Carrots and Sticks Amid Overlapping Enforcement Schemes And Policies: Finding Government Message
The Experience And Views Of The Enforcement Community
Privilege Update: When Should Compliance Practices Be Protected From Disclosure?
In Search of Government's Ideal Role in Fostering "Good Corporate Citizenship"
Symposium Wrap-Up: Commentary On Ideas And Issues Raised During The Conference
Appendix-A: Commission Questions & Answers
John Scalia, Jr., Research Associate, U.S. Sentencing Commission
Kirk S. Jordan, President, Compliance Systems Legal Group
Moderator: Commissioner Michael Goldsmith, U.S. Sentencing Commission
COMMISSIONER GOLDSMITH: Our next session deals with cases sentenced under the organizational guidelines. Our next panel will provide a preliminary look at this topic.
Because answering the question, "What do the cases show?" requires a two-part answer, we have two speakers: John Scalia of the Commission's research staff, and Kirk Jordan of the Compliance Systems Legal Group.
The reason for this two-part approach is as follows: The guidelines have thus far been applied only to cases involving more recent conduct; and, second, bigger cases typically have a longer gestation period. Sentencing Commission data, on which John Scalia will report, may not tell the full story of the guidelines' impact, especially on larger companies. Kirk Jordan will therefore provide a fuller picture of the relevance of compliance programs by talking about criminal cases that, while technically pre-guideline, appear to have been influenced by guideline factors. He will also talk about civil cases in which compliance has proven to be relevant.
John Scalia, Jr., is a research associate at the U.S. Sentencing Commission. In this capacity, Mr. Scalia has served on numerous working groups dealing with white-collar crime and organizational defendants. He was responsible for collecting the past practice sentencing data on organizational defendants. These data were used to inform the development of the Chapter Eight guidelines for organizations. He continues to oversee the collection of data on organizational sentencing pursuant to the guidelines.
Kirk S. Jordan is the President of Compliance Systems Legal Group, a law and consulting firm in Warwick, Rhode Island. Compliance Systems Legal Group designs and implements compliance programs for organizational clients and is a leader in the development of interactive, computer-based ethics and compliance training applications. Before founding Compliance Systems Legal Group, Mr. Jordan was associated with the law firm of Skadden Arps. Mr. Scalia?
MR. SCALIA: Thank you, Commissioner. When the Commission began developing the organizational guidelines, no comprehensive database of past sentencing practices for organizational defendants existed. Consequently, the Commission did extensive empirical research on organizational sentencing practices in the federal courts.
The Commission's study revealed that a very small proportion of the federal caseload actually involved organizational defendants. Of the approximately 40,000 criminal cases sentenced each year, fewer than 400 involved organizational defendants. Chart 1 indicates that the number of organizations sentenced each year is fairly stable, between 300 and 400 cases a year.
Since the organizational guidelines went into effect in 1991, 208 organizations have been sentenced pursuant to Chapter Eight according to documentation received by the Commission as of June 30, 1995. The Commission received an additional 72 organizations that were sentenced pursuant to the former antitrust guideline that was in place prior to the Chapter Eight guidelines. Chart 2 describes the number of organizations sentenced each year pursuant to the guidelines.
Why so few cases? Most of the organizational cases are rather complex frauds or market allocation agreements that involve lengthy investigations before charging decisions can be reached. Second, even though the Chapter Eight guidelines took effect in November 1, 1991 (and according to statute should be applied to all sentencings that occur on, or after, that date), the Department of Justice has instructed prosecutors, in light of relevant court decisions, the guidelines should only be applied to offenses that occur on, or after, November 1, 1991. Therefore, consistent with the Commission's expectations, the majority of the organizations sentenced over the past four years are sentenced pursuant to pre-guideline rules. Of the 197 organizations sentenced during fiscal year 1994, only 106 (or 54 %) were sentenced under the guidelines.
The Commission's data indicate that the majority of organizations sentenced for criminal offenses are closely held organizations. From its study of pre-guideline practice, the Commission found that approximately 90 percent of the organizations sentenced involved closely held organizations. Under guideline practice, approximately 97 percent involved closely held organizations. Openly traded organizations, public traded organizations, typically account for a relatively small percentage, approximately nine percent of past practice and only three percent of guideline practice.
Why are we seeing a significantly smaller proportion of publicly traded organizations? These cases tend to be larger and more complex, and it often takes longer for them to work their way through the system. Secondly, prosecutors may be opting to pursue these cases civilly rather than criminally. (Kirk Jordan is going to talk about the civil cases and large non-guideline criminal cases.) In time, we should see more publicly traded organizations sentenced under the guidelines.
Consistent with the fact that most of them are closely held organizations, owners and top management are frequently named as co-defendants and convicted in tandem with the organization. Of the 264 closely held organizations sentenced thus far, an owner or top executive was convicted in approximately 51 percent, or 134, of these cases; 189 owners or top executives were convicted in all.
Consistent with what Bill Laufer found in his study, the organizations sentenced under the guidelines typically employ fewer than 50 people. Chart 3 indicates that the overwhelming majority, 56 percent, employed fewer than 20 persons, and another 23 percent employed between 20 and 100 people. A very small percentage employed fewer than 500. Under the Small Business Administration criteria, those organizations employing fewer than 50 people would be classified as extremely small organizations.
The organizations sentenced under the guidelines tend to be fairly new. Fifty percent have been in business for less than 15 years. Antitrust defendants have typically been in business or significantly longer, about 37 years. Most of the organizations continued to operate after indictment and conviction; however, many had ceased operations or were experiencing financial stress at the time of sentencing. Chart 4 indicates that 22 percent went out of business sometime around indictment or before sentencing; three percent were undergoing bankruptcy; ten percent were undergoing some other financial stress; and 65 percent remained solvent and operating.
The guidelines provide for a corporate death sentence for organizations identified as criminal purpose. Under the guidelines, an organization that is defined as criminal purpose is divested of its assets. Fourteen organizations have been sentenced under this provision of the guidelines.
Chart 5 indicates that the majority of the offenses for which defendants were convicted are either antitrust offenses, representing 32 percent of the offenses; fraud offenses, about 30 percent; environmental, 12 percent; tax violations, 9 percent; and food and drug violations, 3 percent. As Rusty Burress pointed out yesterday morning, the environmental and the food and drug violations are not covered by the guideline fine provisions.
With respect to the fraud offenses that have been sentenced, the loss to the victims is relatively modest. The loss is typically less than $30,000. In only seven of the cases did the loss actually exceed $1 million.
With regard to the antitrust offenses, the volume of commerce that was affected by the offense was typically less than $4 million; however, in nearly a third of the cases, the volume of commerce did exceed $10 million over the course of the offense.
The culpability score is an essential part of assessing the organization's blameworthiness with respect to the offense. The most significant culpability factor has been level of authority and the size of the organization. Chart 6 describes the application of this factor. Because most of the organizations are small receive no enhancement or only receive a one-point enhancement for this adjustment: 46 percent received no enhancement; 38 percent received a one-point enhancement; and only one organization, which would be a 5,000-person organization, received a five-point enhancement.
Some of the other culpability factors, such as prior history, violation of an order, and obstruction of justice, are rarely applied. According to past practices, these factors were rarely present in those cases.
Four defendants apparently have sought credit for having a compliance program, but credit for a compliance program has only been awarded in one case. While the defendant did receive credited for having an effective program, the unique facts of this case limit its usefulness as a model - especially for larger companies. The defendant was in the business of selling smoking paraphernalia. Due to the nature of the products sold, the defendant recognized the inherent risk of selling those products: the products could be used as drug paraphernalia, which the sale of is prohibited under federal law. In order to prevent violations of the drug paraphernalia laws, the organization produced a training video to instruct employees that they should refuse to sell items to any customer who inquires about drug paraphernalia or indicates that the items will be used as such. The court felt that given the small size of the organization, a videotape in conjunction with verbal instructions issued by the owner represented an appropriate degree of formality to prevent and detect violations of the drug paraphernalia law. The organization was credited with having an effective program.
In the three other cases in which the defendant claimed to have a compliance program, credit was denied. The court cited the following reasons for not applying the mitigation: (1) The corporate president was actively involved in the offense conduct; (2) the corporate president, while not actively involved in the offense conduct, was aware of the illegal conduct; and, (3) while the parent organization had an effective program, the program was not in effect at the time of the offense at the newly acquired subsidiary where the offense actually occurred.
The last culpability factor is self-reporting, cooperation, and acceptance of responsibility. Chart 7 indicates that 87 percent of the defendants received credit for accepting responsibility to some degree. Chart 7 also indicates that most defendants received two points for cooperation; others received one point for acceptance of responsibility. Three defendants did receive the full five points for self-disclosure of the offense. In each of these three cases, the defendants were under investigation. As the defendants conducted their own internal review regarding the nature of the infractions, the defendant informed the government of the pertinent facts.
Under the guidelines, approximately 80 percent of the organizations received a sentence that included a criminal fine. The average fine imposed was $376,000. Chart 8 indicates the average fine imposed on the organization by offense type. It indicates that the highest fines were paid by antitrust defendants and fraud defendants.
Just as an aside, there was one racketeering defendant and it was sentenced as a criminal purpose organization - the organization was divested of its assets.
Chart 9 compares guideline practice with past practice. The chart indicates that the fines have increased significantly, mostly as a result of the antitrust and the fraud cases.
Restitution was ordered in about 33 percent, or 68, of the cases. The average amount of restitution was nearly $300,000.
In promulgating the Chapter Eight guidelines, the Commission emphasized the importance of probation as a sanction. Because probation provides a means of maintaining control over an organization following an offense, the guidelines require probation under certain circumstances.
Under the Chapter Eight guidelines, probation has been ordered in 61 percent of the cases. Consistent with the directive in Chapter Eight, this represents a significant increase over past practice. Under pre-guideline practice, probation was ordered in only 21 percent of the cases. The data indicate that probation was imposed in 72 percent of the cases primarily to secure payment of monetary penalties; however, in 14 percent of the Chapter Eight cases, the defendant was ordered to implement a compliance program to prevent and detect future violations. The case documents, however, provide no detail on how the program should be implemented.
The Commission's data is available through the University of Michigan. There are four data files, two for past practice and two for guideline practice. You can contact the Commission on how to specifically obtain that data. Thank you very much.
MR. JORDAN: Good morning. In the fall of 1993, C. R. Bard, Inc., a medical device maker, settled civil and criminal charges arising out of the company's manufacture and shipment of allegedly defective heart catheters. Part of Bard's plea agreement included a far-reaching compliance program. In reading that agreement, and in particular, the compliance program imposed on Bard, I was struck by how closely the compliance program tracked the organizational sentencing guidelines' seven due diligence criteria. This was true even though the Bard case technically was not covered by the organizational sentencing guidelines - because the conduct at issue had occurred prior to the effective date of the guidelines and, of course, the case had pled out prior to trial.
After the Bard compliance program came down, we undertook an informal review of other consent decrees and plea agreements entered since the guidelines became effective, in which compliance programs or portions of compliance programs have been imposed. Some of these pre-dated Bard, and many have come after. To date, we have looked at about three dozen such compliance programs and plea agreements.
Our survey was not exhaustive. As you might expect, it is difficult to track all of these down. Many are unreported. However, I think we have a representative sample here in the three dozen, and I think we have most, if not all, of the major cases in which compliance programs were imposed.
As the data reflect (see charts following John Scalia's presentation), since the guidelines became effective, compliance programs have been imposed by a cross section of regulatory agencies in connection with the settlement of a variety of underlying civil and criminal offenses. It is important to remember that technically none of these cases falls under the organizational sentencing guidelines for the reasons I mentioned about the Bard case; either the conduct at issue occurred prior to November 1, 1991, or they're civil settlements. Nevertheless, the compliance programs imposed in these cases provide some guidance on what the government is looking for in an organization's compliance program.
I would like to make a few general observations about the consent decrees and then highlight some of the main compliance criteria contained in these consent decrees and plea agreements.
First of all, a few general observations. Several of the compliance programs closely track the organizational sentencing guidelines' due diligence criteria. Bard is one that I have already mentioned. Bard was primarily a criminal case. The Grumman case is another. It was a civil settlement intended to head off the filing of criminal charges against the company. And the Lucas Aerospace case is another one that is a criminal case but closely tracks the organizational sentencing guidelines' requirements.
The National Medical Enterprises (NME) case and the Caremark case - we heard about NME yesterday. Both settled health care fraud and related charges, and the compliance programs imposed are very similar to each other. Those two programs also incorporate a fair portion of the organizational sentencing guidelines' due diligence criteria.
I would like to make a couple points in particular about the Bard, Grumman, and Lucas cases, and these points do apply to some of the other cases on the table.
First of all, the Bard, Grumman, and Lucas cases all closely follow the guidelines. In fact, the Grumman and Lucas cases almost lift the language verbatim from the due diligence criteria section of the guidelines. All three involve large companies - I think they're all public companies - which may be at odds with some of the information we have been talking about earlier and the information contained in last week's Wall Street Journal article. And all three of these would have been organizational sentencing guideline cases if the conduct had occurred after the effective date of the guidelines and the cases had not pled out prior to trial and conviction.
The second point is that several of the more detailed compliance programs, including, for example, the Bard case, Grumman, Lucas, and the Caremark case, are designed to prevent and detect violations of all laws affected by the company's business operations, not just the type of violations at issue in the underlying settlements. For example, the Grumman and Lucas programs are supposed to prevent all "improper business conduct."
The instances where compliance programs have been imposed cut across the enforcement agencies and involve both civil and criminal prosecutions of a variety of underlying offenses. If we discuss these cases by agency, we see that the Department of Justice has been the most active, both through its Criminal Division and its various Civil Divisions. In fact, the Department of Justice Civil Antitrust Division was responsible for settling the largest single group of consent decrees in which compliance programs were imposed. There are approximately 15 antitrust compliance settlements. The compliance programs imposed in connection with those settlements tend to be the same one to the next. The language is almost identical.
The Department of Justice, with respect to criminal cases, usually collaborated with one of the regulatory agencies. For instance, in several cases DOJ's criminal division collaborated with the EPA to settle environmental offenses, and, in many cases, there were parallel civil and criminal prosecutions.
In the environmental area, we see that there is not much distinction between the compliance programs imposed in cases settling civil versus criminal allegations. As an example, I point you to the Louisiana-Pacific case, which was a civil settlement of a Clean Air Act violation in which a rather rigorous compliance program was imposed, and compare that program to the Consolidated Edison case, which settled criminal charges arising under EPCRA. In the Con Edison case, a court-appointed monitor is directed - as part of probation that the company is put under - to develop and implement an effective program to prevent and detect violations of environmental laws under the standards established by the organizational sentencing guidelines.
The Department of Justice also collaborated with the Department of Health and Human Services on two major health care fraud cases: the National Medical Enterprises cases and the Caremark case. We heard about the NME case yesterday from John Meyers. The compliance programs imposed in connection with these two settlements are very similar. And, as John Meyers pointed out yesterday, the NME case, which was the first of the two, is expected to be a model in this area.
A legitimate question from all of this is: Are there any trends? The consent decrees and plea agreements that we have seen show some similarities across offenses - that is, if it is an antitrust offense, you have a good idea what your compliance program is going to look like. Similarly, if you settle health care fraud charges, you know that you are going to have a consent decree that imposes a compliance program like the one in the NME and Caremark case. And if you work in the FDA-regulated area, you would want to take a look at the Bard case. But I think it is too early to identify any specific trends that cut across the enforcement agencies.
It appears that the consent decrees and plea agreements reflect little, if any, policy coordination across the various enforcement agencies, and I think this would be very useful to companies. It would give companies some predictability because companies' operations obviously cut across enforcement agencies. And perhaps we can hear a little bit about this from the enforcement community later today.
Having said all that, and although there doesn't appear to be any direct policy coordination across the enforcement agencies, there are certain elements that tend to recur in these compliance programs, that are worth noting. The first, and one that appears to be very significant to the government, is the establishment or reaffirmation of strong compliance oversight, and management systems generally involving the appointment of a compliance officer, senior management involvement, and active participation of the board of directors.
For example, all of the antitrust compliance programs require the appointment of an antitrust compliance officer to be in charge of the company's antitrust compliance program. In the Bard case, we have the appointment of a compliance coordinator to oversee the company's entire compliance program. In Caremark, we have a compliance officer. In Grumman, there is a vice president of audit and ethics.
The government does not appear to be too concerned, at least in these cases, about who the compliance officer is. He or she clearly has to have sufficient power and authority to meet the guidelines' requirement, but doesn't necessarily have to be a lawyer; in Caremark's case, it is the CFO; in Bard's case, it is the vice president for scientific affairs.
Another feature of many of these compliance programs is the creation or reconstitution of board committees to monitor compliance within the organization and to interface with compliance officers. These committees are often made up entirely of outside directors or a majority of outside independent directors. These committees are expected to take an active role in the compliance efforts, reviewing codes of conduct and other policy statements, interfacing with compliance officers, getting reports on a regular basis from compliance officers. And I point you to the Bard case, Grumman, NME, and Summerville National Bank, among others, as examples of cases where strong board committees have been appointed.
Also, we see in many cases the reconstitution or creation of new senior management committees to take some responsibility for compliance and to give overall corporate direction to the company's compliance program. The compliance officer is usually a member of these committees.
Several of the consent decrees discuss the issue of the delegation of substantial discretionary authority. The Bard, NME, and Caremark cases have language treating this issue, and in a related provision, several of the programs, including the health care fraud compliance programs and the Grumman case, require that managers and supervisors' efforts to promote adherence to the company's compliance program be an element of the manager's performance appraisal process.
Many of the consent decrees also require companies to continue, update, or adopt new codes of conduct or similar written compliance policy statements, and also call for the drafting of additional written policies and procedures which are designed to prevent the recurrence of the misconduct underlying the settlement.
A majority mandate some form of training. The antitrust compliance programs require an annual briefing on the antitrust laws to key employees. The more detailed programs typically require some training of virtually all employees. These would include the Bard, the NME, Caremark programs; Denny's, which was a civil case settling public accommodation laws violations; and Grumman and Lucas also appear to require such training. Several make it clear that the training must be administered on an annual basis to all employees.
To the extent that the programs treat the issues of monitoring and auditing, two features seem to be emphasized: misconduct reporting systems - and where these are stressed, the feature that the employee be able to report it without fear of retribution is very important. Audits are also emphasized. The important factor there is that the auditor should be independent of the facilities or personnel they are auditing - not necessarily an outside auditor, but independent.
Few say much about enforcement. The most substantial is the Bard case, which tracks the guidelines language by requiring the creation of an organization-wide consistent disciplinary system for compliance violations.
To the extent that the decrees treat the issue of appropriate responses after an offense, three things are emphasized: conducting investigations, halting any ongoing violations, and requiring the reporting of substantiated offenses to appropriate governmental agencies.
Finally, these cases make one more point: if a compliance program is imposed, the government and the courts can be expected to be intimately involved in the company's subsequent compliance efforts, and in the company's actual business operations. Virtually all the decrees have one or more of these features, and they're very similar to the probation provisions of the organizational sentencing guidelines. You have court appointed monitors to oversee the company's compliance program. You have consultants who have full and unfettered access to books and records and to people in the organization. Also, companies are often required to get approval for all or part of their programs from the government or the courts. Many of the companies must give regular reports to the government or the appropriate regulatory agency, in some cases as often as every four months. The lesson here is, to echo what John Meyers said yesterday, a company is much better off voluntarily putting a compliance program in place rather than having one put in place in response to a consent decree or a plea agreement. Thanks a lot.
COMMISSIONER GOLDSMITH: Mr. Scalia, you have indicated that only four organizations had sought credit for a compliance program. The questioner says, "I thought the Sentencing Commission had reported that 31 organizations sought credit between November 1991 through 1993, and eight in other cases in 1993 to 1994."
MR. SCALIA: No. In our annual report, in the past two years we have only reported four. The first year we had the drug paraphernalia case, and then last year we reported that three cases didn't receive credit for their programs.
COMMISSIONER GOLDSMITH: Mr. Jordan, you mentioned officer and board involvement. Can you comment on director and officer liability?
MR. JORDAN: Well, I think actually Richard Gruner can speak to that at length. As some of you may know, under the ALI corporate governance principles, board members and senior management are subject to potential personal liability if they have not instituted adequate compliance controls and procedures, particularly in a public company.
I think the government's intent here with respect to the establishment of strong compliance and oversight structures at the top is to involve the highest governing bodies in the organization with the company's compliance program.
COMMISSIONER GOLDSMITH: Mr. Scalia, have any companies been found to violate probation? If so, what happened? Have any assistant U.S. attorneys verified compliance with probation requirements, especially those dealing with compliance programs?
MR. SCALIA: Unfortunately, the Commission doesn't collect post-sentencing information, so we don't have any way of knowing to what extent companies violate probation.
update on cases panel
Kirk Jordan
Q. You mentioned officer and board involvement. Can you comment on director and officer liability (1994 A.C.I. Corp. Governance)? Discuss affirmative duty.
A. The imposed compliance programs suggest that the government places great importance on the establishment of strong compliance oversight and management systems, including senior management and board involvement. Thus, in examining organizations' compliance programs, the government is likely to take a hard look at whether officers, senior managers, and, particularly for a public company, the board of directors are active in overseeing and monitoring the organization's compliance programs. At the same time, emerging standards of liability, in such pronouncements as the 1994 ALI Principles of Corporate Governance and the 1994 Corporate Director's Guidebook, suggest that officers and directors have an affirmative duty to ensure that the organization establishes adequate compliance systems and controls. These pronouncements suggest that officers and directors may face personal liability for failing to do so.
Q. It seems the government is seeking different compliance requirements in different cases. Do you have insight into why? Are your persuaded these differences make sense?
A. There appears to be little, if any, policy coordination among the Department of Justice and the assorted regulatory agencies that have imposed compliance programs since the guidelines became effective. However, two points should be emphasized: The compliance programs imposed for the same type of offense tend to be very similar. For example, the imposed antitrust compliance programs are almost identical, and the programs imposed in the National Medical Enterprises and Caremark cases, both for health care fraud and related violations, are very similar. Second, certain elements tend to recur across the consent decrees and plea agreements in which compliance programs were imposed. These elements generally track - and, more importantly, flesh out - the guidelines' due diligence criteria: strong compliance oversight and management structures, including the designation of specific personnel to oversee compliance; the creation and communication of compliance standards and procedures; monitoring and auditing systems, such as hotlines and independent auditors; and violation response systems.
The Honorable Eleanor Hill, Inspector General, U.S. Department of Defense
Bruce L. Drucker, Deputy Assistant Inspector General for Criminal Investigative Policy and Oversight, U.S. Department of Defense
William B. Lytton, Vice President and General Counsel, Electronics Sector, Lockheed Martin Corporation
David N. Yellen, Assistant Professor, Hofstra University Law School
Moderator: Win Swenson, Deputy General Counsel/Legislative Counsel, U.S. Sentencing Commission
MR. SWENSON: Good morning, again. At yesterday's lunch, Senator Kennedy spoke of the guidelines' promise of reduced penalties for companies that act as good citizens. But he also cautioned that if collateral, non-criminal penalties that a company might face do not turn on the same good citizenship criteria, the value of the guidelines' promise - and the policy that underlies that promise - may be diminished.
When it wrote the organizational sentencing guidelines in 1991, the Sentencing Commission recognized that companies facing guideline penalties might well face other kinds of collateral sanctions. However, the Commission determined that the question of coordinating criminal and other penalties was largely beyond its jurisdiction and control. The guidelines do permit courts to take collateral penalties into account in choosing the fine within the allowable guideline range, but that is really the extent of coordination of penalties under the guidelines.
Today we reopen the discussion, without taking a position on it at this point, but with a significantly broader view because coordination issues really go beyond the question of whether guideline penalties should better account for other sanctions. Coordination issues fundamentally include the question of whether the many enforcement tools and policies used by the federal government are in sync. I think that was the thrust of Senator Kennedy's remarks yesterday.
Exploring these issues this morning will be three distinguished speakers with distinct backgrounds: one from government, one from a large corporation, and one from academia.
Our first speaker is the Honorable Eleanor Hill. Since March 1995, Ms. Hill has served as the Inspector General of the Department of Defense. In this role, she oversees what might be considered the largest and best established government coordination policy: the Defense Department's Voluntary Disclosure Program. This program will be the focus of Ms. Hill's remarks this morning, and in keeping with our policy of trying to keep the train running on time, I'll refer you to the program book for a full description of Ms. Hill's most impressive bio. But let me say here that she has had a remarkable career in a relatively few number of years, spanning work in Congress, as a federal prosecutor, and a trial attorney.
Before calling on Ms. Hill, I should note that due to the press of other obligations, she is going to have to leave following her remarks. However, we are pleased to have Bruce Drucker here to answer questions that you may have in the wake of Ms. Hill's remarks. Bruce is the Deputy Assistant Inspector General for Criminal Investigative Policy and Oversight, and I guess in practical terms, Ms. Hill's point person for the voluntary disclosure program.
On that note, it is my very great privilege to introduce the Honorable Eleanor Hill.
MS. HILL: Good morning, and thank you for the opportunity to be with you here today. I am particularly pleased to be even a small part of the efforts of the Sentencing Commission to work with you on the very important issue of corporate crime in America. As Win mentioned, I have been Inspector General at the Department of Defense for only about six months now, so I am still relatively new in dealing with the Defense Department's voluntary disclosure program. However, in my prior life, both as a federal prosecutor and as a staff member in the U.S. Senate for almost 15 years working a lot on crime issues and law enforcement issues, I can tell you that I am very familiar with the issues you are looking at - corporate crime, the issue of compliance, corporate good citizenship.
In fact, in the Senate I can remember - only too well, perhaps - the many long hours of work that went into drafting and negotiating the final passage of the legislation that gave birth to the Sentencing Commission. I can tell you that many people worked very, very hard to get that legislation passed and to get it done in what they felt was the best way. So I am particularly pleased, and it is very reassuring to me, to be here many years later and see that the Commission is not only a leader in reforming the sentencing process, but is also working very hard with the private sector in forums such as these on other issues, including corporate compliance and corporate good citizenship.
I have been asked this morning to talk about the voluntary disclosure program in the context of the concept of the good citizen corporation, which I understand is the subject of this forum, as well as the need for improved corporate accountability. Both of those concepts, I believe, necessarily imply developing an increased sensitivity to what is and what is not appropriate behavior in the corporate arena. That task is never easy, often thankless, but nevertheless always critically important.
In the rush to compete and to achieve, our society's focus on ethics has too often been too little and too late. General Omar Bradley once commented, "The world has achieved brilliance without conscience. Ours is a world of nuclear giants and ethical infants."
The Department of Defense voluntary disclosure program in my view is our effort to energize an active corporate conscience of sorts in the defense industry. Discussing the voluntary disclosure program could, indeed, be a topic for an entire day's seminar by itself. Fortunately for you and for me, the schedule this morning doesn't permit us to do that.
Briefly, I am going to try to give you some idea about the program's genesis, about the processes under which it operates, and our best estimates as to its effectiveness and what our experience indicates it tells us about contractor efforts at self-governance in the defense industry.
In the early and mid-1980s, both the defense industry and the government faced an important, serious dilemma. There was a need to responsibly address reports of widespread fraud in defense contracting. The media had widely publicized cases of investigations of defense contractors for such offenses as cost mischarging, defective products, false statements, and false certifications. At the same time, the government and the industry needed to maintain a stable, cooperative, and productive relationship. The challenge for both was to do this while, in an oftentimes adversarial process, closely scrutinizing and investigating allegations of fraud in the industry. And that is not an easy task because there are natural tensions, obviously, when you get into the investigative mode.
During the same time period, the Department of Defense realized the need for a better and a more coordinated approach to fraud investigations, an approach that balanced in the most productive way possible all the available remedies - criminal, civil, administrative, and contractual.
The department to do this created something called the coordination of remedies program to ensure that all of those remedies were considered in a balanced and timely fashion. The approach encouraged the exchange of information between independent remedies authorities while attempting to also ensure that an action by one entity would not adversely affect the ability of another to use other available actions. As a result, the number of indictments, convictions, monetary recoveries, suspensions, and debarments all rose dramatically. Unfortunately, although this was beneficial to the government in one sense, it also inevitably increased tensions in the industry between the industry and the government.
Recognizing the need for a new approach, President Reagan created the Blue Ribbon Commission on Defense Management, commonly referred to as the Packard Commission after its Chairman, David Packard. The Commission, among other things, was established to find better ways to manage the business relationship between industry and government. The Commission's report, which was issued in 1986, recommended, among many other significant things, that contractors establish ways to implement stronger industry-wide principles of accountability. Even more specifically, the Commission report recommended that contractors disclose to the government irregularities that they discover in the course of their own accountability procedures.
The Commission recommended that the Defense Department also implement its own program, with appropriate incentives to encourage contractors to, in fact, voluntarily disclose this type of information to the government. To their credit, the major defense contractors acted almost immediately upon receipt of the Packard recommendations. The Defense Industry Initiative for Business Ethics and Conduct was established, and along with it there was an adoption of principles which, in fact, endorsed aggressive self-governance in industry and voluntary disclosure of violations of federal criminal and civil procurement laws.
The Department of Defense, not to be outdone, also reacted, both in response to the Commission's report and to the disclosure of some 14 matters by contractors to the department. Deputy Secretary of Defense Taft signed a memorandum in July of 1986, not only encouraging contractors to make disclosures to the Defense Department, but also establishing the procedures that were to become the voluntary disclosure program.
The program continues to operate today, with both my office and the department's senior management strongly committed to its success. It provides a formal framework in which self-governance efforts by contractors interface with government compliance and remedies programs in the department. It is not a means for excusing contractors for improprieties or illegalities; rather, the program encourages contractors to demonstrate to their employees their commitment to ethical business practices by helping the government to hold individuals accountable for improprieties.
Under the program, matters of potential criminal or civil fraud relating to the contractual relationship between the department and the industry can be brought to the Inspector General at the department by a contractor. Matters of administrative oversight, for instance, accounting issues, costing, pricing, et cetera, which do not involve any knowledge or intent to defraud, are brought instead to the administrative contracting officer or to the Defense Contract Audit Agency.
I want to take just a minute to discuss what the program does and does not do. First, the voluntary disclosure program is not an amnesty program. Action can be taken against corporations as well as individuals that are involved in matters that have been disclosed. On the other hand, good-faith cooperation and disclosure by the contractor is certainly considered favorably by the government in determining what action should be taken.
In reality, the program rests on three premises. First, that the department would be hard pressed if it found that it could no longer do business with a large number of its largest contractors, and, in fact, in the worst-case situation that could happen, particularly in an instance where a contractor, a large defense contractor, had a second or third conviction. Once beyond the first conviction, it gets harder to escape the possibility that that contractor might, in fact, be suspended or debarred, and thus end, at least for a time, the relationship with the department.
The second premise is that the department must make every effort to eliminate the perception - particularly the public perception, which was at a height probably in the mid-1980s - of the defense programs and industry as inefficient and corrupt. That certainly does not help the industry, and it does not help the Department of Defense in its justification of its programs to the Congress and to the President.
Third, a contractor is better off reporting problems rather than running the consequences of independent detection by the government, and I will tell you a little bit about what we do in the program to support that conclusion.
The program offers contractors several advantages: one, expedited investigation and audit of a matter; two, early identification of the DOD component which is designated to make suspension and debarment decisions in the matter. This, of course, serves to facilitate contractor communications from the outset regarding possible remedial actions by the government. And, three, an agreement that the Department of Defense will advise the Justice Department of the nature of the disclosure, the extent of the contractor's cooperation, and the types of corrective action that have been taken by the contractor. This last item is perhaps the most attractive to industry.
A corollary of probably equal benefit to the industry is the nature of the Justice Department process for handling voluntary disclosures under the program. It is not the usual prosecution and investigative process which is carried out in most cases that are not handled under the program.
In effect, the Justice Department has removed the uncertainties and the inconsistencies that would otherwise be inherent in the possible exposure to any number of different United States Attorney's offices in the country by identifying the Defense Procurement Fraud Unit in the Department of Justice as the central point for the Criminal Division in addressing the criminal aspects of these cases. So, in other words, there is one unit in the department that handles all the decisions on those cases as opposed to being handled by individual different prosecutors with different impressions in the field, so to speak.
While the program certainly offers advantages to contractors, on the other hand it also requires that contractors do certain things. First, to gain the benefits of the program, a contractor must make a disclosure of a matter voluntarily and not because of a belief or a knowledge that the facts of the case have been known or are about to be discovered by the government. Prior government knowledge of the facts does not necessarily preclude acceptance into the program as long as there is no evidence that the contractor knew of the government's involvement. In other words, obviously a contractor who is doing something wrong and realizes that the government or someone is about to find out about this cannot head it off, so to speak, by then going to the voluntary disclosure program. Good-faith cooperation is always viewed more favorably than its absence. We, along with the Justice Department, will evaluate a contractor's cooperation in any matter in determining the nature and degree of remedies appropriate for the case.
Two, the disclosure must be made on behalf of the business entity and not be made as admissions by individuals, officers, or employees. In other words, the corporation, the entity itself, must make the disclosure, not the individual.
Third, appropriate action, including appropriate corrective and disciplinary action, as well as restitution to the government, must be taken by the contractor. So, in other words, the contractor must do something to correct the problem. Also, it is not a strict requirement, but in many of our cases, the contractors themselves will actually conduct their own investigation of the allegations. Sometimes that's done before they bring the matter to the department because they obviously want to verify it, and sometimes they, in addition, follow up with a more detailed investigation after that, which we then review and can supplement if we feel it needs to be supplemented as we are reviewing the whole issue at the department.
And, fourth, the contractor must agree to cooperate in any ensuing audit or investigation. As with any new and innovative approach, the implementation of the voluntary disclosure program has not been without its problems. I believe participating contractors and the government have been able to mutually address many of the major problems that have arisen to date and hopefully will continue to do so in the future. I have to admit that I read with interest the outline that was prepared for Bill Lytton's remarks next here this morning. As I understand it, he is going to speak to you about the need for greater coordination, particularly his thoughts on inconsistent government policies in the areas of voluntary disclosure, qui tam suits, and hotlines, et cetera.
I have to confess that I smiled broadly when I read, as one of his lessons learned, that "There is no grand government strategy." I can tell you, having worked for many years both in the executive branch and probably even more pointedly in the legislative branch, in the Senate, that he is absolutely right. There is none.
The diversity and the sheer size of this government, which I believe reflects to a large degree the diversity and the size of this country, makes it, in my view, extremely unlikely, if not impossible, that we will ever have any comprehensive "grand strategy" of sorts in the U.S. Government.
That's not to say we haven't tried. Certainly parts of the government have tried. For example, I can remember working very hard to try to get legislation to come up with a grand strategy, so to speak, in the anti-drug area when the drug problem was at its height. And we worked on that for years and got some legislation, and I am not convinced we still have a grand strategy, but we have tried it in areas, and no doubt we will continue to keep trying. But it is, in my view, a very difficult goal, and it is a goal that is difficult because of the nature of this government and the nature of this country. It is a diverse government; it is a huge government that does many, many different things, and trying to perfectly coordinate it all into one single strategy is an admirable goal, but I'm not sure it's a realistic one.
The good or, at least I should say, the encouraging news is that at least in the Department of Defense, which in and of itself I can tell you is a huge organization and a diverse one, we have made real progress in getting closer coordination, if not a grand strategy, among the players involved in potential remedies, sanctions, or other responses to voluntary disclosure cases. Moreover, we try to coordinate with the Justice Department and with other known government players who may have an interest in these kinds of matters. The trick, of course, is knowing who the players are early on and coordinating and talking to them early on.
It is important to note that particularly where criminal activity is alleged, our coordination, as good as it is with the Justice Department, does not and cannot mean that we control their final decision on the matter, which is, of course, made independently of our office. So there are limitations even on how much we can coordinate, obviously, in certain areas.
In short, we have not solved all of the problems that Mr. Lytton is going to point out to you and that I think we recognize exist in the area of inconsistent policies and lack of coordination. But we certainly are aware of them, and we are working on them, and we will continue to work on them.
In any event, we do believe that the voluntary disclosure program has been successful and beneficial to both the government and the contractor community in providing a mechanism for addressing problems identified in self-governance programs. A few statistics demonstrate the extent to which the program has accomplished its purpose.
As of the quarter ended June 30, 1995, there have been 344 disclosures made to the Inspector General's Office, of which only 27 have been denied admission into the program for any number of reasons. Of the remaining 317 disclosures, 131 have been completed and closed, ten are in preliminary processing, 17 in the preliminary stages of acceptance, and 159 are actively being pursued for resolution.
A total of 145 corporations, including, I might point out, 48 of the top 100 contractors, have made the 344 disclosures. The program has resulted in a return to the government of approximately $297 million. There have been three corporate and 54 individual convictions as a result of the program, and only two contractors - two - have been suspended or debarred as a result of their disclosures. And I might add that the convictions of the corporations and the two that were suspended or debarred were cases where there were, in fact, aggravating circumstances that, in the minds of those making those decisions, justified those sanctions. But that clearly has not been the usual scenario once the disclosure is made in good faith and there had been good-faith cooperation.
Those results and the program's success have not gone unnoticed in other parts of government. The Department of Justice has issued prosecutive guidelines regarding voluntary disclosure in the area of environmental crime and a corporate immunity program for voluntary disclosures in antitrust cases. Recently, the Department of Health and Human Services, confronted by growing public concern and congressional concern over the problem of health care fraud, has announced the establishment of a pilot program for voluntary disclosure in that area.
Finally, my office has been approached by several other executive branch agencies who are considering developing similar programs in their particular areas of concern. And my own view is that with the probable or very likely ongoing reduction and downsizing of government resources over the next several years, it is very likely that you will see an increased interest in many parts of government in enacting and establishing voluntary disclosure programs, because as the government's resources lessen in the areas of audits and oversights and investigations, clearly programs like this that allow industry to help the government take a short-cut on some of these investigations by coming forward voluntarily. That is seen as a help to the government in the way of resources. So I think you are going to see more of this, and we continue to work with the other agencies, including HHS and those that are starting up, to give them the benefit of what we have done in the area of defense.
In sum, at least in the area of government contracting - and I recognize that your interest goes beyond just government contracting - voluntary disclosure programs do help to ensure not only fair and balanced government oversight, but also reliable contractor internal controls. Their goals should rightly be to make government oversight more effective and more efficient, not necessarily to eliminate, reduce, or downgrade such oversight. If these programs succeed, we all, both industry and government, stand to benefit.
On a broader scale, the success of our voluntary disclosure program demonstrates that the concept which you are looking at this morning, the concept of good corporate citizenship, is in my view, alive and well and hopefully growing in corporate America. It shows that good can come from government and industry working together to ensure accountability and ethical conduct in business as well as in government.
I see my time has just about elapsed, so I want to thank you again for the opportunity to be with you, at least for a few minutes here this morning, and just close with the thought that I hope that our experience in the Department of Defense - and we do have some in this area - can at least be of some help to you in working to develop many, many more "good citizen corporations" across the country in all of your areas. Thank you very much.
MR. SWENSON: Our next speaker, Bill Lytton, is one of those people who makes you wish you wrote your Rolodex in pencil. He began his career as a prosecutor and more recently, in 1989, he became the General Counsel of G.E. Aerospace and served in that capacity until G.E. Aerospace merged with Martin Marietta.
At the new Martin Marietta, he served as Vice President and Associate General Counsel until Martin Marietta's merger with Lockheed in March. In the new Lockheed Martin Corporation, Bill is a Vice President and General Counsel of Lockheed Martin Electronics.
Over the last few years I have heard Bill Lytton talk on a range of topics and always very impressively. His theme for today is something I can recall chatting with him about probably at a DII best practices forum a couple of years ago, and I think you will find that, despite his naturally shy demeanor, he has a lot to say. Bill Lytton.
MR. LYTTON: Thank you for the introduction, Win. I will remember that. I should start off with a disclaimer that my comments today are personal, based upon my personal experience. They do not necessarily represent the views of my corporation, whatever the name of it is today.
We have done a couple of things as a result of all the mergers. Number one, I don't order business cards in groups of more than five, and number two, those are now coming out in slate and chalk so that we can keep up to date.
I have been asked to address a provocative subject and to be provocative in doing it to give the perspective of the big corporation - not the big house, I might add, for those of you who are old 1930 movie buffs.
I want to talk about the guidelines. I think they have been a catalyst for organizations in many areas. They have forced a lot of us to re-examine the commitment we have to lawful and ethical behavior, and they have also helped us establish or modify policies and procedures that ensure compliance with legal and ethical standards. And in that regard, I believe the guidelines have had a salutary effect.
I also want to congratulate the Sentencing Commission for sponsoring this public forum and for being open to comments and criticism. It is not a group that has declared victory and gone home; rather, it is a group that has tried to critically examine what they are doing and see what changes might be made. And continuous improvement itself, I think, is somewhat unusual in the government.
Perspective is important. I saw a sign on a marquis a couple of weeks ago that said, "We do not see things as they are. We see things as we are." Obviously we filter what we see through our own eyes. And so what we see is obviously influenced by where we sit, and the challenge we face is to try to see it from the point of view of others. And this type of candid - hopefully candid and hopefully understood to be that - discussion I think is only helpful.
As an optimist, I see the guidelines as a work in progress, one that will improve. As a lawyer, I, of course, admire anyone who has the ability to speak out of both sides of their mouth at once. But I stand in unabashed awe at the ability of the United States Government to promulgate so many different policies, practices, and procedures that are absolutely inconsistent, and to do it all simultaneously.
Let me give you a little bit of an overview. I start with the premise that the guidelines are government policy. They are a specific, integrated, and articulated government policy that rewards a certain type of organizational behavior and punishes other types. So seen in a vacuum, the choice of an organization is clear. You modify your behavior to conform to the guidelines.
Organizations, however, act through human beings who need to be trained and encouraged to conduct the affairs of the organization in a manner consistent with that organization's commitment to conform to the guidelines. To the degree that these human beings are given conflicting or confusing directions, the ability of the organization to achieve its goal of conforming to those guidelines will be jeopardized; and to the degree that the organization's ability to conform to the guidelines is jeopardized, the goal of achieving conformity to this government policy is likewise jeopardized.
The United States Government, through legislation and executive branch actions, has institutionalized other policies which, at best, cause confusion and, at worst, are inconsistent with the guidelines' policy. And this conflict and confusion, I think, may be one of the single most important impediments to the goal of achieving that underlying policy that we all, I think, support with the guidelines.
So organizations sometimes find themselves in a Catch-22 situation where their employees' actions necessarily put them and their organizations at risk because of other government policies. In these cases, both the organization and the government, it seems, suffer.
Now, if the government is serious in wanting to promote the public policy underlying the guidelines, it needs to understand these conflicting policies and to address them, and that's what I have been asked to help do today.
The guidelines talk about a number of things that are important, characteristics that can be mitigating factors if and when a corporation finds itself standing in front of a judge about to be sentenced after having been found guilty of federal criminal conduct.
One of them is internal reporting. The existence "of a reporting system whereby employees and other agents could report criminal conduct by others within the organization without fear of retribution" is an important goal of the organization. This plays into a second important mitigating criterion, voluntary disclosure - part of what Eleanor just addressed - where the organization discloses to the government something that went wrong in the organization, and the company is encouraged to fully cooperate in the investigation and to affirmatively accept responsibility for its criminal conduct.
Most companies, I believe, certainly the large ones - and God knows I've been with a lot of them the last two years - have embraced the guidelines, have worked hard to encourage its employees to self-report, to have trust in their companies, to provide for anonymous reporting, and otherwise to develop audit and other processes that will discover relevant information. Hotlines and ombudsmen are only the most visible and obvious of these efforts.
But there is some inherent resistance to this type of self-reporting process. For instance, some company lawyers that I have known in the past may have difficulty in confessing to a crime that may not have been discovered and, indeed, may not even have been committed. A second impediment may be it is not in human nature in America to be a "snitch," and we sometimes find a lot of difficulty with our employees in encouraging them to tell us if they observe a problem caused by a fellow worker. One only has to look at the most recent case of Archer, Daniels, Midland and the reports that have been in the Wall Street Journal about what has happened in that case and the reaction to the executive who reportedly was acting as an undercover agent, an informant for the government.
I note that a member of the Illinois Christ Lutheran Church said, "Why didn't he just quit? That's what I would have done. I'm not about to be a spy." And the co-owner of Nick's Auto Body said, "The fact that the Feds spy on the community frightens me. They're about as underhanded as anybody. And this guy's not an upright citizen, or he wouldn't be ratting on his boss." So obviously the guidelines' policy has not yet affected the culture of some religious and auto repair organizations.
To the degree that our employees do not report what they see or suspect, and thus deprive the company of the opportunity to make a voluntary disclosure and to cooperate, that may be seen under the guidelines as evidence of an ineffective corporate program and perhaps an inadequate corporate commitment to compliance and ethics. And I'm not sure that is necessarily the conclusion that one should come to.
One of my favorite topics: qui tam. The same Congress that set up the Sentencing Commission has also established the qui tam or whistleblower statute, which provides that someone who files an action alleging a fraud against the government may recover up to 30 percent of the ultimate recovery, which itself can be up to three times the amount of the loss to the government.
The qui tam laws are premised on a central and very powerful idea: greed. And if it's not greed, then why do we need all that money to make people do it?
Money is not normally required to make people do the honorable thing. The theory is that if enough money is offered, employees will turn in their own mothers or at least their own bosses. And added to this greed factor is this wonderful, powerful interest of lawyers who see their opportunity of getting one-third to one-half of the bounty hunter client's reward on top of their counsel fees. I used to be in private practice, and I know how attractive that is.
In the case of an ongoing fraud, the longer the qui tam relator waits to file his qui tam case, the more money the government stands to lose, and the more money he or she stands to gain. I think this highlights the fact that the statute's concentration is on making money for the relator and the lawyer and not on stopping fraud, waste, or abuse.
This lure of the big bucks is a powerful incentive for employees to seek out their local plaintiff's lawyer rather than their ombudsman when they see a problem in their corporation. These whistleblowers are then applauded, of course, as courageous people who have put the interest of the country above their own well-being. The media has a field day with it, and the client and the lawyer begin to consult financial and tax experts and advisors. You might even hear that their very lives were in danger. Spare me.
The motive behind these cases, I suggest, certainly a large number of them, is exactly what Congress has or should have anticipated, and that is greed. And there are other types of bounty hunter laws that are being adopted or proposed or considered, including in the environmental area. So a corporate employee has two choices when confronted with possible wrongdoing in his company: be a good and honorable employee and report it internally, or take the money and run.
The fact that employees don't take the greed route all of the time is, I think, a wonderful surprise, but when it happens to you and your company - and those of you who deal with the government will find it happen - it is not very pleasant.
When they file these types of cases, I think it is predictable; it is human nature. But when we are able to go to an ombudsman and then follow a voluntary disclosure route, that happens in spite of, not because of, the qui tam policy of the United States Government.
This is more than a theoretical issue. Consider the following hypothetical. A company auditor discovers that your company has overbilled the government by $1 million. If he does what he is supposed to do and reports it internally and allows the corporation to make a voluntary disclosure - I checked with Win on this because he's the expert on this stuff - he says the fine could be as low as $50,000. If the same auditor, however, instead of reporting it internally decides to call up the plaintiff's qui tam bar and lets it go on and then we don't get a chance to discover it because we thought that's what the auditor was doing - indeed, the auditor may even lie to us, or maybe he just resigns because he knows he's going to make a lot of money - then the corporation can be fined up to $1 million.
So even though the facts of the crime are exactly the same, the decision made by the auditor could affect the size of the fine by a factor of 20. Such an arbitrary and capricious result cannot be the result of a conscious, coordinated government policy.
I think that if we as a people in this government want to encourage the voluntarily disclosure of problems to the government, why not require that a prerequisite to filing a qui tam action by an employee is that he or she first has to go to the appropriate person, whether it's the CEO or the ombudsman, and tell them. And if the company doesn't do anything for 60 or 90 days, then you can file it.
Do you know what's going to happen if some employee comes to me and says, "I've got a problem and if you don't do something I'm going to file a qui tam?" I'm going to call up Bruce Drucker. And you're going to have more disclosure. What would happen? The plaintiff's bar would lose a lot of money, and the relators wouldn't get up to 30 percent of the money.
I think these are ideas that take greed out of the equation and that would enhance the underlying policy of the guidelines for voluntary disclosure. And such a policy and such a change would be perfectly consistent with the guidelines.
There is also a second government practice or policy that can be inconsistent, or at least cause confusion. Government agencies often encourage and sometimes require that posters be prominently displayed with a hotline for calling the government when an employee is aware of fraud. I think this is confusing. Their quite reasonable rationale for having it is that in some cases employees will not feel comfortable to report it internally. They may not have a system that would work, or maybe they're dealing with a company that is just a bunch of crooks. So I think there's a good reason for it. I don't deny that. And the other reason they would do it is they're not aware of the whistleblower statues and all the money they can make.
But when an employee does call the government hotline, once again a corporation is deprived of the opportunity to make a voluntary disclosure. I think what we have to do is at least realize that in such cases it is not presumptive evidence, if you will, that we had an ineffective policy. I think there needs to be some consideration that the government would give credit to a corporation for what would have happened if they had made a voluntary disclosure - if this guy had called the inside person rather than the outside person. And I think sometimes this does happen in the DOD IG's office. I think they are willing to do that. But as we expand throughout the government, I think you need to watch out for that because our employees are being encouraged not to call us. They are being encouraged to call lawyers or the government, and the policy of the guidelines says that if they don't call you, that is not good - it doesn't say something good about you.
The voluntary disclosure program that Eleanor talked about is, I think, one of the real success stories in the United States Government. I think the DOD IG's office and Bruce Drucker do a wonderful job, and a trust has built up over the years between industry and government in this, and that is why it has been so effective. But let me talk about the process of making the decision to make a voluntary disclosure.
It is rarely a clear-cut, easy decision. The reasons for making it are compelling from a corporate point of view. You significantly reduce, if not eliminate, your chance of being criminally prosecuted. And if you are prosecuted, at least under the guidelines your penalty will be less severe than if you hadn't. But the circumstances in which the decision is often made are difficult, stressful, and ambiguous.
When I was a federal prosecutor in Philadelphia, we had a bank robbery. It was a wonderful case. The bank robber is in line. He robs the bank. A beautiful 8-by-10 glossy photograph of the bank robber comes out of the surveillance camera. The dye pack explodes, and standing behind him in line is an FBI agent. This is all true.
The closing argument of the government prosecutor was: "Ladies and gentlemen, are you familiar with the expression 'caught redhanded?' This guy was caught redhanded. Thank you very much."
Now, that's a dead-bang case, and, by gosh, if that happens, you know what to do. But the reality is in corporations, when you are dealing with fraud instances or potential fraud instances, you rarely see it with that sort of clarity. And while you're trying to get the clarity, you must recognize that hesitation or delay may be fatal to your ability to get into the program and to get the benefits thereof.
Clausewitz, I think it was, somebody like that, talked about the fog of war, and that's what happens when you are sitting on the inside and somebody comes to you with a potential problem. In a defective pricing case, you don't need a primer on this, but it often turns on the intent of the individual. That is your typical white-collar case. There is no question as to what the person did. But did he or she intend to do something wrong? A conscientious, good-hearted internal investigator who believed in the presumption of innocence might look at that and conclude that the person did not intend to do something wrong.
That same investigator having gone to Bruce's school and having been trained with a little booklet they have - I believe it says "Think Fraud" - believes that the presumption of innocence is a nice thing for the books, but it does not really apply. (I think once when I was with Bruce, I asked for a show of hands from the agents. I said, "How many of you really believe in the presumption of innocence?" Not one hand went up.) The investigator might now conclude with the same facts that the guy intended to do something wrong.
So while you are sitting there trying to make these decisions, very difficult decisions, you recognize that the clock is running. If you make the decision too late, you may be out. If you make it too early, you may disclose actions that you later determine upon further investigation are not fraud. And while I think I can convince Bruce on that, when I end up at the DOJ, I have another problem because the Department of Justice Civil Division believes that a filing of a Voluntary Disclosure is the moral, if not the evidentiary, equivalent of a confession of fraud. And if you later go to them and say, "Well, it was all a mistake, we looked into it further and it is not fraud," that might be construed as lack of cooperation, backing off, failure to accept responsibility, et cetera, et cetera.
So I don't know how much of a counter-balance the risk of significant civil penalties - because the DOJ comes in talking trebles and maybe you can get them down to doubles of whatever the loss to the government is - may or may not be to make voluntary disclosures. I don't think it is for the larger companies, but I think that with smaller companies it may well be, and you should keep that in mind.
I understand there is going to be somebody later talking about the self-audit privilege and I think this is another example. One of the things that results from the guidelines is the effort to find out if you've got a problem. So we conduct internal audits and investigations, and we like to keep those things kind of secret - for a number of reasons, many of which are legitimate.
Just like you have the FBI not wanting raw FBI 302s to be out there, we don't want our investigative files to be out there. Why? Because there's another group of lawyers called the plaintiff's security firms. I used to be in one of those, and what they do is every morning they look in the Wall Street Journal, and companies whose stock went up or down find themselves in trouble. They file a class action suit. There's a number you call in Wilmington, and if you're the first one, you're the lead counsel and you get most of the money.
It's very well organized - talk about sentencing guidelines for organizations. There's one you ought to look into.
We would rather not show all of this stuff to the plaintiffs who are going to try and blackmail us to settle the case. I don't mind sharing it with the government so much. They're not my biggest concern. But when we assert a privilege, I think there is a knee-jerk reaction of the government to say: a privilege - lack of cooperation. I think the government should think more carefully about when it's going to challenge an assertion of the self-audit privilege, because the more you challenge it and the more there is no privilege, the less internal investigation there is going to be; the less internal investigation, the less things we find out.
Let me talk for a second about suspension and debarment. The government very rightly doesn't want to have companies working for them that are crooks. Let me give you an example, though, of what government are we talking about.
We had a case where one of our employees pled guilty when I was with G.E. He was actually an old RCA employee. He got sentenced, to I think, a year. The government prosecutor and the defense lawyer said, "That's too much. We really would like for this guy to get work release. He's not a bad guy. He's cooperating."
They came to us and said, "Will you put him in some sort of commercial job just so he doesn't work for the government anymore so we can go in on a joint Rule 35 motion for reduction of sentence to have him put on work release?" I did it. They went in. He got reduced.
Flash forward, I'm now in front of the government suspension and debarment authority a couple of months later, and they said, "Why is this guy still working for your company?" I said, "The government asked us to keep him employed." He said, "What government was that?"
I said, "It was the Department of Justice." They said, "That's not our government." And then he gave me an example. He said, "You know, we had a paraplegic we caught stealing two aspirin. We fired him." I said, "That's not my company."
The government is not a homogenous single organism. It is a hodgepodge of people who rarely share the same ideas or agendas. What are the lessons we can learn? First of all, you are listening to people who have been involved in the defense contracting community. So why is that relevant? Well, a couple of reasons. Number one, our past is your future. The government is coming after everybody. We just happened to go first. Environment, health insurance, safety, everything is coming under the gun. The cross hairs of the government are very tightly focused. They are coming.
The guidelines are in large part consistent with, and I in think some parts, even modeled after the DII guidelines. So we have lived under them for ten years, and, therefore, we might have some insights that help you.
What have we learned? Simple, yet profound. We've got dozens of departments and commissions, hundreds of agencies, hundreds of thousands of people. They're not singing from the same hymn book. They don't even know there are others in the choir. And when they do, they don't really care. So what you get isn't the complex harmony of a Mozart, but the cacophony of a construction site in downtown Chicago or New York City.
And as Eleanor stole my punch line, the reality is that there is no grand government strategy. The fiction we indulge in is that we have to act as if there were such a strategy. And therein lies the risk for companies and the challenge for government. Government could not only make the private sector's life a little easier if it tried to reconcile these discordant policies, but would probably be a lot more successful in helping us all achieve some fundamental and worthwhile goals that are embodied in the sentencing guidelines. If only we could all agree what those goals are. Thank you very much for your attention.
MR. SWENSON: Our next speaker is David Yellen. David is an associate professor of law at Hofstra University and, accordingly, represents a somewhat different perspective than our prior two speakers. But I think it would be wrong to assume that his is the perspective of an ivory tower because David has been a very active participant in policy issues, both in his prior life as an assistant counsel to the House Judiciary Committee and more recently, while at Hofstra, through a number of policy-oriented writings, including a very interesting law review piece on the coordination issues that he is going to talk about. David also served as an advisor to the Clinton transition team on some of these same issues. David Yellen.
MR. YELLEN: Thanks, Win. Several years ago, I was the reporter to a special ABA committee that was set up to study the collateral consequences of organizational convictions, and we came to some conclusions that are not very surprising to anyone in this room, and certainly not after hearing Eleanor and particularly Bill. We found that there is a panoply of overlapping, sometimes inconsistent, unpredictably enforced civil and criminal sanctions that are available when an organization, a corporation, has committed some kind of misconduct. There really isn't a great deal of coordination between the different parts of the government. Despite what Bill said, I still think of it as one government, but there isn't a lot of coordination. And the sources of that lack of coordination are pretty straightforward as well.
First of all, you have Congress, which is not well-coordinated just on its own. Congress has become increasingly in love with criminal penalties in the last 10, 20 years. I guess de Tocqueville wrote many years ago that, in America, all issues of public concern wind up being matters for law and courts. Nowadays you can modify that to say that virtually all issues of public importance wind up being matters of criminal law. And Congress has gone way too far in criminalizing conduct that probably could be better handled civilly. When something is a crime already, Congress loves to just pile on additional penalties. And when that isn't enough, Congress loves to pile on mandatory sentencing laws.
I don't want to give them any ideas, but in some ways it's surprising that there hasn't been an effort to come up with some kind of mandatory minimum sentencing laws for white-collar and organizational crime as well as drug crime, where it principally resides. And then you add to that - so that's the Congress side. And then, of course, the agencies, we've heard a lot about the way, just how difficult it is for an enormous agency like the Department of Defense to coordinate its own efforts to enforce the various laws, let alone to expect any reasonable amount of cooperation and coordination across agencies.
One thing that did concern me about what Eleanor Hill said was in terms of an earlier effort where all the different parts of the Department of Defense that had responsibility for criminal and civil - all the different sorts of enforcement - when they did start talking a lot more, if I heard her right, she said that the great result was that every single type of enforcement action went up and there was more recovery of every kind. To me, that's not necessarily the goal of an effective coordination policy. It may be that you want less of one kind, more of another, more focus, more principles underlying what exactly the government is going to do.
So our conclusion was that there were problems with the lack of coordination from Congress and from the agencies and that more coordination was necessary. In particular, we focused on punitive sanctions. Obviously, criminal sanctions are punitive, and a great many sanctions that are denominated as civil are, nonetheless, punitive. And after the Halper decision from the Supreme Court a few years ago, it is necessary for courts to think about whether sanctions labeled as civil are, in fact, punitive to avoid double jeopardy problems.
In addition, we thought that theories of punishment that I will talk about a little bit also called for greater coordination in the sanctioning of corporations, and we called upon the government in general to start thinking more carefully about those issues. I don't think a lot has really come of that in the intervening years. As Win mentioned, I did a little bit of work advising the Clinton transition team on white-collar crime enforcement policies, and I talked a lot to them about this kind of coordination issue, these issues, and I haven't seen a lot of evidence of any real change in that area.
Also, I think the Sentencing Commission, which ought to play a central role, being a smaller, more well organized entity than something as sprawling as, say, the Department of Defense, the Sentencing Commission can play a crucial role in encouraging greater coordination of sanctions. And I think this is one area, although they have done a tremendously admirable job in many respects with the organizational guidelines, I think they missed an opportunity here. In one of the earlier drafts before the final guidelines that were promulgated, there was a provision that authorized judges to consider when imposing a criminal fine on an organization whether there had been or were likely to be punitive civil fines imposed; and if so, to have some kind of offset. And without any real explanation, that provision was dropped from the final guidelines that went into effort. So I think there is more the Commission can do as well.
I am not going to try and solve these problems, the broad, massive problems of coordination of all the government's enforcement efforts today. I really want to talk about compliance programs and address the question of whether our treatment of compliance programs can have a positive effect in encouraging the government in all its forms to engage in more coordinated sanctioning activity.
Before getting to that precisely, let me start with some fundamental questions about compliance programs that have been addressed only slightly in this conference. We all assume that it is good and proper for the Sentencing Commission in the organizational guidelines to give a very serious reward to companies that have had an effective program in place. Why is that? Why is it that we think it is right to do that - because what we are really doing is rewarding failed efforts at compliance. That may be a little bit unfair to say. If a compliance program reduces dramatically the amount of crime committed by its employees overall it's not a failure. But we are not talking about rewarding corporations for the crimes that weren't committed. Rather, we are talking about rewarding them when a crime has been committed and reported and investigated and prosecuted.
So why should we do that? You might say that individuals don't get an opportunity to stand up there and say to a judge, look, Judge, I really tried hard to not break the law, I wrote myself notes every day, I talked to my spouse, and I just couldn't stop myself.
Individuals don't get to do that, so why do organizations get to do that? And we could also say a little more seriously, why shouldn't effective compliance programs be their own reward? In other words, if companies can come up with truly effective compliance programs, truly effective means they're going to significantly reduce the misconduct by their employees. Why shouldn't we let the marketplace work and say, you know, let that be your own benefit, that you have less exposure to government enforcement actions, as well as the psychological benefit of feeling like you are doing the right thing.
Well, I think that at least as far as criminal liability for organizations goes, that is not the right answer. I think that is the wrong approach, for a couple of reasons. And to answer that, we have to first consider the two main rationales for criminalizing corporate misconduct. I do not want to sound too much like the ivory tower law school professor that Win, thankfully, said I am not, but a little background on the elementary purposes of criminal punishment is appropriate here. The main ones that are applicable to organizations are deterrence and retribution. Deterrence obviously plays a major role in punishing corporate misconduct. We punish companies so they won't do it again and so other companies will learn the lessons and they won't do the same kind of things.
Retribution ought to, in theory at least, have a much lesser role in sanctioning organizational misconduct. A company is not a person. As Professor Coffee from Columbia wrote a long time ago, citing an old case, it doesn't have a body to be kicked or a soul to be damned, so why do we think about punishing organizations for punishment's sake?
But I think clearly in modern times, with the attention that has been paid to corporate misconduct, people think about a need to punish companies that have done wrong, whether it is Exxon with the oil spill or lots of other situations as well. So these twin aims of the criminal law are really in force in how we deal with corporate misconduct.
So let's consider briefly the relationship between these goals and compliance programs. First, deterrence and compliance programs. As I mentioned, we might want to say, we could think about saying that good programs will be their own reward, and why should we give any additional benefit to companies that have put in place a program but the program hasn't worked on this occasion? That argument would have one benefit, I think, which would be to make companies focus exclusively on programs that really work and not at all on a real problem, which is programs that look good whether or not they really are going to have the kind of effect that we hope they do.
On the criminal side, though, this is inadequate. That deterrence argument that economists might make I think would not work, and that is because of a couple of things. First of all, how infrequent corporate prosecutions are. We have heard a lot of talk about - you saw a chart earlier today before the guidelines and under the guidelines. There are just a couple of hundred convictions a year in federal court of organizations. So if you were a rational corporate executive trying to decide simply in terms of your criminal liability, despite what the sentencing guidelines offer you for having an effective compliance program, you might, especially if you are a large corporation who has a very small chance of being prosecuted criminally, you might decide it is just not worth the effort and the money. It is very unlikely we are going to ever be prosecuted for a crime, and it is just cheaper in the long run not to bother with a compliance program under those circumstances.
Well, we as a society really want to encourage the kinds of efforts at compliance that we have heard a lot about here in the last two days. So I think it is entirely appropriate that, even despite what cost/benefit analysis might say, we come up with a way to strongly encourage companies to make serious efforts at compliance with the law.
We could do that in two ways. One way would be to increase the frequency of criminal prosecution or to increase the severity of the sanctions that are imposed when companies are prosecuted and convicted. The other way to do it would be to reward good efforts at compliance. From a deterrence standpoint, it really doesn't matter which way you go. Either way could conceivably have the same kind of effect. And that's where retribution comes in. You know, to put it in terms of the title of this conference, why should we choose carrots over sticks? And I think the answer is because we and government law enforcers believe that companies that have made a strong good-faith effort at complying with the law are less culpable than companies that haven't done that, and they ought to, in a sense of justice and fairness, receive a reward for their compliance programs.
Now, that is somewhat at odds with the respondeat superior principle which says that a corporation can be criminally liable for the acts of any of their employees within the scope of their employment. So we're saying you can be prosecuted for anything any of your employees do, but we are not going to do it when you have taken steps to comply with the law. The respondeat superior principle is very troublesome to those of us who believe that the criminal law ought to be used when necessary but no more than necessary. And, in fact, I think the Sentencing Commission has stumbled across - I am not sure this was completely what they had in mind - but they have come to a really good middle ground between the respondeat superior principle that prevails in federal court and the position urged by the Model Penal Code, on the other hand, which is that companies can only be criminally liable when there is high managerial involvement.
In fact, I think it could be argued that the Sentencing Commission should have gone further. If they really believe in their principles, as I am sure they do, they could have gone further and said, for example, that a company that has a truly effective compliance program, maybe they should receive no fine whatsoever, no criminal fine at least. And, similarly, the courts - there was a Rutgers Law Review article written recently by two New Jersey lawyers - I am sorry I cannot remember their names at the moment. It was a very good article, and they argued that there ought to be a criminal defense based on an effective compliance program. And I personally am very sympathetic to that. So I think the role of compliance programs in criminal prosecutions should, in fact, be even greater than it is today.
The more difficult question is: what should the role of compliance programs be in affecting punitive civil sanctions? It is always hard to define what component of a civil sanction is, in fact, punitive, but we have an obligation to try and do that already under Halper. My own view is that an effective compliance program should not result in no punitive civil sanctions being imposed. I think both the deterrence arguments and the retributive arguments are different when you are talking about non-criminal prosecutions. But I think they ought to have a serious effect on reducing the company's exposure.
What we would wind up with, then, is great benefit criminally if you have an effective compliance program, a good but lesser benefit in terms of punitive civil sanctions, and probably no real benefit in terms of purely remedial civil sanctions.
One of the benefits of this approach, I believe, would be to steer government regulators further towards punitive civil sanctions as opposed to criminal prosecution because they would not be faced with the likelihood of getting no fine for a company that had a truly effective compliance program. And I think that would be a good result for the reasons that I stated about the over-extension of the criminal law.
Now, how should this come about? I think, again, there ought to be a role for Congress to play in this in not simply passing a hodgepodge of laws, whatever seems to be a concern at the moment, and pile on some sanctions; rather, Congress ought to do a better job of thinking about what their goals are in having various kinds of sanctions. I am not too optimistic about that, having worked in Congress, even less so today than when I worked there eight or nine years ago. The agencies themselves have an obligation to do their best, and some agencies are really working hard at this, at least internally within their own structure. But, again, as we heard from Eleanor Hill, with a vast government bureaucracy across many agencies, that is very hard to do. But there needs to be more effort.
Again, the Sentencing Commission should really take the lead, as they are trying to do with this kind of conference, to define what is an effective compliance program, to talk about what ought to be the effect not just in criminal cases but on the civil side as well of a truly effective compliance program.
My hope is that if that effort comes out of this conference and the other things the Sentencing Commission is doing, we might begin to see the way out of the lack of coordination mess that you have heard about from this panel. If we can come up with a better way to coordinate the effect on various sanctions of an effective compliance program, that will have the effect not only of encouraging better efforts, more productive efforts at companies complying with the law, but maybe the government regulators and Congress and the Sentencing Commission can learn more about ways to come up with broader standards of coordination on all of the issues that we have been talking about today. Thank you.
MR. SWENSON: Thanks to our whole panel. I must say I think those were very provocative and helpful comments. We do have a number of questions from the audience. Let me ask one to Bruce Drucker first.
The question is: could you respond to Bill Lytton's suggestion about requiring whistleblowers to go to the company's ombudsman - let's just say not necessarily the ombudsman, but to the company - before filing a qui tam suit? And we had a second question which maybe Bill can keep in mind, and, Bruce, you might want to respond to it as well, which asked about a company policy and whether this might be enforceable, that would require employees to go to a company hotline 60 to 90 days prior to going to the government to file a qui tam action. Did I get the waters too muddy?
MR. DRUCKER: No, that's all right. I think I'm there. With respect to Bill's comments about a requirement for a corporate employee to notify the company, actually there have been similar proposals put forward with respect to whether government employees could be qui tam relators or not because there was a similar problem within the government. I believe in both instances that the opportunity to advise, in the case of a government employee, the appropriate officials in the government and, with respect to corporate America, advising the corporation of the problem would be, in fact, an appropriate means. I think it is entirely consistent with the intent of the qui tam statute. It would provide no bar to the employee or additional counsel ultimately making the government aware of the issue. This gives both the government and the company the opportunity to approach it in a voluntary disclosure mode, a less adversarial mode, if you will. And I think both interests are served.
The qui tam statute was created at a time when there was not sufficient government investigative and prosecutive resources to find all these things, so its concept was to get the public to participate on behalf of the government. Well, now we do have far more resources, and there is a relationship, a framework within which we can operate. So I think it would be a positive step.
MR. SWENSON: Bill, do you have anything you want to add to that? It sounds like you have worked out a deal.
MR. LYTTON: I am glad that Bruce has finally seen the light. No, I don't have anything to add. I don't see why we don't do it.
MR. SWENSON: Why don't we do it?
MR. LYTTON: Well - you want me to get political here - because there's a very powerful senator who thinks it is a great idea. There is a very powerful group of lawyers who bring these types of actions who make a fortune off of it, who have done a very effective job of lobbying, and because the media loves whistleblowers. And any effort that is perceived to be something that would reduce the ability of whistleblowers to blow the whistle - which I don't think this would be - gets jumped on.
So we are swimming upstream because whistleblowers get a lot of attention. And when you really get down to the nitty-gritty and try and deal with reality, a lot of people just don't want to hear it.
MR. SWENSON: I think bringing the political dimension into this is pretty useful. David, you spent some time as a congressional staffer and have seen this up close. Do you have some perspectives on this narrow issue but also more generally?
MR. YELLEN: Well, actually, I want to ask Bill a question. I haven't talked to a lot of people who have filed qui tam actions, but I assume it is a pretty hard step for an employee to take. I mean, you are hoping that you are going to make enough money to buy a house in the islands and retire, but you are taking some real risks in doing that in terms of your employment with your company.
What if it turns out that your claim is wrong and you get nothing? What is your future like at that company? So I think it is probably a pretty hard choice.
I wonder, have any companies - or is there any legal reason they can't do this - have any companies tried to offer financial incentives to employees to report things internally rather than going the lawsuit route? Assuming that Congress is not going to do what you want, why don't companies take some steps to try and encourage it?
MR. LYTTON: Two things. When I was with G.E. Aerospace, I proposed that we have a compliance award that we give out to people who had done exemplary things, not that they had necessarily turned in people, because there is a political problem internally if you are going to offer a bounty if you turn in your buddy. But I was trying to make it as pure as possible. I said, "Let's give awards to people who are exemplary, who come up with new processes, or who reduce the emissions or something like that." I talked about this at several of our plants. I did this in Camden, New Jersey. And the leader of the union there was outraged that I would suggest that we reward people for doing what they should be doing anyway. So that was a very interesting reaction that we had.
On the other hand, we did institute a type of program like that, and I will tell you an example. We gave a plaque to an employee down in Daytona, Florida, for having done something positive, and I sat with her at the lunch table when the award was given out. She was very proud. And I said I would visit her when I was next down at Daytona, which I did. And I went to her work spot, and her plaque wasn't there. And I said, "Where's your plaque?" She said, "I took it to my church." And the impact that that had had on her and how proud she was really something.
So I think you can do things to encourage employees to do the right thing, but remember - and to your point about whether a compliance program is successful or a failure. We are asking companies and organizations to do that which the family, the churches, and the society have failed to do. We want to have a zero defects society in our organizations, and we don't have it. And the fact that we have one or two or 15 or 50 employees who violate the law is not remarkable. Indeed, I did some studies once that showed that if you were a Department of Defense civilian employee, you were up to 20 times more likely to violate the fraud statutes than if you were a General Electric employee, based upon people who had been tried and convicted. It does not say that DOD is a bad group. It does not say that G.E. is a bad group. But I think we need to view this all in a larger perspective.
MR. SWENSON: I think it is the case that there is a lot of interest in whistleblower incentives on the Hill. I guess there is one particular senator who has been a prime sponsor of the qui tam actions, but there also have been bills introduced more recently to expand the bounty concept. We have a couple of questions about qui tam and those kinds of laws.
If I can sort of merge them together, one of them really just says that these statutes have done very nicely in terms of recovering dollars that would otherwise not have been recovered.
And a second question asks your thoughts on real, actual, not hypothetical cases in which an employee or agent of a company charged with undertaking compliance didn't first go to the company. I guess the suggestion of the question is there have been a number of cases where somebody did go to the company first, didn't get a response, and that that's the more typical example. Is your understanding different?
MR. LYTTON: The first question you asked was, you know, these have produced results that would not have otherwise occurred. Yes, I think that is right, maybe, but we don't know. But my proposal, I think, would produce as much or more.
It is really not my proposal, by the way. I didn't think of this. As Bruce mentioned, there have been many suggestions on this. I have plagiarized this, as I do most good ideas that I have.
If you want real-life examples of where people have filed qui tam where they did not go to the company first, the famous G.E. aircraft engines case involving Israel and General Remi Dotan I think is a perfect example of where an individual by the name, I believe, of Chester Walsh observed the fraud against G.E. and the United States Government and against the Government of Israel, did not go to his company because he said he was afraid of being killed - Jack Welsh is a well-known gunslinger - and instead went to a plaintiff's qui tam lawyer, and they watched the case grow, I think from a $12 million to $40 million fraud during the couple of years that they sat on it, and they only filed a qui tam when Remi Dotan was arrested in Israel, and they immediately filed the lawsuit. So that's one example. I think there are any number of examples.
Now, where an employee comes to us - and this has happened to me - you get a letter that says Joe Blow's a crook, and he's ripping off the government, and you better do something about it or else I will.
Well, I've got to figure out who is Joe Blow, where does he work. Now, in this company, I have 170,000 employees. When I was with G.E., I had 240,000 or something like that. Who is this guy? Does he have anything to do with the government? And now I've got to investigate it. When I was a federal prosecutor, you know, the FBI has the luxury of investigating these things for three, four, five years sometimes. I've got a couple of days, and if I don't do something immediately, I may be in jeopardy.
So what I typically do is I call Bruce Drucker, and I say, "Bruce, I don't know what I've got here, but I'm letting you know that I've got this, and if it turns out to be something, I'll be back to you." And as I say, DOD IG works great. Whether that's going to work with other agencies like that, I don't know. But I think there are certainly examples - and I think the Dotan case is perhaps the best example that I know of - where a qui tam relator went to his lawyer rather than to his company. The damage escalated geometrically, and he made a lot of money. So did the lawyer, by the way.
MR. SWENSON: Bill, you made the point in your direct remarks that when companies voluntarily disclose to the Defense Department, part of the final resolution of the case - assuming that they don't fall into that statistical anomaly of actually getting criminally prosecuted or suspended, very few cases there - but they still may end up paying substantial double or treble damages under the False Claims Act.
Bruce, do you think there should be more accommodation for sorting out the good citizen corporations among the voluntary disclosures - for example, companies that have committed to strong compliance efforts versus those that haven't?
This is not directly your bailiwick, but what do you think the policy ideas are behind having double to treble damages for companies that, let's say, voluntarily disclose and also meet additional mitigating criteria - fully cooperate under the program, maybe to the nth degree?
MR. DRUCKER: Well, I think that a part of the theory that is used, the policy approach that is used in dealing with resolution of voluntary disclosure cases is that the statute itself provides that in the case of a truly voluntary disclosure, which is one where a company finds wrongdoing and within a period of 30 days investigates it, identifies it, and fully cooperates with the government in resolving the issues in the case, that the statute itself calls for a double damage application in lieu of a triple damage application that would be provided for in a non-voluntary situation, an adversarial situation, if you will.
So I think part of the thinking that goes into the application of the double damage, even in a voluntary disclosure, is that the case is being settled under a statute that itself provides a reduction - a sufficient statutory reduction. Whether or not that is, in fact, a true incentive to disclose, i.e., that it is double versus treble damages in a situation where a company is fully cooperative, as you put it, to the nth degree, there have been cases that I am aware of in disclosures where we have ended up with resolutions of settlements for singles. I am not saying that that is the norm, but it has occurred where the Department of Justice is willing to negotiate for what the single damage amount plus interest was as a resolution of the matter financially.
There is a judgment factor involved there I think that needs to stay, and that is the extent of cooperation, the extent of participation, varying levels of responsibility within the company.
Bill alluded earlier to and I believe one of the other speakers mentioned the concept of respondeat superior. Well, it depends on whether it is Joe Smith that Bill alluded to earlier that is a line supervisor at the production plant at Fort Swampy or it's Bill sitting at corporate headquarters that knew about and participated in the scheme. And that is where I think we have got to give greater credence to how do we temper what action we take with respect to the corporate liability, i.e., how much was the corporation involved; and if it does cooperate, does it have a strong compliance program, did voluntarily disclose and it is at very low levels, I think we have to take that into account in determining double or single damage.
MR. SWENSON: But your policy at this point - there is no concrete written policy that can be pointed to?
MR. DRUCKER: No, there is not.
MR. SWENSON: Do you think that the Defense Department should move in that direction?
MR. DRUCKER: The problem that we have is that in resolutions of these cases, particularly with the damage aspects of it, the Department of Justice is, both by its mission and by the agreement that we have with Justice as to how the program is administered, responsible for those determinations. We have open discussions with DOJ at very high levels of both the Department of Defense and Justice in how we are and have been administering this program. So I think that is one of the issues that is going to be looked at, is the approach to the monetary resolutions of the case. We may well come out with a final policy.
MR. LYTTON: Could I just comment on that? I think that the DOD's mission is different than DOJ's. DOD's mission is to stop the fraud, clean up the companies - a laudable mission. DOJ's policy is to get money. Prosecutors suffer from a prosecution complex. As one former prosecutor said, "It's an unnatural act not to prosecute somebody." He's now a defense lawyer and, of course, has seen the light, has had a lobotomy, as we all have. But I think in terms of settling civil cases, in my experience dealing with the Department of Justice, less attention is paid by them, in terms of the amount of the fine, to what type of compliance program you have than what you would normally have in any civil settlement; they pay more attention to the strength of the case. And if you can convince them they don't have a strong case, you're much more likely to get those damages down than if you go in and say we're really good guys. So I think that where you get the lower damages as an agreement in a settlement, it may be more as a result of the weakness of the government's case rather than the strength of the company's compliance program.
MR. SWENSON: We have a number of more questions, but we really have run out of time. So I would like to thank the panel and say that I think some of the issues that have just been raised are a nice segue into our next panel, where we will have representatives of the Justice Department talking about what their current policies are. Our thanks to the panel.
Bill Lytton
Q. Could an early disclosure to the government, if it erroneously reports an alleged crime by an employee, lead to a later civil action by that employee? How do employee rights figure into decisions to disclose about employee actions?
A. Almost any employee can sue his or her employee for anything. It is possible that an employee who was the subject of a disclosure that turns out to be incorrect could sue the employer. However, the employer should be able to argue that it acted in good faith, with a belief as to the truth of the matter asserted, and there may be an argument that that type of communication has a limited privilege which would shield it from being the basis for a law suit.
I am not aware of any such lawsuit having been filed, so I can only speculate on what the result would be.
Q. In your experience, how does the government see "full cooperation"? Does it mean full agreement with the government's position (e.g., your cartoon)? What does full cooperation get you and what does it not affect?
A. "Full cooperation" is in the eye of the government. It is a very subjective standard. The assertion of a privilege, the existence of a joint defense agreement to which the corporation is a party, a disagreement about the ultimate resolution - civil or criminal - can all be viewed by the government as a lack of cooperation. And, some prosecutors or enforcement personnel would be willing to use this as a threat - explicit or implicit - to obtain a result that they otherwise might not be able to obtain. The thing to remember is that this is not a level playing field that one might encounter in normal civil litigation. As a rule of thumb, it is not a bad idea to assume that some government personnel will construe lack of full agreement with the government's position as a lack of cooperation.
"Full cooperation" can obviously be important if your company is being sentenced under the guidelines. In the more normal circumstance, it will make your life a lot easier, since the government may be less inclined to take a full pound of flesh, and will probably be more willing to concede that the company is "presently responsible," and thus can continue to do business with the government.
Q. As a former Assistant U.S. Attorney and a current Defense Department (DOD) employee, I would be interested in the study you referenced as showing DOD employees 20 times more likely to violate criminal statutes than GE employees. Where may we find your study?
A. There is no formal study. The statistics were pulled together for me about five years ago by a paralegal. The statistics themselves are not important. The point is that the fact that a member of an organization, whether large or small, government or private industry, violates the law does not necessarily lead to the inescapable conclusion that the organization is evil. Unfortunately, this is the conclusion that some in the media and in the government jump to when they learn that an employee of a corporation has committed a crime.
Q. Why is the qui tam statute inconsistent with the sentencing guidelines and their promotion of compliance -- if an employee discovers grounds for a qui tam, compliance has failed, right? A meritorious qui tam action is a sign that a company needs to work harder to incorporate compliance into its culture. Comment?
A. The guidelines are inconsistent with the qui tam statute because while the guidelines encourage and reward a company for having an internal reporting system that results in the making of a voluntary disclosure , the qui tam statute offers an employee a huge financial incentive to avoid the internal reporting mechanism that a company has established. The government should not actively seek to undermine a corporation's efforts to comply with the guidelines.
The fact that an employee may think he or she has knowledge of a crime does not mean that a company's compliance program has failed. No institution in our society - the government, the churches, or the family - has been able to produce a perfect society. Zero defects is the goal of every organization. The fact that it is not achieved does not mean that the program failed. It may simply be a reflection of basic human nature. If a vaccine can reduce the incidence of a deadly disease from 30 percent to five percent, does that mean that the vaccine is a failure?
Q. Qui tam with its bounty inducement has yielded many times more dollar resources to the public fisc than has the industry-controlled company self-governance programs voluntarily disclosed through the Defense Department's Voluntary Disclosure Program. If bounties work, then what is your problem with qui tam's obvious success?
A. Qui tam actions have resulted in many millions of dollars being recovered by the government. It has also made some private bounty hunter lawyers multi-millionaires, and it has been a windfall for the bounty hunter employees. Every dollar these bounty hunters get is one dollar less for the taxpayers.
We need to reexamine what our underlying policy goal is here. Are we trying to encourage vigorous compliance programs and effective self-policing by corporations who tell the government when the government has been cheated and pay the money back? Or are we interested in perpetuating a system where greed and bounty hunting lawyering are more prized? The present system encourages a game whereby rich lawyers become richer. That seems to me to be awfully hard to defend.
If we were to adopt a procedure such as I proposed whereby a qui tam action could not be filed until 60 or 90 days after an employee has brought the alleged crime or fraud to the attention of the company, the obvious result would be more voluntary disclosures. A company would have to be nuts or awfully confident of its legal position not to notify the government in such a circumstance. The result would be more disclosures, more money to the U.S. Treasury, and more bounty hunter lawyers looking for some other line of work. Sounds like a win-win-win solution to me.
Robert S. Litt, Deputy Assistant Attorney General, Criminal Division,U.S. Department of Justice
Ronald A. Sarachan, Chief, Environmental Crimes Section, Environmental and Natural Resources Division, U.S. Department of Justice
Gary R. Spratling, Deputy Assistant Attorney General, Antitrust Division,U.S. Department of Justice
Eugene M. Thirolf, Director, Office of Consumer Litigation, Civil Division, U.S. Department of Justice
Moderator: Commissioner Wayne A. Budd, U.S. Sentencing Commission
COMMISSIONER BUDD: Ladies and gentlemen, over the last day-and-a-half, we have been talking about the organizational corporate guidelines, the developing of effective compliance programs and standards, and the experience that various corporations have had. We have talked about carrots and sticks. We have speculated as to what the government wants, what the government is looking for. And now I suppose we will hear firsthand of the experience and the views from the perspective of the Department of Justice, which, as you know, is the principal and I suppose the ultimate law enforcement authority in the United States.
So what are the approaches? What are the policies of the Department of Justice regarding these guidelines? How does the government view or treat the good citizen actions, for example, voluntary disclosure, cooperation, and a strong compliance program? How does this come to play in charging decisions? When does the department decide to pursue a case perhaps civilly rather than to go criminally? And whether or not the various divisions within the Department of Justice approach these things in the same manner, or do they treat them differently? Does the Department of Justice speak with one voice?
I am going to start our discussion this morning with Bob Litt, Deputy Assistant Attorney General in the Criminal Division of the Department of Justice. He graduated from Harvard College, and he topped that only by attending the Yale Law School. He did clerk for Justice Potter Stewart of the United States Supreme Court. Between 1978 and 1984, Mr. Litt served as an Assistant United States Attorney in the Southern District of New York. He was for a while a partner in the well-known firm of Williams and Connolly here in Washington, D.C. So as our lead-off speaker in this morning's panel, I would like to call on Bob Litt.
MR. LITT: Thank you, Commissioner Budd. I do welcome the opportunity to address you all this morning and talk about the Criminal Division's views on corporate compliance and criminal law enforcement. Just to anticipate what you will learn in response to one of the issues that Commissioner Budd mentioned, I think you will find that some of the divisions of the Department of Justice have somewhat different approaches to these problems. I don't think there is necessarily anything wrong with that. It develops out of the different enforcement issues that we have and the different kinds of communities that we deal with.
But I want to begin by thanking and congratulating the Commission for having this symposium. It is all too rare for us to have an opportunity to exchange views, not across the table where somebody is representing a client in a litigation context, but rather, in a more informal and academic setting. And I am pleased that we were invited and able to participate in this.
In recent years, the Department of Justice has come to focus more and more on the importance of prevention and compliance, as opposed to enforcement and punishment, as a means of effective law enforcement. If you want to police an entire industry's practices, you frequently have to enlist the industry itself in helping you. And so we are looking for ways to encourage corporate self-policing. By this, I mean requiring or inducing corporate management to take more responsibility itself for preventing and detecting employee misconduct. This includes implementing comprehensive and effective compliance programs to prevent corporate crimes, and it also includes voluntarily disclosing criminal activity to the government when the company discovers it.
Some of the other sessions of the conference are talking about some of these issues, and particularly the sentencing guidelines aspect of them, in greater depth. I would like to describe for you what the Criminal Division views as an effective corporate compliance program and also to talk to you a little bit about the principal means that federal prosecutors have for inducing corporate self-compliance, namely, prosecutorial discretion, voluntary disclosure programs, and I will talk briefly about the sentencing guidelines.
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