The protections and incentives afforded by the SEC’s whistleblower laws seek to reduce and ultimately stop corporate wrongdoing. The SEC’s whistleblower statutes are just one means the federal government uses to combat corporate malfeasance. Another tool the government uses to achieve the same overarching goals is prosecution of corporations that have engaged in criminal wrongdoing. An October 2015 Trac Reports study examines recent data related to the Department of Justice’s (DOJ) prosecution of corporate defendants. In this post we will highlight the trends uncovered by the study and discuss the implications of the study’s findings.
Drop in Corporate Crime Prosecutions
The Trac Reports study finds that though the DOJ has been using powerful rhetoric to condemn corporate malfeasance and to stress its commitment to enforcing criminal statutes pertaining to corporate wrongdoing, the Department has, in fact, been prosecuting fewer and fewer corporate crime cases over the past 10 years for which data is available (2004-2014).
Between 2004 and 2014, there has been a 29% drop in criminal prosecutions. During the 10 years for which data is available, the DOJ prosecuted the most cases in 2005 (398 cases). In 2014, the number of prosecutions was 237, nearly 40% fewer than its peak. Though the decline has not been steady, it has been pronounced. Between 2004 and 2008, the Department of Justice filed at least 300 prosecutions per year against corporations. Between 2008 and 2014, the Department of Justice consistently prosecuted fewer than 300 corporations.
Why Is the DOJ Pulling Back?
The study goes on to discuss why we have seen such a significant drop in prosecutions. According to DOJ data, agency referrals of corporations to federal prosecutors have remained relatively constant, suggesting that the decline in prosecutions cannot be traced to a decline in referrals or to a decline in corporate criminal activity generally. In fact, there were more referrals to federal prosecutors in 2014 than there were in 2004. Furthermore, between 2002 and 2012, the total number of corporate entities, including partnerships, corporations and sole proprietorships, has increased by nearly a quarter. Therefore the decline cannot be traced to a decline in the total number of businesses.
The author of the study points to one possible factor in the reduction in the DOJ’s corporate prosecutions: an internal memorandum from then Deputy Attorney General, Mark Filip, entitled “Principles of Federal Prosecution of Business Organizations.” This memorandum urges prosecutors to consider a number of factors when filing a case against a corporation. For example, the memorandum encourages prosecutors to consider “the consequences to a corporation’s employees, investors, pensioners, and customers, many of whom may . . . have played no role in the criminal conduct, have been unaware of it, or have been unable to prevent it.” The study posits that the 2008 memorandum may have led prosecutors to file fewer cases. The data indicates that there was a 21.9% decrease in prosecutions for the 5-year period between 2010 and 2014 as compared to the 5-year period between 2004 and 2008.
Continuing to Deter Fraud
While prosecutions against individuals are rising in number, prosecutions against corporations have been falling. The decline in corporate prosecutions despite no indication of a corresponding reduction in corporate crime is concerning. Although the SEC Whistleblower Program can play a role in stopping corporate malfeasance by increasing the chances that an offender is caught, attaching serious consequences to violations that are detected is also a critical part of deterring fraudulent activity at financial institutions.