Carrots and Sticks - Post-Enron Regulatory Initiatives

8/13/2019 Carrots and Sticks - Post-Enron Regulatory Initiatives

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“Carrots and Sticks”:Post-Enron Regulatory Initiatives

Pamela H. Bucy†

Introduction.......................................................................279I. Recent Regulatory Initiatives to Combat

Corporate Corruption ..............................................281 A. Legislative Initiatives .......................................281

1. The Sarbanes-Oxley Act of 2002..................281a. New Crimes and Tougher Sentences...... 281

(1) New Crimes ................................282(2) Stiffer Sentences for Existing

Crimes ........................................289

(3) New Duties for Counsel .............2902. The Feeney Amendment of the

“PROTECT” Act............................................291

B. Recent Initiatives by the Executive Branch Addressing Corporate Corruption.....................293

1. The “Ashcroft Memorandum” ......................2932. The “Thompson Memorandum” ...................293

C. Recent Initiatives by Administrative Agencies Addressing Corporate Corruption .....295

1. Securities and Exchange Commission’sPromulgation of “Standards for

Professional Conduct for Attorneys”............295a. Reporting “Up the Ladder” .....................295b. “Noisy Withdrawal”.................................297

† Bainbridge Professor of Law, University of Alabama. The author mostgratefully acknowledges the support of Dean Ken Randall, the University of

Alabama Law School Foundation and the Ball Family Fund. The author thanksKevin Davidson and Bradley Hayes for their research assistance. The authorexpresses her deepest gratitude to the Buffalo Criminal Law Center; ProfessorMarkus Dirk Dubber, Buffalo School of Law and Director, Buffalo Criminal LawCenter; and Joseph Schneider, Managing Editor of the Buffalo Criminal Law

Review for their graciousness, hospitality and vision in creating one of the bestsymposia I have had the pleasure of attending.




278 BUFFALO CRIMINAL LAW REVIEW [Vol. 8:277

2. United States Sentencing Commission’s Amendments to the Sentencing

Guidelines.....................................................299a. Increased Range for Obstruction of

Justice Offenses ......................................299b. Increased Range for Fraud Offenses ......301c. Amendments to Organizational

Sentencing Guidelines ............................302

(1) Guidelines AddressingCorporate Compliance Plans......303

(2) Guidelines Regarding anOrganization’s ReportingRequirement...............................304

D. Recent Initiatives by the American Bar

Association.........................................................304III. The Two Paths Chosen by the Recent Regulatory

Initiatives Aimed at Corporate Corruption.............306 A. Path One: Drafting Insiders Who Know

What Is Going On..............................................306

B. Path Two: Bad Things That Happen toInsiders Who Don’t Assist Law Enforcement...310

IV. Will the Regulatory Initiatives Work? ....................313 A. Reasons to Think the Reforms Will Work ........313B. Reasons to Think the Reforms Will Not Work .315C. A Helpful Option ...............................................318

Conclusion .........................................................................322




2004] “CARROTS AND STICKS” 279

INTRODUCTION

Recent corporate scandals such as Enron,1 Adelphia,2 HealthSouth,3 Tyco,4 and Worldcom5 have led to a spate ofregulatory initiatives, including passage of the Sarbanes-Oxley Act of 2002,6 that have changed the landscape ofcorporate governance. The intended effect of theseinitiatives is enhanced integrity and public confidence in

American financial markets.7 There also will beunintended effects of these regulatory initiatives. Therealways are.

This article reviews these regulatory initiatives, theirintended impact and their likely unintended consequences.Part one discusses the regulatory initiatives passed since2002 to address corporate corruption. It is interesting tonote the variety of sources responsible for these initiatives.These reforms come from legislative, executive, andadministrative governmental bodies, as well as the

American Bar Association. Part one discusses thefollowing: (1) Legislative Initiatives: (a) The Sarbanes-Oxley Act of 2002, which creates new crimes8 and longerprison sentences for existing crimes,9 and places greaterdemands on corporate counsel.10 (b) The “PROTECT” Act,11 specifically, the Feeney Amendment12 which limitsdownward departures. Downward departures have been

1. See Pamela H. Bucy, Private Justice, 76 S. Cal. L. Rev. 1, 9-10 (2002)[hereinafter Bucy, Private Justice].

2. See Kathleen Brickey, From Enron to WorldCom and Beyond: Life andCrime after Sarbanes-Oxley, 81 Wash. U. L.Q. 357, 382, app. A (2003).

3. Id. at 389-91.4. Id. at 399-400.5. Id. at 400-01.6. Pub. L. No. 107-204, 116 Stat. 745 (2002).7. S. Rep. No. 107-205 (2002).8. 18 U.S.C. §§ 1348, 1350, 1513(e), 1519 (2004).9. Sarbanes-Oxley, Pub. L. No. 107-204 § 903 (2002) (amending 18 U.S.C.

§ 1341 (mail fraud) and § 1343 (wire fraud)).10. Id. § 906 (2002) (creating 18 U.S.C. § 1350).11. Prosecutorial Remedies and Tools Against the Exploitation of Children

Today Act of 2003 (PROTECT Act), Pub. L. No. 108-21, 117 Stat. 650, 805 (2003).12. Protect Act Pub. L. No. 108-21 § 401(m), 18 U.S.C. § 3553.





the major way federal criminal defendants obtainsentencing leniency;13 reducing their availability meanscriminal sentences will be stiffer. (2) Executive Initiatives:

(a) The “Ashcroft Memo,”14 an internal U.S. Department ofJustice directive that instructs federal prosecutors tocharge, and allow pleas of guilt only to the most serious,provable offenses. (b) The “Thompson Memo,”15 anotherinternal DOJ directive, that outlines factors federalprosecutors should consider when deciding whether tocharge organizational entities with crimes. Greatercooperation with law enforcement is a key factor inavoiding or minimizing criminal liability. (3)

Administrative Initiatives: (a) Rules issued by theSecurities and Exchange Commission (SEC) governingattorneys who practice before the Commission.16 Theserules require greater vigilance in reporting corporatewrongdoing. (b) Amendments to the United StatesSentencing Guidelines (“USSG”) that also require greatercooperation with regulators.17 (4) Private Initiatives:

Amendments by the American Bar Association to theModel Rules of Professional Conduct requiring a moreproactive role for corporate counsel in policing corporatemisconduct.18

The intended effect of each of the above initiatives is,of course, enhanced honesty, accountability, and public

13. Cf. Nina Marino, Interpreting Feeney—A Defense Perspective, A.B.A.National Institute on White Collar Crime app. P-1 (2004) (course materials).

14. Memorandum from Attorney General John Ashcroft to All FederalProsecutors, Department Policy Concerning Charging Criminal Offenses,Disposition of Charges, and Sentencing (Sept. 22, 2003), available athttp://news.findlaw.com/hdocs/docs/doj/ashcroft92203chrgmem.pdf (last visitedNov. 29, 2004) [hereinafter Ashcroft Memorandum].

15. Memorandum from Deputy Attorney General Larry D. Thompson to UnitedStates Attorneys, Principles of Federal Prosecutions of Business Organizations (Jan.20, 2003), available at http://www.usdoj.gov/dag/cftf/business_organizations.pdf(last visited Nov. 29, 2004) [hereinafter Thompson Memorandum].

16. Sarbanes-Oxley, Pub. L. No. 107-204 § 307 (2002) (Congress’s directive tothe SEC); 17 C.F.R. § 205.

17. U.S. Sentencing Guidelines Manual ch. 8 (1998).18. Model Rules of Prof’l Conduct R. 1.6 (revealing client confidence) and

1.13(b) (requiring counsel to report organizational wrongdoing within theorganization) (2004).





confidence in American financial markets. Part two of thisarticle highlights the two ways each of these initiatives haschosen to reach this goal: they either increase the

consequences for those who commit intentional acts ofcorporate fraud or they draft industry insiders, includingcorporate counsel, into serving as the eyes and ears of lawenforcement. Some choose both paths. The common pathschosen do not appear to result from coordination amongpolicy makers but rather, a function of conventionalwisdom.

Part three of this article assesses the likely outcome ofthese regulatory initiatives. There are reasons to believethey may be successful in taming corporate corruption. Onthe other hand, there are reasons to believe that they willinterfere with effective corporate governance. Part three ofthis article concludes by offering suggestions for improvingupon the regulatory design typified in all of these reformefforts.

I. RECENT REGULATORY INITIATIVES TO COMBAT

CORPORATE CORRUPTION

A. Legislative Initiatives

1. The Sarbanes-Oxley Act of 200219

a. New Crimes and Tougher Sentences

Sarbanes-Oxley created four new crimes, alladdressing financial frauds;20 raised the statutory term ofimprisonment for existing offenses already employed toprosecute financial frauds; and directed the United StatesSentencing Commission to “review” (fair translation:“increase”) existing sentencing guidelines for certainexisting white collar fraud offenses.21 The net effect ofthese provisions of Sarbanes-Oxley raises the stakes for

19. Pub. L. No. 107-204, 116 Stat. 745 (2002).

20. 18 U.S.C. §§ 1348, 1350, 1513(e), 1519 (2004).21. Sarbanes-Oxley, Pub. L. No. 107-204 § 905(2002).





those who commit financial thievery, those who assist in it,and those who fail to alert authorities about it.

(1) New Crimes

(a) 18 U.S.C. § 1519: Destruction, Alteration, orFalsification of Records in Federal Investigations and

Bankruptcy22

Section 1519, which carries a term of imprisonment ofnot more than twenty years, makes it a crime to: (1)knowingly, (2) alter, destroy, mutilate, conceal, cover up,falsify or make any false entry, (3) in any record, documentor tangible object, (4) with the intent to impede, obstruct orinfluence an investigation or proper administration of anymatter within the jurisdiction of any department or agencyof the United States or any case filed under title 11[bankruptcy code] or in relation to or contemplation of anymatter or case.23

There are four notable features of this offense. First, itis expansive. The conduct it covers is broad: to “alter,destroy, mutilate, conceal, cover up, falsify or make anyfalse entry of records at issue in federal investigations.”

And, its jurisdictional reach is broad: it applies to privateas well as public companies. Second, this offense containsa “dual” intent element: it requires proof of “general intent”

(“knowingly”) as well as proof of specific intent (“intent toimpede, obstruct or influence an investigation”). Third,this offense closes loopholes in existing obstruction of

justice offenses. Sections 1512 (title 18, United StatesCode) and 1513, for example, do not cover documentdestruction;24 sections 1503,25 1505,26 1512,27 and 151928

22. Created by Sarbanes-Oxley, Pub. L. No. 107-204 § 802 (2002).23. 18 U.S.C. § 1519 (2004).24. 18 U.S.C. §§ 1512, 1513 (2004) (apply to retaliation against witnesses,

victims and informants).25. 18 U.S.C. § 1503 (2004) (applies to grand jury or court proceedings).26. 18 U.S.C. § 1505 (2004) (applies to matters before departments, agencies

and committees).27. 18 U.S.C. § 1512 (2004) (applies to matters occurring while an “official





apply only when a proceeding or investigation is ongoing atthe time of the conduct. Lastly, the term of imprisonmentfor violations of this offense, not more than twenty years, is

unusual. Before Sarbanes-Oxley, most felonies in thefederal criminal code imposed a five year maximum term ofimprisonment.

(b) 18 U.S.C. § 1513(e): Retaliation against Informants29

Section 1513(e), which carries a term of imprisonmentof not more than ten years, makes it a crime to: “(1)knowingly, (2) with intent to retaliate, (3) take any actionharmful to any person, including interfering with lawfulemployment or livelihood, (4) for providing to a lawenforcement officer, (5) truthful information relating to thecommission or possible commission of any federal offense.”

The notable features of this offense are its “dual”intent element (“knowingly” and “intent to retaliate”), itsten year cap on imprisonment (not as onerous as 18 U.S.C.§ 1519 but longer than most federal felonies), and itsnarrow scope. This provision is narrow in two respects:First, it prohibits retaliation only when the personproviding information about a possible offense gives theinformation to a “law enforcement officer.”30 Providinginformation about fraud to the media, for example, wouldnot be covered. Nor would § 1513(e) apply when

information is provided internally, within corporate ranks.Second, in any situation involving complex fraud,misinformation almost always is intertwined with accurateinformation. Section 1513(e) applies only when “truthful”information is provided; thus, its efficacy will bequestionable when, as will almost always be the case,accurate and inaccurate information is provided. In tworespects § 1513(e)’s scope is broad. Like newly created

proceeding” is pending).28. 18 U.S.C. § 1519 (2004) (applies to investigations within the “jurisdiction

of any department or agency of the United States).

29. Sarbanes-Oxley, Pub. L. No. 107-204 § 1107 (2002).30. 18 U.S.C. § 1513(e) (2004).





§ 1519, § 1513(e) applies to both private and publiclytraded companies. Also, § 1513(e)’s protection extends tonon-employees as well as employees. All § 1513(e) requires

is that a defendant “interfere with” a person’s “lawfulemployment or livelihood.” Thus, for example, interferingwith a competitor’s livelihood by defaming the competitorin retaliation for the competitor’s reporting wrongdoing to alaw enforcement officer would fall within § 1513(e).

As a side note, it is interesting to compare the coverageof § 1513(e) to the private cause of action also created bySarbanes-Oxley for persons who have been retaliatedagainst for reporting corporate wrongdoing. Section 806 ofSarbanes-Oxley creates a private cause of action, found at18 U.S.C. § 1514A, for persons who are discriminatedagainst by their employers because they reported corporatewrongdoing.31 To seek relief under § 1514A, a plaintiffmust first file a complaint with the United States Secretaryof Labor. If the Secretary of Labor “has not issued a finaldecision within 180 days of the filing of the complaint,” theplaintiff may bring an action at law or equity in federaldistrict court.32 There is a ninety day statute of limitationfrom the date of the violation.33 A prevailing plaintiff is

31. Section 806 of Sarbanes-Oxley created 18 U.S.C. § 1514A, which providedthat:

• any “person who alleges discharge or any other discrimination”

• against any publicly traded company or any “officer, employee, contractor,subcontractor, or agent of such company” that “may discharge, demote,suspend, threaten, harass, or in any manner discriminate against an employeein the terms and conditions of employment.”• “because of any lawful act done by the employee: to provide information,cause information to be provided, or otherwise assist in an investigationregarding any conduct which the employee reasonably believes constitutes [a

violation of numerous listed financial and security crimes]; or• “when the information or assistance is provided to or the investigation isconducted by

(A) a Federal regulatory or law enforcement agency;(B) any Member of Congress or any committee of Congress; or(C) a person with supervisory authority over the employee . . .

or to file, cause to be filed or assist in a proceeding relating to [a violation ofnumerous listed financial and security crimes.]

32. Id. § 1514A(b).33. Id. § 1514A(b)(2)(D).





entitled “to all relief necessary to make the employeewhole,” and is specifically entitled to “reinstatement withthe same seniority status that the employee would have

had, but for the discrimination, . . . back pay, with interest;and compensation for special damages, including litigationcosts, expert witness fees, and reasonably attorney fees.”34

Aside from the obvious point that § 1513(e) is a crimeand § 1514A is a civil cause of action, there are severalnotable differences between the two sections. First,coverage provided by § 1514A, the civil cause of action, isbroader than that provided by § 1513(e)’s crime. Unlike 18U.S.C. § 1513(e), which applies only when an individualreports wrongdoing outside corporate ranks to a lawenforcement officer,35 § 1514A covers discriminatory actionstaken against employees who report the wrongdoinginternally within the organization.36 Also, whereas§ 1513(e) requires proof of intent by a defendant,37 § 1514Arequires no proof of intent by a defendant beyondestablishing causation.38 In other respects, however, thecivil cause of action in § 1514A is narrower than the crimein § 1513(e). Section 1513(e) applies to publicly traded andprivate companies,39 while § 1514A applies only to publiclytraded companies.40 Also, section 1513(e) protects againstaction harmful “to any person,”41 while § 1514A protectsonly employees.42

As discussed infra, compared to other civil causes of

action designed to protect corporate whistleblowers,§ 1514A is fairly anemic. Unlike the civil False Claims Act(FCA),43 for example, which applies to false claims

34. Id. § 1514A(c)(1) & (2).35. 18 U.S.C. § 1513(e) (2004).36. 18 U.S.C. § 1514A(1)(C) (2004).37. Section 1513(e) requires proof that a defendant acted “knowingly, with

the intent to retaliate.”38. Section 1514A requires proof that the discrimination action was taken

“because of any lawful act done by the employee.”39. 18 U.S.C. § 1513(e) (2004).40. 18 U.S.C. § 1514 (2004).41. 18 U.S.C. § 1513(e) (2004).

42. 18 U.S.C. § 1514 (2004).43. 31 U.S.C. §§ 3729-3733.





submitted to the federal government, § 1514A presents acumbersome procedural process,44 minimal damages,45 limited ability to qualify as a plaintiff,46 and a limited

statute of limitations.47

(c) 18 U.S.C. § 1350: Failure of Corporate Officers to CertifyFinancial Reports48

Section 1350, which carries a ten year maximum termof imprisonment for “knowing”49 violations and a twentyyear maximum for “wilful” violations,50 has garneredconsiderable publicity.51 This section applies only to

44. Under § 1514A, plaintiffs must file with the Secretary of Labor and mayproceed on their own only after waiting 180 days to allow the Secretary to filesuit. 18 U.S.C. § 1514A(b)(1)(A). There is no such requirement under the civilFalse Claims Act.

45. Under § 1514A, the non-equity relief plaintiffs may obtain is limited todouble damages, reimbursement of litigation costs, and reinstatement, 18 U.S.C.§ 1514A(c). Under the civil False Claims Act, the non-equity relief plaintiffs mayobtain can be up to 30 percent of the judgment as well as reimbursement oflitigation costs. FCA judgments are comprised of treble damages and significantpenalties, in most cases, and can be quite large. For example, recent judgmentsin FCA qui tam cases include an $875 million settlement from TAPPharmaceuticals, 55 Healthcare Fin. Mgmt. 10 (2002); a $745 million settlementwith DCA Healthcare Corporation to resolve some of the alleged FCA violationspending against HCA; a $385 million settlement with National Medical Care,Inc.; a $325 million settlement with SmithKline Beecham Clinical Laboratorie; a$325 million settlement with National Medical Enterprises; and a $110 millionsettlement with National Health Laboratories. John T. Boese, Civil False Claims

and Qui Tam Actions § 1.05[A] (2004).46. Section 1514A requires that in order to have standing plaintiffs must be

damaged from the conduct at issue, 18 U.S.C. § 1514A(b)(1). The civil FalseClaims Act confers plaintiff standing to anyone with information of a violation.

Vermont Agency of Natural Res. v. United States, 529 U.S. 765, 773 (2000).47. Section 1514A provides a ninety-day statute limitation from the date of

the violation, 18 U.S.C. § 1514A(b)(2)(D). The civil False Claims Act provides fora six-year statute of limitations from the date of the violation or three years “afterthe date when facts material to the right of action are known or reasonablyshould have been known by the official of the United States charged withresponsibility to act in the circumstances, but in no event more than 10 yearsafter the date on which the violation was committed, whichever occurs last.” 31U.S.C. § 3731(b).

48. Sarbanes-Oxley, Pub. L. No. 107-204 § 906 (2002).49. 18 U.S.C. § 1350(c)(1) (2004).

50. Id. § 1350(c)(2).51. W. Warren Hamel, Thomas J. Kelly, Jr. & Kathleen S. Dolan, They Got





publicly traded companies,52 and requires that a company’schief executive officer and chief financial officer certify thatinformation contained in reports filed with the SEC “‘fairly

presents’ the financial condition and results of businessoperations” of the issuer.53 The true impact of thisprovision remains to be seen. As one commentator hassaid, “this provision, single-handedly, may re-shape thestructure of American corporations.”54

Section 1350 requires more than compliance withGenerally Accepted Accounting Principles (GAAP) andmore than an absence of falsity or fraud. Its requirementthat company reports convey a “fair presentation of thefinancial condition of the issuer” goes beyond GAAP or evenexisting fraud and false statement offenses.55 Avoidingchicanery is not enough; under § 1350, a corporate officerwill go to prison for failing to tell about all possiblefinancial problems, failing to reveal all possible financialproblems, and failing to disclose all possible financialproblems. For a corporate official to confidently certifyreports under the “fair representation” standard, she mustrely upon the processes and people who generated thereports. To acquire this level of confidence many corporateexecutives have, since the passage of Sarbanes-Oxley,instituted top-to-bottom assessments of corporate systemsfor collecting, categorizing and compiling financial data.56

Tougher, Legal Times, Oct. 7, 2002, at 34 [hereinafter They Got Tougher].52. 18 U.S.C. § 1350(a) (2004).53. 18 U.S.C. § 1350(b) (2004).54. They Got Tougher, supra note 51, at 34.55. See, e.g., 18 U.S.C. § 287 (requires a false claim), § 1001 (requires a false

statement or concealment of a material fact), § 1341 (requires fraud or false orfraudulent pretenses).

56. They Got Tougher, supra note 51, at 34 (“Companies, both large andsmall, must now devise systems that will allow the officers who must sign thefinancial reports to rely absolutely on the process and people by which the

information for the reports was generated.”).





(d) 18 U.S.C. § 1348: Criminal Penalties for DefraudingShareholders of Publicly Traded Companies57

Section 1348, which carries a twenty-five yearmaximum term of imprisonment, makes it a crime to: (1)knowingly, (2) execute or attempt to execute a scheme orartifice to defraud any person in connection with anysecurity of any issuer, or to obtain money or property inconnection with the purchase or sale of securities by meansof false or fraudulent pretenses, representations orpromises.58

This “mail fraud hybrid” offense is extremely broad inthree respects. First, whereas 18 U.S.C. § 1350, the newlycreated certification offense, applies only to those who signreports filed by publicly traded companies, § 1348 appliesto any effort to defraud those others who deal with publiclytraded companies. Thus, § 1348 will apply to oralconversations, informal reports, presentations and the like,not just official reports filed with the SEC.59 Second, likethe mail,60 wire,61 and bank fraud62 “scheme to defraud”statutes, § 1348 includes unsuccessful and nascent effortsto defraud since a “scheme or artifice to defraud”encompasses early, preliminary plans to defraud.63 Third,the mens rea element in § 1348 is fairly minimal, for acriminal offense. Unlike the other new crimes created bySarbanes-Oxley which contain a specific intent element,64

57. Sarbanes-Oxley, Pub. L. No. 107-204 § 807 (2002).58. 18 U.S.C. § 1348 (2004).59. 18 U.S.C. § 1348 applies to anyone who defrauds or attempts to defraud

anyone “in connection with” any publicly traded company, § 1348(1), or “inconnection with the purchase or sale” of a publicly traded company, § 1348(2).

60. 18 U.S.C. § 1341 (2004).61. 18 U.S.C. § 1343 (2004).62. 18 U.S.C. § 1344 (2004).63. While the mails or interstate carrier (§ 1341) or interstate wire

communication (§ 1343) must be used before the crime is complete, the “scheme todefraud” need not be complete or successful. See, e.g., United States v.

Andreadis, 366 F.2d 423, 431 (2d Cir. 1966); Byron v. United States, 273 F. 769,772 (9th Cir. 1921).

64. 18 U.S.C. § 1519 and 18 U.S.C. § 1513(e), by comparison, require proof of

specific intent, and § 1350 includes an optional “wilfulness” (specific intent)requirement. See, e.g., Cheek v. United States, 498 U.S. 192, 201 (1991).





§ 1348 requires only proof that a defendant acted“knowingly.”65 Given case law that interprets “knowingly”to include reckless disregard for the truth,66 § 1348 exposes

corporate executives to expansive criminal liability.Section 1348 is also notable because of the unusually stiffterm of imprisonment it carries. Even among theSarbanes-Oxley crimes, § 1348 stands out. It carries apossible maximum term of imprisonment of twenty-fiveyears.67

(2) Stiffer Sentences for Existing Crimes

Sarbanes-Oxley directly or indirectly increased theterms of imprisonment for existing crimes involvingcorporate wrongdoing in three ways. First, Sarbanes-Oxleyamended the mail fraud and wire fraud statutes, longregarded as mainstay of fraud prosecutions,68 by increasingthe statutory maximum possible term of imprisonment fromfive to thirty years.69 Second, Sarbanes-Oxley created a newconspiracy and attempt offense, 18 U.S.C. § 1349, thatdiffers from existing conspiracy and attempt crimesprimarily in the maximum allowable term of imprisonment.The penalty under 18 U.S.C. § 371, the major conspiracyoffense in the federal code prior to Sarbanes-Oxley, provideda maximum possible sentence of five years imprisonment.Newly created 18 U.S.C. § 1349 provides that attempts and

conspiracies to commit crimes are subject to the samepenalties as those statutorily prescribed for the offense(s)that was the object of the attempt or conspiracy.70 SinceSarbanes-Oxley dramatically increases the sentence for

65. 18 U.S.C. § 1348 (2004).66. See, e.g., United States v. Jewell, 532 F.2d 697, 698-704 (9th Cir. 1976).67. 18 U.S.C. § 1348 (2004).68. Pamela H. Bucy, White Collar Crime, Cases and Materials 60 (1998).69. Sarbanes-Oxley, Pub. L. No. 107-204 § 903 (2002) (amending 18 U.S.C.

§ 1341 (mail fraud) and § 1343 (wire fraud)).70. Id. § 902 (creating 18 U.S.C. § 1349): “Any person who attempts or

conspires to commit any offense under this chapter shall be subject to the same

penalties as those prescribed for the offense, the commission of which was theobject of the attempt or conspiracy.”





existing fraud offenses (from five to thirty years) and creatednew crimes that carry unusual lengthy terms ofimprisonment (ten and twenty years), the practical effect of

§ 1348 is to increase sentences for most attempts andconspiracies. Lastly, Sarbanes-Oxley directed the UnitedStates Sentencing Commission to review sentencingguidelines for crimes involving obstruction of justice, crimesby organizations, and “serious fraud offenses,” to ensure thatresulting sentences are severe enough to obtain deterrence.71 In April 2004, the Sentencing Commission completed thisreview and recommended increased sentences for a varietyof fraud and fraud-related crimes and reductions in theavailability of downward departures (the major vehicle bywhich convicted defendants may obtain reductions in theirsentences), and required greater cooperation with regulatorsby convicted corporations.

(3) New Duties for Counsel

Fifteen years ago, in the midst of savings and loanscandals, Judge Stanley Sporkin, former head of the SEC’sEnforcement Division, asked:

Where were these professionals, a number of whom are nowasserting their rights under the Fifth Amendment, whenthese clearly improper transactions were beingconsummated? Why didn’t any of them speak up or

disassociate themselves from the transactions? Where alsowere the outside accountants and attorneys when thesetransactions were effectuated?

What is difficult to understand is that with all theprofessional talent involved (both accounting and legal),why at least one professional would not have blown thewhistle to stop the overreaching that took place in hiscase.72

71. Id. § 905.72. Lincoln Sav. & Loan Ass’n v. Wall, 743 F. Supp. 901, 920 (D.D.C. 1990).





Echoing Judge Sporkin’s concerns,73 Congress directedthe SEC in Section 307 of Sarbanes-Oxley “[To] issue rules,in the public interest and for the protection of investors,

setting forth minimum standards of professional conductfor attorneys appearing and practicing before theCommission in any way . . . .”74 In 2003 the SEC did so,most notably by requiring that counsel report possiblecorporate wrongdoing up the ladder within an organizationto whomever and whatever level is necessary to obtain an“appropriate” response.

2. The Feeney Amendment of the “PROTECT” Act

In April, 2003 Congress passed the “ProsecutorialRemedies and Other Tools to End the Exploitation ofChildren Today” (PROTECT) Act.75 As its name implies,the Act deals almost exclusively with child pornographyissues. On the eve of passage, the PROTECT Act wasamended, in a bill introduced by Representative TomFeeney.76 The Feeney Amendment directs the SentencingCommission to “substantially reduce[]” the incidence ofdownward departures.77 In 2003, the U.S. SentencingCommission issued new sentencing guidelines and revisedexisting guidelines to reduce the availability of downwarddepartures.78

An understanding of the federal sentencing guidelines

is necessary to appreciate the significance of the Feeney Amendment. The federal sentencing guidelines werecreated in 1984 with passage of the Sentencing Reform

Act.79 The Act mandated an overhaul of sentencing for

73. 148 Cong. Rec. S6551 (daily ed., July 10, 2002) (statement of JohnEdwards).

74. Sarbanes-Oxley, Pub. L. No. 107-204 § 307 (2002).75. Pub. L. No. 108-21, 117 Stat. 650 (2003).76. Pub. L. No. 108-21 § 401(m), 117 Stat. 675 (2003) codified at 18 U.S.C.

§ 3553.77. 18 U.S.C. § 3553(m)(2)(A) (2004).78. The effective date for these guideline changes was October 27, 2003, but

they apply retroactively to April 30, 2003. U.S.S.G., app. C.79. 18 U.S.C. §§ 3551-3742; 28 U.S.C. §§ 991-998.





federal crimes by abolishing parole. It also created asystem for standardizing, to the extent possible, criminalsentences. Crimes are assessed points based upon factors

such as the amount of money stolen or number of victimsharmed. Defendants are assessed points based upon theircriminal history. The total number of points determinesthe sentence a defendant receives.80 The only discretion acourt has to reduce a defendant’s sentence is through“downward departures.”81 The Feeney Amendment limitedthe grounds available for downward departures.82

In the Feeney Amendment, Congress also changed thestandard of review of sentences on appeal. Trial courtrulings on downward departures are to be reviewed de novo rather than due deference.83

The practical effect of the Feeney Amendment and theSentencing Commission’s response to it is to encouragegreater cooperation with regulators since cooperation is leftas one of the few ways to obtain a downward departure.Realistically, the only way for a corporate defendant toreduce his or her sentence by obtaining a downwarddeparture is to plead guilty and provide information toregulators as to who was involved in the wrongdoing, theextent to which individuals were involved, how thewrongdoing occurred and who the victims are.84

80. Excellent sources on federal sentencing policies include Thomas W.Hutchison et al., Federal Sentencing Law and Practice (2004); CorporateSentencing Guidelines: Compliance & Mitigation (Jed S. Rakoff et al. eds., 1993).

81. 18 U.S.C. § 3553(b) (2004).82. For example, the Sentencing Guidelines issued pursuant to the Feeney

Amendment “restrict the availability of departures based on multiplecircumstances” and prohibit use of heretofore existing grounds for downwarddepartures. 18 U.S.C. app. § 651 (2004). See also U.S.S.G. § 5K2.0.

83. 18 U.S.C § 3553(d)(2).84. Cf. Marino, supra note 13, app. P-1.





B. Recent Initiatives by the Executive Branch AddressingCorporate Corruption

1. The “Ashcroft Memorandum”85

In September 2003, Attorney General Ashcroftinstructed federal prosecutors to charge the most serious,provable offense available, limit plea agreements to suchoffenses, and seek imposition of maximum sentencesprovided by statute. Exceptions to this charging policy arelimited, must be justified in writing by the prosecutor andmust be approved by an Assistant Attorney General.86 Theprimary exception available is to provide “substantialassistance” to law enforcement in its investigation orprosecution of another person.87

Standing alone, the Ashcroft Memo is not particularlysignificant. Its admonition: that prosecutors charge, andallow pleas to, only the most serious provable offense, isconsistent with most existing prosecutive policies. Itsintent, to standardize prosecutorial discretion to the extentpossible, is laudable and appropriate. The Ashcroft Memois significant when viewed in conjunction with the otherregulatory initiatives enacted post-Enron which raise thestakes for those engaging in or failing to report corporatewrongdoing.

2. The “Thompson Memorandum”88

In January 2003, Assistant Attorney General LarryThompson reissued the 1999 “Holder Memorandum” thatset forth factors federal prosecutors should consider indeciding whether, and to what extent, to criminally chargeorganizations. Most factors remain unchanged from theHolder Memorandum and include what one would expectwhen the target is an organization: the nature and

85. Ashcroft Memorandum, supra note 14.86. Id.

87. Id.88. Thompson Memorandum, supra note 15.





seriousness of the offense; the pervasiveness of wrongdoingwithin the corporation; the organization’s history of similarconduct; the organization’s timely disclosure of wrongdoing

and willingness to cooperate in the investigation; theadequacy of the corporation’s compliance program andremedial actions; collateral consequences to innocent thirdparties; adequacy of other, lesser remedies.89

New in the “Thompson Memo” is the directive toprosecutors to explicitly consider a corporation’swillingness to cooperate with regulators by:

• “identify[ing] the culprits within the corporation”;90 • “mak[ing] witnesses available”;91 • “disclos[ing] the complete results of its internal

investigation”;92 • “waiv[ing] attorney-client and work product protection

. . . both with respect to communications betweenspecific officers, directors and employees andcounsel.”93

The Memo cautions prosecutors to be “wary” of efforts byorganizations to look like they are cooperating when theyare not.94

The Thompson Memo clearly and unmistakablycommunicates that organizations are expected to “help the

89. Id.

90. Id.91. Id.92. Id.93. Id.94. Prosecutors are told to be “wary” of:• “a corporations’ promise of support to culpable employees and agents,

either through the advancing of attorneys fees, through retaining theemployees without sanction for their misconduct, or through providinginformation to the employee about the government’s investigation pursuantto a joint defense agreement . . .;”

• “a corporation’s effort to shield corporate officers and employees fromliability by a willingness of the corporation to plead guilty;”

• a corporation’s “overly broad assertions of corporation representation ofemployees or former employees;”

• a corporation’s “inappropriate directions to employees or their counsel,

such as directions not to cooperate fully with the investigation . . .”Id.





Government catch the crooks.”95 No longer may anorganization simply exercise due diligence in preventing

violations of the law by its agents. Now, an organization

must aggressively investigate any wrongdoing that tookplace within its ranks and disclose all details: the who, what,when, and how, to the government. If the organization doesnot, if the organization does so incompletely or too slowly, itwill be charged with crimes and with more serious crimes.

C. Recent Initiatives by Administrative Agencies Addressing Corporate Corruption

1. Securities and Exchange Commission’sPromulgation of “Standards for ProfessionalConduct for Attorneys”

a. Reporting “Up the Ladder”

Section 307 of Sarbanes-Oxley directed the SEC toestablish minimum standards of conduct for attorneys whopractice before the Commission. Pursuant to § 307, the SECissued Rule 205. Effective on August 5, 2003, Rule 205applies to attorneys “appearing and practicing before theCommission in the representation of an issuer”96 who become“aware of evidence of a material violation by the issuer or byany officer, director, employee or agent of the issuer.”97 Rule

205 is mandatory: attorneys are required to report evidence ofa possible violation to an issuer’s chief legal officer and/or thechief executive officer.98 If the attorney does not receive “anappropriate response within a reasonable time,” she “shall”report the evidence to the board of directors.99

95. Interview with United States Attorney James Comey Concerning theDepartment of Justice’s Policy on Requesting Corporations under CriminalInvestigation to Waive the Attorney Client Privilege and Work ProductProtection, ABA National Institute on White Collar Crime app. L-13 (2004)(course materials).

96. 17 C.F.R. § 205.3(a) (2004).97. 17 C.F.R. § 205.3(b)(1) (2004).

98. Id.99. 17 C.F.R. § 205(b)(3). The rule provides that counsel report to the audit





b. “Noisy Withdrawal”

Initially, in response to § 307 of Sarbanes-Oxley, the

SEC proposed a rule104 that required counsel105 withdrawfrom representing her corporate client, give written noticeof her withdrawal “indicating that the withdrawal is basedon professional considerations,” and “promptly disaffirm tothe Commission any opinion, document, affirmation,representation [or] characterization . . . that the attorneyhas prepared or assisted in preparing . . . that the attorneyreasonably believes is or may be materially false ormisleading.”106

104. Release No. 33-8150 (Dec. 2, 2002) (67 Fed. Reg. 71670).105. The Proposed Rule applied to “attorneys appearing and practicing before

the Commission.” 68 Fed. Reg. 6326 (Feb. 6, 2003). Rule 205 provides thefollowing definitions:

(a) Appearing and practicing before the Commission:

(1) Means:

(i) Transacting any business with the Commission, includingcommunications in any form;

(ii) Representing an issuer in a Commission administrative proceeding orin connection with any Commission investigation, inquiry, informationrequest, or subpoena;

(iii) Providing advice in respect of the United States securities laws or theCommission’s rules or regulations thereunder regarding any document thatthe attorney has notice will be filed with or submitted to, or incorporated

into any document that will be filed with or submitted to, the Commission,including the provision of such advice in the context of preparing orparticipating in the preparation of, any such document; or

(iv) Advising an issuer as to whether information or a statement, opinion,or other writing is required under the United States securities laws or theCommission’s rules or regulations thereunder to be filed with or submittedto, or incorporated into any document that will be filed with or submittedto, the Commission; but

(2) Does not include an attorney who:

(i) Conducts the activities in paragraphs (a)(1)(i) through (a)(1)(iv) of thissection other than in the context of providing legal services to an issuerwith whom the attorney has an attorney-client relationship; or

(ii) Is a non-appearing foreign attorney.

17 C.F.R. § 205.2(a) (2004).

106. Proposed Rule 205.3(d)(i); Release No. 33-8150 (Dec. 2, 2002) (67 Fed. Reg.71670).





Under the proposed rule, counsel was to take suchaction if she “reasonably believed” her client had not madean “appropriate response” within a “reasonable time” and

the “material violations” are ongoing or about to occur.107 Ifthe violations had already occurred and were not ongoing,counsel was not required to make the proscribed “noisy”withdrawal but was permitted to do so.108 This proposalbecame known as the “noisy withdrawal” rule.

The SEC withdrew this proposal in the wake ofsignificant opposition109 to its disregard of attorney-clientprivilege, its effort to enlist counsel into serving as eyesand ears of regulators, and its likely inconsistency withmany state codes of ethics.110 In its place, the SEC issuedRule 205.3(d). Rule 205.3(d) tracks the prior rule exceptthat the company (rather than counsel) is required to notifythe SEC of counsel’s withdrawal “and the circumstancesrelated thereto.”111 The company is also to notify anyattorney retained or employed to replace the withdrawingattorney “that the previous attorney has withdrawn, ceasedto participate or assist or has been discharged.”112 Thestatus of this proposal is unclear. It is worth noting that asrevised this rule, while perhaps still is effective in alerting

107. Id.108. Id. R. 205.3(d)(2).109. 68 Fed. Reg. 6324-6325 (Feb. 6, 2003).

110. Id. at 6325; Charles M. Carberry, Lawyers under Scrutiny—A ContinuingTrend in the New Regulatory Environment, A.B.A. National Institute on WhiteCollar Crime app. H-1, H-4 (2004) (course materials).

111. Proposed Rule 205.3(e), 68 Fed. Reg. 6336 (Feb. 6, 2003) provided:Where an attorney has provided an issuer with a written notice pursuantto paragraph (d)(1), (d)(2) or (d)(3) of this section, the issuer shall, withintwo business days of receipt of such written notice, report such notice andthe circumstances related thereto on Form 8-K, 20-F, or 40-F (§§ 249.308,220f or 240f of this chapter), as applicable.

112. Proposed Rule 205.3(d)(4), 68 Fed. Reg. 6335 (Feb. 6, 2003), provides infull:

The issuer’s chief legal officer (or the equivalent thereof) shall notify anyattorney retained or employed to replace an attorney who has given noticeto an issuer pursuant to paragraph (d)(1), (d)(2) or (d)(3) of this section thatthe previous attorney has withdrawn, ceased to participate or assist or has

been discharged, as the case may be, pursuant to the provisions of thisparagraph.





regulators to an internal problem, raises the same concernsas its predecessor.

2. United States Sentencing Commission’s Amendments to the Sentencing Guidelines

As noted supra, Sarbanes-Oxley directed the U.S.Sentencing Commission to review the sentencingguidelines to ensure that they adequately deterred,prevented, and punished serious fraud offenses.113 In April2004, the Commission approved amendments to theguidelines that: (1) increased the guideline range forobstruction of justice, (2) increased the guideline range forfraud offenses, and (3) added additional factors forconsideration when assessing an organization’s sentence.Unless Congress rejects these amendments, they go intoeffect in November 2004.

a. Increased Range for Obstruction of JusticeOffenses

Sarbanes-Oxley directed the Sentencing Commissionto review the guidelines for obstruction of justice offensesthat “involve more than minimal planning” or “abuse of aspecial skill or a position of trust,” or where the evidencedestroyed or altered was “particularly probative or

essential.”114

Upon review, the Sentencing Commissionincreased the base offense level for obstruction of justiceoffenses and added a two-level enhancement whenever theoffense involves the “destruction, alteration, or fabricationof a substantial number of records, documents, or tangibleobjects.”115

Increasing base level offense for obstruction of justiceoffenses is a significant step because of an apparent newtrend in federal prosecutions. Rather than prosecutingdefendants for underlying crimes, such as insider trading,

113. Sarbanes-Oxley, Pub. L. No. 107-204 § 905 (2002) § 905; see also id. § 805.

114. Id. § 805(a); cf. id. § 1104.115. U.S.S.G. § 2J1.2(b).





DOJ increasingly is prosecuting defendants on obstructionof justice charges for lying to investigators during theinvestigations of such crimes.116 The recent prosecutions of

Martha Stewart117 and Frank Quattrone118 demonstratethis trend. In both cases, federal prosecutors elected not tocharge the more difficult to prove substantive offenses,opting instead to charge obstruction of justice because ofthe defendants’ misstatements to investigators during theinvestigation of the substantive offenses. As the one newsheadline recently proclaimed, “It’s the Cover-Up, Not theCrime.”119 From the prosecution’s point of view, opting toprosecute for obstruction of justice instead of thesubstantive offense is an effective strategy. Theprosecution sends a powerful message (don’t lie toinvestigators). Also, given the straightforward conduct(lying) and intent revealed when a defendant lies,obstruction of justice is often easier to prove than the morecomplex, underlying crimes.120 This trend by prosecutionsmakes the revised base level offense for obstruction of

justice all the more significant.

116. Russell Hayman, A General Counsel’s Guide to Avoiding ‘Obstruction ofJustice’ Liability, Mondaq Bus. Briefing, 2004 WL 69983490 (June 9, 2004)

[hereinafter Hayman, Obstruction of Justice].117. On March 6, 2004, Martha Stewart was convicted after a jury trial, of

obstruction of justice charges for giving false information to federal investigatorsand attorneys during an investigation of whether Stewart received insideinformation before selling Imclone stock in December, 2001. See, e.g., KaraScannell, Stewart Trial: White Collar, White Heat, Wall St. J., Jan. 16, 2004, atC1.

118. On May 6, 2004, Frank Quattrone, a former star investment banker inSilicon Valley, was convicted by a jury of obstruction of justice and witnesstampering charges arising from an email Quattrone sent to his colleaguesdirecting them to “clean up” their files during a federal investigation into howinitial public stock offerings were allocated. See, e.g., Kara Scannell & RandallSmith, Round 2 for Quattrone, in Post-Tyco World, Wall St. J., Apr. 8, 2004, atC1.

119. Peter Anderson, It’s the Cover-Up, Not the Crime, Triangle Bus. J., June

7, 2004.120. Hayman, Obstruction of Justice, supra note 116.





company.132 A four-level enhancement now applies foroffenses committed by officers or directors of publiclytraded companies.133 The practical impact of these

enhancements is expected to be “substantial”134 and“draconian.”135

c. Amendments to Organizational SentencingGuidelines

In 1986, the Sentencing Commission began draftingsentencing guidelines for organizations; the Guidelineswent into effect in 1991 and have been amended multipletimes since. The organizational guidelines apply tocorporations, partnerships, labor unions, pension funds,trusts, nonprofit entities, and governmental units.136

The guidelines require an organization to remedy theharm caused by its conduct and set the punishment to fitthe seriousness of the offense and culpability of theorganization.137 An organization’s culpability is determinedby its involvement in, tolerance of, or wilful ignorance ofcriminal activity by individuals with managementauthority within the organization; prior regulatory orcriminal activity; violation of an order; obstruction of

justice during the investigation; existence of an effectivecorporate compliance plan; and acceptance ofresponsibility.138 Since promulgated, the organizational

sentencing guidelines have provided for mitigation of anorganization’s sentence if the organization had in place aneffective corporate compliance plan and if the organizationpromptly reported the wrongdoing to authorities.139 The

132. U.S.S.G. § 2B1.1(b)(12)(B).133. U.S.S.G. § 2B1.1(b)(14).134. Michael E. Clark, How Low Can You Go? (Federal Sentencing Guidelines

and Criminal and Civil Damages), A.B.A. Health Care Fraud Institute app. H-15(2004).

135. Id. app. H-18.136. U.S.S.G. ch. 8, § 8A1.1, cmt.137. U.S.S.G. ch. 8, Introductory cmt.

138. Id.139. Id.





amendments issued by the Sentencing Commissionpursuant to Congress’s directive in Sarbanes-Oxley addressthese areas of mitigation, primarily corporate compliance

plans and the duty to report the wrongdoing to regulators.These amendments take effect in November 2004 unlessCongress intervenes.

(1) Guidelines Addressing Corporate Compliance Plans

The 2003 amendments to the U.S. SentencingGuidelines add section 8B2.1, which provides that anorganization is deemed to have an effective compliance andethics program only if the organization “exercise[s] duediligence to prevent and detect criminal conduct” and“otherwise promote[s] an organizational culture thatencourages a commitment to compliance with the law.”140 The Guidelines set forth seven minimum requirements forsuch a program.141

Consistent with other efforts to encourage disclosure ofwrongdoing, the amendments to the OrganizationalGuidelines remove the possibility of obtaining a reductionof sentence for implementation of an effective corporatecompliance plan if an organization unreasonably delayedreporting an offense to regulators.142 The amendments alsocreate a “rebuttable presumption” that an organization didnot have an effective corporate compliance plan if “high

level personnel” or personnel with “substantial authority”were involved in the offense.143

140. U.S.S.G. § 8B2.1(a).141. U.S.S.G. § 8B2.1(b). These requirements previously were set forth in the

Guidelines commentary. The 2003 amendments elevate them to Guidelinestatus.

142. U.S.S.G. § 8C2.5(f)(2).143. U.S.S.G. § 8C2.5(f)(3).





(2) Guidelines Regarding an Organization’s ReportingRequirement

In addition to the prohibition noted supra thatdisqualifies an organization from obtaining reduction insentence if it “unreasonably delayed” reporting an offenseto regulators,144 new commentary to the guidelines requireswaiver of attorney-client and work product privileges aspart of the reporting obligation whenever “such waiver isnecessary in order to provide timely and thoroughdisclosure of all pertinent information known to theorganization.”145 Thus, like DOJ’s internal policy (theThompson Memo) and the ABA’s Amendment to the ModelRules of Professional Responsibility, the SentencingGuidelines put pressure on counsel and clients to waiveattorney-client privilege and self report.

D. Recent Initiatives by the American Bar Association

In 2003, the American Bar Association amended twoModel Rules of Professional Conduct. Both amendmentsaddress disclosure of client confidences. Although theamendments are permissive in allowing greater disclosure,one wonders whether they impose new standards ofcompetency on counsel, so that realistically all corporate

counsel will be expected to disclose client confidences.Prior to the 2003 amendments, ABA Model Rule 1.6permitted counsel to reveal client confidences when counsel“reasonably believes” such disclosure is “necessary toprevent reasonably certain death or substantial bodilyharm.”146 As amended, Rule 1.6 permits disclosure whencounsel “reasonably believes” such disclosure “is necessaryto prevent . . . a crime or fraud that is reasonably certain toresult in substantial injury to the financial interests or

144. See text accompanying supra notes 141-143.

145. U.S.S.G. cmt. to § 8C2.5, n.12.146. Model Rules of Prof’l Conduct R. 1.6 (b)(1) (2004).





property of another.147 Obviously, this amendment istargeted at and will affect economic wrongdoing.

Professional Rule of Conduct 1.13 was also amended in

2003. Prior to amendment, Model Rule 1.13 required alawyer who represents an organization and who “knows”that an officer or employee of the organization has, iscurrently, or is about to violate the law or any legalobligation, to “proceed as reasonably necessary in the bestinterest of the organization.”148 Model Rule 1.13 listedoptional measures counsel may consider, including askingfor reconsideration of the matter, seeking another legalopinion, or “referring the matter to higher authority in theorganization.”149 Thus, under the prior rule, reporting upthe ladder was only one option provided. As amended,Model Rule 1.13 now provides that reporting up the ladderby reporting wrongdoing as high as necessary through anorganization is the only course of action available tocounsel.150 In addition, even if the triggering events forreporting up the ladder are not met (i.e., counsel “knows” ofa violation and is proceeding as “reasonably necessary” inthe “best interest of the organization”), counsel may stillreport all the way up the ladder if counsel “reasonablybelieves” that she has been discharged because of her“reporting up” actions. In this situation counsel ispermitted to proceed as she believes is “reasonably

147. Id. R. 1.6. As amended Model Rule 1.6 also permits disclosure “to prevent,mitigate or rectify substantial injury to the financial interests or property ofanother . . .” Potentially, this latter provision is enormously broad, permittingdisclosure years after a fraud if the disclosure is necessary to “mitigate or rectify”the financial injury.

148. Model Rules of Prof’l Conduct R. 1.13(b) (2004).149. Id.150. As amended, Model Rule 1.13 states:

Unless the lawyer reasonably believes that it is not necessary in the bestinterest of the organization to do so, the lawyer shall refer the matter to ahigher authority in the organization, including, if warranted by thecircumstances, to the highest authority that can act on behalf of theorganization as determined by applicable law.

Although the rule provides an exception to the reporting up requirement: whenlawyer “reasonably believes that it is not necessary,” as one commentator opined:

“It would be a brave lawyer indeed who would avail herself of that exception.”Litt, Changing Contours, supra note 102, app. C-9.





necessary to assure that the organization’s highestauthority is informed of the lawyer’s discharge orwithdrawal.”151 Prior to the 2003 amendment, Model Rule

1.13 was silent as to what counsel could or should do ifcounsel’s reporting or other steps failed to adequatelyaddress the problem. As amended, Model Rule 1.13addresses this situation, permitting disclosure by counselto outside sources if the organization fails to address theproblem in a “timely and appropriate manner”152 aftercounsel has reported up the ladder and if counsel“reasonably believes” that such disclosure is “necessary toprevent substantial injury to the organization.”153 In asignificant exception, amended Model Rule 1.13 exemptsfrom its reporting up requirements and disclosure optionslawyers who are retained by an organization to do aninternal investigation.154

III. THE TWO P ATHS CHOSEN BY THE RECENT REGULATORY

INITIATIVES A IMED AT CORPORATE CORRUPTION

The single goal of each of the regulatory initiativesenacted in the wake of recent corporate scandals isenhanced corporate integrity. All of the regulatoryinitiatives reviewed herein seek to accomplish this goal inone of two ways: enlisting corporate insiders as informers,and increasing the severity of consequences for those who

engage in corporate wrongdoing. Part two of this articlediscusses how the reforms follow these paths.

A. Path One: Drafting Insiders Who Know What Is GoingOn

Portions of Sarbanes-Oxley, the Feeney Amendment tothe PROTECT Act, the “Thompson Memo,” the SEC’s Rule205, the amended U.S. Sentencing Guidelines, and the

151. Model Rules of Prof’l Conduct R. 1.13(e).152. Id. R. 1.13(c)(1).

153. Id. R. 1.13(c).154. Id. R. 1.13(d).





recent amendments by the ABA to the Rules of ProfessionalConduct require insiders to assist regulators.

Four provisions of Sarbanes-Oxley seek to conscript

insiders into the regulatory effort. Most obvious is § 1350,which imposes a new duty on CEOs and CFOs, that theymust certify that financial reports filed with the SEC“fairly present” the financial condition of the company.155 Sections 1513(e)156 and 1514A 157 of Sarbanes-Oxleyrecognize the value of enlisting the support of insiders butfollow either a protection (§ 1513(e)) or reward (§ 1514A)approach rather than the “stick” approach in § 1350.Section 1513(e) makes it a crime to retaliate againstinsiders, while § 1514A provides a private cause of action tothose who suffer because they blew the whistle oncorporate wrongdoing. Lastly, Sarbanes-Oxley seeks toenlist insiders as regulatory assistants by directing theSEC to set new standards for professionals who practicebefore the SEC.158 In response the SEC promulgated ruleswhich impose additional duties on corporate insiders toblow the whistle internally.159

The Feeney Amendment to the PROTECT Act seeks toconscript insiders as regulatory assistants with the stickapproach by restricting the ways convicted defendantsobtain mitigation of their sentences to instances wheredefendants have assisted law enforcement.160

The U.S. Organizational Sentencing Guidelines use the

“carrot” approach to encourage cooperation with lawenforcement by providing for more lenient sentences forthose organizations that cooperate with law enforcement.The 2003 amendments to the Guidelines require greatercooperation than ever for those organizations that want toqualify for mitigation of their criminal sentences. Theamendments require that an organization must report its

155. 18 U.S.C. § 1350.156. 18 U.S.C. § 1513(e).157. 18 U.S.C. § 1514A.158. Sarbanes-Oxley, Pub. L. No. 107-204 § 307 (2002).

159. 17 C.F.R. § 205 (2003).160. Pub. L. No. 108-21 § 401(m), 18 U.S.C. § 3553.





wrongdoing to regulators without “unreasonable delay[].”161 Thus, in-house counsel must quickly determine if aninternal investigation into the alleged wrongdoing is

necessary, who should do the investigation, and whetheroutside counsel should be retained. Counsel conducting theinvestigation must determine the scope and extent of theinvestigation, conduct the investigation, and determine whatdisclosure, if any, should be made to regulators.162 Becauseof high stakes (possible prison terms for corporate officersand directors, severe sanctions for the organization) andcomplexity of most corporate wrongdoing, the “nounreasonable delay” mandate increases the institutional andpersonal stress for all involved.

The 2002 amendments to the U.S. Sentencing Guidelinesalso require that more information be given to regulatorsthan in the past. Essentially, they require that anorganization must reveal who was involved in the wrongdoingand to what extent. Granted, the Guidelines do not explicitlyrequire such disclosure but do so implicitly by creating a“rebuttable presumption” that if “high level personnel” orpersonnel with “substantial authority” were involved in theoffense, the organization did not have an effective corporatecompliance plan.163 Implementation of an effective corporatecompliance plan is a significant factor in assessing anorganization’s sentence upon conviction. To rebut thispresumption or deal with it if it does apply, an organization

must identify to regulators the individuals within theorganization who are responsible for the wrongdoing and theextent of their involvement. It is important to note that theDepartment of Justice’s directive to prosecutors contained inthe “Thompson Memo” regarding factors to consider indetermining whether to charge an organization with a crimealso requires organizations to determine and identify thosewho were involved in the wrongdoing.164

161. U.S.S.G. § 8C2.5(f)(2).162. Robert Fabrikant, Paul E. Kalb, Mark D. Hopson, & Pamela H. Bucy,

Health Care Fraud: Enforcement and Compliance §§ 8.01-8.12 (2004).

163. U.S.S.G. § 8C2.5(f)(3).164. Thompson Memorandum, supra note 15.





The 2002 amendments to the U.S. SentencingGuidelines require waiver of privileged information byorganizations that want credit for cooperating with law

enforcement.165 Commentary in the 2002 amendments tothe Guidelines states that waiver of the attorney-client andwork-product privileges by an organization is required“whenever necessary” for full disclosure of all pertinentinformation known by the organization about thewrongdoing.166 Although theoretically possible for anorganization to make a full disclosure without waivingprivileged information, it is hard to imagine, especiallywhen an internal investigation has been conducted. Heretoo, the expectation that an organization must waive itsattorney-client and work-product privileges to receivecredit for cooperation is echoed by the Department ofJustice internal policy. The “Thompson Memo” states thatan organization’s willingness to waive attorney-client andwork-product privileges is relevant to the prosecutorialdecision whether to charge an organization with a crime.167

The last reform that is designed to enlist insiders aslaw enforcement’s eyes and ears is the ABA’s amendmentsto the Rules of Professional Conduct. Amended Rule 1.6expands the circumstances under which counsel maybreach client confidence to instances where counsel hasbeen consulted in connection with a financial crime.168 Previously, counsel was permitted to reveal a client

confidence only when counsel’s advice had been sought toconduct a crime involving death or substantial bodilyharm.169 Amended Rule 1.13 imposes new reporting dutieson lawyers who work in an organization to reportwrongdoing. Under prior Rule 1.13, an attorney hadseveral options of what to do upon discovering wrongdoing,but now counsel is required to report suspected wrongdoing

165. U.S.S.G. cmt. to § 8C2.5 n.12.166. Id.167. Thompson Memorandum, supra note 15.

168. Model Rules of Prof’l Conduct R. 1.6 (2004).169. Model Rules of Prof’l Conduct R. 1.6 (2002).





up the ladder within the organization.170 SEC Rule 205,promulgated pursuant to Sarbanes-Oxley’s mandate thatthe SEC devise standards of conduct for those who practice

before it, also requires that insiders (not just attorneys, butanyone who appears and practices before the Commission)report up the ladder through the organization informationabout wrongdoing.171

In summary, both of the legislative initiatives(Sarbanes-Oxley and the Feeney Amendment), theexecutive branch’s initiative (the Thompson Memo), both ofthe administrative agency initiatives (the SEC’s Rule 205and the U.S. Sentencing Commission’s amendments to theSentencing Guidelines), and the ABA’s amendments to theProfessional Rules seek to draft insiders to regulators’sefforts.

B. Path Two: Bad Things Happen to Insiders Who Don’t Assist Law Enforcement

The second path chosen by the corporate integrityinitiatives is imposing unpleasant consequences on thosewho engage in corporate wrongdoing and in some cases onthose who fail to report it. These consequences range fromprison to peer pressure. Sarbanes-Oxley’s new crimes andstiff sentences, the Feeney Amendment’s restriction inobtaining downward departures, DOJ internal policies on

the exercise of prosecutorial discretion (both the“Thompson Memo” and the “Ashcroft Memo”) and the 2003amendments to the U.S. Sentencing Guidelines’ increase insentences make it more likely that corporate wrongdoers aswell as insiders who fail to fulfill their legal obligations willgo to prison.

When evaluating the impact of these new crimes andstiffer sentences, it is important to bear in mind twogeneral principles of criminal jurisprudence: accompliceliability and conspiracy liability. Both render actors on the

170. 17 C.F.R. § 205.171. Id.





periphery of crimes criminally liable for the crimes. Aperson is guilty as an accomplice to a crime if she intendsfor the principal actor to commit a crime, knows the

principal is or is planning to commit a crime, and rendersassistance to the principal in committing the crime.172 There need not be an agreement between the principal andaider; the principal actor need not even know of the aider’sassistance.

A well known case, State v. Tally,173 demonstrates this.William Talley prevented a warning from being sent to anintended murder victim, thereby allowing Talley’s relativesto ambush and kill the victim.174 There was no evidencethat Talley’s relatives (the ambushers) knew of, orrequested help from Talley.175 Even so, Talley was foundguilty of murder as an accomplice. The court reasoned thatbecause of the assistance he intentionally rendered, Talleywas just as guilty as those who shot and killed the victim.176

Applying complicity principles to the corporate contextmeans that if a corporate executive knows that hercolleagues are misrepresenting the financial condition of acorporation and she aids them by not reporting themisrepresentation to auditors, the executive is guilty of thesame offenses as those directly involved. It does not matterwhy the executive did not alert auditors. Nor is itirrelevant to the executive’s liability whether hercolleagues were aware of her help to them; she is guilty

even if they never knew of her assistance.Conspiracy liability is broader than complicity liabilitybecause it makes it a crime to engage in extremelypreliminary criminal conduct. Simply agreeing to do acrime is a conspiracy, even if no steps are taken to committhe offense.177 The agreement may be tacit or overt, and

172. Sarah N. Welling, Sara Sun Beale, & Pamela H. Bucy, Federal CriminalLaw and Related Actions § 4.2 (1998).

173. 15 So. 722 (Ala. 1894).174. Id. at 724-25.175. Id. at 727.

176. Id. at 741.177. Pamela H. Bucy, White Collar Crime, Cases and Materials 5-6 (1998).





may be proven by direct or circumstantial evidence.178 Under conspiracy liability, the executive who learns thatothers within the corporation are misrepresenting the

financial condition of the corporation and does nothing tostop or report the misrepresentations may be a co-conspirator if a tacit agreement can be found to existamong the actors. It does not matter if none of the actorstook any steps to execute the crime. All that is necessary isan agreement, an intent that one conspirator commit thecrime, and evidence of the agreement. Unlike complicityliability, it is not even necessary that this actor assist theperpetrators in any way.

Sarbanes-Oxley’s new crimes and stiffer sentencescarry even more of a bite when viewed in the context ofbroad principles of conspiracy and complicity liability andin conjunction with the Feeney Amendment to thePROTECT Act and the amendments to the U.S. SentencingGuidelines, which affect the sentences convicteddefendants receive.

Although they do not carry as big of a stick, the SEC’sup-the-ladder rule and the ABA’s amendments to the Rulesof Professional Conduct bring pain to insiders who do notfulfill their new duties of reporting wrongdoing toregulators.

The stick approach of imposing unpleasantconsequences on those who engage in wrongdoing has the

potential to effectively deter wrongdoing. Not only is thelikelihood of being prosecuted and going to jail extremelyunpleasant, it is also public. Very public. Once a corporateexecutive is prosecuted, her name appears on courtdocuments and in newspaper headlines. “Perp walks” flashher arrest spectacle for all to see. Defending againstcriminal prosecution can be financially disastrous.Conviction likely will result in painful and publicly visiblechanges in lifestyle for the offender and her family.Because of their powerful communicative ability, the stick

178. Pamela H. Bucy, Information as a Commodity in the Regulatory World, 39Hous. L. Rev. 940-47 (2002) [hereinafter Bucy, Information As a Commodity].





approach of the recent regulatory initiatives may affect thenorm of what is now expected of a competent corporateexecutive. Together, these initiatives communicate that no

longer should corporate executives close ranks, protectthemselves, their employer, friends, and colleagues bycovering up improper conduct. Rather, corporateexecutives today should be alert for wrongdoing, blow thewhistle when they see it. Above all, they should report,report, report.

IV. WILL THE REGULATORY INITIATIVES WORK ?

A. Reasons To Think the Reforms Will Work

There are five reasons to believe that the regulatoryreforms enacted post-Enron will be effective in detectingand deterring corporate wrongdoing. First and foremost,they recognize the benefit of insiders’ information andmake efforts to enlist such information. Complex economicwrongdoing cannot be detected or deterred effectivelywithout the help of those who are intimately familiar withit. Such wrongdoing usually is concealed from its victims,buried in documents and diffused within an organization.It is virtually impossible for anyone outside the group ofperpetrators to know what is going on, until it is too lateand losses are sustained. Knowledgeable insiders who can

provide regulators with specific information about who,what, where, and why corporate wrongdoing is taking placeare an invaluable resource for regulators. Without thisinformation, regulators are condemned to playing catch up,never fully learning what went on and expending largeamounts of resources in scattershot efforts to do so.179

The second reason the regulatory reforms enactedpost-Enron may be effective is that they recognize thedifficulty of what they demand of insiders and take steps toovercome the difficulty. Rarely will insiders want to aidregulators. It is personally wrenching to turn in friends,

179. Bucy, Information As a Commodity, supra note 178.





colleagues, sometimes even family. Insiders also may incurenormous professional costs for providing information toregulators.180 Surveys of whistleblowers consistently show

the hardship they endure. In one survey of ninetywhistleblowers, 54 percent said they were harassed atwork, 82 percent said they were harassed by superiors, 80percent reported physical deterioration as a result of theirwhistleblowing experience, and 86 percent reported“negative emotional consequences, including feelings ofdepression, powerlessness, isolation, anxiety and anger.”181

The recent reforms recognize the difficulty of askinginsiders to turn in friends. They seek to overcome thepowerful disincentives to doing so by applying a stickapproach. The reforms expand criminal liability andimpose severe penalties on insiders who fail to cooperate.Insiders who should be aware of corporate wrongdoing butaren’t violate § 1350, a ten-year felony, under SarbanesOxley. Insiders who are attorneys and who fail to reportperceived wrongdoing violate ethical standards imposed bythe ABA. Insiders who practice before the SEC and fail toreport up the ladder face sanctions. Organizations aresubject to more aggressive prosecution and stiffer sentencesif they fail to assist regulators by fully investigating anddisclosing, in depth, who, what, when, and how wrongdoingtook place. Corporate executives now face new norms ofcompetency, which subject them to greater shareholder

liability as well as action by regulators. At all levels,regulators are more focused on corporate corruption andmore likely to aggressively exercise their prosecutorialdiscretion against those who commit, tolerate, aid, orintentionally ignore such activity.

The third reason the post-Enron reforms may beeffective in detecting and deterring corporate wrongdoing isthat they elevate corporate wrongdoing to the top ofprosecutive agendas.182 This, in turn, leads to added

180. Id. at 948-58.181. Clyde H. Farnsworth, Survey of WhistleBlowers Finds Some Retaliation

but Few Regrests, Chi. Daily L. Bull., July 27, 1987, at 3.182. Michael Bologna, Lawyers Cite Tougher Stance on White Collar





resources.183 Such prioritization may, of course, be short-lived, giving way to other priorities as future dramas andcrises capture government attention. While in place,

however, agenda priorities are powerful. Wrongdoing thatmay not have been investigated previously will be. Thatalone has deterrent value. In addition, however, exercises ofprosecutive discretion will tilt toward aggressive deploymentof broad statutes and existing principles of liability.

The fourth reason the post-Enron reforms may beeffective is that they focus the public’s attention on theimportance of detecting and deterring corporatewrongdoing. Although subtle and difficult to gauge, thisincreased sensitivity could make a difference. Individualsmay be more vigilant to what is going on around them andmore empowered to blow the whistle. Witnesses may bemore willing to be forthright and candid. Shareholdersmay be more aggressive in bringing suits based upon lackof due diligence by corporate executives. Executives maybe more careful to avoid wrongdoing. Judges may betougher on corporations that come before them.

The last reason the post-Enron reforms may beeffective is related to the prior reason. Their collectiveinfluence may be altering norms of behavior in the businessworld. No longer will companies and corporate executivesbe expected to generate as much profit as possible inwhatever way possible. Instead, they will be expected to

generate as much profit as possible while being honest.

B. Reasons to Think the Reforms Will Not Work

There are two reasons to question whether the reformswill achieve their goal of detecting and deterring corporatewrongdoing. First, they impose a costly infrastructure on

American businesses. For companies barely operating at aprofit, and for companies that compete in the globalmarket, these costs may cause severe hardship.184

Enforcement Efforts, Sec. Reg. & L. Rep., May 10, 2004, at 856.

183. John R. Schmidt, Ready for Prosecutors, Legal Times, Oct. 7, 2002, at 35.184. Tamara Loomis, For Public Companies, A High Price for Compliance,





Second, the conventional wisdom shared by thereforms—that the way to alter behavior is to impose harshconsequences for those who engage in it—may be wrong.

Clearly, the key to the reforms’ effectiveness is their abilityto marshal the valuable resource of inside information. Ifthey fail in this regard they fail in their goal of betterdetection and deterrence of corporate wrongdoing. Raisingthe stakes for those who engage in corporate wrongdoingmay be counterproductive in obtaining this insideinformation in three respects. First, those who fearprosecution may be so concerned about their liability or thatof their friends that they communicate less with corporatecounsel. They do not want corporate counsel, nowregulators’ in-house surrogate, to report them. In addition,corporate executives who are not concerned about their ownliability may opt not to communicate with corporate counselbecause they don’t want to be told no. In the post-Enronworld, corporate counsel is and should be cautious. In thebusiness world, aggressive, pushing-the-envelope tacticsoften are the key to success. Executives who want to pursueaggressive tactics simply won’t consult with counsel aboutthem because they don’t want to be hemmed in by corporatecounsel’s caution. Third, corporate counsel, and any otherinsiders with an obligation to report perceived wrongdoing,may have their own motive for poor communication withcorporate executives. They don’t want to have to report

them if they learn of wrongdoing. This reluctance is afunction of the “carpool” factor. Almost certainly corporatecounsel will be social friends with many executives withinthe organization. They will belong to the same communityand social organizations, their children may attend schooland extracurricular activities together, and their familiesprobably carpool together. Once corporate counsel or anyinsider knows of another’s wrongdoing, it is painful,personally and professionally, to alert regulators and set inmotion events that could ruin his friend’s lives.185 Added to

Nat’l L.J., May 12, 2003, at 18.185. Bucy, Information as a Commodity, supra note 178, at 948-58.





this is the professional ostracization whistleblowers arelikely to face. Companies, even an entire industry, could“boycott” a whistleblower; after all, who wants to run the

risk of having the whistle blown on him?186 The question is whether something besides the stick

approach would be more effective in deterring anddetecting corporate wrongdoing. Fisch & Rosen havesuggested several ideas which “increase the incentives forcorporate decisionmakers to demand information fromtheir lawyers.” They suggest requiring additional personalcertifications of accuracy on reports filed with the SEC,increased liability for directors, greater use of outsidecounsel to investigate possible problems within thecorporation, and greater use of the legal audit committee.187

186. Id.187. Fisch and Rosen have noted the following possible problems. Jill E. Fisch

& Kenneth M. Rosen, Is There a Role For Lawyers in Preventing Future Enrons?,48 Vill. L. Rev. 1097 (2003). Getting information of wrongdoing to the board ofdirectors is only that; there is not way to ensure that once the board has theinformation it will take appropriate action. In fact, it appears that the Enronboard had adequate information of malfeasance but repeatedly failed to respondappropriately. Id. at 1118-19. Fisch and Rosen argue persuasively that imposingreporting obligations on counsel is a “second-best” option for detecting anddeterring corporate wrongdoing and that the best solution is to encourage

directors to better govern corporate actions and culture. Id. at 1131-38. Theysuggest the following to more directly impact directors’ behavior: additional“personal certifications of the contents of corporate communications and reports,”id. at 1132-33; increased civil and criminal liability for directors, id. at 1133-34;creation of a legal audit committee of the board, id. at 1135-37, that would includeroutine, more inclusive reporting by corporate counsel to the board, id. at 1136;and greater use of outside counsel to investigate possible problems, id. at 1135.Second, the reporting requirement ignores the fact that attorneys and law firmscompete for corporate clients. Businesses may well prefer counsel who does notoften see a need to report suspected wrongdoing than counsel who takes seriouslythe reporting up requirement. Id. at 1123-24. Third, the reporting uprequirement ignores the fact that it is likely to be personally difficult for counselto report on corporate executives who have been and are personal friends. Arelated concern is counsel’s professional reputation. Few businesses will be eagerto hire a known whistleblower. Fifth, the reporting up requirement jeopardizes

the sense of trust that needs to exist between clients and counsel for clients to feelcomfortable fully disclosing possible problems. Id. at 1125-26.





C. A Helpful Option

There is an additional regulatory tool to add to the

package of reforms: a carrot that entices insiders to bringregulators information of corporate wrongdoing. For thistool to be helpful two things are needed: enactment of a“qui tam” provision, similar to the civil False Claims Act,and reduction of the draconian criminal penaltiesapplicable to corporate wrongdoers because of Sarbanes-Oxley, amended U.S. Sentencing Guidelines, and new DOJpolicies. The tastiest carrot in the world will not be able tobring forth enough inside information where theconsequences for perpetrators are so severe.

Crafting a qui tam provision for use in the financialworld would not be difficult. There is enough experiencewith this mechanism in the false claims context to see howit could be deployed effectively in the financial context.Briefly here is how the qui tam model works in the federalcontracting area: A person who believes that he hasinformation that someone else (individual or company) hasfiled false claims with the federal government may file alawsuit making such allegations.188 This plaintiff (termed a“relator”) is required to file his lawsuit under seal (not evenserving it on the defendant). The relator is also required togive a copy of his lawsuit to the United States Departmentof Justice (DOJ), along with a written report of “all

material evidence and information” the relator possesses.189

The lawsuit remains under seal, often for two years ormore, to allow the DOJ to fully investigate charges made bythe relator.190 The secrecy of the sealed complaint not onlyfacilitates the DOJ’s investigation of the relator’sinformation191 but also protects a defendant’s reputation ifthe relator’s information amounts to nothing.192

188. 31 U.S.C. § 3730(b)(1)(2004).189. Id. § 3730(b)(2).190. Robin Page West, Advising the Qui Tam Whistleblower 33 (2000).191. Interview with John R. Phillips, then Co-Director, Center for Law in the

Public Interest, Corp. Crime Rptr., Nov. 9, 1987, at 11. Phillips, who is generallycredited as the person responsible for the 1986 Amendments to the FCA,





At the conclusion of its investigation, the DOJ decideswhether it will intervene in the lawsuit as an additionalplaintiff. If it does, the DOJ assumes “primary

responsibility” for the case, although the relator remains asa plaintiff and is guaranteed a participatory role.193 Insome cases, the DOJ handles the entire case afterintervening; in others, relators work hand in hand withgovernment prosecutors. In some cases, relators and theirattorneys assume the bulk of the investigative andlitigative duties.194

If the DOJ does not join the lawsuit, the relator maycontinue, litigating the case alone.195 Even if the DOJ doesnot join a relator’s case, it retains authority over therelator’s lawsuit in several ways: the DOJ monitors thecase and, with a court’s consent, may join it at any time,even for limited purposes, such as appeal;196 the DOJ maysettle or dismiss a relator’s suit over the relator’s objectionsas long as the relator has been given an opportunity in

explained how the sealing provision came about:The Justice Department resisted these qui tam provisions of the FalseClaims Act. If you look at the record, the Justice Department didn’t wantthem changed at all. One argument that was advanced was, “you are goingto make our job more difficult because as soon as you file these complaints,it is public information, and we can’t do our normal investigations. If wewant to put a wire on somebody or do an undercover investigation, youhave blown the cover instantly, so this is a bad idea.” My response was tosay, “fine, we will draft a seal provision so that it is under seal until you

decide to join the case. . . . It is a very unusual provision in that regard.What [it] did was [to] completely negate the argument advanced by theJustice Department.”

See, e.g., West, Advising the Whistleblower, supra note 190, at 33; Sen. Rep.99-345, reprinted in 1986 U.S.C.C.A.N. 5266, 5281.

192. Bucy, Private Justice, supra note 1.193. 31 U.S.C. § 3730(c)(1)(2004).194. For other examples of FCA qui tam cases where the relator and relator’s

counsel assumed large amounts of responsibility for the preparation of the case,see United States ex rel. Alderson v. Quorum Health Group, Inc., 171 F. Supp. 2d1323 (M.D. Fla. 2001); United States ex rel. Merena v. SmithKline BeechamCorp., 114 F. Supp. 2d 352 (E.D. Pa. 2000) (facts more fully discussed in Merena,52 F. Supp. 2d 420 (E.D. Pa. 1998) rev’d 205 F.3d 97 (3rd Cir. 2000)).

195. 31 U.S.C. § 3730(c)(3) (2003).196. Id. § 3730(c)(3)(2003); See, e.g.,Vermont Agency of Natural Resources v.

United States ex rel. Stevens, 529 U.S. 765, 769 (2000); United States ex rel.Garibaldi v. Orleans Parish Sch. Bd., 244 F.3d 486, 489 (5th Cir. 2001).





court to be heard;197 the DOJ may seek limitations on therelator’s involvement in the case,198 or seek alternativeremedies (such as administrative sanctions) in lieu of the

relator’s lawsuit.199 If the government joins the relator’s case, the relator is

guaranteed at least 15 percent of any judgment orsettlement and the court can award more—up to 25percent. If the government does not join the lawsuit, therelator is guaranteed 25 percent and could receive up to 30percent.200 The amount within the statutory awarddepends upon the relator’s helpfulness to thegovernment.201 Because the FCA’s damages and penaltyprovisions tend to generate exceptionally large

judgments,202 relators’ percentages involve substantialsums.203

197. 31 U.S.C. § 3730(c)(2)(A) and (B) (2003). DOJ may even move fordismissal or oppose a settlement without intervening. See, e.g., Juliano v.Federal Asset Disposition Ass’n, 736 F. Supp. 348, 350-51 (1990) (DOJ moved todismiss relator’s case after declining to intervene); United States v. HealthPossibilities, P.S.C., 207 F.3d 335, 340-41 (6th Cir. 2000) (After declining tointervene, DOJ opposed the settlement reached by relator and defendant.).

198. 31 U.S.C. § 3730(c)(2)(C) (2004).199. Id. § 3730(c)(5).200. Id. § 3730(c)(3).201. The FCA has four built-in features to reward only those relators who

actually supply helpful information. First, the FCA directs courts to determinewhat percentage, within the statutory range, of the judgment should be given tothe relator based upon how helpful the relator was in “advancing the case to

litigation.” 31 U.S.C. § 3730(d)(1) (2004). Second, a court is directed to reducethe share of the award further if the relator “planned or initiated” the FCA

violation, and to exclude the relator from receiving any portion of the award if shehas been convicted of conduct constituting the FCA violation. Id. § 3730(d)(3).Third, the FCA’s jurisdictional bar provision prohibits a qui tam case from goingforward if the information it includes is already public (unless the relator is the“original source” of the information. Id. § 3730(e)(4). Lastly, the FCA providesthat only the first qualifying qui tam lawsuit may proceed. Id. § 3730(b)(5).

202. For example, recent judgements in FCA qui tam cases include an $875million settlement from TAP Pharmaceuticals, 55 HealthCare Fin. Mgt. 10(2002); a $745 million settlement with HCA Healthcare Corporation to resolvesome of the alleged FCA violations pending against HCA; a $385 millionsettlement with National Medical Care, Inc.; a $325 million settlement withSmithKline Beecham Clinical Laboratory; a $325 million settlement withNational Medical Enterprises; and a $110 million settlement with National

Health Laboratories. Boese, supra note 45, § 1.05[A].203. Recent relators’ awards include $95 million, $44.8 million, $28.9 million,





The qui tam provision of the FCA contains twofeatures that render it extraordinarily successful bringingforth inside information.204 It does so through the damages

and penalty provisions and the “jurisdictional bar”provision.205 The damages and penalty provisions, coupledwith the mandatory percentage allocated for the relator,provide a substantial enough incentive to attractknowledgeable insiders willing to serve as whistleblowers.The jurisdictional bar provision, which disqualifies most ofus from serving as relators, ensures that a whistleblower’sinformation is timely and helpful to the government.

Second, the “dual-plaintiff” mechanism, whereby DOJinvestigates, amends, joins, or monitors the privateplaintiffs’ suit, provides a potentially powerful qualitycontrol on the private actions. It also provides a way forknowledgeable and helpful insiders to work hand in handwith regulators lending expertise and resources to anoverburdened DOJ.206

and $18.1 million. Top Qui Tam Recoveries of the Year 2000, TAF Q. Rev., Jan.2001, at 20-21.

204. This was one if its goals. As noted in the senate report accompanying the1986 Amendments, “[t]he proposed legislation seeks not only to provide theGovernment’s law enforcers with more effective tools, but to encourage anyindividual knowing of Government fraud to bring that information forward.” S.Rep. No. 345, 99th Cong. (1986), reprinted in 1986 U.S.C.C.A.N. 5266, 5266-67.

205. The “jurisdictional bar” provision provides:No court shall have jurisdiction over an action under this section based

upon the public disclosure of allegations or transactions in a criminal, civil,or administrative hearing, in a congressional, administrative, orGovernment Accounting Office report, hearing, audit, or investigation, orfrom the news media, unless the action is brought by the Attorney Generalor the person bringing the action is an original source of the information.

31 U.S.C. § 3730(e) (2004).206. The FCA contains another mechanism to help with quality control, but

this mechanism, unlike the dual-plaintiff system, is not unique to the FCA. TheFCA provides that parties filing frivolous qui tam actions may be held responsiblefor defendants’ attorneys fees and expenses:

If the Government does not proceed with the action and the personbringing the action conducts the action, the court may award to thedefendant its reasonable attorneys’ fees and expenses if the defendantprevails in the action and the court finds that the claim of the personbringing the action was clearly frivolous, clearly vexatious, or brought

primarily for purposes of harassment.31 U.S.C. § 3730(d)(4) (2004). See, e.g., United States ex rel. Haycock v. Hughes





The number of suits filed and monetary judgmentsobtained in qui tam FCA actions, especially when comparedto other existing private attorney general actions, shows

that the qui tam FCA private justice model is successful.Between 1987 and 2000, an average of 237.5 qui tam FCAcases were filed annually, compared to 181.8 averageannual filings of securities fraud class actions and 37.4average annual filings of environmental citizen suit privateattorney general actions.207 Moreover, since 1987, there hasbeen a sharp increase per year in qui tam FCA filingscompared to relatively flat numbers of filings in securitiesand citizen suit private actions.208

The qui tam FCA private justice model could andshould be expanded to protect national financial markets.These markets need inside information of wrongdoing.They also need the most effective regulatory tools available.The carrot approach of the qui tam mechanism in thegovernment contracting arena has proven to be enormouslysuccessful. It should be deployed to enhance corporateintegrity.

CONCLUSION

The confluence of post-Enron reforms by legislative,executive, administrative government actors as well as the

ABA is impressive. The reforms are surprisingly coherent

in their stated goal and approaches chosen to achieve theirgoal. Whether they will work or be derailed by unintendedconsequences remains to be seen. This article suggeststhat the intended effect of these reforms can be maximizedand their unintended effects minimized by including a quitam provision similar to that successfully used in thegovernment contracting arena.

Aircraft Co., No. CV 90-1677 (C.D. Ca. May 9, 1994); United States ex rel.Herbert v. National Academy of Sciences, Civ. A. No. 90-2568, 1992 WL 247587(D.D.C. 1992).

207. Bucy, Private Justice, supra note 1, apps. C-4, C-5, C-6.208. Id. app. C-4.

Carrots and Sticks - Post-Enron Regulatory Initiatives

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