and even shut down. Coon also strongly disagrees with those who insist on a mens rea requirement before a company executive can be charged. Many times, he argues, executives are made aware of potentially dangerous problems and choose to ignore them. This is the so-called willful blindness test. "Not all laws require criminal intent," he insists. "Many times the bad conduct itself is enough to prosecute."

One drawback, though, is that the criminal process for corporate executives "is a little like getting struck by lightning," says Bruce Green, chair of the American Bar Association's criminal justice section and a criminal law professor at Fordham University School of Law. Green is also a former federal prosecutor. He mentions "recent corporate cases where it seems [individual] wrongdoing is involved and nobody, or few, are indicted or prosecuted."

Yet another solution might be the enactment of laws that make it easier to prosecute executives at guilty corporations. The United Kingdom, for example, enacted a manslaughter law in 2008 that removes the need for proving intent in corporate fatality cases, such as the BP refinery fire or the Gulf oil spill. It states that a jury can simply consider the "attitudes, policies, systems, or accepted practices within the organization."

White-collar defense attorney Katya Jestin, for one, opposes adopting new laws akin to the U.K.'s. Jestin, a partner at Jenner & Block in New York who served as counsel to the examiner in the Lehman bankruptcy case, says reacting to huge corporate wrongs with new legislation isn't the way to go. "We don't need more statutes," she says. "We need more detection and more enforcement" of the laws already on the books.

At least one government agency, the U.S. Department of Health and Human Services, has beefed up enforcement efforts by taking on corporate executives. In a case pending before federal court in Washington, D.C., three drug company executives including the general counsel are appealing. In that case, HHS in 2007 charged the Purdue Pharma Inc. executives, including its general counsel, Howard Udell, with a criminal misdemeanor over the misbranding of the addictive drug OxyContin. The company itself signed a nonprosecution agreement, while a subsidiary pled guilty.

The three executives were not specifically accused of wrongdoing. Much to the chagrin of the overcriminalization coalition, prosecutors relied on a novel theory of strict liability. Under the theory, the government can hold responsible any corporate officers who fail to prevent, detect, or correct federal drug violations—without any proof of actual misconduct on their part.

The three did not challenge the theory, and instead they pled guilty to the misdemeanor. By doing that, they avoided any jail time, while each paid multimillion-dollar penalties. The agency later debarred the three from working at any company with government contracts, in effect ending their careers in health care. They are now appealing the debarment part of the punishment.

In the more recent action against drugmaker Glaxo, the government in November charged a former associate general counsel there with lying to investigators and obstructing their inquiry into the company's off-label sales of the drug Wellbutrin. Again, prosecutors did not accuse the in-house counsel of actually being involved in the alleged sales misconduct, but in an alleged cover-up. Glaxo itself at this writing has not been charged.

And Dara Corrigan, the Food and Drug Administration's associate commissioner, made a point of the individual, rather than corporate, prosecution in the Glaxo case. "Those who purposely subvert the regulatory functions of the FDA through false statements and misleading information will be held accountable," Corrigan said in a statement.

If the prosecution of senior managers expands beyond one government department, then PepsiCo's Thompson could be getting at least part of his wish. Corporations would see fewer criminal charges. But their executives would face more scrutiny by investigators, and perhaps more criminal charges based on theories of strict liability, willful blindness, or, as in the Glaxo case, obstruction of justice.

For Coon, and other lawyers who have battled the repeat corporate offenders of the world, it's time for such a change. •