Posted 3:28 PM by Robert

Another Zero Tolerance Watch

OpinionJournal maintains its "Zero Tolerance Watch" chronicling the absurd, destructive and counterproductive consequences of abandoning cost-benefit principles in connection with public school safety in favor of so-called "zero tolerance." But Larry Thompson, the deputy attorney general who chairs the Corporate Fraud Task Force, apparently doesn't read that WSJ feature - or he wouldn't have been able to scribe a hair-raising call for application of the same "zero tolerance" non-principle to corporate criminal law.

On the one hand Mr. Thompson simply misstates the issue preposterously: Some have argued that certain businesses are simply too big or economically important to be subjected to criminal prosecution, even for pervasive or serious criminal conduct by senior management. Since it is perfectly obvious that nobody has suggested any such thing, it is tempting to treat Mr. Thompson's screed as empty barrel-thumping with the positive goal of sending the bifurcated message that the Bush Administration is on guard against corporate crime while sensibly restricting himself to attacking straw men. Similarly, when Mr. Thompson opines that It is a bedrock principle of American law that business organizations, including corporations, may be held to account by the criminal law for the wrongdoing of employees or agents, one is tempted to observe that since a corporation (or other business entity) is a fiction that acts only through its employees or agents, Mr. Thompson's statement is a safe-and-silly pleonasm.

But there is more going on here. Mr. Thompson speaks for a Justice Department that has heavily bought into, and acted upon, a notion much stronger than the one he ambiguously articulates: That a legal entity - such as a corporation or the Arthur Andersen partnership - can be utterly destroyed by criminal prosecutors for the actions of a single, mid-level representative. The Justice Department destroyed Arthur Andersen by holding it criminally liable not on any theory of pervasive or serious criminal conduct by senior management - but on the much more destructive notion that the mere criminal act by one mid-level Andersen partner, a man essentially playing the role of a vice president in the Andersen partnership structure, was enough to convict and destroy the partnership so long as the crime was committed in the course of the partner's Andersen business. That's quite a price to pay to protect the nation from the absurd straw-man alternative of corporations ... merely appoint[ing] a "vice president in charge of going to jail" who would serve as a scapegoat for wrongful acts that actually benefited the corporation.

To make matters worse, Mr. Thompson attempts to justify expansive corporate criminal liability as follows:

[S]ome attorneys who appear before the department purporting to represent a corporation are in fact representing the interests of management. They have forgotten who their client is. As one learns in a first year corporate law class, when you represent a corporation your client is the entity -- not its management. Disturbingly, a recent survey by the American Corporate Counsel Association revealed that 20% of in-house counsel felt that their corporate culture emphasized "senior management" as the client, rather than the corporation as a whole.

There seems to be exactly no understanding on Mr. Thompson's part that criminal liability assessed against a public corporation will first and foremost hurt its public investors. His "justification" amounts to observing that corporate insiders sometimes betray a corporation's public investors by making its attorneys and representatives work on behalf of the insiders - and his ersatz "solution" is to slam the corporation and its investors with criminal liability for the resulting acts of the insiders. It should be unbelievable - but all the post-Enron baloney has made his sentiments commonplace.

It is also chilling that the deputy attorney general who chairs the Corporate Fraud Task Force does not even mention, does not even seem to be aware, that legal scholars are noting with increasing alarm the dangerous "backwash" from corporate crime to individual crime, as this quote from "Disentangling Corporate Criminal Liability and Human Rights" by Victor V. Ramraj (link no longer available) indicates:

"[F]irst, the general principles of criminal liability have become much more stringent so as to ensure that unscrupulous corporations are convicted; second, constitutional rights generally have been diluted to ensure that corporations are convicted. Both of these consequences in turn affect individual criminal liability because of the ... equation for legal purposes of corporations and individuals. That is to say that the pressure to convict corporations has a discernible impact on individuals, both in terms of the principles of criminal liability under which they are convicted and the strength of individual constitutional rights."

Mr. Thompson does include a sentence that suggests that he is appallingly unmindful of exactly this "backwash:" Corporations should not be treated leniently because of their artificial nature, nor should they be subject to harsher treatment. In other words, he thinks corporate and individual criminal principles should be pari passu - which is exactly what scholars such as Professor Ramraj have been warning about. To see Professor Ramraj's concern in action, consider that if a corporation is criminally liable for the acts of its employees, then - applying Mr. Thompson's false "even handedness" - the same should be true for an individual. So, for example, Mr. Thompson should serve time in prison if the nanny he employs wilfully runs over a neighbor while driving his children to school, especially if he has granted her the right to make "discretionary decisions" in the course of her emplyment. That's what the Justice Department did to Arthur Andersen - and it's "bedrock" to Mr. Thompson. He says that corporations should not be subject to harsher treatment then individuals, so it seems he would have to do prison time for his nanny's transgression. Gee, he makes it all sound so reasonable - until you realize he's advocating reifying a nightmare.

Mr. Thompson's views of corporate criminal responsibility as a "bedrock principle" is certainly consistent with a move to abandon a "cost-v-benefit" approach to corporate law in favor of one that celebrates absolute, zero-tolerance moral "principle" over wealth creation. Alan Greenspan, chairman of the Federal Reserve, recently warned that "a pervasive sense of caution" following America's rash of corporate scandals had held back investment and employment when he observed before Congress: "As yet there is little evidence that the more accommodative financial environment has materially improved the willingness of top executives to increase capital investment ... Corporate executives are seemingly unclear . . . about how an increase in risk-taking on their part would be viewed by shareholders and regulators."

One can but wonder at the wisdom of Mr. Thompson's brand of moral Puritanism since there is considerable scholarly opinion that corporate criminal liability is already overbroad and has pernicious social effects - effects which Mr. Thompson simply ignores. [See: V.S. Khanna, “Corporate Criminal Liability: What Purpose Does it Serve?” (1996), 109 Harvard Law Review 1477 (arguing that corporate civil liability can achieve all of the goals of corporate criminal liability, without the attendant procedural protections and stigmatic effects of the latter)].

There is no reason why the Justice Department has to agree with any particular academic dissenter. But it is hard to have confidence in the Justice Department given the moralistic tone of Mr. Thompson's argument, its chilling ignorance of the costs of maintaining expansive and ever-expanding notions of corporate crime, and the recent destructive and sometimes downright stupid history of Justice Department corporate criminal enforcement actions.

Let's hope the whole piece is all another Bush Administration sop to the left - something to shore up the Administration's election-year flanks against predictable mainstream media and Democratic attack - as we begin and maintain this new Zero Tolerance Watch.