Corporate Employees Need Protection from Overzealous Prosecutors

Prosecutors over the Line

The economic, reputational and psychological effects of being blacklisted by a federal prosecutor are obviously enormous. Moreover, if the corporation is not charged or enters into a deferred-prosecution agreement, the victimized executives will have no opportunity, as they did in the KPMG case, to seek judicial redress in any proceeding initiated by the DOJ. And even if the corporation itself is indicted, the individuals may have no recourse within that proceeding.

The role of a prosecutor is to investigate and decide whether to bring charges or not. If no charges are brought, prosecutors are not supposed to disclose their views about people they have investigated. Unindicted co-conspirators are not usually named in an indictment for this reason. And one of the complaints about the Independent Counsel statute that led to its demise was its provision for a report that could accuse individuals without giving them any means to defend themselves. Prosecutors are not authorized to defame or harass unindicted individuals. Nor are they authorized to reform a company by imposing personnel changes. Corporate governance is not within the province of the DOJ, which has no expertise or standards to apply in this area. Yet this is precisely what the prosecutors have done in our firm's cases and, no doubt, in others.

We would not tolerate this conduct if it occurred in plain view. For example, if a prosecutor investigated a public official and decided to bring no charges, we would not condone him making public statements that he thought the official was guilty and voters should turn him out of office. Why is similar conduct any more tolerable when accomplished behind the scenes by pressure on corporations facing a threat of prosecution, whether through private statements to company counsel, specific secret agreements, or winks and nods? Indeed, in one respect the overreaching is worse in the private corporate sphere than with public officials: voters are free to disregard a prosecutor's wishes, but corporations facing possible indictment are at her mercy.

Counsel for Scapegoat Executives

For many public companies, just the threat of a federal indictment is sufficiently terrifying that they will take any steps to avoid it, including throwing any senior executive 'under the bus.' The mere announcement of an indictment can have devastating consequences, as in the collapse of Arthur Andersen. And fighting a criminal case is extremely difficult for a corporation, because our current law gives a corporation virtually no defense so long as any agent, including the lowliest employee, has engaged in an illegal action in part to benefit the company. Judge Kaplan called the power that prosecutors hold over corporations one of 'life and death'; it leads nervous Boards of Directors or Audit Committees to do whatever a prosecutor suggests or implies in hope of warding off criminal charges.

These circumstances place counsel representing the individual in an extremely difficult position. A direct approach to the prosecutor, complaining of the unfair and damaging conduct, risks provoking her to return criminal charges against the client that she might not otherwise bring. On the other hand, bypassing the line prosecutor to seek review by a supervisor may be counterproductive, antagonizing those with the power to indict.

Counsel might also seek to initiate a preemptive lawsuit. This may be the best of a number of bad solutions, but it has formidable downsides. It will undoubtedly bring unwanted publicity to the client. (Counsel might have to seek leave to file a John Doe complaint or seal the proceedings.) Any lawsuit may be met with claims of prosecutorial immunity. And under the best of circumstances, it will be difficult to prove that the corporation acted as a result of clear and unambiguous demands by the prosecutor. If mere hints, or even just fear of government reaction, led the corporation to fire your client, that may be insufficient government coercion to warrant relief.

Any litigation that is brought will likely depend on the claim that a corporate executive's right to remain in his position and earn his compensation is a recognized property interest protected by the Fifth Amendment's Due Process Clause. For example, Congress has given to the federal banking agencies (not to the DOJ) the authority to remove individuals from the industry ' but only under certain specified circumstances, based on enumerated criteria, and subject to the right to a hearing before the agency and judicial review of the agency's decision. By imposing a 'backdoor prohibition' on an individual against whom no charges have been brought and no indictment has been filed, a prosecutor not only exceeds his authority, but also deprives the individual of safeguards to which he is entitled by law. In such cases, judicial redress in the form of an injunction or similar equitable relief may be available. Additionally, if damages have resulted, prosecutors may be held personally liable in a Bivens action, as the absolute immunity typically enjoyed by prosecutors might not protect violation of a clearly established right occurring outside of judicial proceedings. If the actions of the prosecutor would be a tort under state law, the DOJ may be liable under the Federal Tort Claims Act (although such claims are subject to numerous exceptions).

Responsibility of the DOJ

It would be preferable, however, if this kind of abuse of power were addressed in the first instance by the DOJ. The Department should modify its present policy and provide that a prosecutor's evaluation of a company's cooperation should focus on the cessation of the offending conduct and assistance to the government in its investigation and leave personnel actions to the corporation. Unless there is a demonstrably significant threat of continuing criminal conduct, there is no justification for a prosecutor to impose his views of the future employment of those the prosecutor deems 'culpable,' particularly in light of the fiduciary obligations already imposed by state law on corporate boards of directors. Second, if the government is going to continue to examine the corporation's treatment of those whom the prosecutor deems 'culpable,' culpability should be defined to mean provable, personal guilt of criminal behavior. The focus should be on employees whose conduct was criminal and not simply on those who happened to be in supervisory positions when the challenged conduct occurred. Finally, no action should be taken against any individual without notice of the basis and a full opportunity to defend.

If the Department declines to implement reforms that are adequate to protect individuals against abuse ' to the detriment of uncharged but discharged executives, and to the possible detriment of the corporations they served ' then Congress should consider amending the Hyde Amendment to provide a suit for compensatory and punitive damages, filed with the name of the plaintiff under seal, against a prosecutor who intentionally and directly causes economic harm (other than legal fees for defense), vexatiously or in bad faith, to an individual who was not charged with a crime. Indeed, the mere introduction and consideration of such legislation may be sufficient to modify behavior at the DOJ, as happened regarding attorney-client privilege after the introduction of a bill by Sen. Arlen Specter (R-PA) that would mandate a change from past DOJ practice.

Conclusion

One way or another, prosecutors should be told to quit imposing personnel changes and stick to their job of investigating suspected crimes and deciding whether or not to indict.

Robert S. Litt ([email protected]) is a partner at Arnold & Porter LLP in Washington, DC.

The KPMG tax shelter case brought to light heavy-handed attempts by federal prosecutors to exert economic coercion on indicted former KMPG partners and deprive them of the counsel of their choice, of resources that would otherwise be available for their defense, and of their Fifth Amendment right against compelled self-incrimination. Judge Lewis A. Kaplan's landmark decisions on motions by various defendants held many of the government's actions unlawful. See United States v. Stein , 488 F Supp. 2d 350 (S.D.N.Y. 2007); 435 F. Supp. 2d 330 (S.D.N.Y. 2006). But what are counsel for corporate employees to do when prosecutors attack their clients' reputation and pocketbook, but there's no judge to complain to?

In cases my firm has handled in the past year, federal prosecutors, by direct demands or more subtle means, have caused two senior corporate executives to lose their jobs even though neither was charged with a crime. For regulated financial institutions, the practice by government agencies of obtaining agreements that bar non-party individuals from employment has become so prevalent that it has a name: 'backdoor prohibitions.' The Department of Justice (DOJ) seems to have adopted a similar practice of 'blacklisting,' even though Congress has never authorized it.

In our cases, the prosecutors ' presumably carrying out the McNulty Memorandum's directive to determine if the corporation under investigation was cooperating adequately ' told company lawyers that the corporation appeared to be 'protecting the culpable employees' by (in the words of the McNulty Memorandum) 'retaining the [executives] without sanction.' Neither of our clients had any prior brush with the law, neither has any criminal 'associations,' and neither is alleged to be directly involved with unlawful activity. Nonetheless, their corporate employers, to avoid indictment or obtain a deferred-prosecution agreement, acceded to prosecutors' wishes and terminated the employment of our clients.

Prosecutors over the Line

The economic, reputational and psychological effects of being blacklisted by a federal prosecutor are obviously enormous. Moreover, if the corporation is not charged or enters into a deferred-prosecution agreement, the victimized executives will have no opportunity, as they did in the KPMG case, to seek judicial redress in any proceeding initiated by the DOJ. And even if the corporation itself is indicted, the individuals may have no recourse within that proceeding.

The role of a prosecutor is to investigate and decide whether to bring charges or not. If no charges are brought, prosecutors are not supposed to disclose their views about people they have investigated. Unindicted co-conspirators are not usually named in an indictment for this reason. And one of the complaints about the Independent Counsel statute that led to its demise was its provision for a report that could accuse individuals without giving them any means to defend themselves. Prosecutors are not authorized to defame or harass unindicted individuals. Nor are they authorized to reform a company by imposing personnel changes. Corporate governance is not within the province of the DOJ, which has no expertise or standards to apply in this area. Yet this is precisely what the prosecutors have done in our firm's cases and, no doubt, in others.

We would not tolerate this conduct if it occurred in plain view. For example, if a prosecutor investigated a public official and decided to bring no charges, we would not condone him making public statements that he thought the official was guilty and voters should turn him out of office. Why is similar conduct any more tolerable when accomplished behind the scenes by pressure on corporations facing a threat of prosecution, whether through private statements to company counsel, specific secret agreements, or winks and nods? Indeed, in one respect the overreaching is worse in the private corporate sphere than with public officials: voters are free to disregard a prosecutor's wishes, but corporations facing possible indictment are at her mercy.

Counsel for Scapegoat Executives

For many public companies, just the threat of a federal indictment is sufficiently terrifying that they will take any steps to avoid it, including throwing any senior executive 'under the bus.' The mere announcement of an indictment can have devastating consequences, as in the collapse of Arthur Andersen. And fighting a criminal case is extremely difficult for a corporation, because our current law gives a corporation virtually no defense so long as any agent, including the lowliest employee, has engaged in an illegal action in part to benefit the company. Judge Kaplan called the power that prosecutors hold over corporations one of 'life and death'; it leads nervous Boards of Directors or Audit Committees to do whatever a prosecutor suggests or implies in hope of warding off criminal charges.

These circumstances place counsel representing the individual in an extremely difficult position. A direct approach to the prosecutor, complaining of the unfair and damaging conduct, risks provoking her to return criminal charges against the client that she might not otherwise bring. On the other hand, bypassing the line prosecutor to seek review by a supervisor may be counterproductive, antagonizing those with the power to indict.

Counsel might also seek to initiate a preemptive lawsuit. This may be the best of a number of bad solutions, but it has formidable downsides. It will undoubtedly bring unwanted publicity to the client. (Counsel might have to seek leave to file a John Doe complaint or seal the proceedings.) Any lawsuit may be met with claims of prosecutorial immunity. And under the best of circumstances, it will be difficult to prove that the corporation acted as a result of clear and unambiguous demands by the prosecutor. If mere hints, or even just fear of government reaction, led the corporation to fire your client, that may be insufficient government coercion to warrant relief.

Any litigation that is brought will likely depend on the claim that a corporate executive's right to remain in his position and earn his compensation is a recognized property interest protected by the Fifth Amendment's Due Process Clause. For example, Congress has given to the federal banking agencies (not to the DOJ) the authority to remove individuals from the industry ' but only under certain specified circumstances, based on enumerated criteria, and subject to the right to a hearing before the agency and judicial review of the agency's decision. By imposing a 'backdoor prohibition' on an individual against whom no charges have been brought and no indictment has been filed, a prosecutor not only exceeds his authority, but also deprives the individual of safeguards to which he is entitled by law. In such cases, judicial redress in the form of an injunction or similar equitable relief may be available. Additionally, if damages have resulted, prosecutors may be held personally liable in a Bivens action, as the absolute immunity typically enjoyed by prosecutors might not protect violation of a clearly established right occurring outside of judicial proceedings. If the actions of the prosecutor would be a tort under state law, the DOJ may be liable under the Federal Tort Claims Act (although such claims are subject to numerous exceptions).

Responsibility of the DOJ

It would be preferable, however, if this kind of abuse of power were addressed in the first instance by the DOJ. The Department should modify its present policy and provide that a prosecutor's evaluation of a company's cooperation should focus on the cessation of the offending conduct and assistance to the government in its investigation and leave personnel actions to the corporation. Unless there is a demonstrably significant threat of continuing criminal conduct, there is no justification for a prosecutor to impose his views of the future employment of those the prosecutor deems 'culpable,' particularly in light of the fiduciary obligations already imposed by state law on corporate boards of directors. Second, if the government is going to continue to examine the corporation's treatment of those whom the prosecutor deems 'culpable,' culpability should be defined to mean provable, personal guilt of criminal behavior. The focus should be on employees whose conduct was criminal and not simply on those who happened to be in supervisory positions when the challenged conduct occurred. Finally, no action should be taken against any individual without notice of the basis and a full opportunity to defend.

If the Department declines to implement reforms that are adequate to protect individuals against abuse ' to the detriment of uncharged but discharged executives, and to the possible detriment of the corporations they served ' then Congress should consider amending the Hyde Amendment to provide a suit for compensatory and punitive damages, filed with the name of the plaintiff under seal, against a prosecutor who intentionally and directly causes economic harm (other than legal fees for defense), vexatiously or in bad faith, to an individual who was not charged with a crime. Indeed, the mere introduction and consideration of such legislation may be sufficient to modify behavior at the DOJ, as happened regarding attorney-client privilege after the introduction of a bill by Sen. Arlen Specter (R-PA) that would mandate a change from past DOJ practice.

Conclusion

One way or another, prosecutors should be told to quit imposing personnel changes and stick to their job of investigating suspected crimes and deciding whether or not to indict.

Robert S. Litt ([email protected]) is a partner at Arnold & Porter LLP in Washington, DC.