APRIL 2005 White Collar Crime / Criminal Defense Has United States v. Booker Closed the Book on Corporate Compliance Programs and Voluntary Cooperation? With respect to corporations, perhaps the single biggest impact of the Federal Sentencing Guidelines is found in their emphasis on corporate compliance programs and cooperation in governmental investigations. In United States v. Booker, the Supreme Court recently determined that the Federal Sentencing Guidelines are no longer mandatory, and instead courts are to consult them when determining sentences. If the Guidelines are what drove many corporations to develop corporate compliance programs, will or should corporations rethink the value of having these programs, as well as cooperating with the government, now that the Guidelines are merely instructive? The short answer to this question is an emphatic No. In fact, such programs may be more valuable than ever precisely because the Guidelines are no longer mandatory. There are two primary reasons for this answer. First, when faced with a criminal investigation, a corporation s first and primary objective is to avoid prosecution of the company. In making a determination whether to prosecute a corporation, prosecutors have been and will continue to be influenced heavily by the corporation s compliance programs and its cooperation with the government s investigation. Second, events after the Supreme Court s decision in Booker indicate that the courts will continue to apply and probably to follow the Federal Sentencing Guidelines. CONSIDERATIONS APPLICABLE TO AVOIDING PROSECUTION Since at least 1980, the United States Department of Justice recognized either implicitly or explicitly that the presence of a corporate compliance program and/ or cooperation could favorably impact a federal prosecutor s decision to decline a prosecution. DOJ has recently been more specific and explicit in this regard, in a January 20, 2003 memorandum by then- Deputy Attorney General Larry D. Thompson, entitled Principles of Federal Prosecution of Business Organizations (the Thompson Memorandum ). The Thompson Memorandum lists nine factors to be considered in determining whether to charge a corporation, including the nature and seriousness of the offense, the pervasiveness of the wrongdoing, the entity s history of similar conduct, collateral consequences to persons such as shareholders resulting from prosecution, and the adequacy of actions against individuals and civil actions. In addition, the Thompson Memorandum echoes considerations found in the Sentencing Guidelines: the corporation s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents, including, if necessary, the waiver of corporate attorney-client and work product protection; the existence and adequacy of the corporation s compliance program; and the corporation s remedial actions, including any efforts to implement an effective corporate compliance program or to improve an existing one, to replace responsible management, to discipline or terminate wrongdoers, to pay restitution, and to cooperate with the relevant government agencies.
Compliance Programs According to the Thompson Memorandum, the critical factors in evaluating any corporate compliance program are whether the program is adequately designed for maximum effectiveness in preventing and detecting wrongdoing by employees and whether corporate management is enforcing the program or is tacitly encouraging or pressuring employees to engage in misconduct to achieve business objectives. In other words, the fundamental questions are Is the corporation s compliance program well designed? and Does the corporation s compliance program work? In answering these questions, the prosecutor is to consider: 1. The comprehensiveness of the compliance program; 2. The extent and pervasiveness of the criminal conduct; 3. The number and level of the corporate employees involved; 4. The seriousness, duration, and frequency of the misconduct; and 5. Any remedial actions taken by the corporation including restitution, disciplinary action and revisions to corporate compliance programs. Significantly, this portion of the Thompson Memorandum is cross-referenced in a footnote to the relevant sections of the Federal Sentencing Guidelines. In addition, the Thompson Memorandum s discussion refers to In re Caremark, 698 A.2d 959 (Del. Ct. Chan. 1996), the leading case on corporate compliance programs in the context of civil liabilities of corporations and their boards of directors. Cooperation and Voluntary Disclosure The Thompson Memorandum addresses a corporation s cooperation and voluntary disclosure in connection with the government s investigation. Again this is a consideration that the Department has looked to since at least 1980 in the context of exercising prosecutorial discretion, not in relation to sentencing by a court. The Thompson Memorandum describes it in more detail and can be viewed as giving such considerations greater prominence in the context of the exercise of prosecutorial discretion. Among the factors is the corporation s willingness: 1. To identify the culprits within the corporation, including senior executives; 2. To make witnesses available; 3. To disclose the complete results of its internal investigation; and 4. To waive attorney-client and work-product protection. With respect to the waiver issue, the Thompson Memorandum states, one factor the prosecutor may weigh in assessing the adequacy of a corporation s cooperation is the completeness of its disclosure including, if necessary, a waiver of the attorney-client and work-product protections both with respect to its internal investigation and with respect to communications between specific officers, directors, and employees and counsel. The Thompson Memorandum goes on to state that such a waiver is not an absolute requirement and is only one factor in evaluating the corporation s cooperation. The Thompson Memorandum also notes that prosecutors may consider a corporation s timely and voluntary disclosure in evaluating the adequacy of the corporation s compliance program and its management s commitment to the compliance program. In other words, timely and voluntary disclosure should help to demonstrate that the corporation s compliance program is in place and working. CONSIDERATIONS APPLICABLE TO THE FEDERAL SENTENCING GUIDELINES As noted above, these same factors are important under the Federal Sentencing Guidelines in determining a corporation s punishment if it is found guilty of criminal offenses. Chapter 8 of the Guidelines pertains to sentencing of organizations. Section 8C2.5 defines the factors entering into a corporation s Culpability Score in assessing a Guidelines sentence for the corporation. Pursuant to that section, a corporation receives credit for an Effective Compliance and Ethics Program and for Self-Reporting, Cooperation and Acceptance of Responsibility. 2 APRIL 2005 KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP
Compliance Programs Section 8B2.1 contains the Guidelines definition of an Effective Compliance and Ethics Program. It is noteworthy that there is a cross-reference to Section 805(a)(2)(5) of the Sarbanes-Oxley Act of 2002 which requires this provision in the Guidelines. The essence of the Guidelines definition of an Effective Compliance and Ethics Program is similar to that used in the Thompson Memorandum, i.e., the essential questions are: Is the program well designed? Does it work? The section also contains a detailed outline of what the Guidelines consider to be important elements of an Effective Compliance and Ethics Program for corporations. This outline can be a useful tool for corporate counsel in implementing and assessing a corporation s own compliance program. All of the factors discussed in this section are consistent with those discussed in the Thompson Memorandum. Cooperation and Voluntary Disclosure The Guidelines make clear that, in order to be worthy of credit, the cooperation of a corporation must be both timely and thorough. Under the Guidelines, a prime test of whether the corporation has disclosed all pertinent information is whether the information is sufficient for law enforcement personnel to identify the nature and extent of the offense and the individuals responsible for the criminal conduct. Furthermore, waiver of attorney-client privilege and of work-product protection is not a prerequisite to a reduction in culpability score... unless such waiver is necessary in order to provide thorough disclosure of all pertinent information known to the organization. Again, the factors cited by the Guidelines for assessing cooperation, and their application, are virtually the same as those in the Thompson Memorandum. BOOKER AND ITS IMMEDIATE AFTERMATH The Supreme Court Decision The Booker decision is addressed in our Client Alert of January 2005. Although the Supreme Court in Booker held that the Guidelines were no longer mandatory, it made clear its expectation that courts would continue to use the Guidelines in imposing sentences. The Court noted: The district courts, while not bound to apply the Guidelines, must consult those Guidelines and take them into account when sentencing.... The courts of appeals [will] review sentencing decisions for unreasonableness. The Justice Department Reaction The Justice Department reaction is addressed in our Client Alert of February 2005. The Department has made clear that its prosecutors will continue to use the Guidelines in calculating sentences and will press the courts to do so as well. Among other things, a recent memorandum provides that all federal prosecutors must : 1. Consult the Guidelines at the charging stage and continue to charge and pursue the most serious readily provable offenses. 2. Actively seek sentences within the range established by the Guidelines, keeping in mind that under the Guidelines, departures are reserved for rare cases involving circumstances that were not contemplated by the Sentencing Commission. 3. Preserve the ability of the government to appeal unreasonable sentences. 4. Continuously assess the impact of the Supreme Court s decision by continuing to follow the existing requirements for reporting adverse decisions set forth in the U.S. Attorney s Manual. In other words, District Court judges are being put on notice that the Justice Department will pursue aggressively what it views to be unreasonable and adverse decisions on sentencing. The Reaction of the Courts A recent decision by the United States Court of Appeals for the Second Circuit, almost immediately after Booker, makes clear that courts in the Second Circuit are expected to continue to apply the Guidelines in determining sentences. See United States v. Crosby, No. 03-1675 (2d Cir. Feb. 2, 2005). Among other things, the court stated that sentencing judges: 1. Must consider the applicable Guidelines range in selecting a sentence. 2. Normally will have to determine the applicable 3 APRIL 2005 KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP
Guidelines range in selecting a sentence. 3. May find all the facts necessary for determining either (i) a Guidelines sentence : a sentence within the applicable Guidelines range or within permissible departure authority, or (ii) a non-guidelines sentence a sentence that is neither within the applicable Guidelines range nor within permissible departure authority. 4. The court should then decide whether to impose a Guidelines sentence or a non-guidelines sentence. Moreover, the court warned that the Guidelines are more than just casual advice, to be consulted or overlooked at the whim of a sentencing judge It would be a mistake to think that, after Booker/Fanfan, district judges may return to the sentencing regime that existed before 1987 and exercise unfettered discretion to select any sentence within the applicable statutory maximum and minimum. Federal courts appear to be continuing to use the Guidelines after Booker. According to a recent report by the Chairman of the Federal Sentencing Commission to a House subcommittee, of the 692 post-booker cases for which complete sentencing information was available, 63.9% were within the applicable Guidelines range. In prior years, approximately 64% were within the Guidelines range. Strategies for Counsel The fact that the Sentencing Guidelines are no longer mandatory for the courts may elevate the importance of implementation of compliance programs and of voluntary cooperation for corporations facing criminal investigations. Under the Guidelines, such actions were almost mandatory, and their absence could be quite damning. With the Guidelines becoming instructive rather than mandatory, compliance programs and cooperation may well be viewed by a prosecutor as volitional, and therefore more meaningful, on the part of the corporation. In any event, it cannot be doubted that implementation of an effective compliance program is good business and, so long as the program is properly monitored and administered, is well worth the investment should the corporation find itself in the government s crosshairs. In summary, corporate counsel would be well advised to continue to pay close attention to the corporation s compliance programs, to make sure that they are in place, are well designed and are working. And if the unwelcome specter of a criminal investigation should appear at the corporation s door, corporate counsel must pay close and immediate attention to the company s timely and complete cooperation with that investigation. Eva M. Ciko eciko@klng.com 212.536.3905 Barry M. Hartman bhartman@klng.com 202.778.9338 Eugene R. Licker elicker@klng.com 212.536.3916 William O. Purcell wpurcell@klng.com 212.536.3922 4 APRIL 2005 KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP
If you have questions or would like more information about K&LNG s White Collar Crime/Criminal Defense practice, please contact one of our White Collar Crime/Criminal Defense lawyers listed below: Boston Michael DeMarco mdemarco@klng.com 617.951.9111 Dallas Jacqueline R. Peterson jacqueline.peterson@klng.com 214.939.4926 Los Angeles Richard P. Crane, Jr. rcrane@klng.com 310.552.5089 Miami Beatrice A. Butchko bbutchko@klng.com 305.539.3371 Newark David S. Kwon dkwon@klng.com 973.848.4025 New York Eva M. Ciko eciko@klng.com 212.536.3905 Eugene R. Licker elicker@klng.com 212.536.3916 William O. Purcell wpurcell@klng.com 212.536.3922 Pittsburgh Mark A. Rush mrush@klng.com 412.355.8333 Washington, D.C. Dick Thornburgh dthornburgh@klng.com 202.778.9080 Stephen W. Grafman sgrafman@klng.com 202.778.9057 Barry M. Hartman bhartman@klng.com 202.778.9338 www.klng.com BOSTON DALLAS HARRISBURG LONDON LOS ANGELES MIAMI NEWARK NEW YORK PITTSBURGH SAN FRANCISCO WASHINGTON Kirkpatrick & Lockhart Nicholson Graham LLP (K&LNG) has approximately 950 lawyers and represents entrepreneurs, growth and middle market companies and leading FORTUNE 100 and FTSE 100 global corporations nationally and internationally. K&LNG is a combination of two limited liability partnerships, each named Kirkpatrick & Lockhart Nicholson Graham LLP, one qualified in Delaware, U.S.A. and practicing from offices in Boston, Dallas, Harrisburg, Los Angeles, Miami, Newark, New York, Pittsburgh, San Francisco and Washington and one incorporated in England practicing from the London office. This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Unless otherwise indicated, the lawyers are not certified by the Texas Board of Legal Specialization. Data Protection Act 1988 - We may contact you from time to time with information on Kirkpatrick & Lockhart Nicholson Graham LLP seminars and with our regular newsletters, which may be of interest to you. We will not provide your details to any third parties. Please e-mail cgregory@klng.com if you would prefer not to receive this information. 2005 KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP. ALL RIGHTS RESERVED.