Make It Go Away!

In most vicarious liability cases, the corporation's principal officers were entirely unaware of the criminal acts at the time that the employee committed them. In fact, the discovery of such acts by upper management is often the impetus that brings the case to light. But management's lack of awareness does not shield the corporation from prosecution. Prosecutors often consider themselves duty-bound to take action, particularly in a political environment where corporate misconduct is an enforcement priority.

Once the crime is exposed, the corporation has few options. Unless the employee's actions redounded solely to his or her own benefit (as with insider trading or pocketed funds), the corporation has no legal defense to criminal charges. Where the facts are undisputed, proceeding to trial is not a realistic alternative, because the prosecution only has to prove what occurred.

One popular tactic in these circumstances is to argue that the bad actor was a 'rogue employee,' who was operating deliberately in the shadows of management oversight and completely at odds with corporate policies and procedures. The tactic rarely succeeds, however, for a number of good reasons. It is difficult and expensive to prove the negative; namely, that no one else knew or had reason to suspect. In accordance with the laws of human nature, the employee ' who is either a target or cooperating ' will not shoulder the full blame. Most importantly, the 'rogue employee' argument is not a legal defense but a naked appeal to prosecutorial discretion. The corporation is asking to be let go entirely, and concerns about enforcement policy and fairness only rarely allow prosecutors to do that. The corporation thus may have no choice but to enter into plea negotiations. Yet, the consequences of a plea are great. The corporation faces possible suspension and debarment and extensive negative publicity that may jeopardize its place in the public eye and on Wall Street.

A Creative Approach

One more approach is worth a try. In dealing with corporate criminal liability, white-collar defense counsel can borrow a strategy from their blue-collar crime counterparts: pre-trial diversion.

In most jurisdictions, federal and local, prosecutors handle many first-time offenders charged with misdemeanors through well-established diversion programs. Eligible defendants are offered the opportunity to have the charges dismissed after a specified period if they refrain from further violations and fulfill agreed conditions, such as community service, anger management training or various treatment programs. The rationale for pre-trial diversion, also known as 'adjournment in contemplation of dismissal' or 'conditional dismissal,' is straightforward: Prosecutors avoid the time-consuming judicial process, and offenders avoid the stigma of a criminal conviction.

This rationale applies even more fully to vicarious corporate liability. Through pre-trial diversion, prosecutors are able to gain a deterrent effect, similar to what they might achieve with successful prosecution and probation, while avoiding a costly legal battle. For corporate defendants, pre-trial diversion avoids bad publicity and collateral consequences like suspension and debarment. In addition, a pre-trial diversion agreement may also offer the corporation some insulation from further criminal prosecution for related matters.

Diversion also circumvents the problem presented by 'rogue employee' and other 'drop the charges' appeals; namely, the prosecutor 's reluctance to decline entirely. Pre-trial diversion allows the prosecutor to 'win' without having to take the matter before a judge and jury, making it an easier alternative for corporate counsel to sell.

In the white-collar world, pre-trial diversion is fundamentally different from persuading, or attempting to persuade, a prosecutor to 'go civil.' First, the prosecutorial arm maintains supervision and control over the defendant's compliance with the pre-trial diversion agreement. Second, diversionary terms are typically less extensive, though no less onerous than consent decree language. Third, a diversion agreement typically takes much less time to negotiate and implement than a consent decree. Diversion is not a substitute for 'going civil.' Rather, it is an alternative to prosecution when the only other choice is a plea.

The Nuts and Bolts

When a prosecutor and defendant consent to the remedy of pre-trial diversion, it is memorialized in a pre-trial diversion agreement. This agreement, though written, typically is not filed with the court ' it is simply a contract between the parties. In some instances, however, prosecutors might insist on filing at least an information. See 'Bank Enters Deferred Prosecution Agreement,' Business Crimes Bulletin, February 2003, pages 7-8. In either case, the prosecutor agrees not to bring or to prosecute certain criminal charges against the defendant for a number of months, usually between 12 and 36. In exchange, the defendant agrees to undertake some combination of community service, prevention, and restitution.

As part of pretrial diversion agreements, corporate defendants have agreed, for example, to provide increased training for their employees, conduct outside audits, and provide restitution to individuals who have been harmed, including shareholders. If, at the end of the specified time, the defendant has complied with the terms, then the prosecutor will waive all charges stemming from the events in question. But if the obligations are not met, the prosecutors essentially 'restart the clock,' and return to the point in time before the agreement was signed. Pre-trial diversion allows the defendant to deny liability but agree to the conditions in light of the dismissal. In this sense, a diversion agreement operates much like a consent decree. Under the terms of the agreement, the company's compliance should preclude future prosecutions. In reality, the specified compliance efforts may prevent future violations from happening in the first place.

Three Successful Diversions

The diversion mechanism has been successfully used in a wide variety of contexts, both as its own remedy and in conjunction with other criminal charges. The examples below (with identifying information removed) indicate how it has worked:

Corporation A. A corporate employee was responsible for excessive discharges of hazardous waste into a holding pond for a mining operation. Migratory birds used the pond for refuge, and several birds were found dead. The Department of the Interior and the U.S. Attorney's Office threatened charges under the Migratory Bird Treaty Act.

The corporation's vicarious liability was plain, and the agency's desire to establish precedent was strong. Ultimately, the prosecutor was persuaded to divert because of the corporation's past performance and its willingness to work creatively with the agency and local conservation groups to try to prevent future occurrences.

Terms of the agreement: The United States alleged that, on more than one occasion, the corporation may have caused or contributed to the deaths of migratory birds in violation of the Migratory Bird Act Treaty. The prosecutor agreed to defer prosecution for a period of 36 months, provided that the corporation complied with the agreement. In addition to a pledge not to violate any federal law relating to wildlife, the terms of the agreement specified that within the first 30 days of diversion, the corporation would make a significant contribution to a local organization in order to assist in establishing a migratory bird habitat. In addition, within 12 months of the diversion, the company agreed to expend a specified amount of funds to develop sound environmental techniques to dispose of contaminants and hire an independent auditor to ensure proper compliance with all environmental regulations. Non-compliance with these terms would result in revocation and filing of the original charges.

Corporation B. The corporation regularly generated and disposed of hazardous wastes. A single employee decided that proper disposal was too great a hassle and financial burden, so he began disposing of wastes improperly. Because of possible harm to the environment in an ecologically sensitive area, the Department of Justice and U.S. Attorney's Office demanded a plea.

In part because of a lack of available evidence of harm, the corporation's agreed guilty plea was to misdemeanor 'negligent supervision' violations of the Clean Water Act. In exchange, the prosecution deferred prosecution on felony charges related to the disposal itself, contingent upon compliance with a pre-trial diversion agreement. Among various conditions, the agreement required the company to expend significant funds on the development, implementation, and maintenance of a corporate compliance program.

Prosecutors found that an individual defendant had violated importation permit requirements. The violation involved highly technical and complex regulations. Although 'ignorance of the law is no excuse,' counsel successfully convinced prosecutors the individual's lack of awareness was genuine and a successful diversion agreement was negotiated.

A Perfect Fit

Where legal liability is plain, but fairness dictates otherwise, pre-trial diversion fits the bill. It is an established an effective law enforcement technique in the world of street crime. Enforcement authorities often claim that the criminal law should not recognize status or wealth and claim further that they treat 'white-collar' defendants no differently from other defendants. If that is the case, then the opportunity for pre-trial diversion should be available to all defendants, including corporations and their white-collar employees.

Jeffrey T. Green is a partner in the Washington, D.C.. office of Sidley Austin Brown & Wood.

Forget about Global Crossing, WorldCom, and Enron. These are extreme examples of corporate misconduct. The more typical criminal case against a corporation involves greater ambiguity and often turns on the actions of a very few individuals, or perhaps even one employee acting alone. The vicarious liability case law that is the vehicle for all corporate prosecutions casts a very broad net. An individual need only be acting pursuant to his or her duties (or even apparent duties) in order to create criminal liability for the corporation as a whole. Liability attaches even if the individual's motives were primarily self-serving, like 'making the books look better,' and in direct contravention of a corporate code of conduct.

Many well-intentioned and otherwise well-behaved corporations have found themselves caught in this broad net of vicarious criminal liability. To protect themselves, corporations across the country have instituted strict policies to prevent and detect crime by employees. Yet despite such measures, crime will still occur. When it does, the corporation itself is on the hook.

Inevitable Outcome?

In most vicarious liability cases, the corporation's principal officers were entirely unaware of the criminal acts at the time that the employee committed them. In fact, the discovery of such acts by upper management is often the impetus that brings the case to light. But management's lack of awareness does not shield the corporation from prosecution. Prosecutors often consider themselves duty-bound to take action, particularly in a political environment where corporate misconduct is an enforcement priority.

Once the crime is exposed, the corporation has few options. Unless the employee's actions redounded solely to his or her own benefit (as with insider trading or pocketed funds), the corporation has no legal defense to criminal charges. Where the facts are undisputed, proceeding to trial is not a realistic alternative, because the prosecution only has to prove what occurred.

One popular tactic in these circumstances is to argue that the bad actor was a 'rogue employee,' who was operating deliberately in the shadows of management oversight and completely at odds with corporate policies and procedures. The tactic rarely succeeds, however, for a number of good reasons. It is difficult and expensive to prove the negative; namely, that no one else knew or had reason to suspect. In accordance with the laws of human nature, the employee ' who is either a target or cooperating ' will not shoulder the full blame. Most importantly, the 'rogue employee' argument is not a legal defense but a naked appeal to prosecutorial discretion. The corporation is asking to be let go entirely, and concerns about enforcement policy and fairness only rarely allow prosecutors to do that. The corporation thus may have no choice but to enter into plea negotiations. Yet, the consequences of a plea are great. The corporation faces possible suspension and debarment and extensive negative publicity that may jeopardize its place in the public eye and on Wall Street.

A Creative Approach

One more approach is worth a try. In dealing with corporate criminal liability, white-collar defense counsel can borrow a strategy from their blue-collar crime counterparts: pre-trial diversion.

In most jurisdictions, federal and local, prosecutors handle many first-time offenders charged with misdemeanors through well-established diversion programs. Eligible defendants are offered the opportunity to have the charges dismissed after a specified period if they refrain from further violations and fulfill agreed conditions, such as community service, anger management training or various treatment programs. The rationale for pre-trial diversion, also known as 'adjournment in contemplation of dismissal' or 'conditional dismissal,' is straightforward: Prosecutors avoid the time-consuming judicial process, and offenders avoid the stigma of a criminal conviction.

This rationale applies even more fully to vicarious corporate liability. Through pre-trial diversion, prosecutors are able to gain a deterrent effect, similar to what they might achieve with successful prosecution and probation, while avoiding a costly legal battle. For corporate defendants, pre-trial diversion avoids bad publicity and collateral consequences like suspension and debarment. In addition, a pre-trial diversion agreement may also offer the corporation some insulation from further criminal prosecution for related matters.

Diversion also circumvents the problem presented by 'rogue employee' and other 'drop the charges' appeals; namely, the prosecutor 's reluctance to decline entirely. Pre-trial diversion allows the prosecutor to 'win' without having to take the matter before a judge and jury, making it an easier alternative for corporate counsel to sell.

In the white-collar world, pre-trial diversion is fundamentally different from persuading, or attempting to persuade, a prosecutor to 'go civil.' First, the prosecutorial arm maintains supervision and control over the defendant's compliance with the pre-trial diversion agreement. Second, diversionary terms are typically less extensive, though no less onerous than consent decree language. Third, a diversion agreement typically takes much less time to negotiate and implement than a consent decree. Diversion is not a substitute for 'going civil.' Rather, it is an alternative to prosecution when the only other choice is a plea.

The Nuts and Bolts

When a prosecutor and defendant consent to the remedy of pre-trial diversion, it is memorialized in a pre-trial diversion agreement. This agreement, though written, typically is not filed with the court ' it is simply a contract between the parties. In some instances, however, prosecutors might insist on filing at least an information. See 'Bank Enters Deferred Prosecution Agreement,' Business Crimes Bulletin, February 2003, pages 7-8. In either case, the prosecutor agrees not to bring or to prosecute certain criminal charges against the defendant for a number of months, usually between 12 and 36. In exchange, the defendant agrees to undertake some combination of community service, prevention, and restitution.

As part of pretrial diversion agreements, corporate defendants have agreed, for example, to provide increased training for their employees, conduct outside audits, and provide restitution to individuals who have been harmed, including shareholders. If, at the end of the specified time, the defendant has complied with the terms, then the prosecutor will waive all charges stemming from the events in question. But if the obligations are not met, the prosecutors essentially 'restart the clock,' and return to the point in time before the agreement was signed. Pre-trial diversion allows the defendant to deny liability but agree to the conditions in light of the dismissal. In this sense, a diversion agreement operates much like a consent decree. Under the terms of the agreement, the company's compliance should preclude future prosecutions. In reality, the specified compliance efforts may prevent future violations from happening in the first place.

Three Successful Diversions

The diversion mechanism has been successfully used in a wide variety of contexts, both as its own remedy and in conjunction with other criminal charges. The examples below (with identifying information removed) indicate how it has worked:

Corporation A. A corporate employee was responsible for excessive discharges of hazardous waste into a holding pond for a mining operation. Migratory birds used the pond for refuge, and several birds were found dead. The Department of the Interior and the U.S. Attorney's Office threatened charges under the Migratory Bird Treaty Act.

The corporation's vicarious liability was plain, and the agency's desire to establish precedent was strong. Ultimately, the prosecutor was persuaded to divert because of the corporation's past performance and its willingness to work creatively with the agency and local conservation groups to try to prevent future occurrences.

Terms of the agreement: The United States alleged that, on more than one occasion, the corporation may have caused or contributed to the deaths of migratory birds in violation of the Migratory Bird Act Treaty. The prosecutor agreed to defer prosecution for a period of 36 months, provided that the corporation complied with the agreement. In addition to a pledge not to violate any federal law relating to wildlife, the terms of the agreement specified that within the first 30 days of diversion, the corporation would make a significant contribution to a local organization in order to assist in establishing a migratory bird habitat. In addition, within 12 months of the diversion, the company agreed to expend a specified amount of funds to develop sound environmental techniques to dispose of contaminants and hire an independent auditor to ensure proper compliance with all environmental regulations. Non-compliance with these terms would result in revocation and filing of the original charges.

Corporation B. The corporation regularly generated and disposed of hazardous wastes. A single employee decided that proper disposal was too great a hassle and financial burden, so he began disposing of wastes improperly. Because of possible harm to the environment in an ecologically sensitive area, the Department of Justice and U.S. Attorney's Office demanded a plea.

In part because of a lack of available evidence of harm, the corporation's agreed guilty plea was to misdemeanor 'negligent supervision' violations of the Clean Water Act. In exchange, the prosecution deferred prosecution on felony charges related to the disposal itself, contingent upon compliance with a pre-trial diversion agreement. Among various conditions, the agreement required the company to expend significant funds on the development, implementation, and maintenance of a corporate compliance program.

Prosecutors found that an individual defendant had violated importation permit requirements. The violation involved highly technical and complex regulations. Although 'ignorance of the law is no excuse,' counsel successfully convinced prosecutors the individual's lack of awareness was genuine and a successful diversion agreement was negotiated.

A Perfect Fit

Where legal liability is plain, but fairness dictates otherwise, pre-trial diversion fits the bill. It is an established an effective law enforcement technique in the world of street crime. Enforcement authorities often claim that the criminal law should not recognize status or wealth and claim further that they treat 'white-collar' defendants no differently from other defendants. If that is the case, then the opportunity for pre-trial diversion should be available to all defendants, including corporations and their white-collar employees.

Jeffrey T. Green is a partner in the Washington, D.C.. office of Sidley Austin Brown & Wood.