Non-Prosecution of Corporations: Toward a Model of Cooperation and Leniency

NORTH CAROLINA LAW REVIEW Volume 96 Number 3 23rd Annual Institute for Law & Economic Policy Symposium: Secrecy Article 8 3-1-2018 Non-Prosecution of Corporations: Toward a Model of Cooperation and Leniency Cindy R. Alexander Yoon-Ho Alex Lee Follow this and additional works at: http://scholarship.law.unc.edu/nclr Part of the Law Commons Recommended Citation Cindy R. Alexander & Yoon-Ho A. Lee, Non-Prosecution of Corporations: Toward a Model of Cooperation and Leniency, 96 N.C. L. Rev. 859 (2018). Available at: http://scholarship.law.unc.edu/nclr/vol96/iss3/8 This Article is brought to you for free and open access by Carolina Law Scholarship Repository. It has been accepted for inclusion in North Carolina Law Review by an authorized editor of Carolina Law Scholarship Repository. For more information, please contact . 96 N.C. L. REV. 859 (2018) NON-PROSECUTION OF CORPORATIONS: TOWARD A MODEL OF COOPERATION AND LENIENCY* CINDY R. ALEXANDER AND YOON-HO ALEX LEE** We apply the Kaplow-Shavell model of optimal law enforcement to study the effects of prosecutors’ use of non-prosecution agreements (NPAs) to obtain cooperation on broader enforcement objectives, including deterrence of crime. The NPA policy of the Department of Justice is documented in a series of memos that provide guidance to federal prosecutors on the charging of corporations. Prosecutors may offer NPAs as alternatives to a plea agreement in exchange for the company’s authentic cooperation. A benefit of authentic cooperation is to reduce the prosecutors’ costs of case development, both postreferral and pre-trial. But in order for the NPA to induce cooperation, the company must regard it as more lenient (or no less lenient) than the plea settlement. Thus, one concern regarding the use of a NPA is that the leniency it provides may, if anticipated, undermine general deterrence. For this reason, the prosecutor who seeks to maximize general deterrence may be more cautious in offering NPAs than one who is primarily concerned about minimizing the use of federal resources. A closer look at the tradeoffs reveals strategic benefits of the use of NPAs beyond the resource savings from cooperation. Using our basic model application as a guide, we conclude that the policy of limiting the use of NPAs to cases where the company provides authentic cooperation serves several enforcement objectives. From a traditional social welfare perspective, the efficiency of the * © 2018 Cindy R. Alexander & Yoon-Ho Alex Lee. ** Alexander: Research Fellow, Law and Economics Center, George Mason University. Lee (corresponding author): Professor of Law, Northwestern Pritzker School of Law. Cindy Alexander thanks James Cooper and the staff of the Law & Economics Center for their support for the portions of the DPA study that led to this project, colleagues at the SEC, and former colleagues at the DOJ and CEA for helpful discussions. The SEC disclaims responsibility for any private publication or statement by any of its employees. This Article expresses the views of the authors and does not necessarily reflect the views of the Commission or the authors’ colleagues upon the staff of the Commission. We would like to thank the following individuals for their helpful comments and discussions: Jennifer Arlen, Miriam Baer, Sam Buell, Mark Cohen, Honorable Jed Rakoff, David Reiffen, and the participants at the Institute for Law and Economic Policy’s 23rd symposium. 96 N.C. L. REV. 859 (2018) 860 NORTH CAROLINA LAW REVIEW [Vol. 96 NPA relative to a plea depends on whether the value of the resources saved through cooperation—in the form of increased ex ante probability of sanction faced by the offender—exceed the direct loss of deterrence due to the leniency of the sanction needed to obtain cooperation under the policy, other things equal. We also conclude that the use of NPAs—with or without cooperation—can facilitate efficient substitution between the informal sanctions that attach to criminal conviction, which can be socially costly (a deadweight loss), and the monetary sanction (a transfer). We suggest extensions of the model in which the effect of the NPA is to facilitate substitution into more efficient forms of settlement than those that would occur through plea agreements alone. INTRODUCTION ....................................................................................... 861 I. INSTITUTIONAL BACKGROUND ........................................................ 864 A. Guidance for Prosecutors: Valuing Cooperation by Corporations .......................................................................... 867 B. Non-Plea Settlements as Instruments for Obtaining Cooperation ........................................................................... 872 II. AN ECONOMIC MODEL OF NON-PLEA SETTLEMENT WITH COOPERATION.............................................................................. 873 A. Basic Enforcement Program ................................................ 874 B. Alternative Enforcement Program: NPA ............................ 877 III. APPLYING THE BASIC MODEL: PROSECUTOR CHOICE UNDER ALTERNATIVE ENFORCEMENT OBJECTIVES............. 881 A. Objective #1: Conserving Enforcement Resources ............. 882 B. Objective #2: Maximizing Proceeds and Resource Savings .................................................................................... 883 C. Objective #3: Maximizing Deterrence with a Fixed Budget ..................................................................................... 884 D. Objective #4: Enforcement Resources and Social Welfare ................................................................................... 888 IV. OTHER MOTIVATIONS FOR NPA?: THE DISCRIMINATING PROSECUTOR WITH BUNDLING ................................................. 889 A. Use of NPA in Complex Cases to Extend the Scope of Criminal Enforcement .......................................................... 890 B. Use of NPA to Obtain a Commitment to Future Cooperation ........................................................................... 892 C. Use of NPA with Selection Effects That Encourage Investment in Compliance Programs................................... 894 V. CONCLUSION ...................................................................................... 896 APPENDIX ................................................................................................ 898 96 N.C. L. REV. 859 (2018) 2018] NON-PROSECUTION OF CORPORATIONS 861 INTRODUCTION In 1994, John Hancock Mutual Life Insurance (“John Hancock”) settled charges that it had “repeatedly violat[ed] Massachusetts state law by giving legislators gifts worth more than $50,” such as theater and sports tickets and, in one instance, an expense-paid trip to the Super Bowl.1 After a lengthy investigation, the federal government entered into a non-prosecution agreement (“NPA”) with the company in which it admitted to violations of the state criminal law, “pa (...truncated)