Project: Corporate Counsel Part I (Unintended Consequences)* The Justice Department's Rational Approach To Deterring Corporate Crime

Friday, July 1, 2005 - 01:00
Christopher Wray

Editor: Chris, tell us about your background.

Wray: Most recently, I served as the Assistant Attorney General in charge of the Justice Department's Criminal Division. I was nominated by the President for the position in the spring of 2003 and subsequently confirmed. Immediately preceding my nomination, I was the Principal Associate Deputy Attorney General, a title that's a mouthful but in which I was the ranking deputy to then-Deputy Attorney General Larry Thompson, the Department's number two. In that capacity, I helped craft the so-called "Thompson Memo" and was one of the two officials listed by Larry as the contacts for prosecutors' questions or feedback about the Memo. (Interestingly, the other official, Drew Hruska, has recently joined me, in King & Spalding's New York office.) I was a member of the President's Corporate Fraud Task Force and participated in its creation. I also interacted on behalf of the Administration with various players involved in the adoption and implementation of Sarbanes-Oxley.

Right before joining the Administration, I was an Assistant U.S. Attorney, a line prosecutor in the Atlanta U.S. Attorney's office. I was in the courtroom and the grand jury, handling securities fraud, public corruption and a wide variety of other cases. So I was in the trenches before I moved up to senior management at Justice in Washington. Before being a line prosecutor, I was a lawyer at King & Spalding, handling internal investigations, white-collar criminal defense, and complex civil litigation.

Having stepped down from my government post this past May, I've now rejoined King & Spalding as chair of the firm's special matters and government investigations practice group, which provides counsel on a variety of corporate, securities and fraud matters, including white-collar criminal and regulatory enforcement matters, whistleblower complaints and other parallel proceedings, and corporate internal investigations. The group, originally established by former U.S. Attorney General Griffin Bell, includes more than a dozen experienced former federal prosecutors and senior government officials.

Editor: Did your work at the Justice Department also entail working with the Commission that formulated the Federal Organizational Sentencing Guidelines?

Wray: I've testified before the Sentencing Commission, although I wasn't all that directly involved in the development of the latest version of the Organizational Guidelines; I did oversee a number of folks who were. As a practical matter, I think the Thompson Memo may have a more immediate and direct impact on companies' behavior than the Sentencing Guidelines themselves.

Editor: Tell us more about the Thompson Memo.

Wray: The Thompson Memo is designed to shape and guide prosecutor's decisions in terms of whether or not to charge a company in the first instance. The Organizational Sentencing Guidelines are Designed to determine how a company should be treated at sentencing. Most companies view the threshold decision to charge as the one that has the greatest implications for their future. The Sentencing Guidelines comes into sharper focus in their minds after the calamity of indictment and conviction has occurred.

Editor: Could you describe the programs that the Justice Department has that would alert companies to what they need to do in order to be in the best possible posture if the question of whether to charge should arise?

Wray: The Justice Department's concern is less whether they present themselves in the best possible way, but whether they behave in the best possible way. I wouldn't say that there is a formal program as such; but the Thompson Memo is pretty detailed and gives companies a good insight as to how the Department approaches these issues. They can also look at how the government has handled other companies - companies can learn from what their peers did right and wrong. The Memo and that history, I think, are the primary sources.

If you take it down a level further in detail, it's fair to say that the government - prosecutors, agents, regulators, and their supervisors - are much more sophisticated now and much more rigorous in their analysis of a company's compliance program and of the company's response if there's actually been a problem. The Department and other parts of the government now view true cooperation as being a lot more than just complying with subpoenas. There's a difference between cooperation and not obstructing. Not obstructing is terribly important, of course, but it's not the same thing as cooperation. Cooperation means actively trying to be proactive and helpful. And companies are becoming a lot more creative and forthcoming in how they handle that interaction.

Editor: It is a fact of corporate life that there are bound to be people in any large company who will act in illegal ways notwithstanding a company's strenuous efforts to inculcate a compliance culture. How does the Department handle such situations?

Wray: The behavior of a rogue manager is not viewed in isolation. The government looks at it in the context of what that manager's company has done to instill a compliance culture that alerts its employees that severe sanctions will be imposed for compliance failures. A compliance program that's mere window-dressing isn't going to be viewed particularly persuasively by the folks at the other end of the equation, in the government. Those kinds of programs aren't likely to prevent misconduct either. A really effective compliance program is going to permeate a company's entire culture and affect things like discipline, promotions, and bonuses, for example.

I've heard a lot of concern that law enforcement or regulators have begun policing "unethical" rather than "illegal" conduct. What I tell people in response to that concern is that the Department pursues criminal, not unethical, conduct. That doesn't mean, though, that unethical conduct is irrelevant. A company's history of repeated unethical conduct, followed by an employee's criminal act might well be viewed quite differently from the same criminal conduct coming instead on the heels of a long history of responsible, ethical conduct.

Editor: I gather that it is not sufficient merely to show that the company was committed to compliance before the crime took place, but it also must demonstrate a cooperative attitude in connection with the investigation?

Wray: There's no one thing that's either a requirement on the one hand or a safe harbor on the other, but there are things that are significantly persuasive in pushing a corporate charging decision one way or the other. If you look at the Thompson Memo, you'll see a greater emphasis both on compliance and on cooperation. They're two sides of a single coin that manifests responsible corporate behavior.

Editor: Are there situations where awareness of wrongdoing by others may create liability?

Wray: Under certain circumstances, knowledge of wrongdoing by others can expose your company to some form of accessorial liability. Depending on what other facts exist, that might occur where your company's knowledge of a third-party's misconduct or wrongdoing comes directly from a business relationship or transaction that's not appropriately disclosed. Both Merrill Lynch and CIBC, for example, entered into forms of deferred prosecution agreements with the Justice Department based on the conduct of employees at both of those financial institutions whose knowledge of certain fraudulent business practices at Enron came from their own roles in facilitating the Enron fraud. A little more recently, AOL entered into a similar deferred prosecution agreement based on behavior by employees that constituted aiding and abetting securities fraud at a software firm called PurchasePro. There are many other instances where companies, that did not view themselves as principal actors, created exposure for themselves because they sat on information that arose from fraud elsewhere but that their own employees had facilitated.

When this arises, it's important for general counsel and other lawyers for a company to assess the implications of employees' knowledge of wrongdoing at another company. They should look awfully hard at how that knowledge was derived. A closer look may in fact reveal aiding and abetting liability. For example, they should be alert to situations where the documentation of a transaction differs dramatically from the substance of what's really going on with the deal - often a red flag.

Editor: In considering the decision to prosecute, how important are actions taken by a company after it learns that it is being investigated?

Wray: I view compliance and cooperation as a continuum compliance at the front end because it should prevent misconduct issues from arising, and cooperation at the other end, after a problem has already surfaced. Along that continuum will be things like internal investigations and voluntary disclosures to the government, sometimes including waiver of the applicable privileges. A company that comes in first and initiates a dialogue with the government makes a very powerful first impression. In my experience, there aren't many instances where a company that took that step wound up regretting its decision. That's not at all to say that it's the right advice for every company in every situation, but there are a remarkable number of instances where companies are doing that these days. The Justice Department welcomes dialogue with corporate counsel and a lot of the things we've been talking about here are reflective of that. With a few narrow exceptions, the Department is not in the business of providing forward-looking legal opinions about the legality of a particular business practice. But the Department welcomes having counsel come in and say "We've found the following potential problem, here's what we've done to deal with it, here's why we think this is the extent of it, here's why we think there's no basis for criminal liability, but as an abundance of caution we want to disclose it to you."

Editor: Doesn't the legality of particular practices inevitably come up where there is a deferred prosecution or a non-prosecution agreement?

Wray: The ongoing relationships that are created through deferred prosecution agreements or non-prosecution agreements inevitably give rise to questions as to whether a business practice is problematic or not, and if not, why not. During my tenure, we tried hard to warn line prosecutors not to make the mistake of believing that they'd become, overnight, independent experts in a particular industry. That's not to say that they shouldn't have strong views and aren't very smart professionals whose views matter, but the Department tries to encourage them to consult with the right kind of experts. The purpose of the Corporate Fraud Task Force was to bring together the enforcement folks and their regulatory expert counterparts. Prosecutors are cautioned to be mindful of potentially unintended, far-reaching consequences their decisions may have for other companies in the same industry, for example.

Editor: How do deferred prosecution and non-prosecution agreements work?

Wray: These alternative resolutions deferred prosecution agreements and non-prosecution agreements are getting increasing attention. Despite some sporadic concerns and criticism, I'm pretty confident that if you look at the federal government's track record in using these agreements, it's a record of having been aggressive, but professional and appropriate. We viewed these agreements as flexible alternatives that in the right kinds of situations sometimes offer the best way to deal with companies facing potential criminal exposure. The prospect of using one of these agreements, of course, usually only comes into play after a Thompson Memo analysis of what to do after a problem has been uncovered. These resolutions sometimes permit appropriate action to be taken where the collateral effects of an indictment might be disastrous and the company has shown good reason to believe it can rehabilitate itself.

The main difference between a deferred prosecution agreement and a non-prosecution agreement is whether or not a charging instrument is actually filed. Under a deferred prosecution agreement, the government files a complaint, but agrees to defer prosecution based on that complaint for a year, two years, or even longer; a non-prosecution agreement is similar but includes no formal complaint. Both types of agreements typically require the company to cooperate fully and admit publicly the facts of its misconduct. Both almost invariably require some kind of payment, like restitution or a fine. There may be remedial actions taken by the company to prevent the harm from happening again or to mitigate harm that's already happened. Increasingly, you've also seen a provision in these agreements that requires an independent monitor. If the company complies with all the agreement's requirements, at the end of the term of the agreement, the government will dismiss all the charges so there's no criminal record for the company. If the company doesn't comply, however, the government can then proceed on the complaint, armed with the company's admission of its misconduct and all the evidence it was able to obtain as a result of the company's cooperation - making conviction pretty much a foregone conclusion.

Editor: What do you see as the general counsel's role?

Wray: I think that a general counsel's role includes providing, on a day-to-day basis, an independent look (with some healthy skepticism) at individual instances of conduct. The general counsel's role is fundamentally different from that of the compliance officer. But in many ways, the legal department's day-in/day-out, case-by-case, transaction-by-transaction mindset and approach can be very meaningful and important manifestations of the company's true commitment to compliance. If the general counsel is doing his or her job really well, compliance becomes an everyday reality and way of life in the company.

Editor: What controls exist to prevent a U.S. Attorney from charging corporations without adequate justification?

Wray: The Thompson Memo is designed to be one form of control; it's a substantive guide to U.S. Attorney's Offices and other prosecutors that handle criminal cases against corporations. It outlines the bases on which they should make decisions to prosecute and describes how they should assess and respond to a company's efforts at compliance and cooperation. That's one form of control. Second, the Justice Department has made clear to U.S. Attorneys that decisions to charge corporations are expected to be made with heavy involvement of supervisors in the U.S. Attorney's Offices. They're explicitly instructed to consider the severity of collateral consequences. There are other factors that have to be considered too: How pervasive is the wrongdoing within the company? What is the company's compliance history? What does the company's compliance program look like? How has the company handled cooperation? What has the company done to provide restitution to victims or to remediate the problem? And finally, decisions of this magnitude are followed closely, and sometimes reviewed, at Main Justice, especially in the Criminal Division.

Editor: One of the consequences of waiver of the privilege is to provide ammunition to private litigants. Has the Justice Department considered corporate concerns about this?

Wray: The Department at the leadership level is well aware that waiver of a company's attorney-client or work-product privilege in its dealings with criminal authorities would likely have serious ramifications for the company's handling of other proceedings. That's largely why the government recognizes a privilege waiver as a big deal - because of those very ramifications. The government does enter into confidentiality agreements in appropriate circumstances, although the enforceability of those agreements is somewhat unsettled when it comes to fending off third parties. It's a tricky area of law, one that a lot of people have spoken and written about at length, and that may ultimately require greater clarification by the courts or, potentially, even legislation.