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Sunday, April 19, 2015
Deferred Prosecution Agreements: Right Problem, Wrong Fix
Yglesias has a good write-up of the problems with regulating big financial firms, but he (and Elizabeth Warren) get to the wrong solutions.
To paraphrase, the problem is that many regulated firms are effectively judgment proof. We may threaten sanctions against accounting firms that commit fraud, or chemical firms that dump waste into the river, or banks that swindle their counter-parties. The problem is that the typical criminal sanction is too big, since indictment triggers a run on the firm by its employees, trading partners, and (eventually) creditors. Prosecutors have therefore basically stopped indicting, leading to the rise of deferred-prosecution agreements, as nicely chronicled by my law school classmate Brandon Garrett.
For Yglesias, and to lesser degree Garrett, the deferred prosecution agreement is too wimpy. Since firms know that the government won’t indict, they have no reason to cave, leading to quite defendant-friendly deals. This leads to under-deterrence. Yglesias endorses Sen. Warren’s proposed solution, which is to credibly put the threat of indictment back on the table.
But prosecutors are not wrong to avoid indictment, since that leads to over-deterrence. Over-deterrence is bad not only for firms that sink too much money into compliance, but also for society. It’s like the problem of medieval justice: if the sentence for every crime is hanging, bandits have no marginal incentive to avoid killing their victims.
My own view, as I sketch in this new draft, is that the problem is caused by the choice of ex post remedies. When regulators are facing defendants who are, in effect, judgment proof, the better solution is to switch to other incentives. So, for example, we might impose a tariff on chemicals that would be hazardous if dumped, or use anti-trust to keep banks too small to impose systemic risks. Obviously, there’s a tradeoff: not all firms will dump the chemical. A key part of my argument is that regulators can adjust their ex ante prices to account for expected variations in ex post behavior; firms that are at higher risk of dumping pay more for the chemical.
(Cross-posted at the Law & Economics Prof Blog)
Posted by BDG on April 19, 2015 at 05:28 PM in Article Spotlight, Criminal Law | Permalink
Comments
BDG,
That assumes that the only alternatives to prosecution are not harsh enough. My impression is that non-prosecution penalties can run the gamut from under-to-overly harsh, with some falling in between and being roughly appropriate.
In other words, from the fact that the relevant parties are aware that one non-optimal regulatory tool will not be used, it does not follow that regulation will not be optimal. That conclusion is in tension with the premise, if anything.
Posted by: anon321 | Apr 21, 2015 12:51:50 PM
I wonder if there are limits as to what one can draw from Markoff's paper (the Anderson "myth" paper linked and cited by Mike Koehler in the comments above). As I recall, Markoff found that the companies that were formally charged by prosecutors (as opposed to receiving DPA's or NPA's) did not fold or suffer major harms. The obvious question here is whether selection bias undermines any conclusions one might draw from these findings. (I.e., did prosecutors avoid indicting those companies that would have been overly harmed by an indictment?) Although Markoff addresses selection bias, it is not clear to me that he sufficiently dispels it as an explanation for his results. So I would be interested to hear from the more empirically inclined on this point.
Moreover, there is a different problem that tends to get buried: that is the difference between the filing of an Information (whereby the defendant waives indictment) and a true "indictment" whereby the prosecutor presents information before at grand jury and seeks a "true bill," with no cooperation from the corporate defendant. In the corporate context, the latter is quite rare - precisely because the costs of filing an *Indictment* against a parent corporation *are* in fact high.
The filing of an Information requires the defendant's consent to waive indictment; accordingly, in these types of cases, when an Information filed, it signals the effective resolution of the case (i.e., Company X wouldn't be waiving indictment unless it already had agreed on the terms of its guilty plea). Moreover, the Information (or an indictment) can be filed against a subsidiary of the company, which effectively limits collateral effects. If the government files an Information, it can get assurances first as to how the Information will affect the parent's ongoing business. Court Golumbic and Albert Lichy have a very nice discussion of the use of this approach in an article they published in the Hastings Law Journal. Here is the SSRN link (go to pp. 141-42 for the relevant discussion):
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2443554
Finally, regarding Brian's ex ante regulation argument (a paper I just happened to come across a few days ago and which I very much enjoyed reading), I have an earlier piece entitled Choosing Punishment that offers a depressing take on why our society is likely to favor ex post punishment over ex ante regulation:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2030275
Posted by: Miriam Baer | Apr 20, 2015 3:39:57 PM
Anon, it's: 1. officials believe that corporate prosecutions have results that are too harsh; 2. regulated parties learn that officials are reluctant to pursue prosecutions; 3. regulated parties adjust their expectations of enforcement probability downwards.
Posted by: BDG | Apr 20, 2015 3:12:00 PM
BDG, can you explain how under-deterrence results from the strategic situation you describe between prosecutors and corporations? I'm not sure I follow . . .
Posted by: anon321 | Apr 20, 2015 1:50:48 PM
Thanks, Brad & Mike. Brad, my draft discusses individual liability. Basically, the concern is that the firm can usually offset any incentives set up by the government, and the firm has more information and more flexibility than Congress. Can you pay someone enough to offset the risk of jail? An empirical question, to be sure, but I suspect the answer is often yes. Mike, I wasn't aware of that study, so thanks for the link. The point remains that if officials believe that corporate prosecutions over-deter, and corporate actors know they believe that (hold on, I'm diagramming this...ok, got it), then there's still under-deterrence. So I guess we agree more people should read your blog...
Posted by: BDG | Apr 20, 2015 9:43:33 AM
The "Arthur Anderson Effect" has been debunked as a myth.
http://www.fcpaprofessor.com/arthur-anderson-and-the-myth-of-the-corporate-death-penalty
NPAs and DPAs are problematic on both sides of the spectrum. Under-prosecution of conduct and overprosecution of conduct.
http://www.fcpaprofessor.com/assistant-attorney-general-breuers-unconvincing-defense-of-dpas-npas
http://www.fcpaprofessor.com/assistant-attorney-general-caldwells-unconvincing-defense-of-dpas-npas
http://www.fcpaprofessor.com/doj-prosecution-of-individuals-are-other-factors-at-play-4
http://www.fcpaprofessor.com/doj-prosecution-of-individuals-then-vs-now
Posted by: Mike Koehler | Apr 19, 2015 9:55:43 PM
What about focusing on the *people* responsible for criminal misbehavior rather than the artificial entity that they control? I don't see any reason Athur Andersen couldn't have survived Joseph Berardino going to prison.
As I understand it the was a deliberate decision to shift white collar prosecutions from individuals to corporations because it is easier to 'win' such case. But given that such victories look more and more empty, perhaps it is time to rethink that.
A common retort is that such cases are very difficult to win because of the difficult nature of proof of intent required under various statutes. In that case reformers should be looking at changing the laws. Just as RICO and other laws were put into place to enable dismantling mafia crime families so to laws can be written to make it easier to prosecute criminals who do tremendous harm to huge numbers of people via the boardroom.
Posted by: brad | Apr 19, 2015 6:24:14 PM
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