Business Crime: What To Do When the Law Pursues You

U.S. prosecutors are imposing giant fines and imprisoning managers when regulatory compliance problems arise. Know how to protect your company and yourself when a legal crisis hits.

In 1997, U.S. federal agents launched a series of no-warning searches at the offices of Columbia/HCA, the largest forprofit health care provider in the United States, looking for evidence of improper charges billed to the federal government’s Medicare program. The chairman’s public comment that “government investigations are matter-of-fact in health care” sat poorly with the company’s directors, and the chairman was soon gone. Years later, the investigation continues. Most of senior management has been replaced. Several executives have been indicted; two are appealing jail sentences. Other investigations and suits have been launched against the company. Institutional investors are suing the board. The company’s stock has been as low as 40% of its previous high.

In 1996, food-processing giant Archer Daniels Midland (ADM) pled guilty to price-fixing charges. Key evidence had been gathered through an ADM manager who secretly recorded business meetings for the government. ADM was fined $100 million and promised to cooperate in the prosecution of its executives. Subsequent convictions included the vice chairman, who is now appealing a two-year jail sentence.

After several waves of bank failures in the U.S. savings and loan industry during the 1980’s, Congress funded the Office of the Special Counsel for Financial Institution Fraud, which coordinated a massive prosecutorial effort. Criminal convictions were obtained against 5,506 defendants; jail sentences were meted out in 3,793 cases. Among those convicted were 1,588 bankers, including 411 bank CEOs, chairmen of the board, or presidents.1

In the United States, cases such as those mentioned above are becoming more common. Every senior manager should expect to confront, at some time, a serious allegation that his or her company and some of its managers have committed a crime—not a crime like stealing, which could arise in a nonbusiness setting, but a violation of the criminal provisions by which the complex regulations governing U.S. business are sometimes enforced. Few companies can avoid these regulations, which deal with securities, antitrust, the environment, government procurement, international trade, financial services, health care, and other aspects of business. The criminal provisions are invoked more often than the public record suggests, because many disputes with government that are officially noncriminal involve threatened criminal proceedings.

A serious allegation of criminality is a crisis for the corporation and often also for the managers who direct the corporation’s response.

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References

1. U.S. Department of Justice Special Counsel for Financial Institution Fraud, “Financial Institution Fraud—Special Report” (1995). See table at p. 20 (“Major Financial Institution Fraud Cases”).

2. For a current statement of prosecutorial policy, see:

“Federal Prosecution of Corporations,” internal U.S. Department of Justice document circulated under a memorandum from Eric Holder dated 16 June 1999 (www.bna.com/prodhome/leg/guidance.html).

3. SAS No. 82 on “Consideration of Fraud in a Financial Statement Audit,” promulgated by the American Institute of Certified Public Accountants, effective for audit periods ending on or after 15 December 1997 (reproduced in Journal of Accountancy, April 1997, pp. 88–99).

4. See: In re Caremark International Derivative Litigation, 698 A.2d 959 (Court of Chancery of Delaware, 1996).

5. See reference 2.

6. For crisis management with a legal bent, see: H. Pitt and K. Groskaufmanis, “When Bad Things Happen to Good Companies: A Crisis Management Primer,” Cardozo Law Review, volume 15, January 1994, pp. 951–969.

7. U.S. Securities and Exchange Commission Release Nos. 34-39156 (dealing with the company and ordering it to cease and desist from violating the securities laws) and 34-39157 (dealing with individual officers and directors and taking no formal action) (both dated 30 September 1997), reproduced at Federal Securities Law Reports (CCH), para. 85,963.

8. In re Caremark, p. 971 (see reference 4).

9. For a discussion of the limits of a legalistic approach, see:

L.S. Paine, “Managing for Organizational Integrity,” Harvard Business Review, volume 72, March/April 1994, pp. 106–117.