President's Column: Standing Up for Corporations

Standing Up for Corporations Martin S. Pinales

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Corporations are people, too.

This statement holds truth in some obvious ways. Corporations are merely organizations made up of the people who own them and work for them; corporate entities are often popularly identified with their chiefs (Jack Welch, Lee Iacocca); and corporations are described as being healthy, robust, weak, ailing, fleet, or sluggish. By the same token, corporations can be, and have been, “villainized” into lead characters in any number of historical tragedies (Exxon Valdez in the Gulf of Alaska; Union Carbide in Bhopal; even whole industries, like tobacco).

It is not an obvious proposition, though, that corporations can and should receive the same constitutional protections as you and I do as individual citizens. In terms of criminal law and procedure, corporations have fewer protections than individuals. For example, a corporation has no Fifth Amendment right not to testify against itself. Further, beginning with a 1909 Supreme Court case, corporations have vicarious criminal liability for the acts of their employees. The best explanation for these anomalies is probably more of a prudential than a doctrinal one, although the doctrinal one — that a corporation is only a fictional person — is strong. If a corporation were to refuse to turn over information to a prosecutor on Fifth Amendment grounds, for example, it would not be just one “person” refusing to provide testimony — it would be dozens, or hundreds, or even thousands. The chief argument in favor of vicarious criminal liability for a corporation is one of deterrence: the only way to have a real impact on the behavior of a corporation is to increase the probability that a corporation will be held liable for its actions. Vicarious liability certainly appears to ensure this end.

However, the Bill of Rights ensures that even while we punish people for the serious and tragic social costs of crime, we also give due weight to the social costs of ignoring the protections that are the backbone of a free society. In other words, the ends do not justify the means.

This has not been the view of many prosecutors and regulators with regard to corporations, especially since the Enron/WorldCom/Tyco/Adelphia scandals that followed the “pop” of the stock market bubble in the late 1990s. At every conference on the subject in the last five years, at least one enforcement lawyer can be heard to say, “It’s the job of the corporation to help us catch the bad guys.” Even lip service to the adversarial system of justice is generally abandoned. Witness one statement by a top-ranking DOJ lawyer at an American Bar Association conference last year:

I would expect that, if the company wants to be getting credit for cooperation, they should be coming in and giving us the information that they are getting on a real-time basis so we can use it and we can work with it. Unfortunately, we are still seeing lawyers out there with what we consider the “old school mentality” that to my mind is, “We understand there’s a problem, we’re going to conduct our internal investigation, we’ll report to the board and management, and then when that is all done, Mister Prosecutor and Miss Regulator, we’ll get back to you and let you know what we’re gong to disclose to you.” That doesn’t cut it anymore.

As Judge Lewis Kaplan, sitting in the Southern District of New York, recently ruled in the case of 17 defendants in the KPMG tax shelter marketing case (United States v. Stein), trying to prevent a corporation from “circling the wagons” does not entitle the government to turn the corporation into its investigative arm. In Stein, the nearly uncontroverted evidence showed that the United States Attorney’s Office pressured KPMG to refuse to advance attorney’s fees to its employees, despite a decades-long practice of doing so without exception. In exchange, KPMG avoided indictment. Judge Kaplan, in eloquent and remarkably unguarded language, said that the government let “its zeal get in the way of its judgment,” and held that this behavior violated the defendants’ right to counsel and a fair trial. He also traced this behavior directly to the Thompson Memorandum, a now infamous three-year-old piece of guidance from DOJ that instructs prosecutors who are evaluating whether a corporation has “cooperated” to consider whether it has advanced fees for lawyers, waived its attorney-client privilege, and “enabled” testimony from employees without triggering their Fifth Amendment rights.

The Thompson Memorandum arguably affects some notion that we have of the due process rights of corporations themselves. But the KPMG case and hundreds of cases like it highlight that it is ultimately individuals whose rights are affected — individuals whose statements to company counsel are turned over to the government, and individuals who can’t afford lawyers nor construct their defense in a manner that is consistent with their employer’s. Because corporations are vicariously liable in the criminal system for the acts of their employees — regardless of whether the employees were acting in the company’s interest — any indication of wrongdoing that is uncovered during an investigation could give rise to total ruin. From that perspective, the Thompson Memorandum provides companies with their only way out of legal quicksand — the prosecutor’s helping hand. Should what’s good for shareholders — the “people” who are the corporation — be so bad for employees? And should it come at the cost of many individuals’ constitutional rights?

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The answer is, of course, no. We need to start examining alternatives to vicarious corporate liability — certainly, alternatives that consider a company’s existing compliance programs, as many areas of civil law recognize. And as for the Thompson Memorandum, our position as members of the defense bar and “Liberty’s Last Champions” should be unyielding: Using the fiction of the company to violate the rights of individuals is unacceptable, has no conceivable relationship to whether a corporation is cooperative, and must be excised from government practice. 

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