Source: http://www.ussc.gov/corporate-crime-america-strengthening-good-citizen-corporation-day-two
Timestamp: 2015-07-29 04:48:31
Document Index: 127363058

Matched Legal Cases: ['art 1', 'art 2', 'art 3', 'art 4', 'art 5', 'art 6', 'art 7', 'art 7', 'art 8', 'art 9']

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Corporate Crime in America: Strengthening The "Good Citizen" Corporation - Day Two
An Update On Cases
Carrots and Sticks Amid Overlapping Enforcement Schemes And Policies: Finding
The Experience And Views Of The Enforcement Community
Privilege Update: When Should Compliance Practices Be Protected From Disclosure?In Search of Government's Ideal Role in Fostering "Good
Corporate Citizenship"
Symposium Wrap-Up: Commentary On Ideas And Issues Raised
Appendix-A: Commission Questions & Answers
An Update on Cases John Scalia, Jr., Research Associate, U.S. Sentencing Commission
Kirk S. Jordan, President, Compliance Systems Legal Group
Moderator: Commissioner Michael Goldsmith, U.S. Sentencing
CASES SENTENCED UNDER THE GUIDELINES
COMMISSIONER GOLDSMITH: Our next session deals with cases sentenced under the
organizational guidelines. Our next panel will provide a preliminary look at
Because answering the question, "What do the cases show?" requires a
two-part answer, we have two speakers: John Scalia of the Commission's research
staff, and Kirk Jordan of the Compliance Systems Legal Group.
The reason for this two-part approach is as follows: The guidelines have thus
far been applied only to cases involving more recent conduct; and, second,
bigger cases typically have a longer gestation period. Sentencing Commission
data, on which John Scalia will report, may not tell the full story of the
guidelines' impact, especially on larger companies. Kirk Jordan will therefore
provide a fuller picture of the relevance of compliance programs by talking
about criminal cases that, while technically pre-guideline, appear to have been
influenced by guideline factors. He will also talk about civil cases in which
compliance has proven to be relevant.
John Scalia, Jr., is a research associate at the U.S. Sentencing Commission. In this capacity, Mr. Scalia has served on numerous working groups dealing with
white-collar crime and organizational defendants. He was responsible for
collecting the past practice sentencing data on organizational defendants. These data were used to inform the development of the Chapter Eight guidelines
for organizations. He continues to oversee the collection of data on
organizational sentencing pursuant to the guidelines.
Kirk S. Jordan is the President of Compliance Systems Legal Group, a law and
consulting firm in Warwick, Rhode Island. Compliance Systems Legal Group
designs and implements compliance programs for organizational clients and is a
leader in the development of interactive, computer-based ethics and compliance
training applications. Before founding Compliance Systems Legal Group, Mr.
Jordan was associated with the law firm of Skadden Arps. Mr. Scalia?
MR. SCALIA: Thank you, Commissioner. When the Commission began developing
the organizational guidelines, no comprehensive database of past sentencing
practices for organizational defendants existed. Consequently, the Commission
did extensive empirical research on organizational sentencing practices in the
The Commission's study revealed that a very small proportion of the federal
caseload actually involved organizational defendants. Of the approximately
40,000 criminal cases sentenced each year, fewer than 400 involved
organizational defendants. Chart 1 indicates that the number of organizations
sentenced each year is fairly stable, between 300 and 400 cases a year.
Since the organizational guidelines went into effect in 1991, 208
organizations have been sentenced pursuant to Chapter Eight according to
documentation received by the Commission as of June 30, 1995. The Commission
received an additional 72 organizations that were sentenced pursuant to the
former antitrust guideline that was in place prior to the Chapter Eight
guidelines. Chart 2 describes the number of organizations sentenced each year
pursuant to the guidelines.
Why so few cases? Most of the organizational cases are rather complex frauds
or market allocation agreements that involve lengthy investigations before
charging decisions can be reached. Second, even though the Chapter Eight
guidelines took effect in November 1, 1991 (and according to statute should be
applied to all sentencings that occur on, or after, that date), the Department
of Justice has instructed prosecutors, in light of relevant court decisions, the
guidelines should only be applied to offenses that occur on, or after, November
1, 1991. Therefore, consistent with the Commission's expectations, the majority
of the organizations sentenced over the past four years are sentenced pursuant
to pre-guideline rules. Of the 197 organizations sentenced during fiscal year
1994, only 106 (or 54 %) were sentenced under the guidelines.
The Commission's data indicate that the majority of organizations sentenced
for criminal offenses are closely held organizations. From its study of
pre-guideline practice, the Commission found that approximately 90 percent of
the organizations sentenced involved closely held organizations. Under
guideline practice, approximately 97 percent involved closely held
organizations. Openly traded organizations, public traded organizations,
typically account for a relatively small percentage, approximately nine percent
of past practice and only three percent of guideline practice.
Why are we seeing a significantly smaller proportion of publicly traded
organizations? These cases tend to be larger and more complex, and it often
takes longer for them to work their way through the system. Secondly,
prosecutors may be opting to pursue these cases civilly rather than criminally. (Kirk Jordan is going to talk about the civil cases and large non-guideline
criminal cases.) In time, we should see more publicly traded organizations
sentenced under the guidelines.
Consistent with the fact that most of them are closely held organizations,
owners and top management are frequently named as co-defendants and convicted in
tandem with the organization. Of the 264 closely held organizations sentenced
thus far, an owner or top executive was convicted in approximately 51 percent,
or 134, of these cases; 189 owners or top executives were convicted in all.
Consistent with what Bill Laufer found in his study, the organizations
sentenced under the guidelines typically employ fewer than 50 people. Chart 3
indicates that the overwhelming majority, 56 percent, employed fewer than 20
persons, and another 23 percent employed between 20 and 100 people. A very
small percentage employed fewer than 500. Under the Small Business
Administration criteria, those organizations employing fewer than 50 people
would be classified as extremely small organizations.
The organizations sentenced under the guidelines tend to be fairly new. Fifty
percent have been in business for less than 15 years. Antitrust defendants have
typically been in business or significantly longer, about 37 years. Most of the
organizations continued to operate after indictment and conviction; however,
many had ceased operations or were experiencing financial stress at the time of
sentencing. Chart 4 indicates that 22 percent went out of business sometime
around indictment or before sentencing; three percent were undergoing
bankruptcy; ten percent were undergoing some other financial stress; and 65
percent remained solvent and operating.
The guidelines provide for a corporate death sentence for organizations
identified as criminal purpose. Under the guidelines, an organization that is
defined as criminal purpose is divested of its assets. Fourteen organizations
have been sentenced under this provision of the guidelines. Chart 5 indicates that the majority of the offenses for which defendants were
convicted are either antitrust offenses, representing 32 percent of the
offenses; fraud offenses, about 30 percent; environmental, 12 percent; tax
violations, 9 percent; and food and drug violations, 3 percent. As Rusty
Burress pointed out yesterday morning, the environmental and the food and drug
violations are not covered by the guideline fine provisions.
With respect to the fraud offenses that have been sentenced, the loss to the
victims is relatively modest. The loss is typically less than $30,000. In only
seven of the cases did the loss actually exceed $1 million.
With regard to the antitrust offenses, the volume of commerce that was
affected by the offense was typically less than $4 million; however, in nearly a
third of the cases, the volume of commerce did exceed $10 million over the
course of the offense.
The culpability score is an essential part of assessing the organization's
blameworthiness with respect to the offense. The most significant culpability
factor has been level of authority and the size of the organization. Chart 6
describes the application of this factor. Because most of the organizations are
small receive no enhancement or only receive a one-point enhancement for this
adjustment: 46 percent received no enhancement; 38 percent received a one-point
enhancement; and only one organization, which would be a 5,000-person
organization, received a five-point enhancement.
Some of the other culpability factors, such as prior history, violation of an
order, and obstruction of justice, are rarely applied. According to past
practices, these factors were rarely present in those cases.
Four defendants apparently have sought credit for having a compliance program,
but credit for a compliance program has only been awarded in one case. While
the defendant did receive credited for having an effective program, the unique
facts of this case limit its usefulness as a model - especially for larger
companies. The defendant was in the business of selling smoking paraphernalia. Due to the nature of the products sold, the defendant recognized the inherent
risk of selling those products: the products could be used as drug
paraphernalia, which the sale of is prohibited under federal law. In order to
prevent violations of the drug paraphernalia laws, the organization produced a
training video to instruct employees that they should refuse to sell items to
any customer who inquires about drug paraphernalia or indicates that the items
will be used as such. The court felt that given the small size of the
organization, a videotape in conjunction with verbal instructions issued by the
owner represented an appropriate degree of formality to prevent and detect
violations of the drug paraphernalia law. The organization was credited with
having an effective program.
In the three other cases in which the defendant claimed to have a compliance
program, credit was denied. The court cited the following reasons for not
applying the mitigation: (1) The corporate president was actively involved in
the offense conduct; (2) the corporate president, while not actively involved in
the offense conduct, was aware of the illegal conduct; and, (3) while the parent
organization had an effective program, the program was not in effect at the time
of the offense at the newly acquired subsidiary where the offense actually
The last culpability factor is self-reporting, cooperation, and acceptance of
responsibility. Chart 7 indicates that 87 percent of the defendants received
credit for accepting responsibility to some degree. Chart 7 also indicates that
most defendants received two points for cooperation; others received one point
for acceptance of responsibility. Three defendants did receive the full five
points for self-disclosure of the offense. In each of these three cases, the
defendants were under investigation. As the defendants conducted their own
internal review regarding the nature of the infractions, the defendant informed
the government of the pertinent facts.
Under the guidelines, approximately 80 percent of the organizations received a
sentence that included a criminal fine. The average fine imposed was $376,000. Chart 8 indicates the average fine imposed on the organization by offense type. It indicates that the highest fines were paid by antitrust defendants and fraud
Just as an aside, there was one racketeering defendant and it was sentenced as
a criminal purpose organization - the organization was divested of its assets.
Chart 9 compares guideline practice with past practice. The chart indicates
that the fines have increased significantly, mostly as a result of the antitrust
and the fraud cases.
Restitution was ordered in about 33 percent, or 68, of the cases. The average
amount of restitution was nearly $300,000. In promulgating the Chapter Eight guidelines, the Commission emphasized the
importance of probation as a sanction. Because probation provides a means of
maintaining control over an organization following an offense, the guidelines
require probation under certain circumstances.
Under the Chapter Eight guidelines, probation has been ordered in 61 percent
of the cases. Consistent with the directive in Chapter Eight, this represents a
significant increase over past practice. Under pre-guideline practice,
probation was ordered in only 21 percent of the cases. The data indicate that
probation was imposed in 72 percent of the cases primarily to secure payment of
monetary penalties; however, in 14 percent of the Chapter Eight cases, the
defendant was ordered to implement a compliance program to prevent and detect
future violations. The case documents, however, provide no detail on how the
program should be implemented.
The Commission's data is available through the University of Michigan. There
are four data files, two for past practice and two for guideline practice. You
can contact the Commission on how to specifically obtain that data. Thank you
COMPLIANCE CRITERIA IN CONSENT DECREES
MR. JORDAN: Good morning. In the fall of 1993, C. R. Bard, Inc., a medical
device maker, settled civil and criminal charges arising out of the company's
manufacture and shipment of allegedly defective heart catheters. Part of Bard's
plea agreement included a far-reaching compliance program. In reading that
agreement, and in particular, the compliance program imposed on Bard, I was
struck by how closely the compliance program tracked the organizational
sentencing guidelines' seven due diligence criteria. This was true even though
the Bard case technically was not covered by the organizational sentencing
guidelines - because the conduct at issue had occurred prior to the effective
date of the guidelines and, of course, the case had pled out prior to trial.
After the Bard compliance program came down, we undertook an informal review
of other consent decrees and plea agreements entered since the guidelines became
effective, in which compliance programs or portions of compliance programs have
been imposed. Some of these pre-dated Bard, and many have come after. To date,
we have looked at about three dozen such compliance programs and plea
Our survey was not exhaustive. As you might expect, it is difficult to track
all of these down. Many are unreported. However, I think we have a
representative sample here in the three dozen, and I think we have most, if not
all, of the major cases in which compliance programs were imposed.
As the data reflect (see charts following John Scalia's presentation),
since the guidelines became effective, compliance programs have been imposed by
a cross section of regulatory agencies in connection with the settlement of a
variety of underlying civil and criminal offenses. It is important to remember
that technically none of these cases falls under the organizational sentencing
guidelines for the reasons I mentioned about the Bard case; either the conduct
at issue occurred prior to November 1, 1991, or they're civil settlements. Nevertheless, the compliance programs imposed in these cases provide some
guidance on what the government is looking for in an organization's compliance
I would like to make a few general observations about the consent decrees and
then highlight some of the main compliance criteria contained in these consent
decrees and plea agreements.
First of all, a few general observations. Several of the compliance programs
closely track the organizational sentencing guidelines' due diligence criteria. Bard is one that I have already mentioned. Bard was primarily a criminal case. The Grumman case is another. It was a civil settlement intended to head off the
filing of criminal charges against the company. And the Lucas Aerospace case is
another one that is a criminal case but closely tracks the organizational
sentencing guidelines' requirements.
The National Medical Enterprises (NME) case and the Caremark case - we heard
about NME yesterday. Both settled health care fraud and related charges, and
the compliance programs imposed are very similar to each other. Those two
programs also incorporate a fair portion of the organizational sentencing
guidelines' due diligence criteria.
I would like to make a couple points in particular about the Bard, Grumman,
and Lucas cases, and these points do apply to some of the other cases on the
First of all, the Bard, Grumman, and Lucas cases all closely follow the
guidelines. In fact, the Grumman and Lucas cases almost lift the language
verbatim from the due diligence criteria section of the guidelines. All three
involve large companies - I think they're all public companies - which may be at
odds with some of the information we have been talking about earlier and the
information contained in last week's Wall Street Journal article. And
all three of these would have been organizational sentencing guideline cases if
the conduct had occurred after the effective date of the guidelines and the
cases had not pled out prior to trial and conviction.
The second point is that several of the more detailed compliance programs,
including, for example, the Bard case, Grumman, Lucas, and the Caremark case,
are designed to prevent and detect violations of all laws affected by the
company's business operations, not just the type of violations at issue in the
underlying settlements. For example, the Grumman and Lucas programs are
supposed to prevent all "improper business conduct."
The instances where compliance programs have been imposed cut across the
enforcement agencies and involve both civil and criminal prosecutions of a
variety of underlying offenses. If we discuss these cases by agency, we see
that the Department of Justice has been the most active, both through its
Criminal Division and its various Civil Divisions. In fact, the Department of
Justice Civil Antitrust Division was responsible for settling the largest single
group of consent decrees in which compliance programs were imposed. There are
approximately 15 antitrust compliance settlements. The compliance programs
imposed in connection with those settlements tend to be the same one to the
next. The language is almost identical.
The Department of Justice, with respect to criminal cases, usually
collaborated with one of the regulatory agencies. For instance, in several
cases DOJ's criminal division collaborated with the EPA to settle environmental
offenses, and, in many cases, there were parallel civil and criminal
In the environmental area, we see that there is not much distinction between
the compliance programs imposed in cases settling civil versus criminal
allegations. As an example, I point you to the Louisiana-Pacific case, which
was a civil settlement of a Clean Air Act violation in which a rather rigorous
compliance program was imposed, and compare that program to the Consolidated
Edison case, which settled criminal charges arising under EPCRA. In the Con
Edison case, a court-appointed monitor is directed - as part of probation that
the company is put under - to develop and implement an effective program to
prevent and detect violations of environmental laws under the standards
established by the organizational sentencing guidelines.
The Department of Justice also collaborated with the Department of Health and
Human Services on two major health care fraud cases: the National Medical
Enterprises cases and the Caremark case. We heard about the NME case yesterday
from John Meyers. The compliance programs imposed in connection with these two
settlements are very similar. And, as John Meyers pointed out yesterday, the
NME case, which was the first of the two, is expected to be a model in this
A legitimate question from all of this is: Are there any trends? The consent
decrees and plea agreements that we have seen show some similarities across
offenses - that is, if it is an antitrust offense, you have a good idea what
your compliance program is going to look like. Similarly, if you settle health
care fraud charges, you know that you are going to have a consent decree that
imposes a compliance program like the one in the NME and Caremark case. And if
you work in the FDA-regulated area, you would want to take a look at the Bard
case. But I think it is too early to identify any specific trends that cut
across the enforcement agencies.
It appears that the consent decrees and plea agreements reflect little, if
any, policy coordination across the various enforcement agencies, and I think
this would be very useful to companies. It would give companies some
predictability because companies' operations obviously cut across enforcement
agencies. And perhaps we can hear a little bit about this from the enforcement
community later today.
Having said all that, and although there doesn't appear to be any direct
policy coordination across the enforcement agencies, there are certain elements
that tend to recur in these compliance programs, that are worth noting. The
first, and one that appears to be very significant to the government, is the
establishment or reaffirmation of strong compliance oversight, and management
systems generally involving the appointment of a compliance officer, senior
management involvement, and active participation of the board of directors.
For example, all of the antitrust compliance programs require the appointment
of an antitrust compliance officer to be in charge of the company's antitrust
compliance program. In the Bard case, we have the appointment of a compliance
coordinator to oversee the company's entire compliance program. In Caremark, we
have a compliance officer. In Grumman, there is a vice president of audit and
The government does not appear to be too concerned, at least in these cases,
about who the compliance officer is. He or she clearly has to have sufficient
power and authority to meet the guidelines' requirement, but doesn't necessarily
have to be a lawyer; in Caremark's case, it is the CFO; in Bard's case, it is
the vice president for scientific affairs.
Another feature of many of these compliance programs is the creation or
reconstitution of board committees to monitor compliance within the organization
and to interface with compliance officers. These committees are often made up
entirely of outside directors or a majority of outside independent directors. These committees are expected to take an active role in the compliance efforts,
reviewing codes of conduct and other policy statements, interfacing with
compliance officers, getting reports on a regular basis from compliance
officers. And I point you to the Bard case, Grumman, NME, and Summerville
National Bank, among others, as examples of cases where strong board committees
Also, we see in many cases the reconstitution or creation of new senior
management committees to take some responsibility for compliance and to give
overall corporate direction to the company's compliance program. The compliance
officer is usually a member of these committees.
Several of the consent decrees discuss the issue of the delegation of
substantial discretionary authority. The Bard, NME, and Caremark cases have
language treating this issue, and in a related provision, several of the
programs, including the health care fraud compliance programs and the Grumman
case, require that managers and supervisors' efforts to promote adherence to the
company's compliance program be an element of the manager's performance
Many of the consent decrees also require companies to continue, update, or
adopt new codes of conduct or similar written compliance policy statements, and
also call for the drafting of additional written policies and procedures which
are designed to prevent the recurrence of the misconduct underlying the
A majority mandate some form of training. The antitrust compliance programs
require an annual briefing on the antitrust laws to key employees. The more
detailed programs typically require some training of virtually all employees. These would include the Bard, the NME, Caremark programs; Denny's, which was a
civil case settling public accommodation laws violations; and Grumman and Lucas
also appear to require such training. Several make it clear that the training
must be administered on an annual basis to all employees.
To the extent that the programs treat the issues of monitoring and auditing,
two features seem to be emphasized: misconduct reporting systems - and where
these are stressed, the feature that the employee be able to report it without
fear of retribution is very important. Audits are also emphasized. The
important factor there is that the auditor should be independent of the
facilities or personnel they are auditing - not necessarily an outside auditor,
but independent.
Few say much about enforcement. The most substantial is the Bard case, which
tracks the guidelines language by requiring the creation of an organization-wide
consistent disciplinary system for compliance violations.
To the extent that the decrees treat the issue of appropriate responses after
an offense, three things are emphasized: conducting investigations, halting any
ongoing violations, and requiring the reporting of substantiated offenses to
Finally, these cases make one more point: if a compliance program is imposed,
the government and the courts can be expected to be intimately involved in the
company's subsequent compliance efforts, and in the company's actual business
operations. Virtually all the decrees have one or more of these features, and
they're very similar to the probation provisions of the organizational
sentencing guidelines. You have court appointed monitors to oversee the
company's compliance program. You have consultants who have full and unfettered
access to books and records and to people in the organization. Also, companies
are often required to get approval for all or part of their programs from the
government or the courts. Many of the companies must give regular reports to
the government or the appropriate regulatory agency, in some cases as often as
every four months. The lesson here is, to echo what John Meyers said yesterday,
a company is much better off voluntarily putting a compliance program in place
rather than having one put in place in response to a consent decree or a plea
agreement. Thanks a lot.
COMMISSIONER GOLDSMITH: Mr. Scalia, you have indicated that only four
organizations had sought credit for a compliance program. The questioner says,
"I thought the Sentencing Commission had reported that 31 organizations
sought credit between November 1991 through 1993, and eight in other cases in
1993 to 1994."
MR. SCALIA: No. In our annual report, in the past two years we have only
reported four. The first year we had the drug paraphernalia case, and then last
year we reported that three cases didn't receive credit for their programs.
COMMISSIONER GOLDSMITH: Mr. Jordan, you mentioned officer and board
involvement. Can you comment on director and officer liability?
MR. JORDAN: Well, I think actually Richard Gruner can speak to that at
length. As some of you may know, under the ALI corporate governance principles,
board members and senior management are subject to potential personal liability
if they have not instituted adequate compliance controls and procedures,
particularly in a public company.
I think the government's intent here with respect to the establishment of
strong compliance and oversight structures at the top is to involve the highest
governing bodies in the organization with the company's compliance program.
COMMISSIONER GOLDSMITH: Mr. Scalia, have any companies been found to violate
probation? If so, what happened? Have any assistant U.S. attorneys verified
compliance with probation requirements, especially those dealing with compliance
programs? MR. SCALIA: Unfortunately, the Commission doesn't collect post-sentencing
information, so we don't have any way of knowing to what extent companies
violate probation.
QUESTIONS & ANSWERS - WRITTEN
update on cases panel
Q.	You mentioned officer and board involvement. Can you comment on director
and officer liability (1994 A.C.I. Corp. Governance)? Discuss affirmative duty.
A.	The imposed compliance programs suggest that the government places great
importance on the establishment of strong compliance oversight and management
systems, including senior management and board involvement. Thus, in examining
organizations' compliance programs, the government is likely to take a hard look
at whether officers, senior managers, and, particularly for a public company,
the board of directors are active in overseeing and monitoring the
organization's compliance programs. At the same time, emerging standards of
liability, in such pronouncements as the 1994 ALI Principles of Corporate
Governance and the 1994 Corporate Director's Guidebook, suggest that officers
and directors have an affirmative duty to ensure that the organization
establishes adequate compliance systems and controls. These pronouncements
suggest that officers and directors may face personal liability for failing to
Q.	It seems the government is seeking different compliance requirements in
different cases. Do you have insight into why? Are your persuaded these
differences make sense?
A.	There appears to be little, if any, policy coordination among the
Department of Justice and the assorted regulatory agencies that have imposed
compliance programs since the guidelines became effective. However, two points
should be emphasized: The compliance programs imposed for the same type of
offense tend to be very similar. For example, the imposed antitrust compliance
programs are almost identical, and the programs imposed in the National Medical
Enterprises and Caremark cases, both for health care fraud and related
violations, are very similar. Second, certain elements tend to recur across the
consent decrees and plea agreements in which compliance programs were imposed. These elements generally track - and, more importantly, flesh out - the
guidelines' due diligence criteria: strong compliance oversight and management
structures, including the designation of specific personnel to oversee
compliance; the creation and communication of compliance standards and
procedures; monitoring and auditing systems, such as hotlines and independent
auditors; and violation response systems.
Carrots and Sticks Amid Overlapping Enforcement Schemes and
Policies: Finding Government's Message
The Honorable Eleanor Hill, Inspector General, U.S. Department of
Bruce L. Drucker, Deputy Assistant Inspector General for Criminal
Investigative Policy and Oversight, U.S. Department of Defense
William B. Lytton, Vice President and General Counsel, Electronics
Sector, Lockheed Martin Corporation
David N. Yellen, Assistant Professor, Hofstra University Law School
Moderator: Win Swenson, Deputy General Counsel/Legislative
Counsel, U.S. Sentencing Commission
COORDINATING ENFORCEMENT UNDER THE DEFENSE DEPARTMENT'S
MR. SWENSON: Good morning, again. At yesterday's lunch, Senator Kennedy spoke
of the guidelines' promise of reduced penalties for companies that act as good
citizens. But he also cautioned that if collateral, non-criminal penalties that
a company might face do not turn on the same good citizenship criteria, the
value of the guidelines' promise - and the policy that underlies that promise -
may be diminished.
When it wrote the organizational sentencing guidelines in 1991, the Sentencing
Commission recognized that companies facing guideline penalties might well face
other kinds of collateral sanctions. However, the Commission determined that
the question of coordinating criminal and other penalties was largely beyond its
jurisdiction and control. The guidelines do permit courts to take collateral
penalties into account in choosing the fine within the allowable guideline
range, but that is really the extent of coordination of penalties under the
Today we reopen the discussion, without taking a position on it at this point,
but with a significantly broader view because coordination issues really go
beyond the question of whether guideline penalties should better account for
other sanctions. Coordination issues fundamentally include the question of
whether the many enforcement tools and policies used by the federal government
are in sync. I think that was the thrust of Senator Kennedy's remarks
Exploring these issues this morning will be three distinguished speakers with
distinct backgrounds: one from government, one from a large corporation, and one
from academia.
Our first speaker is the Honorable Eleanor Hill. Since March 1995, Ms. Hill
has served as the Inspector General of the Department of Defense. In this role,
she oversees what might be considered the largest and best established
government coordination policy: the Defense Department's Voluntary Disclosure
Program. This program will be the focus of Ms. Hill's remarks this morning, and
in keeping with our policy of trying to keep the train running on time, I'll
refer you to the program book for a full description of Ms. Hill's most
impressive bio. But let me say here that she has had a remarkable career in a
relatively few number of years, spanning work in Congress, as a federal
prosecutor, and a trial attorney.
Before calling on Ms. Hill, I should note that due to the press of other
obligations, she is going to have to leave following her remarks. However, we
are pleased to have Bruce Drucker here to answer questions that you may have in
the wake of Ms. Hill's remarks. Bruce is the Deputy Assistant Inspector General
for Criminal Investigative Policy and Oversight, and I guess in practical terms,
Ms. Hill's point person for the voluntary disclosure program.
On that note, it is my very great privilege to introduce the Honorable Eleanor
MS. HILL: Good morning, and thank you for the opportunity to be with you here
today. I am particularly pleased to be even a small part of the efforts of the
Sentencing Commission to work with you on the very important issue of corporate
crime in America. As Win mentioned, I have been Inspector General at the
Department of Defense for only about six months now, so I am still relatively
new in dealing with the Defense Department's voluntary disclosure program. However, in my prior life, both as a federal prosecutor and as a staff member in
the U.S. Senate for almost 15 years working a lot on crime issues and law
enforcement issues, I can tell you that I am very familiar with the issues you
are looking at - corporate crime, the issue of compliance, corporate good
In fact, in the Senate I can remember - only too well, perhaps - the many long
hours of work that went into drafting and negotiating the final passage of the
legislation that gave birth to the Sentencing Commission. I can tell you that
many people worked very, very hard to get that legislation passed and to get it
done in what they felt was the best way. So I am particularly pleased, and it
is very reassuring to me, to be here many years later and see that the
Commission is not only a leader in reforming the sentencing process, but is also
working very hard with the private sector in forums such as these on other
issues, including corporate compliance and corporate good citizenship.
I have been asked this morning to talk about the voluntary disclosure program
in the context of the concept of the good citizen corporation, which I
understand is the subject of this forum, as well as the need for improved
corporate accountability. Both of those concepts, I believe, necessarily imply
developing an increased sensitivity to what is and what is not appropriate
behavior in the corporate arena. That task is never easy, often thankless, but
nevertheless always critically important.
In the rush to compete and to achieve, our society's focus on ethics has too
often been too little and too late. General Omar Bradley once commented, "The
world has achieved brilliance without conscience. Ours is a world of nuclear
giants and ethical infants."
The Department of Defense voluntary disclosure program in my view is our
effort to energize an active corporate conscience of sorts in the defense
industry. Discussing the voluntary disclosure program could, indeed, be a topic
for an entire day's seminar by itself. Fortunately for you and for me, the
schedule this morning doesn't permit us to do that.
Briefly, I am going to try to give you some idea about the program's genesis,
about the processes under which it operates, and our best estimates as to its
effectiveness and what our experience indicates it tells us about contractor
efforts at self-governance in the defense industry.
In the early and mid-1980s, both the defense industry and the government faced
an important, serious dilemma. There was a need to responsibly address reports
of widespread fraud in defense contracting. The media had widely publicized
cases of investigations of defense contractors for such offenses as cost
mischarging, defective products, false statements, and false certifications. At
the same time, the government and the industry needed to maintain a stable,
cooperative, and productive relationship. The challenge for both was to do this
while, in an oftentimes adversarial process, closely scrutinizing and
investigating allegations of fraud in the industry. And that is not an easy
task because there are natural tensions, obviously, when you get into the
investigative mode.
During the same time period, the Department of Defense realized the need for a
better and a more coordinated approach to fraud investigations, an approach that
balanced in the most productive way possible all the available remedies -
criminal, civil, administrative, and contractual.
The department to do this created something called the coordination of
remedies program to ensure that all of those remedies were considered in a
balanced and timely fashion. The approach encouraged the exchange of
information between independent remedies authorities while attempting to also
ensure that an action by one entity would not adversely affect the ability of
another to use other available actions. As a result, the number of indictments,
convictions, monetary recoveries, suspensions, and debarments all rose
dramatically. Unfortunately, although this was beneficial to the government in
one sense, it also inevitably increased tensions in the industry between the
industry and the government.
Recognizing the need for a new approach, President Reagan created the Blue
Ribbon Commission on Defense Management, commonly referred to as the Packard
Commission after its Chairman, David Packard. The Commission, among other
things, was established to find better ways to manage the business relationship
between industry and government. The Commission's report, which was issued in
1986, recommended, among many other significant things, that contractors
establish ways to implement stronger industry-wide principles of accountability.
Even more specifically, the Commission report recommended that contractors
disclose to the government irregularities that they discover in the course of
their own accountability procedures.
The Commission recommended that the Defense Department also implement its own
program, with appropriate incentives to encourage contractors to, in fact,
voluntarily disclose this type of information to the government. To their
credit, the major defense contractors acted almost immediately upon receipt of
the Packard recommendations. The Defense Industry Initiative for Business
Ethics and Conduct was established, and along with it there was an adoption of
principles which, in fact, endorsed aggressive self-governance in industry and
voluntary disclosure of violations of federal criminal and civil procurement
The Department of Defense, not to be outdone, also reacted, both in response
to the Commission's report and to the disclosure of some 14 matters by
contractors to the department. Deputy Secretary of Defense Taft signed a
memorandum in July of 1986, not only encouraging contractors to make disclosures
to the Defense Department, but also establishing the procedures that were to
become the voluntary disclosure program.
The program continues to operate today, with both my office and the
department's senior management strongly committed to its success. It provides a
formal framework in which self-governance efforts by contractors interface with
government compliance and remedies programs in the department. It is not a
means for excusing contractors for improprieties or illegalities; rather, the
program encourages contractors to demonstrate to their employees their
commitment to ethical business practices by helping the government to hold
individuals accountable for improprieties.
Under the program, matters of potential criminal or civil fraud relating to
the contractual relationship between the department and the industry can be
brought to the Inspector General at the department by a contractor. Matters of
administrative oversight, for instance, accounting issues, costing, pricing, et
cetera, which do not involve any knowledge or intent to defraud, are brought
instead to the administrative contracting officer or to the Defense Contract
Audit Agency.
I want to take just a minute to discuss what the program does and does not do.
First, the voluntary disclosure program is not an amnesty program. Action can
be taken against corporations as well as individuals that are involved in
matters that have been disclosed. On the other hand, good-faith cooperation and
disclosure by the contractor is certainly considered favorably by the government
in determining what action should be taken.
In reality, the program rests on three premises. First, that the department
would be hard pressed if it found that it could no longer do business with a
large number of its largest contractors, and, in fact, in the worst-case
situation that could happen, particularly in an instance where a contractor, a
large defense contractor, had a second or third conviction. Once beyond the
first conviction, it gets harder to escape the possibility that that contractor
might, in fact, be suspended or debarred, and thus end, at least for a time, the
relationship with the department.
The second premise is that the department must make every effort to eliminate
the perception - particularly the public perception, which was at a height
probably in the mid-1980s - of the defense programs and industry as inefficient
and corrupt. That certainly does not help the industry, and it does not help
the Department of Defense in its justification of its programs to the Congress
and to the President.
Third, a contractor is better off reporting problems rather than running the
consequences of independent detection by the government, and I will tell you a
little bit about what we do in the program to support that conclusion.
The program offers contractors several advantages: one, expedited
investigation and audit of a matter; two, early identification of the DOD
component which is designated to make suspension and debarment decisions in the
matter. This, of course, serves to facilitate contractor communications from
the outset regarding possible remedial actions by the government. And, three,
an agreement that the Department of Defense will advise the Justice Department
of the nature of the disclosure, the extent of the contractor's cooperation, and
the types of corrective action that have been taken by the contractor. This
last item is perhaps the most attractive to industry.
A corollary of probably equal benefit to the industry is the nature of the
Justice Department process for handling voluntary disclosures under the program.
It is not the usual prosecution and investigative process which is carried out
in most cases that are not handled under the program.
In effect, the Justice Department has removed the uncertainties and the
inconsistencies that would otherwise be inherent in the possible exposure to any
number of different United States Attorney's offices in the country by
identifying the Defense Procurement Fraud Unit in the Department of Justice as
the central point for the Criminal Division in addressing the criminal aspects
of these cases. So, in other words, there is one unit in the department that
handles all the decisions on those cases as opposed to being handled by
individual different prosecutors with different impressions in the field, so to
While the program certainly offers advantages to contractors, on the other
hand it also requires that contractors do certain things. First, to gain the
benefits of the program, a contractor must make a disclosure of a matter
voluntarily and not because of a belief or a knowledge that the facts of the
case have been known or are about to be discovered by the government. Prior
government knowledge of the facts does not necessarily preclude acceptance into
the program as long as there is no evidence that the contractor knew of the
government's involvement. In other words, obviously a contractor who is doing
something wrong and realizes that the government or someone is about to find out
about this cannot head it off, so to speak, by then going to the voluntary
disclosure program. Good-faith cooperation is always viewed more favorably than
its absence. We, along with the Justice Department, will evaluate a
contractor's cooperation in any matter in determining the nature and degree of
remedies appropriate for the case.
Two, the disclosure must be made on behalf of the business entity and not be
made as admissions by individuals, officers, or employees. In other words, the
corporation, the entity itself, must make the disclosure, not the individual.
Third, appropriate action, including appropriate corrective and disciplinary
action, as well as restitution to the government, must be taken by the
contractor. So, in other words, the contractor must do something to correct the
problem. Also, it is not a strict requirement, but in many of our cases, the
contractors themselves will actually conduct their own investigation of the
allegations. Sometimes that's done before they bring the matter to the
department because they obviously want to verify it, and sometimes they, in
addition, follow up with a more detailed investigation after that, which we then
review and can supplement if we feel it needs to be supplemented as we are
reviewing the whole issue at the department.
And, fourth, the contractor must agree to cooperate in any ensuing audit or
investigation. As with any new and innovative approach, the implementation of
the voluntary disclosure program has not been without its problems. I believe
participating contractors and the government have been able to mutually address
many of the major problems that have arisen to date and hopefully will continue
to do so in the future. I have to admit that I read with interest the outline
that was prepared for Bill Lytton's remarks next here this morning. As I
understand it, he is going to speak to you about the need for greater
coordination, particularly his thoughts on inconsistent government policies in
the areas of voluntary disclosure, qui tam suits, and hotlines, et
I have to confess that I smiled broadly when I read, as one of his lessons
learned, that "There is no grand government strategy." I can tell
you, having worked for many years both in the executive branch and probably even
more pointedly in the legislative branch, in the Senate, that he is absolutely
right. There is none.
The diversity and the sheer size of this government, which I believe reflects
to a large degree the diversity and the size of this country, makes it, in my
view, extremely unlikely, if not impossible, that we will ever have any
comprehensive "grand strategy" of sorts in the U.S. Government.
That's not to say we haven't tried. Certainly parts of the government have
tried. For example, I can remember working very hard to try to get legislation
to come up with a grand strategy, so to speak, in the anti-drug area when the
drug problem was at its height. And we worked on that for years and got some
legislation, and I am not convinced we still have a grand strategy, but we have
tried it in areas, and no doubt we will continue to keep trying. But it is, in
my view, a very difficult goal, and it is a goal that is difficult because of
the nature of this government and the nature of this country. It is a diverse
government; it is a huge government that does many, many different things, and
trying to perfectly coordinate it all into one single strategy is an admirable
goal, but I'm not sure it's a realistic one.
The good or, at least I should say, the encouraging news is that at least in
the Department of Defense, which in and of itself I can tell you is a huge
organization and a diverse one, we have made real progress in getting closer
coordination, if not a grand strategy, among the players involved in potential
remedies, sanctions, or other responses to voluntary disclosure cases. Moreover, we try to coordinate with the Justice Department and with other known
government players who may have an interest in these kinds of matters. The
trick, of course, is knowing who the players are early on and coordinating and
talking to them early on.
It is important to note that particularly where criminal activity is alleged,
our coordination, as good as it is with the Justice Department, does not and
cannot mean that we control their final decision on the matter, which is, of
course, made independently of our office. So there are limitations even on how
much we can coordinate, obviously, in certain areas.
In short, we have not solved all of the problems that Mr. Lytton is going to
point out to you and that I think we recognize exist in the area of inconsistent
policies and lack of coordination. But we certainly are aware of them, and we
are working on them, and we will continue to work on them.
In any event, we do believe that the voluntary disclosure program has been
successful and beneficial to both the government and the contractor community in
providing a mechanism for addressing problems identified in self-governance
programs. A few statistics demonstrate the extent to which the program has
accomplished its purpose. As of the quarter ended June 30, 1995, there have been 344 disclosures made to
the Inspector General's Office, of which only 27 have been denied admission into
the program for any number of reasons. Of the remaining 317 disclosures, 131
have been completed and closed, ten are in preliminary processing, 17 in the
preliminary stages of acceptance, and 159 are actively being pursued for
A total of 145 corporations, including, I might point out, 48 of the top 100
contractors, have made the 344 disclosures. The program has resulted in a
return to the government of approximately $297 million. There have been three
corporate and 54 individual convictions as a result of the program, and only two
contractors - two - have been suspended or debarred as a result of their
disclosures. And I might add that the convictions of the corporations and the
two that were suspended or debarred were cases where there were, in fact,
aggravating circumstances that, in the minds of those making those decisions,
justified those sanctions. But that clearly has not been the usual scenario
once the disclosure is made in good faith and there had been good-faith
Those results and the program's success have not gone unnoticed in other parts
of government. The Department of Justice has issued prosecutive guidelines
regarding voluntary disclosure in the area of environmental crime and a
corporate immunity program for voluntary disclosures in antitrust cases. Recently, the Department of Health and Human Services, confronted by growing
public concern and congressional concern over the problem of health care fraud,
has announced the establishment of a pilot program for voluntary disclosure in
Finally, my office has been approached by several other executive branch
agencies who are considering developing similar programs in their particular
areas of concern. And my own view is that with the probable or very likely
ongoing reduction and downsizing of government resources over the next several
years, it is very likely that you will see an increased interest in many parts
of government in enacting and establishing voluntary disclosure programs,
because as the government's resources lessen in the areas of audits and
oversights and investigations, clearly programs like this that allow industry to
help the government take a short-cut on some of these investigations by coming
forward voluntarily. That is seen as a help to the government in the way of
resources. So I think you are going to see more of this, and we continue to
work with the other agencies, including HHS and those that are starting up, to
give them the benefit of what we have done in the area of defense.
In sum, at least in the area of government contracting - and I recognize that
your interest goes beyond just government contracting - voluntary disclosure
programs do help to ensure not only fair and balanced government oversight, but
also reliable contractor internal controls. Their goals should rightly be to
make government oversight more effective and more efficient, not necessarily to
eliminate, reduce, or downgrade such oversight. If these programs succeed, we
all, both industry and government, stand to benefit.
On a broader scale, the success of our voluntary disclosure program
demonstrates that the concept which you are looking at this morning, the concept
of good corporate citizenship, is in my view, alive and well and hopefully
growing in corporate America. It shows that good can come from government and
industry working together to ensure accountability and ethical conduct in
business as well as in government.
I see my time has just about elapsed, so I want to thank you again for the
opportunity to be with you, at least for a few minutes here this morning, and
just close with the thought that I hope that our experience in the Department of
Defense - and we do have some in this area - can at least be of some help to you
in working to develop many, many more "good citizen corporations"
across the country in all of your areas. Thank you very much.
THE CASE FOR GREATER GOVERNMENTAL COORDINATION:
CIVIL SANCTIONS AND THIRD-PARTY ACTIONS
MR. SWENSON: Our next speaker, Bill Lytton, is one of those people who makes
you wish you wrote your Rolodex in pencil. He began his career as a prosecutor
and more recently, in 1989, he became the General Counsel of G.E. Aerospace and
served in that capacity until G.E. Aerospace merged with Martin Marietta.
At the new Martin Marietta, he served as Vice President and Associate General
Counsel until Martin Marietta's merger with Lockheed in March. In the new
Lockheed Martin Corporation, Bill is a Vice President and General Counsel of
Lockheed Martin Electronics.
Over the last few years I have heard Bill Lytton talk on a range of topics and
always very impressively. His theme for today is something I can recall
chatting with him about probably at a DII best practices forum a couple of years
ago, and I think you will find that, despite his naturally shy demeanor, he has
a lot to say. Bill Lytton.
MR. LYTTON: Thank you for the introduction, Win. I will remember that. I
should start off with a disclaimer that my comments today are personal, based
upon my personal experience. They do not necessarily represent the views of my
corporation, whatever the name of it is today.
We have done a couple of things as a result of all the mergers. Number one, I
don't order business cards in groups of more than five, and number two, those
are now coming out in slate and chalk so that we can keep up to date.
I have been asked to address a provocative subject and to be provocative in
doing it to give the perspective of the big corporation - not the big house, I
might add, for those of you who are old 1930 movie buffs.
I want to talk about the guidelines. I think they have been a catalyst for
organizations in many areas. They have forced a lot of us to re-examine the
commitment we have to lawful and ethical behavior, and they have also helped us
establish or modify policies and procedures that ensure compliance with legal
and ethical standards. And in that regard, I believe the guidelines have had a
I also want to congratulate the Sentencing Commission for sponsoring this
public forum and for being open to comments and criticism. It is not a group
that has declared victory and gone home; rather, it is a group that has tried to
critically examine what they are doing and see what changes might be made. And
continuous improvement itself, I think, is somewhat unusual in the government.
Perspective is important. I saw a sign on a marquis a couple of weeks ago
that said, "We do not see things as they are. We see things as we are."
Obviously we filter what we see through our own eyes. And so what we see is
obviously influenced by where we sit, and the challenge we face is to try to see
it from the point of view of others. And this type of candid - hopefully candid
and hopefully understood to be that - discussion I think is only helpful.
As an optimist, I see the guidelines as a work in progress, one that will
improve. As a lawyer, I, of course, admire anyone who has the ability to speak
out of both sides of their mouth at once. But I stand in unabashed awe at the
ability of the United States Government to promulgate so many different
policies, practices, and procedures that are absolutely inconsistent, and to do
it all simultaneously.
Let me give you a little bit of an overview. I start with the premise that
the guidelines are government policy. They are a specific, integrated, and
articulated government policy that rewards a certain type of organizational
behavior and punishes other types. So seen in a vacuum, the choice of an
organization is clear. You modify your behavior to conform to the guidelines.
Organizations, however, act through human beings who need to be trained and
encouraged to conduct the affairs of the organization in a manner consistent
with that organization's commitment to conform to the guidelines. To the degree
that these human beings are given conflicting or confusing directions, the
ability of the organization to achieve its goal of conforming to those
guidelines will be jeopardized; and to the degree that the organization's
ability to conform to the guidelines is jeopardized, the goal of achieving
conformity to this government policy is likewise jeopardized.
The United States Government, through legislation and executive branch
actions, has institutionalized other policies which, at best, cause confusion
and, at worst, are inconsistent with the guidelines' policy. And this conflict
and confusion, I think, may be one of the single most important impediments to
the goal of achieving that underlying policy that we all, I think, support with
So organizations sometimes find themselves in a Catch-22 situation where their
employees' actions necessarily put them and their organizations at risk because
of other government policies. In these cases, both the organization and the
government, it seems, suffer.
Now, if the government is serious in wanting to promote the public policy
underlying the guidelines, it needs to understand these conflicting policies and
to address them, and that's what I have been asked to help do today.
The guidelines talk about a number of things that are important,
characteristics that can be mitigating factors if and when a corporation finds
itself standing in front of a judge about to be sentenced after having been
found guilty of federal criminal conduct.
One of them is internal reporting. The existence "of a reporting system
whereby employees and other agents could report criminal conduct by others
within the organization without fear of retribution" is an important goal
of the organization. This plays into a second important mitigating criterion,
voluntary disclosure - part of what Eleanor just addressed - where the
organization discloses to the government something that went wrong in the
organization, and the company is encouraged to fully cooperate in the
investigation and to affirmatively accept responsibility for its criminal
Most companies, I believe, certainly the large ones - and God knows I've been
with a lot of them the last two years - have embraced the guidelines, have
worked hard to encourage its employees to self-report, to have trust in their
companies, to provide for anonymous reporting, and otherwise to develop audit
and other processes that will discover relevant information. Hotlines and
ombudsmen are only the most visible and obvious of these efforts.
But there is some inherent resistance to this type of self-reporting process. For instance, some company lawyers that I have known in the past may have
difficulty in confessing to a crime that may not have been discovered and,
indeed, may not even have been committed. A second impediment may be it is not
in human nature in America to be a "snitch," and we sometimes find a
lot of difficulty with our employees in encouraging them to tell us if they
observe a problem caused by a fellow worker. One only has to look at the most
recent case of Archer, Daniels, Midland and the reports that have been in the
Wall Street Journal about what has happened in that case and the
reaction to the executive who reportedly was acting as an undercover agent, an
informant for the government.
I note that a member of the Illinois Christ Lutheran Church said, "Why
didn't he just quit? That's what I would have done. I'm not about to be a spy."
And the co-owner of Nick's Auto Body said, "The fact that the Feds spy on
the community frightens me. They're about as underhanded as anybody. And this
guy's not an upright citizen, or he wouldn't be ratting on his boss." So
obviously the guidelines' policy has not yet affected the culture of some
religious and auto repair organizations.
To the degree that our employees do not report what they see or suspect, and
thus deprive the company of the opportunity to make a voluntary disclosure and
to cooperate, that may be seen under the guidelines as evidence of an
ineffective corporate program and perhaps an inadequate corporate commitment to
compliance and ethics. And I'm not sure that is necessarily the conclusion that
one should come to.
One of my favorite topics: qui tam. The same Congress that set up
the Sentencing Commission has also established the qui tam or
whistleblower statute, which provides that someone who files an action alleging
a fraud against the government may recover up to 30 percent of the ultimate
recovery, which itself can be up to three times the amount of the loss to the
The qui tam laws are premised on a central and very powerful idea: greed. And if it's not greed, then why do we need all that money to make people
Money is not normally required to make people do the honorable thing. The
theory is that if enough money is offered, employees will turn in their own
mothers or at least their own bosses. And added to this greed factor is this
wonderful, powerful interest of lawyers who see their opportunity of getting
one-third to one-half of the bounty hunter client's reward on top of their
counsel fees. I used to be in private practice, and I know how attractive that
In the case of an ongoing fraud, the longer the qui tam relator waits
to file his qui tam case, the more money the government stands to lose,
and the more money he or she stands to gain. I think this highlights the fact
that the statute's concentration is on making money for the relator and the
lawyer and not on stopping fraud, waste, or abuse.
This lure of the big bucks is a powerful incentive for employees to seek out
their local plaintiff's lawyer rather than their ombudsman when they see a
problem in their corporation. These whistleblowers are then applauded, of
course, as courageous people who have put the interest of the country above
their own well-being. The media has a field day with it, and the client and the
lawyer begin to consult financial and tax experts and advisors. You might even
hear that their very lives were in danger. Spare me.
The motive behind these cases, I suggest, certainly a large number of them, is
exactly what Congress has or should have anticipated, and that is greed. And
there are other types of bounty hunter laws that are being adopted or proposed
or considered, including in the environmental area. So a corporate employee has
two choices when confronted with possible wrongdoing in his company: be a good
and honorable employee and report it internally, or take the money and run.
The fact that employees don't take the greed route all of the time is, I
think, a wonderful surprise, but when it happens to you and your company - and
those of you who deal with the government will find it happen - it is not very
When they file these types of cases, I think it is predictable; it is human
nature. But when we are able to go to an ombudsman and then follow a voluntary
disclosure route, that happens in spite of, not because of, the qui tam
policy of the United States Government.
This is more than a theoretical issue. Consider the following hypothetical. A company auditor discovers that your company has overbilled the government by
$1 million. If he does what he is supposed to do and reports it internally and
allows the corporation to make a voluntary disclosure - I checked with Win on
this because he's the expert on this stuff - he says the fine could be as low as
$50,000. If the same auditor, however, instead of reporting it internally
decides to call up the plaintiff's qui tam bar and lets it go on and
then we don't get a chance to discover it because we thought that's what the
auditor was doing - indeed, the auditor may even lie to us, or maybe he just
resigns because he knows he's going to make a lot of money - then the
corporation can be fined up to $1 million.
So even though the facts of the crime are exactly the same, the decision made
by the auditor could affect the size of the fine by a factor of 20. Such an
arbitrary and capricious result cannot be the result of a conscious, coordinated
I think that if we as a people in this government want to encourage the
voluntarily disclosure of problems to the government, why not require that a
prerequisite to filing a qui tam action by an employee is that he or she
first has to go to the appropriate person, whether it's the CEO or the
ombudsman, and tell them. And if the company doesn't do anything for 60 or 90
days, then you can file it.
Do you know what's going to happen if some employee comes to me and says, "I've
got a problem and if you don't do something I'm going to file a qui tam?"
I'm going to call up Bruce Drucker. And you're going to have more disclosure. What would happen? The plaintiff's bar would lose a lot of money, and the
relators wouldn't get up to 30 percent of the money.
I think these are ideas that take greed out of the equation and that would
enhance the underlying policy of the guidelines for voluntary disclosure. And
such a policy and such a change would be perfectly consistent with the
There is also a second government practice or policy that can be inconsistent,
or at least cause confusion. Government agencies often encourage and sometimes
require that posters be prominently displayed with a hotline for calling the
government when an employee is aware of fraud. I think this is confusing. Their quite reasonable rationale for having it is that in some cases employees
will not feel comfortable to report it internally. They may not have a system
that would work, or maybe they're dealing with a company that is just a bunch of
crooks. So I think there's a good reason for it. I don't deny that. And the
other reason they would do it is they're not aware of the whistleblower statues
and all the money they can make.
But when an employee does call the government hotline, once again a
corporation is deprived of the opportunity to make a voluntary disclosure. I
think what we have to do is at least realize that in such cases it is not
presumptive evidence, if you will, that we had an ineffective policy. I think
there needs to be some consideration that the government would give credit to a
corporation for what would have happened if they had made a voluntary disclosure
- if this guy had called the inside person rather than the outside person. And
I think sometimes this does happen in the DOD IG's office. I think they are
willing to do that. But as we expand throughout the government, I think you
need to watch out for that because our employees are being encouraged not to
call us. They are being encouraged to call lawyers or the government, and the
policy of the guidelines says that if they don't call you, that is not good - it
doesn't say something good about you.
The voluntary disclosure program that Eleanor talked about is, I think, one of
the real success stories in the United States Government. I think the DOD IG's
office and Bruce Drucker do a wonderful job, and a trust has built up over the
years between industry and government in this, and that is why it has been so
effective. But let me talk about the process of making the decision to make a
It is rarely a clear-cut, easy decision. The reasons for making it are
compelling from a corporate point of view. You significantly reduce, if not
eliminate, your chance of being criminally prosecuted. And if you are
prosecuted, at least under the guidelines your penalty will be less severe than
if you hadn't. But the circumstances in which the decision is often made are
difficult, stressful, and ambiguous.
When I was a federal prosecutor in Philadelphia, we had a bank robbery. It
was a wonderful case. The bank robber is in line. He robs the bank. A
beautiful 8-by-10 glossy photograph of the bank robber comes out of the
surveillance camera. The dye pack explodes, and standing behind him in line is
an FBI agent. This is all true.
The closing argument of the government prosecutor was: "Ladies and
gentlemen, are you familiar with the expression 'caught redhanded?' This guy
was caught redhanded. Thank you very much."
Now, that's a dead-bang case, and, by gosh, if that happens, you know what to
do. But the reality is in corporations, when you are dealing with fraud
instances or potential fraud instances, you rarely see it with that sort of
clarity. And while you're trying to get the clarity, you must recognize that
hesitation or delay may be fatal to your ability to get into the program and to
get the benefits thereof.
Clausewitz, I think it was, somebody like that, talked about the fog of war,
and that's what happens when you are sitting on the inside and somebody comes to
you with a potential problem. In a defective pricing case, you don't need a
primer on this, but it often turns on the intent of the individual. That is
your typical white-collar case. There is no question as to what the person did.
But did he or she intend to do something wrong? A conscientious, good-hearted
internal investigator who believed in the presumption of innocence might look at
that and conclude that the person did not intend to do something wrong.
That same investigator having gone to Bruce's school and having been trained
with a little booklet they have - I believe it says "Think Fraud" -
believes that the presumption of innocence is a nice thing for the books, but it
does not really apply. (I think once when I was with Bruce, I asked for a show
of hands from the agents. I said, "How many of you really believe in the
presumption of innocence?" Not one hand went up.) The investigator might
now conclude with the same facts that the guy intended to do something wrong.
So while you are sitting there trying to make these decisions, very difficult
decisions, you recognize that the clock is running. If you make the decision
too late, you may be out. If you make it too early, you may disclose actions
that you later determine upon further investigation are not fraud. And while I
think I can convince Bruce on that, when I end up at the DOJ, I have another
problem because the Department of Justice Civil Division believes that a filing
of a Voluntary Disclosure is the moral, if not the evidentiary, equivalent of a
confession of fraud. And if you later go to them and say, "Well, it was
all a mistake, we looked into it further and it is not fraud," that might
be construed as lack of cooperation, backing off, failure to accept
responsibility, et cetera, et cetera.
So I don't know how much of a counter-balance the risk of significant civil
penalties - because the DOJ comes in talking trebles and maybe you can get them
down to doubles of whatever the loss to the government is - may or may not be to
make voluntary disclosures. I don't think it is for the larger companies, but I
think that with smaller companies it may well be, and you should keep that in
I understand there is going to be somebody later talking about the self-audit
privilege and I think this is another example. One of the things that results
from the guidelines is the effort to find out if you've got a problem. So we
conduct internal audits and investigations, and we like to keep those things
kind of secret - for a number of reasons, many of which are legitimate. Just like you have the FBI not wanting raw FBI 302s to be out there, we don't
want our investigative files to be out there. Why? Because there's another
group of lawyers called the plaintiff's security firms. I used to be in one of
those, and what they do is every morning they look in the Wall Street
Journal, and companies whose stock went up or down find themselves in
trouble. They file a class action suit. There's a number you call in
Wilmington, and if you're the first one, you're the lead counsel and you get
most of the money.
It's very well organized - talk about sentencing guidelines for organizations.
There's one you ought to look into.
We would rather not show all of this stuff to the plaintiffs who are going to
try and blackmail us to settle the case. I don't mind sharing it with the
government so much. They're not my biggest concern. But when we assert a
privilege, I think there is a knee-jerk reaction of the government to say: a
privilege - lack of cooperation. I think the government should think more
carefully about when it's going to challenge an assertion of the self-audit
privilege, because the more you challenge it and the more there is no privilege,
the less internal investigation there is going to be; the less internal
investigation, the less things we find out.
Let me talk for a second about suspension and debarment. The government very
rightly doesn't want to have companies working for them that are crooks. Let me
give you an example, though, of what government are we talking about.
We had a case where one of our employees pled guilty when I was with G.E. He
was actually an old RCA employee. He got sentenced, to I think, a year. The
government prosecutor and the defense lawyer said, "That's too much. We
really would like for this guy to get work release. He's not a bad guy. He's
cooperating."
They came to us and said, "Will you put him in some sort of commercial
job just so he doesn't work for the government anymore so we can go in on a
joint Rule 35 motion for reduction of sentence to have him put on work release?"
I did it. They went in. He got reduced.
Flash forward, I'm now in front of the government suspension and debarment
authority a couple of months later, and they said, "Why is this guy still
working for your company?" I said, "The government asked us to keep
him employed." He said, "What government was that?"
I said, "It was the Department of Justice." They said, "That's
not our government." And then he gave me an example. He said, "You
know, we had a paraplegic we caught stealing two aspirin. We fired him." I said, "That's not my company."
The government is not a homogenous single organism. It is a hodgepodge of
people who rarely share the same ideas or agendas. What are the lessons we can
learn? First of all, you are listening to people who have been involved in the
defense contracting community. So why is that relevant? Well, a couple of
reasons. Number one, our past is your future. The government is coming after
everybody. We just happened to go first. Environment, health insurance,
safety, everything is coming under the gun. The cross hairs of the government
are very tightly focused. They are coming.
The guidelines are in large part consistent with, and I in think some parts,
even modeled after the DII guidelines. So we have lived under them for ten
years, and, therefore, we might have some insights that help you.
What have we learned? Simple, yet profound. We've got dozens of departments
and commissions, hundreds of agencies, hundreds of thousands of people. They're
not singing from the same hymn book. They don't even know there are others in
the choir. And when they do, they don't really care. So what you get isn't the
complex harmony of a Mozart, but the cacophony of a construction site in
downtown Chicago or New York City.
And as Eleanor stole my punch line, the reality is that there is no grand
government strategy. The fiction we indulge in is that we have to act as if
there were such a strategy. And therein lies the risk for companies and the
challenge for government. Government could not only make the private sector's
life a little easier if it tried to reconcile these discordant policies, but
would probably be a lot more successful in helping us all achieve some
fundamental and worthwhile goals that are embodied in the sentencing guidelines.
If only we could all agree what those goals are. Thank you very much for your
OTHER COORDINATION ISSUES AND PROPOSALS
MR. SWENSON: Our next speaker is David Yellen. David is an associate
professor of law at Hofstra University and, accordingly, represents a somewhat
different perspective than our prior two speakers. But I think it would be
wrong to assume that his is the perspective of an ivory tower because David has
been a very active participant in policy issues, both in his prior life as an
assistant counsel to the House Judiciary Committee and more recently, while at
Hofstra, through a number of policy-oriented writings, including a very
interesting law review piece on the coordination issues that he is going to talk
about. David also served as an advisor to the Clinton transition team on some
of these same issues. David Yellen.
MR. YELLEN: Thanks, Win. Several years ago, I was the reporter to a special
ABA committee that was set up to study the collateral consequences of
organizational convictions, and we came to some conclusions that are not very
surprising to anyone in this room, and certainly not after hearing Eleanor and
particularly Bill. We found that there is a panoply of overlapping, sometimes
inconsistent, unpredictably enforced civil and criminal sanctions that are
available when an organization, a corporation, has committed some kind of
misconduct. There really isn't a great deal of coordination between the
different parts of the government. Despite what Bill said, I still think of it
as one government, but there isn't a lot of coordination. And the sources of
that lack of coordination are pretty straightforward as well.
First of all, you have Congress, which is not well-coordinated just on its
own. Congress has become increasingly in love with criminal penalties in the
last 10, 20 years. I guess de Tocqueville wrote many years ago that, in
America, all issues of public concern wind up being matters for law and courts. Nowadays you can modify that to say that virtually all issues of public
importance wind up being matters of criminal law. And Congress has gone way too
far in criminalizing conduct that probably could be better handled civilly. When something is a crime already, Congress loves to just pile on additional
penalties. And when that isn't enough, Congress loves to pile on mandatory
I don't want to give them any ideas, but in some ways it's surprising that
there hasn't been an effort to come up with some kind of mandatory minimum
sentencing laws for white-collar and organizational crime as well as drug crime,
where it principally resides. And then you add to that - so that's the Congress
side. And then, of course, the agencies, we've heard a lot about the way, just
how difficult it is for an enormous agency like the Department of Defense to
coordinate its own efforts to enforce the various laws, let alone to expect any
reasonable amount of cooperation and coordination across agencies.
One thing that did concern me about what Eleanor Hill said was in terms of an
earlier effort where all the different parts of the Department of Defense that
had responsibility for criminal and civil - all the different sorts of
enforcement - when they did start talking a lot more, if I heard her right, she
said that the great result was that every single type of enforcement action went
up and there was more recovery of every kind. To me, that's not necessarily the
goal of an effective coordination policy. It may be that you want less of one
kind, more of another, more focus, more principles underlying what exactly the
government is going to do.
So our conclusion was that there were problems with the lack of coordination
from Congress and from the agencies and that more coordination was necessary. In particular, we focused on punitive sanctions. Obviously, criminal sanctions
are punitive, and a great many sanctions that are denominated as civil are,
nonetheless, punitive. And after the Halper decision from the Supreme
Court a few years ago, it is necessary for courts to think about whether
sanctions labeled as civil are, in fact, punitive to avoid double jeopardy
In addition, we thought that theories of punishment that I will talk about a
little bit also called for greater coordination in the sanctioning of
corporations, and we called upon the government in general to start thinking
more carefully about those issues. I don't think a lot has really come of that
in the intervening years. As Win mentioned, I did a little bit of work advising
the Clinton transition team on white-collar crime enforcement policies, and I
talked a lot to them about this kind of coordination issue, these issues, and I
haven't seen a lot of evidence of any real change in that area.
Also, I think the Sentencing Commission, which ought to play a central role,
being a smaller, more well organized entity than something as sprawling as, say,
the Department of Defense, the Sentencing Commission can play a crucial role in
encouraging greater coordination of sanctions. And I think this is one area,
although they have done a tremendously admirable job in many respects with the
organizational guidelines, I think they missed an opportunity here. In one of
the earlier drafts before the final guidelines that were promulgated, there was
a provision that authorized judges to consider when imposing a criminal fine on
an organization whether there had been or were likely to be punitive civil fines
imposed; and if so, to have some kind of offset. And without any real
explanation, that provision was dropped from the final guidelines that went into
effort. So I think there is more the Commission can do as well.
I am not going to try and solve these problems, the broad, massive problems of
coordination of all the government's enforcement efforts today. I really want
to talk about compliance programs and address the question of whether our
treatment of compliance programs can have a positive effect in encouraging the
government in all its forms to engage in more coordinated sanctioning activity.
Before getting to that precisely, let me start with some fundamental questions
about compliance programs that have been addressed only slightly in this
conference. We all assume that it is good and proper for the Sentencing
Commission in the organizational guidelines to give a very serious reward to
companies that have had an effective program in place. Why is that? Why is it
that we think it is right to do that - because what we are really doing is
rewarding failed efforts at compliance. That may be a little bit unfair to say.
If a compliance program reduces dramatically the amount of crime committed by
its employees overall it's not a failure. But we are not talking about
rewarding corporations for the crimes that weren't committed. Rather, we are
talking about rewarding them when a crime has been committed and reported and
So why should we do that? You might say that individuals don't get an
opportunity to stand up there and say to a judge, look, Judge, I really tried
hard to not break the law, I wrote myself notes every day, I talked to my
spouse, and I just couldn't stop myself.
Individuals don't get to do that, so why do organizations get to do that? And
we could also say a little more seriously, why shouldn't effective compliance
programs be their own reward? In other words, if companies can come up with
truly effective compliance programs, truly effective means they're going to
significantly reduce the misconduct by their employees. Why shouldn't we let
the marketplace work and say, you know, let that be your own benefit, that you
have less exposure to government enforcement actions, as well as the
psychological benefit of feeling like you are doing the right thing.
Well, I think that at least as far as criminal liability for organizations
goes, that is not the right answer. I think that is the wrong approach, for a
couple of reasons. And to answer that, we have to first consider the two main
rationales for criminalizing corporate misconduct. I do not want to sound too
much like the ivory tower law school professor that Win, thankfully, said I am
not, but a little background on the elementary purposes of criminal punishment
is appropriate here. The main ones that are applicable to organizations are
deterrence and retribution. Deterrence obviously plays a major role in
punishing corporate misconduct. We punish companies so they won't do it again
and so other companies will learn the lessons and they won't do the same kind of
Retribution ought to, in theory at least, have a much lesser role in
sanctioning organizational misconduct. A company is not a person. As Professor
Coffee from Columbia wrote a long time ago, citing an old case, it doesn't have
a body to be kicked or a soul to be damned, so why do we think about punishing
organizations for punishment's sake?
But I think clearly in modern times, with the attention that has been paid to
corporate misconduct, people think about a need to punish companies that have
done wrong, whether it is Exxon with the oil spill or lots of other situations
as well. So these twin aims of the criminal law are really in force in how we
deal with corporate misconduct.
So let's consider briefly the relationship between these goals and compliance
programs. First, deterrence and compliance programs. As I mentioned, we might
want to say, we could think about saying that good programs will be their own
reward, and why should we give any additional benefit to companies that have put
in place a program but the program hasn't worked on this occasion? That
argument would have one benefit, I think, which would be to make companies focus
exclusively on programs that really work and not at all on a real problem, which
is programs that look good whether or not they really are going to have the kind
of effect that we hope they do.
On the criminal side, though, this is inadequate. That deterrence argument
that economists might make I think would not work, and that is because of a
couple of things. First of all, how infrequent corporate prosecutions are. We
have heard a lot of talk about - you saw a chart earlier today before the
guidelines and under the guidelines. There are just a couple of hundred
convictions a year in federal court of organizations. So if you were a rational
corporate executive trying to decide simply in terms of your criminal liability,
despite what the sentencing guidelines offer you for having an effective
compliance program, you might, especially if you are a large corporation who has
a very small chance of being prosecuted criminally, you might decide it is just
not worth the effort and the money. It is very unlikely we are going to ever be
prosecuted for a crime, and it is just cheaper in the long run not to bother
with a compliance program under those circumstances.
Well, we as a society really want to encourage the kinds of efforts at
compliance that we have heard a lot about here in the last two days. So I think
it is entirely appropriate that, even despite what cost/benefit analysis might
say, we come up with a way to strongly encourage companies to make serious
efforts at compliance with the law.
We could do that in two ways. One way would be to increase the frequency of
criminal prosecution or to increase the severity of the sanctions that are
imposed when companies are prosecuted and convicted. The other way to do it
would be to reward good efforts at compliance. From a deterrence standpoint, it
really doesn't matter which way you go. Either way could conceivably have the
same kind of effect. And that's where retribution comes in. You know, to put
it in terms of the title of this conference, why should we choose carrots over
sticks? And I think the answer is because we and government law enforcers
believe that companies that have made a strong good-faith effort at complying
with the law are less culpable than companies that haven't done that, and they
ought to, in a sense of justice and fairness, receive a reward for their
Now, that is somewhat at odds with the respondeat superior principle
which says that a corporation can be criminally liable for the acts of any of
their employees within the scope of their employment. So we're saying you can
be prosecuted for anything any of your employees do, but we are not going to do
it when you have taken steps to comply with the law. The respondeat
superior principle is very troublesome to those of us who believe that the
criminal law ought to be used when necessary but no more than necessary. And,
in fact, I think the Sentencing Commission has stumbled across - I am not sure
this was completely what they had in mind - but they have come to a really good
middle ground between the respondeat superior principle that prevails in
federal court and the position urged by the Model Penal Code, on the other hand,
which is that companies can only be criminally liable when there is high
managerial involvement.
In fact, I think it could be argued that the Sentencing Commission should have
gone further. If they really believe in their principles, as I am sure they do,
they could have gone further and said, for example, that a company that has a
truly effective compliance program, maybe they should receive no fine
whatsoever, no criminal fine at least. And, similarly, the courts - there was a
Rutgers Law Review article written recently by two New Jersey lawyers - I am
sorry I cannot remember their names at the moment. It was a very good article,
and they argued that there ought to be a criminal defense based on an effective
compliance program. And I personally am very sympathetic to that. So I think
the role of compliance programs in criminal prosecutions should, in fact, be
even greater than it is today.
The more difficult question is: what should the role of compliance programs
be in affecting punitive civil sanctions? It is always hard to define what
component of a civil sanction is, in fact, punitive, but we have an obligation
to try and do that already under Halper. My own view is that an
effective compliance program should not result in no punitive civil sanctions
being imposed. I think both the deterrence arguments and the retributive
arguments are different when you are talking about non-criminal prosecutions. But I think they ought to have a serious effect on reducing the company's
What we would wind up with, then, is great benefit criminally if you have an
effective compliance program, a good but lesser benefit in terms of punitive
civil sanctions, and probably no real benefit in terms of purely remedial civil
sanctions. One of the benefits of this approach, I believe, would be to steer government
regulators further towards punitive civil sanctions as opposed to criminal
prosecution because they would not be faced with the likelihood of getting no
fine for a company that had a truly effective compliance program. And I think
that would be a good result for the reasons that I stated about the
over-extension of the criminal law.
Now, how should this come about? I think, again, there ought to be a role for
Congress to play in this in not simply passing a hodgepodge of laws, whatever
seems to be a concern at the moment, and pile on some sanctions; rather,
Congress ought to do a better job of thinking about what their goals are in
having various kinds of sanctions. I am not too optimistic about that, having
worked in Congress, even less so today than when I worked there eight or nine
years ago. The agencies themselves have an obligation to do their best, and
some agencies are really working hard at this, at least internally within their
own structure. But, again, as we heard from Eleanor Hill, with a vast
government bureaucracy across many agencies, that is very hard to do. But there
needs to be more effort.
Again, the Sentencing Commission should really take the lead, as they are
trying to do with this kind of conference, to define what is an effective
compliance program, to talk about what ought to be the effect not just in
criminal cases but on the civil side as well of a truly effective compliance
My hope is that if that effort comes out of this conference and the other
things the Sentencing Commission is doing, we might begin to see the way out of
the lack of coordination mess that you have heard about from this panel. If we
can come up with a better way to coordinate the effect on various sanctions of
an effective compliance program, that will have the effect not only of
encouraging better efforts, more productive efforts at companies complying with
the law, but maybe the government regulators and Congress and the Sentencing
Commission can learn more about ways to come up with broader standards of
coordination on all of the issues that we have been talking about today. Thank
MR. SWENSON: Thanks to our whole panel. I must say I think those were very
provocative and helpful comments. We do have a number of questions from the
audience. Let me ask one to Bruce Drucker first.
The question is: could you respond to Bill Lytton's suggestion about
requiring whistleblowers to go to the company's ombudsman - let's just say not
necessarily the ombudsman, but to the company - before filing a qui tam
suit? And we had a second question which maybe Bill can keep in mind, and,
Bruce, you might want to respond to it as well, which asked about a company
policy and whether this might be enforceable, that would require employees to go
to a company hotline 60 to 90 days prior to going to the government to file a
qui tam action. Did I get the waters too muddy?
MR. DRUCKER: No, that's all right. I think I'm there.	With respect to Bill's
comments about a requirement for a corporate employee to notify the company,
actually there have been similar proposals put forward with respect to whether
government employees could be qui tam relators or not because there was
a similar problem within the government. I believe in both instances that the
opportunity to advise, in the case of a government employee, the appropriate
officials in the government and, with respect to corporate America, advising the
corporation of the problem would be, in fact, an appropriate means. I think it
is entirely consistent with the intent of the qui tam statute. It would
provide no bar to the employee or additional counsel ultimately making the
government aware of the issue. This gives both the government and the company
the opportunity to approach it in a voluntary disclosure mode, a less
adversarial mode, if you will. And I think both interests are served.
The qui tam statute was created at a time when there was not
sufficient government investigative and prosecutive resources to find all these
things, so its concept was to get the public to participate on behalf of the
government. Well, now we do have far more resources, and there is a
relationship, a framework within which we can operate. So I think it would be a
MR. SWENSON: Bill, do you have anything you want to add to that? It sounds
like you have worked out a deal.
MR. LYTTON: I am glad that Bruce has finally seen the light. No, I don't
have anything to add. I don't see why we don't do it.
MR. SWENSON: Why don't we do it?
MR. LYTTON: Well - you want me to get political here - because there's a very
powerful senator who thinks it is a great idea. There is a very powerful group
of lawyers who bring these types of actions who make a fortune off of it, who
have done a very effective job of lobbying, and because the media loves
whistleblowers. And any effort that is perceived to be something that would
reduce the ability of whistleblowers to blow the whistle - which I don't think
this would be - gets jumped on.
So we are swimming upstream because whistleblowers get a lot of attention. And when you really get down to the nitty-gritty and try and deal with reality,
a lot of people just don't want to hear it.
MR. SWENSON: I think bringing the political dimension into this is pretty
useful. David, you spent some time as a congressional staffer and have seen
this up close. Do you have some perspectives on this narrow issue but also more
MR. YELLEN: Well, actually, I want to ask Bill a question. I haven't talked
to a lot of people who have filed qui tam actions, but I assume it is a
pretty hard step for an employee to take. I mean, you are hoping that you are
going to make enough money to buy a house in the islands and retire, but you are
taking some real risks in doing that in terms of your employment with your
What if it turns out that your claim is wrong and you get nothing? What is
your future like at that company? So I think it is probably a pretty hard
I wonder, have any companies - or is there any legal reason they can't do this
- have any companies tried to offer financial incentives to employees to report
things internally rather than going the lawsuit route? Assuming that Congress
is not going to do what you want, why don't companies take some steps to try and
encourage it?
MR. LYTTON: Two things. When I was with G.E. Aerospace, I proposed that we
have a compliance award that we give out to people who had done exemplary
things, not that they had necessarily turned in people, because there is a
political problem internally if you are going to offer a bounty if you turn in
your buddy. But I was trying to make it as pure as possible. I said, "Let's
give awards to people who are exemplary, who come up with new processes, or who
reduce the emissions or something like that." I talked about this at
several of our plants. I did this in Camden, New Jersey. And the leader of the
union there was outraged that I would suggest that we reward people for doing
what they should be doing anyway. So that was a very interesting reaction that
On the other hand, we did institute a type of program like that, and I will
tell you an example. We gave a plaque to an employee down in Daytona, Florida,
for having done something positive, and I sat with her at the lunch table when
the award was given out. She was very proud. And I said I would visit her when
I was next down at Daytona, which I did. And I went to her work spot, and her
plaque wasn't there. And I said, "Where's your plaque?" She said, "I
took it to my church." And the impact that that had had on her and how
proud she was really something.
So I think you can do things to encourage employees to do the right thing, but
remember - and to your point about whether a compliance program is successful or
a failure. We are asking companies and organizations to do that which the
family, the churches, and the society have failed to do. We want to have a zero
defects society in our organizations, and we don't have it. And the fact that
we have one or two or 15 or 50 employees who violate the law is not remarkable. Indeed, I did some studies once that showed that if you were a Department of
Defense civilian employee, you were up to 20 times more likely to violate the
fraud statutes than if you were a General Electric employee, based upon people
who had been tried and convicted. It does not say that DOD is a bad group. It
does not say that G.E. is a bad group. But I think we need to view this all in
MR. SWENSON: I think it is the case that there is a lot of interest in
whistleblower incentives on the Hill. I guess there is one particular senator
who has been a prime sponsor of the qui tam actions, but there also have
been bills introduced more recently to expand the bounty concept. We have a
couple of questions about qui tam and those kinds of laws.
If I can sort of merge them together, one of them really just says that these
statutes have done very nicely in terms of recovering dollars that would
otherwise not have been recovered.
And a second question asks your thoughts on real, actual, not hypothetical
cases in which an employee or agent of a company charged with undertaking
compliance didn't first go to the company. I guess the suggestion of the
question is there have been a number of cases where somebody did go to the
company first, didn't get a response, and that that's the more typical example. Is your understanding different?
MR. LYTTON: The first question you asked was, you know, these have produced
results that would not have otherwise occurred. Yes, I think that is right,
maybe, but we don't know. But my proposal, I think, would produce as much or
It is really not my proposal, by the way. I didn't think of this. As Bruce
mentioned, there have been many suggestions on this. I have plagiarized this,
as I do most good ideas that I have. If you want real-life examples of where people have filed qui tam
where they did not go to the company first, the famous G.E. aircraft engines
case involving Israel and General Remi Dotan I think is a perfect example of
where an individual by the name, I believe, of Chester Walsh observed the fraud
against G.E. and the United States Government and against the Government of
Israel, did not go to his company because he said he was afraid of being killed
- Jack Welsh is a well-known gunslinger - and instead went to a plaintiff's qui
tam lawyer, and they watched the case grow, I think from a $12 million to
$40 million fraud during the couple of years that they sat on it, and they only
filed a qui tam when Remi Dotan was arrested in Israel, and they
immediately filed the lawsuit. So that's one example. I think there are any
Now, where an employee comes to us - and this has happened to me - you get a
letter that says Joe Blow's a crook, and he's ripping off the government, and
you better do something about it or else I will.
Well, I've got to figure out who is Joe Blow, where does he work. Now, in
this company, I have 170,000 employees. When I was with G.E., I had 240,000 or
something like that. Who is this guy? Does he have anything to do with the
government? And now I've got to investigate it. When I was a federal
prosecutor, you know, the FBI has the luxury of investigating these things for
three, four, five years sometimes. I've got a couple of days, and if I don't do
something immediately, I may be in jeopardy.
So what I typically do is I call Bruce Drucker, and I say, "Bruce, I
don't know what I've got here, but I'm letting you know that I've got this, and
if it turns out to be something, I'll be back to you." And as I say, DOD
IG works great. Whether that's going to work with other agencies like that, I
don't know. But I think there are certainly examples - and I think the Dotan
case is perhaps the best example that I know of - where a
qui tam relator went to his lawyer rather than to his company. The
damage escalated geometrically, and he made a lot of money. So did the lawyer,
MR. SWENSON: Bill, you made the point in your direct remarks that when
companies voluntarily disclose to the Defense Department, part of the final
resolution of the case - assuming that they don't fall into that statistical
anomaly of actually getting criminally prosecuted or suspended, very few cases
there - but they still may end up paying substantial double or treble damages
under the False Claims Act.
Bruce, do you think there should be more accommodation for sorting out the
good citizen corporations among the voluntary disclosures - for example,
companies that have committed to strong compliance efforts versus those that
This is not directly your bailiwick, but what do you think the policy ideas
are behind having double to treble damages for companies that, let's say,
voluntarily disclose and also meet additional mitigating criteria - fully
cooperate under the program, maybe to the nth degree? MR. DRUCKER: Well, I think that a part of the theory that is used, the policy
approach that is used in dealing with resolution of voluntary disclosure cases
is that the statute itself provides that in the case of a truly voluntary
disclosure, which is one where a company finds wrongdoing and within a period of
30 days investigates it, identifies it, and fully cooperates with the government
in resolving the issues in the case, that the statute itself calls for a double
damage application in lieu of a triple damage application that would be provided
for in a non-voluntary situation, an adversarial situation, if you will.
So I think part of the thinking that goes into the application of the double
damage, even in a voluntary disclosure, is that the case is being settled under
a statute that itself provides a reduction - a sufficient statutory reduction. Whether or not that is, in fact, a true incentive to disclose, i.e.,
that it is double versus treble damages in a situation where a company is fully
cooperative, as you put it, to the nth degree, there have been cases that I am
aware of in disclosures where we have ended up with resolutions of settlements
for singles. I am not saying that that is the norm, but it has occurred where
the Department of Justice is willing to negotiate for what the single damage
amount plus interest was as a resolution of the matter financially.
There is a judgment factor involved there I think that needs to stay, and that
is the extent of cooperation, the extent of participation, varying levels of
responsibility within the company.
Bill alluded earlier to and I believe one of the other speakers mentioned the
concept of respondeat superior. Well, it depends on whether it is Joe
Smith that Bill alluded to earlier that is a line supervisor at the production
plant at Fort Swampy or it's Bill sitting at corporate headquarters that knew
about and participated in the scheme. And that is where I think we have got to
give greater credence to how do we temper what action we take with respect to
the corporate liability, i.e., how much was the corporation involved;
and if it does cooperate, does it have a strong compliance program, did
voluntarily disclose and it is at very low levels, I think we have to take that
into account in determining double or single damage.
MR. SWENSON: But your policy at this point - there is no concrete written
policy that can be pointed to?
MR. DRUCKER: No, there is not.
MR. SWENSON: Do you think that the Defense Department should move in that
MR. DRUCKER: The problem that we have is that in resolutions of these cases,
particularly with the damage aspects of it, the Department of Justice is, both
by its mission and by the agreement that we have with Justice as to how the
program is administered, responsible for those determinations. We have open
discussions with DOJ at very high levels of both the Department of Defense and
Justice in how we are and have been administering this program. So I think that
is one of the issues that is going to be looked at, is the approach to the
monetary resolutions of the case. We may well come out with a final policy.
MR. LYTTON: Could I just comment on that? I think that the DOD's mission is
different than DOJ's. DOD's mission is to stop the fraud, clean up the
companies - a laudable mission. DOJ's policy is to get money. Prosecutors
suffer from a prosecution complex. As one former prosecutor said, "It's an
unnatural act not to prosecute somebody." He's now a defense lawyer and,
of course, has seen the light, has had a lobotomy, as we all have. But I think
in terms of settling civil cases, in my experience dealing with the Department
of Justice, less attention is paid by them, in terms of the amount of the fine,
to what type of compliance program you have than what you would normally have in
any civil settlement; they pay more attention to the strength of the case. And
if you can convince them they don't have a strong case, you're much more likely
to get those damages down than if you go in and say we're really good guys. So
I think that where you get the lower damages as an agreement in a settlement, it
may be more as a result of the weakness of the government's case rather than the
strength of the company's compliance program.
MR. SWENSON: We have a number of more questions, but we really have run out
of time. So I would like to thank the panel and say that I think some of the
issues that have just been raised are a nice segue into our next panel, where we
will have representatives of the Justice Department talking about what their
current policies are. Our thanks to the panel.
Q.	Could an early disclosure to the government, if it erroneously reports an
alleged crime by an employee, lead to a later civil action by that employee? How do employee rights figure into decisions to disclose about employee actions?
A.	Almost any employee can sue his or her employee for anything. It is
possible that an employee who was the subject of a disclosure that turns out to
be incorrect could sue the employer. However, the employer should be able to
argue that it acted in good faith, with a belief as to the truth of the matter
asserted, and there may be an argument that that type of communication has a
limited privilege which would shield it from being the basis for a law suit.
I am not aware of any such lawsuit having been filed, so I can only speculate
on what the result would be.
Q.	In your experience, how does the government see "full cooperation"?
Does it mean full agreement with the government's position (e.g., your
cartoon)? What does full cooperation get you and what does it not affect?
A.	"Full cooperation" is in the eye of the government. It is a very
subjective standard. The assertion of a privilege, the existence of a joint
defense agreement to which the corporation is a party, a disagreement about the
ultimate resolution - civil or criminal - can all be viewed by the government as
a lack of cooperation. And, some prosecutors or enforcement personnel would be
willing to use this as a threat - explicit or implicit - to obtain a result that
they otherwise might not be able to obtain. The thing to remember is that this
is not a level playing field that one might encounter in normal civil
litigation. As a rule of thumb, it is not a bad idea to assume that some
government personnel will construe lack of full agreement with the government's
position as a lack of cooperation.
"Full cooperation" can obviously be important if your company is
being sentenced under the guidelines. In the more normal circumstance, it will
make your life a lot easier, since the government may be less inclined to take a
full pound of flesh, and will probably be more willing to concede that the
company is "presently responsible," and thus can continue to do
Q.	As a former Assistant U.S. Attorney and a current Defense Department (DOD)
employee, I would be interested in the study you referenced as showing DOD
employees 20 times more likely to violate criminal statutes than GE employees. Where may we find your study?
A.	There is no formal study. The statistics were pulled together for me about
five years ago by a paralegal. The statistics themselves are not important. The point is that the fact that a member of an organization, whether large or
small, government or private industry, violates the law does not necessarily
lead to the inescapable conclusion that the organization is evil. Unfortunately, this is the conclusion that some in the media and in the
government jump to when they learn that an employee of a corporation has
Q.	Why is the qui tam statute inconsistent with the sentencing
guidelines and their promotion of compliance -- if an employee discovers grounds
for a qui tam, compliance has failed, right? A meritorious qui tam
action is a sign that a company needs to work harder to incorporate compliance
into its culture. Comment?
A.	The guidelines are inconsistent with the qui tam statute because
while the guidelines encourage and reward a company for having an internal
reporting system that results in the making of a voluntary disclosure , the
qui tam statute offers an employee a huge financial incentive to avoid
the internal reporting mechanism that a company has established. The government
should not actively seek to undermine a corporation's efforts to comply with the
The fact that an employee may think he or she has knowledge of a crime does
not mean that a company's compliance program has failed. No institution in our
society - the government, the churches, or the family - has been able to produce
a perfect society. Zero defects is the goal of every organization. The fact
that it is not achieved does not mean that the program failed. It may simply be
a reflection of basic human nature. If a vaccine can reduce the incidence of a
deadly disease from 30 percent to five percent, does that mean that the vaccine
Q.	Qui tam with its bounty inducement has yielded many times more
dollar resources to the public fisc than has the industry-controlled company
self-governance programs voluntarily disclosed through the Defense Department's
Voluntary Disclosure Program. If bounties work, then what is your problem with
qui tam's obvious success?
A.	Qui tam actions have resulted in many millions of dollars being
recovered by the government. It has also made some private bounty hunter
lawyers multi-millionaires, and it has been a windfall for the bounty hunter
employees. Every dollar these bounty hunters get is one dollar less for the
We need to reexamine what our underlying policy goal is here. Are we trying
to encourage vigorous compliance programs and effective self-policing by
corporations who tell the government when the government has been cheated and
pay the money back? Or are we interested in perpetuating a system where greed
and bounty hunting lawyering are more prized? The present system encourages a
game whereby rich lawyers become richer. That seems to me to be awfully hard to
If we were to adopt a procedure such as I proposed whereby a qui tam
action could not be filed until 60 or 90 days after an employee has brought the
alleged crime or fraud to the attention of the company, the obvious result would
be more voluntary disclosures. A company would have to be nuts or awfully
confident of its legal position not to notify the government in such a
circumstance. The result would be more disclosures, more money to the U.S.
Treasury, and more bounty hunter lawyers looking for some other line of work. Sounds like a win-win-win solution to me.
Robert S. Litt, Deputy Assistant Attorney General, Criminal
Division,U.S. Department of Justice
Ronald A. Sarachan, Chief, Environmental Crimes Section,
Environmental and Natural Resources Division, U.S. Department of Justice
Gary R. Spratling, Deputy Assistant Attorney General, Antitrust
Eugene M. Thirolf, Director, Office of Consumer Litigation, Civil
Division, U.S. Department of Justice
Moderator: Commissioner Wayne A. Budd, U.S. Sentencing Commission
COMMISSIONER BUDD: Ladies and gentlemen, over the last day-and-a-half, we
have been talking about the organizational corporate guidelines, the developing
of effective compliance programs and standards, and the experience that various
corporations have had. We have talked about carrots and sticks. We have
speculated as to what the government wants, what the government is looking for. And now I suppose we will hear firsthand of the experience and the views from
the perspective of the Department of Justice, which, as you know, is the
principal and I suppose the ultimate law enforcement authority in the United
So what are the approaches? What are th