The Boeing-DOJ Debacle

In a June letter to US Attorney General Alberto Gonzales, Ralph Nader and I wrote:

The Boeing case and the rash of no-prosecute deals for large corporations represent a systematic derogation of the Justice Department’s fundamental duty to seek equal justice, and an institutionalized double standard biased in favor of large corporations.

The full text of the letter follows:

Ralph Nader

Robert Weissman

P.O. Box 19312

Washington, DC 20036

June 5, 2006

Attorney General Alberto Gonzales

U.S. Department of Justice

950 Pennsylvania Avenue, NW

Washington, DC 20530

Dear Attorney General Gonzales,

To what extent do you believe that large corporations are subject to the criminal law?

The Justice Department’s Principles of Federal Prosecution of Business Organizations (the “Thompson Memo”) crisply describes the framework under which corporate criminal liability is to be assessed.

Corporations are “legal persons,” capable of suing and being sued, and capable of committing crimes. Under the doctrine of respondeat superior, a corporation may be held criminally liable for the illegal acts of its directors, officers, employees, and agents. To hold a corporation liable for these actions, the government must establish that the corporate agent’s actions (i) were within the scope of his duties and (ii) were intended, at least in part, to benefit the corporation. In all cases involving wrongdoing by corporate agents, prosecutors should consider the corporation, as well as the responsible individuals, as potential criminal targets. (1)

There are some who believe that there should be no corporate criminal liability.(2) Perhaps you share this view. If the Bush administration believes that there should be no corporate criminal liability, then it should seek legislation to establish this principle. In the meantime, the Justice Department has a duty to enforce the law – which does in fact encompass corporate criminal liability — guided by the reasonable exercise of prosecutorial discretion.

We are prompted to raise these issues because of a remarkable and disturbing trend, intensified in the last few years, of federal prosecutors refusing to prosecute large corporations, evidenced most recently by the shocking decision not to prosecute Boeing.

The Epidemic of Non-Prosecution and Deferred Prosecution Deals

A recent report issued by Corporate Crime Reporter found that there were at least 34 non-prosecution and deferred prosecution agreements with large corporations between 1992 and 2005 — with more than two thirds of the cases occurring since 2002.(3) The system of pre-trial diversion, which was intended as a means of preserving prosecutorial resources and simply disposing of non-serious cases, has now mutated into a tool to facilitate corporate criminals’ escape from prosecution, conviction and serious penalty for their criminal acts.

What has intensified under your watch is a pervasive system of double standards: tough criminal penalties and lifetime stigma for individual street criminals, but second (and third chances) for corporate criminals that promise to do better in the future. The double standard is all the worse because it contradicts and undermines the basic purposes of the criminal justice system — deterrence and punishment — for the very actors for whom such objectives make the most sense. Because corporations coldly calculate costs and benefits — undertaking careful and detailed risk assessments as a fundamental part of their intentional decision-making process — they are most likely to be responsive to hard-hitting penalties, not fines easily integrated and transferred into the “cost of doing business.”

The defenses of routine use of non-prosecution and deferred prosecution agreements are unpersuasive. First is the notion that, because corporations are anxious to avoid prosecution, negotiations over a deal not to prosecute give great leverage to prosecutors. They can use this leverage to gain information to prosecute executives who committed the underlying crime, and to demand ongoing monitoring of the corporation’s actions and changes in its structure. But the goals of ongoing monitoring might instead be achieved through prosecution and implementation of a probation period, as was notably done with a federal case involving Consolidated Edison in the 1990s.(4) And the focus on individuals, while important, ignores the crucial role of organizational culture in fostering criminal wrongdoing, and the responsibility of the corporation to police the activities of its officers. No-prosecute arrangements also fail to consider the effect of the deal on other potential wrongdoers.(5) The message sent is: You get at least one free opportunity to break the law without facing criminal sanctions.

A second rationale for no-prosecute arrangements is the perceived need to avoid imposing harm on innocent bystanders — a convicted company’s shareholders or employees, for example. But while concern for innocent parties is legitimate, it does not generally justify a no-prosecute approach. First, there are many innocent parties to consider, including those hurt by the criminal wrongdoing in the first place. Second, the innocent party concern is driven especially by a fear that a convicted company will be forced out of business. That rarely happens, though convictions may (and should) have bottom-line consequences. Third, not all of the presumed innocent parties have clean hands; they often benefited along the way from corporate misdeeds.

There may be specific cases of corporate criminal wrongdoing where reasonable persons can argue that no-prosecute arrangements are justified, but these should be the exception, not the norm. Now, it is only the rare case, at least outside of the antitrust and environmental law enforcement arenas, where a corporation is criminally prosecuted.

The Boeing case makes clear how serious the problem has become.

The Boeing Debacle

Last month, the Justice Department announced a tentative agreement with Boeing to resolve two entirely separate cases of apparent criminal wrongdoing — “concerning Boeing’s hiring of former Air Force acquisition official Darleen Druyun in 2002 and the investigation by the United States Attorney’s Office for the Central District of California regarding possession of a competitor’s information in connection with launch service contracts with the Air Force under the Evolved Expendable Launch Vehicle Program and with a task order with NASA for 19 missions under its launch services contract.”(6)

Both of these matters involved serious offenses against the U.S. government and U.S. taxpayers. They both involved projects of considerable importance to Boeing. And in both cases the company’s conduct was extraordinarily egregious; these were not failures to comply with arcane rules, but theft of a competitor’s proprietary data to facilitate bid-rigging and a quid pro quo arrangement with a government contracting officer to facilitate a massive government overpayment for a weapons system of very questionable benefit.

In the Evolved Expendable Launch Vehicle Program scandal, Boeing acquired 25,000 pages of bidding documents from its sole competitor, Lockheed Martin. It then used the information to set its bids just below those of Lockheed. The government and taxpayers were thus cheated of the benefits of genuine competition.

In the elaborate Darleen Druyan affair, Air Force contracting officer Druyan admitted doing a variety of “favors” for Boeing. In the Pentagon’s misguided deal to lease rather than buy tankers from Boeing, Druyan admitted that she “agreed to a higher price for the aircraft than she believed was appropriate.” Boeing reciprocated for these gifts — ripoffs of taxpayer money — by hiring her. Her hiring was managed at the highest levels of the company, involving then-Chief Financial Officer Michael Sears. It is true that Boeing would eventually disclose the improper collaboration between Sears and Druyan, but this came only after public outcry and the exertion of political pressure by Senators John McCain and John Warner, among others. A diligent corporation — including a diligent board of directors — would have scrutinized this suspect arrangement before a formal hire was made.

News reports have remarked on some of the extraordinary concessions that Boeing was able to exact from the Justice Department in reaching a non-prosecution deal:

• The government agreed to enter into a non-prosecution agreements rather than a deferred prosecution deal;

• The government agreed to describe the penalty payment from Boeing as a potentially tax deductible “monetary penalty” rather than a “criminal penalty;” and

• Boeing does not have to acknowledge that federal prosecutors have sufficient evidence to warrant felony charges.(7)

Among other advantages, these concessions will assist the company defend itself in civil litigation. They of course comes on top of the main benefits: no criminal charges, no ongoing scrutiny of the company’s performance in the context of a criminal prosecution, no criminal penalties.

Perhaps the most audacious innovation of the Boeing non-prosecution agreement is that it resolves not just one instance of potential criminal activity, but two. One of the key factors in the Thompson Memo, and in any commonsense exercise of prosecutorial discretion, is whether the wrongdoer has engaged in repeated violations of the law. Here by definition Boeing has engaged in repeat violations, for the non-prosecution agreement settles two brazen and potentially criminal abuses of the contracting process.(8)

At the very least, the Department owes the American people a public explanation of how it applied the Thompson Memo factors to reach a determination not to prosecute – a move that Win Swenson, who was a key figure in developing the U.S. Sentencing Commission corporate criminal guidelines, properly says should be done as a standard feature in connection with all such decisions.(9)

However, given the seriousness of Boeing’s misdeeds and the fact that it committed two entirely separate and serious offenses, it is very hard to see how a reasonable application of the Thompson Memo factors could have led to a no-prosecute decision.

Indeed, if a report in the Wall Street Journal is correct, career attorneys at the Justice Department reached a similar conclusion – only to be overridden by higher-ranking officials.(10)

Remedying the Damage Done

The Boeing case and the rash of no-prosecute deals for large corporations represent a systematic derogation of the Justice Department’s fundamental duty to seek equal justice, and an institutionalized double standard biased in favor of large corporations.

We urge you to withdraw from the tentative no-prosecute agreement with Boeing; formally reassess the routinized use of deferred prosecution and non-prosecution agreements for large corporations; and adopt a formal policy of explaining, in every case where deferred prosecution and non-prosecution agreements are employed in cases involving large corporations, how application of the Thompson Memo factors, or other appropriate considerations, led to the decision not to criminally charge and prosecute.

We look forward to your timely reply.

Sincerely,

Ralph Nader Robert Weissman

FOOTNOTES:

1. Deputy Attorney General Larry D. Thompson, “Principles of Federal Prosecution of Business Organizations” (hereinafter the Thompson Memo), January 20, 2003.

2. See, for example, An Interview with Jeffrey Parker, Corporate Crime Reporter, November 25, 1991.

3. Corporate Crime Reporter, Crime Without Conviction: The Rise of Deferred and Non Prosecution Agreements, December 28, 2005, available at .

4. See Dean Starkman, “Con Ed Case Shows Monitors Are Gaining Prominence, Power,” December 1, 1997.

5. As the Thompson Memo notes, “[C]orporations are likely to take immediate remedial steps when one is indicted for criminal conduct that is pervasive throughout a particular industry, and thus an indictment often provides a unique opportunity for deterrence on a massive scale.”

6. Statement of Tasia Scolinos, Department of Justice Director of Public Affairs, Regarding the Proposed Settlement with the Boeing Company, May 15, 2006.

7. Andy Pasztor, “Boeing to Settle Federal Probes for $615 Million – Deal Allows Defense Giant to Avoid Criminal Charges in Contracting Scandals,” Wall Street Journal, May 15, 2006.

8. Boeing has a record replete with other cases of serious wrongdoing (most resolved civilly). See www.pogo.org/db.

9. An Interview with Win Swenson, Corporate Crime Reporter, January 9, 2006.

10. See also Kenneth Culp Davis, Discretionary Justice, Chicago: University of Illinois Press, 1971, especially pp. 103-106. Davis explains that the government decisions most prone to abuse are those that are discretionary, and argues that one modest check on government discretionary action, including decisions to prosecute or not prosecute, is to publish written explanations of the decisions.

Pasztor (“The deal marks a retreat from the more than $750 million in penalties originally sought by Justice Department lawyers, who also envisioned the company’s pleading guilty to several felony charges, according to people familiar with the matter. But as the settlement talks dragged on and higher-ranking Justice Department officials became involved, the emphasis shifted to a smaller penalty and an agreement that didn’t include criminal charges.”).