APRIL 2005
White Collar Crime / Criminal Defense
Has United States v. Booker Closed the Book on Corporate
Compliance Programs and Voluntary Cooperation?
With respect to corporations, perhaps the single
biggest impact of the Federal Sentencing Guidelines
is found in their emphasis on corporate compliance
programs and cooperation in governmental
investigations. In United States v. Booker, the
Supreme Court recently determined that the Federal
Sentencing Guidelines are no longer mandatory, and
instead courts are to consult them when determining
sentences. If the Guidelines are what drove many
corporations to develop corporate compliance
programs, will or should corporations rethink the
value of having these programs, as well as
cooperating with the government, now that the
Guidelines are merely instructive? The short answer
to this question is an emphatic “No.” In fact, such
programs may be more valuable than ever precisely
because the Guidelines are no longer mandatory.
There are two primary reasons for this answer. First,
when faced with a criminal investigation, a
corporation’s first and primary objective is to avoid
prosecution of the company. In making a
determination whether to prosecute a corporation,
prosecutors have been and will continue to be
influenced heavily by the corporation’s compliance
programs and its cooperation with the government’s
investigation. Second, events after the Supreme
Court’s decision in Booker indicate that the courts
will continue to apply and probably to follow the
Federal Sentencing Guidelines.
CONSIDERATIONS APPLICABLE TO AVOIDING
PROSECUTION
Since at least 1980, the United States Department of
Justice recognized either implicitly or explicitly that
the presence of a corporate compliance program and/
or cooperation could favorably impact a federal
prosecutor’s decision to decline a prosecution. DOJ
has recently been more specific and explicit in this
regard, in a January 20, 2003 memorandum by thenDeputy Attorney General Larry D. Thompson, entitled
“Principles of Federal Prosecution of Business
Organizations” (the “Thompson Memorandum”). The
Thompson Memorandum lists nine factors to be
considered in determining whether to charge a
corporation, including the nature and seriousness of
the offense, the pervasiveness of the wrongdoing, the
entity’s history of similar conduct, collateral
consequences to persons such as shareholders
resulting from prosecution, and the adequacy of
actions against individuals and civil actions. In
addition, the Thompson Memorandum echoes
considerations found in the Sentencing Guidelines:
the corporation’s timely and voluntary disclosure
of wrongdoing and its willingness to cooperate in
the investigation of its agents, including, if
necessary, the waiver of corporate attorney-client
and work product protection;
the existence and adequacy of the corporation’s
compliance program; and
the corporation’s remedial actions, including any
efforts to implement an effective corporate
compliance program or to improve an existing
one, to replace responsible management, to
discipline or terminate wrongdoers, to pay
restitution, and to cooperate with the relevant
government agencies.
Compliance Programs
According to the Thompson Memorandum, the
“critical factors” in evaluating any corporate
compliance program are “whether the program is
adequately designed for maximum effectiveness in
preventing and detecting wrongdoing by employees
and whether corporate management is enforcing the
program or is tacitly encouraging or pressuring
employees to engage in misconduct to achieve
business objectives.” In other words, the fundamental
questions are “Is the corporation’s compliance
program well designed?” and “Does the corporation’s
compliance program work?”
In answering these questions, the prosecutor is to
consider:
1. The comprehensiveness of the compliance
program;
2. The extent and pervasiveness of the criminal
conduct;
3. The number and level of the corporate
employees involved;
4. The seriousness, duration, and frequency of the
misconduct; and
5. Any remedial actions taken by the corporation
including restitution, disciplinary action and
revisions to corporate compliance programs.
Significantly, this portion of the Thompson
Memorandum is cross-referenced in a footnote to the
relevant sections of the Federal Sentencing
Guidelines. In addition, the Thompson
Memorandum’s discussion refers to In re Caremark,
698 A.2d 959 (Del. Ct. Chan. 1996), the leading case
on corporate compliance programs in the context of
civil liabilities of corporations and their boards of
directors.
Cooperation and V
oluntary Disclosur
e
Voluntary
Disclosure
The Thompson Memorandum addresses a
corporation’s cooperation and voluntary disclosure in
connection with the government’s investigation.
Again this is a consideration that the Department has
looked to since at least 1980 in the context of
exercising prosecutorial discretion, not in relation to
sentencing by a court. The Thompson Memorandum
describes it in more detail and can be viewed as giving
such considerations greater prominence in the context
2 APRIL 2005
of the exercise of prosecutorial discretion. Among the
factors is the corporation’s willingness:
1. To identify the culprits within the corporation,
including senior executives;
2. To make witnesses available;
3. To disclose the complete results of its internal
investigation; and
4. To waive attorney-client and work-product
protection.
With respect to the waiver issue, the Thompson
Memorandum states, “one factor the prosecutor may
weigh in assessing the adequacy of a corporation’s
cooperation is the completeness of its disclosure
including, if necessary, a waiver of the attorney-client
and work-product protections both with respect to its
internal investigation and with respect to
communications between specific officers, directors,
and employees and counsel.” The Thompson
Memorandum goes on to state that such a waiver is
not “an absolute requirement” and is only one factor
in evaluating the corporation’s cooperation.
The Thompson Memorandum also notes that
prosecutors may consider a corporation’s timely and
voluntary disclosure in evaluating the adequacy of
the corporation’s compliance program and its
management’s commitment to the compliance
program. In other words, timely and voluntary
disclosure should help to demonstrate that the
corporation’s compliance program is in place and
working.
CONSIDERATIONS APPLICABLE TO THE
FEDERAL SENTENCING GUIDELINES
As noted above, these same factors are important
under the Federal Sentencing Guidelines in
determining a corporation’s punishment if it is found
guilty of criminal offenses. Chapter 8 of the
Guidelines pertains to sentencing of organizations.
Section 8C2.5 defines the factors entering into a
corporation’s “Culpability Score” in assessing a
Guidelines sentence for the corporation. Pursuant to
that section, a corporation receives credit for an
Effective Compliance and Ethics Program and for
Self-Reporting, Cooperation and Acceptance of
Responsibility.
KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP
Compliance Programs
The Justice Department Reaction
Section 8B2.1 contains the Guidelines’ definition of
an Effective Compliance and Ethics Program. It is
noteworthy that there is a cross-reference to Section
805(a)(2)(5) of the Sarbanes-Oxley Act of 2002 which
requires this provision in the Guidelines. The essence
of the Guidelines’ definition of an Effective
Compliance and Ethics Program is similar to that used
in the Thompson Memorandum, i.e., the essential
questions are: Is the program well designed? Does it
work? The section also contains a detailed outline of
what the Guidelines consider to be important elements
of an Effective Compliance and Ethics Program for
corporations. This outline can be a useful tool for
corporate counsel in implementing and assessing a
corporation’s own compliance program. All of the
factors discussed in this section are consistent with
those discussed in the Thompson Memorandum.
The Justice Department reaction is addressed in our
Client Alert of February 2005. The Department has
made clear that its prosecutors will continue to use the
Guidelines in calculating sentences and will press the
courts to do so as well. Among other things, a recent
memorandum provides that all federal prosecutors
“must”:
Cooperation and V
oluntary Disclosur
e
Voluntary
Disclosure
The Guidelines make clear that, in order to be worthy
of credit, the cooperation of a corporation must be
both timely and thorough. Under the Guidelines, a
prime test of whether the corporation has disclosed all
pertinent information is whether the information is
sufficient for law enforcement personnel to identify
the nature and extent of the offense and the
individuals responsible for the criminal conduct.
Furthermore, “waiver of attorney-client privilege and
of work-product protection is not a prerequisite to a
reduction in culpability score . . . unless such waiver is
necessary in order to provide thorough disclosure of
all pertinent information known to the organization.”
Again, the factors cited by the Guidelines for assessing
cooperation, and their application, are virtually the
same as those in the Thompson Memorandum.
BOOKER AND ITS IMMEDIATE AFTERMATH
The Supreme Court Decision
The Booker decision is addressed in our Client Alert of
January 2005. Although the Supreme Court in Booker
held that the Guidelines were no longer mandatory, it
made clear its expectation that courts would continue
to use the Guidelines in imposing sentences. The
Court noted: “The district courts, while not bound to
apply the Guidelines, must consult those Guidelines
and take them into account when sentencing. . . . The
courts of appeals [will] review sentencing decisions
for unreasonableness.”
3 APRIL 2005
1. “Consult” the Guidelines at the charging stage
and “continue to charge and pursue the most
serious readily provable offenses.”
2. “Actively seek sentences within the range
established by” the Guidelines, keeping in mind
that under the Guidelines, “departures are
reserved for rare cases involving circumstances
that were not contemplated by the Sentencing
Commission.”
3. Preserve the ability of the government to appeal
“unreasonable” sentences.
4. “Continuously assess the impact” of the
Supreme Court’s decision by continuing
to follow “the existing requirements for
reporting adverse decisions set forth in the U.S.
Attorney’s Manual.”
In other words, District Court judges are being put on
notice that the Justice Department
will pursue aggressively what it views to be
“unreasonable” and “adverse” decisions on
sentencing.
The Reaction of the Courts
A recent decision by the United States Court of
Appeals for the Second Circuit, almost immediately
after Booker, makes clear that courts in the Second
Circuit are expected to continue to apply the
Guidelines in determining sentences. See United
States v. Crosby, No. 03-1675 (2d Cir. Feb. 2, 2005).
Among other things, the court stated that sentencing
judges:
1. “Must ‘consider’ the applicable Guidelines range
in selecting a sentence.”
2. Normally will have to determine the applicable
KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP
Guidelines range in selecting a sentence.
3. May find all the facts necessary for determining
either (i) a “Guidelines sentence”:
– a sentence within the applicable Guidelines
range or within permissible departure
authority, or (ii) a “non-Guidelines sentence”
– a sentence that is neither within the
applicable Guidelines range nor within
permissible departure authority.
4. The court should then decide whether to impose
a Guidelines sentence or a non-Guidelines
sentence.
Moreover, the court warned that the Guidelines are
more than just “casual advice, to be consulted or
overlooked at the whim of a sentencing judge … It
would be a mistake to think that, after Booker/Fanfan,
district judges may return to the sentencing regime
that existed before 1987 and exercise unfettered
discretion to select any sentence within the applicable
statutory maximum and minimum.”
Federal courts appear to be continuing to use the
Guidelines after Booker. According to a recent report
by the Chairman of the Federal Sentencing
Commission to a House subcommittee, of the 692
post-Booker cases for which complete sentencing
information was available, 63.9% were within the
applicable Guidelines range. In prior years,
approximately 64% were within the Guidelines range.
prosecutor as volitional, and therefore more
meaningful, on the part of the corporation.
In any event, it cannot be doubted that
implementation of an effective compliance program is
good business and, so long as the program is properly
monitored and administered, is well worth the
investment should the corporation find itself in the
government’s crosshairs.
In summary, corporate counsel would be well advised
to continue to pay close attention to the corporation’s
compliance programs, to make sure that they are in
place, are well designed and are working. And if the
unwelcome specter of a criminal investigation should
appear at the corporation’s door, corporate counsel
must pay close and immediate attention to the
company’s timely and complete cooperation with that
investigation.
Eva M. Ciko
eciko@klng.com
212.536.3905
Barry M. Hartman
bhartman@klng.com
202.778.9338
Eugene R. Licker
elicker@klng.com
212.536.3916
Strategies for Counsel
The fact that the Sentencing Guidelines are no longer
mandatory for the courts may elevate the importance
of implementation of compliance programs and of
voluntary cooperation for corporations facing criminal
investigations. Under the Guidelines, such actions
were almost mandatory, and their absence could be
quite damning. With the Guidelines becoming
instructive rather than mandatory, compliance
programs and cooperation may well be viewed by a
4 APRIL 2005
William O. Purcell
wpurcell@klng.com
212.536.3922
KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP
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