[A Part of the Student Series] January 11, 2013

Motivational Speaking: Corporate Cooperation and Employee Whistleblowing

By Carl Newmani

A frequent refrain in the last decade has been calls for increased uniformity in the corporate charging practices of the United States Attorney’s Offices.[1] This call for uniformity of practice has lent itself naturally (along with corresponding political pressure and pushback from the Department of Justice) to calls for legislative intervention.[2] At the same time, similar (if not the same) interest groups are railing against the most recent, major legislative intervention in American business: The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).[3] Now, the Dodd-Frank reforms have yielded the final whistleblower award rules.[4] The rules are designed to incentivize disclosure to the SEC while the cooperation credit standards are designed, in part, to facilitate disclosure to the DOJ.

This article will analyze the differences and similarities in incentives between today’s corporate cooperation credit guidelines and Dodd-Frank’s new whistleblower regime. After comparing the (startlingly similar) incentives, this article will argue that the current differences in institutional design are justifiable even though both regimes are designed to reach the same goal – compliance with the law. Though the similarities could also be used to argue in favor of codifying DOJ cooperation criteria (since a similar template already exists in the whistleblower rules), ultimately, the difference in timing of the decision to disclose favors the current regime.

I. The Evolution of Corporate Charging and the Filip Memo

The evolution of corporate charging policy is well documented elsewhere,[5] but the abbreviated history is quite simple: after twenty years of corporate criminal pretrial diversions, there is still merely guidance, and not formal rules for determining when leniency is appropriate. The remainder of this section presents the general progression that has occurred over the last two decades, with a focus on the current standard for assessing whether a corporation has sufficiently “cooperated” to gain the benefits of leniency.

The decision of the United States Attorney’s Office for the Southern District of New York to decline prosecution of Salomon Brothers in 1992 is typically credited as the first corporate pretrial diversion.[6] It was not until 1999 that any significant guidance was offered on the use of pretrial diversion for corporations, when then-Deputy Attorney General Eric Holder wrote a non-binding memorandum, “Federal Prosecution of Corporations.”[7] The Holder Memo tied the treatment of corporations in large part to the organizational sentencing guidelines issued in 1991, notably by another agency,[8] and one not in the executive branch.[9] It may not be the judicial oversight that some critics of the DOJ are hoping for, but it’s worth noting that the charging guidelines were originally, and still today are meaningfully parallel to the organizational sentencing guidelines that the United States Sentencing Commission created.[10]

The corporate fraud scandals that followed the issuance of the Holder Memo brought with them Sarbanes-Oxley[11] and soon after, a new, guidance document by then-Deputy Attorney General Larry Thompson in 2003.[12] In addition to guiding all federal prosecutors, the Thompson Memo is frequently credited for resting the charging decision largely on a single factor: cooperation.[13] In 2006, yet a third Deputy Attorney General, Paul McNulty, offered a slight (but significant) concession on some particularly objectionable aspects of the Thompson Memo: by prohibiting federal prosecutors from considering the company’s decision to grant a waiver of attorney-client privilege or advance of legal fees to its employees in making a charging determination.[14] But the McNulty Memo was not long for this world because of a strong pressure by corporations and their counsels, and, critically, because of the Second Circuit’s decision in U.S. v. Stein.[15] The Stein court held that the government’s conditioning cooperation on refusing to advance legal fees to individual employees charged with wrongdoing unconstitutionally infringed the Sixth Amendment rights of those employee defendants.[16] The same day that Stein was decided, Deputy Attorney General Mark Filip offered another revision dealing with the ruling of Stein[17] and also taking the further step towards formality by placing what had been a series of memoranda on corporate charging policies and moving them into the United States Attorneys’ Manual (“the Manual”).[18]

Section 9-28.700 of the Manual is now devoted to assessing “The Value of Cooperation” by the corporation.[19] It includes an emphasis[20] on “the corporation’s timely and voluntary disclosure of wrongdoing” and “the corporation’s willingness to provide relevant information and evidence that identify relevant actors within and outside the corporation” before making a few exclusions from the definition of cooperation.[21] Most notably, as a result of the Stein decision and the political pressure exerted on the DOJ, cooperation cannot depend on waiver of privilege or advancement of obligated legal fees to employees who are individually charged.[22]

The literature on this evolution frequently ends here.[23] In addition to the guidance documents, there is also a history of widely available non-prosecution agreements (“NPAs”) and DPAs – a common law of sorts for pretrial diversion.[24] Granted, neither prior agreements nor the Filip Memo give a corporation facing investigation today a substantive right to challenge its treatment in charging,[25] but this additional “guidance” through a sort of common law development creates some more definite boundaries for prosecutors determining cooperation, even if not as stringently as a formal rule or statute.

II. Dodd-Frank’s Whistleblower Protection and Awards

Despite its youth, the Dodd-Frank whistleblower statutory protections and award regulations are nearly as thoroughly plowed an area as corporate charging.[26] Rather than detail the history of Dodd-Frank, this section will focus on the retaliation protection provided and the SEC’s adopted final rules for awarding a bounty.

Dodd-Frank explicitly protects corporate whistleblowers from retaliation for reporting a wide variety of potential criminal violations.[27] Largely as a response to criticism that whistleblower protection under Sarbanes-Oxley was too weak,[28] Dodd-Frank not only expanded what was protected, but also increased how strong protection would be. Additionally, Dodd-Frank removed several of the procedural hurdles to retaliation claims that Sarbanes-Oxley imposed.[29] This article focuses on the final rules that the SEC adopted in June of 2011 implementing whistleblower awards.[30]

The final rules define a whistleblower as any real person (entities are excluded) who provides the SEC with information about a possible violation of federal securities laws, or specified other federal laws.[31] Anyone who meets this definition is eligible for the retaliation protection,[32] but to qualify for an award the information provided must be “original information”[33] and provided in accordance with established procedures.[34] The whistleblower may remain anonymous (if he or she reports to the SEC through an attorney).[35]

In addition to the foregoing requirements, in order to qualify for an award, the whistleblower’s information must lead to a successful enforcement action that collects over $1 million.[36] If all these requirements are met, the whistleblower may be awarded ten to thirty percent of the amount collected.[37] More importantly for the purposes of this article, the award can be reduced for failure to use the corporation’s internal compliance program, for hampering the same, or for culpable conduct.[38]

III. How the Incentives Match

A preliminary note is necessary, which is that this article primarily compares the incentives created by cooperation guidance and whistleblower rules. Obviously there are other considerations in the corporate charging context[39] and there is more to being a whistleblower[40] than protection from retaliation and the chance at a bounty. Some of the disincentives are mentioned below, but this is not intended to be exhaustive.

Beginning with the most similar, both the award provisions and the Filip Memo start with voluntary disclosure as the preferred means. The whistleblower rules have the clarity of a definition of “voluntary,”[41] but the concept is one so common to the law, it is difficult to imagine that there is a significant difference in meaning between the contexts at issue here. Of course, the fact that the corporation may be liable for the very conduct it is disclosing may change the calculus of the decision, and may even make the disclosure that much more deserving of reward.

Though the recent changes prevent consideration of advancement of legal fees for indicted employees in assessing cooperation, it is still likely that in many cases corporations will disclose facts that identify culpable employees, and that such disclosures are still the central component of cooperation.[42] The parallel to whistleblower awards is the exclusion of culpable employees from eligibility for an award. Although not coterminous, it is reasonable to suspect there will be an overlap between persons ineligible for a whistleblower award and employees who the company cooperates against. Further overlap of the two groups is unlikely because cooperation is sometimes determined ex ante (prior to charging culpable employees) and whistleblower award exclusions are always determined ex post (after successful enforcement action), but the significant overlap yields a parallel in incentive structure: that culpable employees are a target in the investigation, and should (or will) not benefit from it.

Both regimes treat the issue of confidentiality almost identically. The whistleblower may remain anonymous by acting through an attorney, but only up to the point that a bounty is paid.[43] Given the new restrictions on prosecutors demanding waiver, a corporation that refuses to waive attorney client privilege may do the same as the whistleblower until the goal is reached – when pretrial diversion agreements become public and include an agreed statement of facts.[44] The identity of the whistleblower, and the company’s wrongdoing (what each respectively seeks to keep secret) are then revealed. Both are designed to secure an “award” of sorts from the government, and one that will not be granted in secret, though the exposure of it may be controlled to some extent by the parties or in the case of public companies, the securities laws.

Let us assume for a moment that the sole goal of cooperation is to avoid indictment and the sole goal of whistleblowing is a bounty. Given this assumption, each party has a significant economic incentive, albeit one with some degree of uncertainty and on different orders of magnitude. This trite similarity is obvious, and it actually may not be as similar as it initially appears. There may actually be less uncertainty that the corporation will benefit financially from cooperation at the time it cooperates than the whistleblower faces at the time he or she reports. Consider the behavior of a corporation after voluntary disclosure – during the investigation where the bulk of “cooperation” conduct is performed; the corporation can be guaranteed at a broad level of generality that it is in its best interest financially to cooperate in exchange for favorable treatment (that will ultimately translate into lowering the cost of the punishment in one form or another). However, the important moment for the whistleblower is in the initial decision to report or not – and here there is actually a much larger degree of uncertainty in action. The whistleblower may report, and for any of a number of reasons, collect no bounty at all. Even with a formal rule for granting awards, comparing only the moment of the disclosure decision and the ability at that moment to project likely benefits from disclosure, the corporation trying to gain cooperation credit is actually in a better position.

Here it is worth noting that the cynical assumptions above may be too simplistic to reflect reality. Whistleblowers (and perhaps some corporations, too) may be motivated in large part by ethical considerations.[45] And the comparison is not perfect because cooperation credit has two, rather than one time period that affects the determination. The corporation has to decide whether or not to disclose, just like the whistleblower, but the corporation also then determines the extent of its cooperation thereafter, which is the more relevant point of comparison for the whistleblower. Disclosure is a binary decision in both contexts, but cooperation is not binary, but rather a spectrum.

Cooperation is measured in part on the “completeness” of disclosure, and at first glance there is no equivalent in the whistleblower award rules. But the requirement for eligibility that the information provided to the SEC “significantly contribute”[46] to the successful enforcement action is very similar. The burden was lowered from the proposed rule,[47] but this causation element is roughly parallel to completeness of disclosure in corporate cooperation. Although completeness of disclosure has a punitive essence to it (in that cooperation credit could be denied if the investigation revealed information the corporation should have disclosed earlier) and the “significantly contribute” element does not, ultimately both elements compare whether the information was enough to lead to a successful investigation (though, of course, the results of those investigations may be very different). Again, the comparison is imperfect – the whistleblower’s information needs a successful action for an award, but the corporation’s goal is that cooperation may stave off an enforcement action.

As a final similarity, a frequent criticism of the current corporate charging regime (though it was much stronger when now disallowed tactics were more the norm) is that it deputizes in house counsel as arms of the prosecutor, where the results of an internal investigation are turned over to the government, who in exchange are less likely to indict.[48] The same can be said, only perhaps even more so, in the whistleblower context: what could be more “deputizing” than paying for and protecting an individual for aiding an investigation? This similarity is not explicit within the regimes, but is an interesting effect of both that demonstrates the unity between the two.

IV. Why the Current Regime Works

Both cooperation credit and whistleblower awards are tools towards increased corporate compliance and the detection of corporate crimes. But only cooperation is really an end in itself as cooperating is essentially compliance. That is, uncertainty in awarding cooperation credit can create an incentive for corporations to “over-cooperate” during an investigation where clear and narrow rules could lead to evasion; uncertainty in whistleblower award rules could decrease the amount of information offered without much worry about evasion if the rules are both certain and broad in their definition of information that qualifies for an award. Further, the likely scenarios are that the corporation is criminally liable for the action at issue, while the whistleblower is not. As a matter of distributive justice, it seems obvious that the whistleblower is the actor more entitled to certainty, seeing as the corporation and not the whistleblower is criminally liable.

Beyond the similarities in the cooperation credit and the whistleblower regimes, each operates in a context with similar external disincentives. For corporations, the desire not to cooperate can be motivated by a number of factors, including the knowledge that cooperation may lead to a DPA or NPA, which while preferable to indictment, is still bad for business. For employees, the decision to blow the whistle is strongly disincentivized by the career costs it entails. The retaliation protections of Sarbanes-Oxley were a failure,[49] and it remains to be seen if the retaliation protections of Dodd-Frank will fare much better (though they are designed to do so).

Fundamentally, the reason that the two different methods for similar regimes is justified is that the incentives in the whistleblower award and retaliation protection are about getting the whistleblower to report information, a gateway consideration, whereas cooperation credit is about both the decision to disclose (a similar gateway consideration) and the effective investigation and prosecution of corporate crime (once the gate has already been opened). The corporation is incentivized by the cooperation credit awards to, for example, disclose additional facts and in a more timely manner. The post-disclosure behavior of the whistleblower is largely irrelevant unless it is disqualifying, but the behavior of a corporation after disclosure is highly relevant to the success of an investigation. In addition to other considerations, the lack of codification may increase the amount the corporation is willing to invest in cooperation in order to ensure a more favorable outcome (an NPA instead of a DPA, a smaller fine, etc.), all of which are discretionary judgments under the current regime. A whistleblower’s decision to report would be dramatically undercut if the award were entirely discretionary, so the use of statute and formal rules to minimize discretion is a more appropriate institutional design. The discretion that is reserved by prosecutors in awarding cooperation credit has less of an effect on the initial decision to voluntarily disclose relative to the impact on the consequences of the disclosure, and the conduct of the corporation during investigation.

This last argument could be used by the proponents of legislation governing corporate criminal investigations; if the whistleblower awards regime is appropriate because it is designed to facilitate the initial reporting decision, then formal rules should be put in place by statute that corporations should benefit (in some way) automatically from voluntary self-disclosure. But this goes too far because one of the principles of the whistleblower regime is that culpable whistleblowers are excluded from awards. More importantly, the corporation should not receive an automatic benefit for voluntary disclosure because such a rule could easily be gamed and lead to strategic delays in disclosure by corporations, and because this is, after all, the criminal law. As much as commentators have criticized corporate criminal liability doctrine,[50] corporations seeking cooperation credit typically are criminally liable actors. The real difference between the conduct affected by the two regimes is that the whistleblower is being targeted at a point with an essentially binary option: disclose or don’t. The corporation is being targeted at two different and sequential points: first in the disclosure decision (similarly binary), and second in the cooperation during investigation (which is a spectrum, not a binary choice).

V. Conclusion

The mantra of corporate crime has been that self-policing is the goal because any other regime is impractical or impossible because of the cost (of investigation and of interference) and because of the high barriers of acquiring the information necessary to prosecute corporate crime. Both the determination of cooperation credit and the new Dodd-Frank whistleblower provisions are designed with this in mind. Recent calls for reforms to the DOJ cooperation regime and calls for the repeal of Dodd-Frank are coming from the same quarters, and as to cooperation credit, have focused on implementing formal rules. The institutional design of the current system is more in line with the goals of both. The incentives created are similar, to the point that it suggests a general coherence in what it means to aid a government investigation of corporate crime. The differences of institutional design between the regimes are justifiable because of the different actors, and different points of the decision tree each regime effects.

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Notes:

i Carl Newman is currently serving a one-year fellowship at the Domestic Violence Legal Clinic in Chicago. He is a graduate of the University of Chicago Law School, class of 2012. This article represents solely his views.

[1] See, e.g. Dane C. Ball & Daniel E. Bolia, Ending a Decade of Federal Prosecutorial Abuse in the Corporate Criminal Charging Decision, 9 Wyo. L. Rev. 229, 259 (2009)(criticizing the current regime)(hereinafter “Ending a Decade”).

[2] See Rachel Delaney, Comment, Congressional Legislation: The Next Step for Corporate Deferred Prosecution Agreements, 93 Marq. L. Rev. 875 (2009); see also, John A. Gallagher, Note, Legislation is Necessary for Deferred Prosecution of Corporate Crime, 43 Suffolk U. L. Rev. 447 (2010) (hereinafter “Legislation is Necessary”).

[3] Pub. L. No. 111-203, 124 Stat. 1376 (2010).

[4] 17 C.F.R. § 240.21F-1, et seq.

[5] See, e.g., Matt Senko, Note, Prosecutorial Overreaching in Deferred Prosecution Agreements, 19 S. Cal. Interdisc. L.J. 163, 165-69 (2009).

[6] See Peter Spivack & Sujit Raman, Regulating the ‘New Regulators’: Current Trends in Deferred Prosecution Agreements, 45 Am. Crim. L. Rev. 159, 164 (2008)(hereinafter “Regulating the ‘New Regulators’”).

[7] Id. at 165.

[8] Though this point seems to escape some critics. See, e.g., Ending a Decade, supra note 1, at 238 (incorrectly attributing the guidelines to the Department of Justice).

[9] Worth noting is that the current factors considered and the organizational sentencing guidelines are still closely related, perhaps even more so than before the most recent changes. See Sarah Kelly-Kilgore & Emily M. Smith, Corporate Criminal Liability, 48 Am. Crim. L. Rev. 421, 443-449 (outlining factors that increase or decrease sentence under the organizational guidelines).

[10] See Senko, note 5, supra at 172.

[11] Sarbanes-Oxley Act of 2002, Pub. L. 107-204, 116 Stat. 745 (codified in multiple sections of the U.S. Code).

[12] Memorandum from Larry D. Thompson, Deputy Attorney General, on Principles of Federal Prosecution of Business Organizations 1 (Jan. 20, 2003), available at http://www.usdoj.gov/dag/cftf/corporate_guidelines.htm.

[13] Regulating the ‘New Regulators’, supra note 5, at 167-68.

[14] See Sarah Helene Duggin, The McNulty Memorandum, the KPMG Decision and Corporate Cooperation: Individual Rights and Legal Ethics, 21 Geo. J. Legal Ethics 341, 356-359 (2008)(discussing the McNulty Memo’s treatment of waiver of privilege and advancement of attorney’s fees as factors in determining cooperation).

[15] United States v. Stein, 541 F.3d 130 (2d Cir. 2008).

[16] Id.

[17] The conduct at issue in Stein is specifically prohibited from consideration by the new USAO Manual language. See United States Attorneys’ Manual, at 9-28.710, available at http://www.justice.gov/usao/eousa/foia_reading_room/usam/title9/28mcrm.htm. Notably, the new language about attorney-client privilege and work product protection does not cite to Stein.

[18] Id. at 9-28.

[19] Id.

[20] Id. at 9-28.700 (“In addition, and critically, cooperation may benefit the corporation by presenting it with the opportunity to earn credit for its efforts.”)(emphasis added).

[21] See id. at 9-28.710 (excluding waiver of attorney client privilege and work product protection from determination of cooperation).

[22] See Ending a Decade, supra note 1, at 258-59 (detailing the changes made by the Filip Memo).

[23] See, e.g., Legislation is Necessary, supra note 2, at 451.

[24] See Federal Organizational Prosecution Agreements, at http://lib.law.virginia.edu/Garrett/prosecution_agreements/home.suphp.

[25] As critics of the DOJ are quick to point out. See Legislation is Necessary, supra note 2, at 467-68.

[26] See, e.g., Geoffrey Christopher Rapp, Mutiny by the Bounties? The Attempt to Reform Wall Street by the New Whistleblower Provisions of the Dodd-Frank Act, 2012 B.Y.U. L. Rev. 73, 74-78 (2012)(collecting scholarship on the issue)(hereinafter Mutiny by the Bounties?).

[27] 15 U.S.C. § 78u-6(h).

[28] See Geoffrey Christopher Rapp, Beyond Protection: Invigorating Incentives for Sarbanes-Oxley Corporate and Securities Fraud Whistleblowers, 87 B.U. L. Rev. 91, 111-114 (criticizing the whistleblower incentives under Sarbanes-Oxley).

[29] See Jessica Luhrs, Note, Encouraging Litigation: Why Dodd-Frank Goes Too Far in Eliminating the Procedural Difficulties in Sarbanes-Oxley, 8 Hastings Bus. L.J. 175, 176 (2012).

[30] Securities Whistleblower Incentives and Protections, 76 F.R. 34300 (June 13, 2011).

[31] 17 C.F.R. § 240.21F-2.

[32] Id.

[33] Id.

[34] Id.

[35] 17 C.F.R. § 240.21F-9.

[36] 17 C.F.R. § 240.21F-3.

[37] 17 C.F.R. § 240.21F-5.

[38] 17 C.F.R. § 240.21F-16.

[39] The Filip Memo (and its predecessors) stress that the factors to consider in organizational charging are illustrative and not exhaustive, and that a single factor may weigh so heavily as to make the others negligible. See note 14, supra.

[40] See Jisoo Kim, Comment, Confessions of a Whistleblower: The Need to Reform the Whistleblower Provision of the Sarbanes-Oxley Act, 43 J. Marshall L. Rev. 241, 242 (2009).

[41] 17 C.F.R. § 240.21F-4.

[42] See United States Attorneys’ Manual, at 9-28.200 (suggesting criminal liability for culpable employees “may provide the strongest deterrent against future corporate wrongdoing”).

[43] 15 U.S.C. § 76u-F(d).

[44] The recent DPA with Bizjet International Sales and Support, Inc. is illustrative, available at http://www.corporatecrimereporter.com/documents/bizjet.pdf.

[45] Mutiny by the Bounties?, supra note 21, at 110.

[46] 17 C.F.R. § 240.21F-4(c).

[47] 76 F.R. 34,324 (“[T]he Proposed Rule provided a significantly higher standard…(1) would not have otherwise been obtained; and (2) was essential to the success of the action.”).

[48] See, e.g., Jonathan N. Rosen, In-House Counsel and the Government’s War on Corporate Fraud, Crim. Just. Fall 2010, at 5 (“Like it or not, in-house counsel have become the government’s foot soldiers in the war on corporate crime.”).

[49] See, e.g., Richard E. Moberly, Unfulfilled Expectations: An Empirical Analysis of Why Sarbanes-Oxley Whistleblowers Rarely Win, 49 Wm. & Mary L. Rev. 65, 67 (2007).

[50] See, e.g., Andrew Weissmann, et al., Reforming Corporate Criminal Liability to Promote Responsible Corporate Behavior, at 17, available at http://www.instituteforlegalreform.com/news/events/9th-annual-legal-reform-summit (Last visited May 21, 2012).

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Carl Newman

Carl Newman