Guidelines, Judges Become Corporate CEOs
Corporations On Probation: Sentenced to Fail
The next time a nominee for
a federal judgeship appears for Senate confirmation, the Judiciary Committee
should add to the list of legal qualifications whether the candidate can run
General Motors, or Alcoa, or Nynex. If the U.S. Sentencing
Commission's draft guidelines for corporate criminal sanctions become law
this year, the judge might wind up managing a major corporation.
What principle of law could
possibly transform a federal judge into an operating officer of a healthy
U.S. business? The vehicle for this remarkable outcome is a document
entitled “Organizational Probation," which is part of a larger set of
draft guidelines, “Sentencing of Organizations.” In the
organizational probation guidelines, the Sentencing Commission sets out its
proposed rules under federal law for sentencing a convicted corporation to
probation - a punishment that judges in the past have generally found
unworkable for corporations, though suitable for individual defendants.
Those judges may have been
on to something: The Sentencing Commission's proposals are full of pitfalls.
Up to now, corporate
probation has been used sparingly, and basically amounted to ministerial
oversight. A judge might impose probation as a means of continuing the
court's non-interventionist jurisdiction over a matter until all fines or
restitution were paid. But the Sentencing Commission's proposals go
way beyond this principle, expanding probation into a hands-on supervisory
power - and that's where they get into trouble.
Under the draft guidelines,
probation is mandatory if, at the time of sentencing, the corporate
defendant has not completely paid whatever monetary penalty and restitution
are imposed. Non-payment at that stage will, of course, be
commonplace. By sentencing day, not all victims entitled to
restitution will have been found. Similarly, it may be physically
impossible for the company to have finished cleaning up an environmental
Indeed, the exact amount of
the fine will not even be revealed until sentencing. Only then can a
corporation, which usually must follow regularized procedures in issuing
payments, start the wheels in motion for obtaining a definite sum. Yet
if the fine is not paid at the time of sentencing, the corporation must be
handed a probationary term - and if the crime was a felony, that term must
be for a minimum of one year.
The guidelines also attempt
to order probation if the company violates a criminal statute not contained
in Title 18 of the U.S. Code - for example, antitrust, securities, and
environmental offenses. The purpose here, apparently, is to extend
restitution remedies to these crimes. It's a backdoor maneuver by the
commission: Recognizing that 18 U.S.C. 3663 does not itself authorize
restitution for these offenses, the guidelines direct judges to seize the
restitution power indirectly, by sentencing the corporation to probation
with a condition requiring restitution.
It is unclear where the
commission thinks the courts will derive their power to do this. But
it is not really the concept of restitution that is so troublesome.
Rather, it is the commission's proposal to use the circuitous route of
mandatory probation as a device to order restitution where Congress has
pointedly avoided it. And with that forced probation comes the judge
or probation officer to run the company as well as the attendant conditions
on business operations.
Probation is also mandatory
under the proposed guidelines if the corporation committed a like offense
within five years of the instant offense. Yet an infraction by a
company actually means an infraction by an employee. And employee
offenses are frequently detected - through telephone hotlines, internal
audits, and similar government-recommended programs - and brought to justice
by conscientious corporate management. In these circumstances, the
main consequence of mandatory probation may be to increase the burden on
companies that are already doing a good job of ferreting out and reporting
The Sentencing Commission
is, if possible, even more heavy-handed when it turns to the terms of
probation. If a corporation is put on probation because its monetary
penalty was not fully paid at the time of sentencing, the proposed
guidelines recommend that "to secure the defendant's obligation to
pay," the court should impose certain conditions. These include:
the corporation to submit to regular or unannounced audits by a
probation officer or auditors and to "interrogation of
the corporation from paying dividends or other distributions to equity
holders without prior approval from the court;
the company from issuing new stock or debt or obtaining new financing
outside the ordinary course of business, unless the court permits; and
the corporation to get prior judicial approval of any merger,
consolidation, reorganization, refinancing, liquidation, bankruptcy, or
any other major transaction.
If probation is imposed
because of a prior conviction or concerns about compliance, the draft
guidelines recommend that the sentencing judge order the company to develop
compliance programs for court approval. The court may hire outside
experts to assess the plan's efficacy. In addition, the company must
submit periodic reports to the court or probation officer.
Finally, the draft
guidelines include this open-ended invitation to judicial micro-management:
The court may impose any "other [probationary] condition"
reasonably related to the nature and circumstances of the entire case and
the purposes of sentencing. More specifically, the Sentencing
Commission's commentary OD this provision adds that a judge may devise a
restriction "to assure that a defendant not avoid the impact of a fine
by inappropriately passing the costs of such on to consumers or other
persons." Presumably, this authorizes courts and probation
officers to control corporate pricing structures.
What is ominous about these
proposals is the utter absence of empirical data to support them.
Supervisory probation of legitimate business corporations is virtually
unprecedented. It would be purely fortuitous if the punishment
accomplished more good than harm.
How is a judge or probation
officer to determine, for example, whether the company should pay dividends,
issue new debt, or, for heaven's sake, enter into a merger? If the
court disagrees with and prevents a financial transaction desired by the
board of directors, and that decision results in depletion of assets, is the
court subject to a stockholder suit for breach of fiduciary duty? Is the
A better trick yet is
devising a condition of probation that assures the cost of the fine is not
passed on to "consumers or other persons.” Is a judge or probation
officer really equipped to regulate a business' cost structure or pricing
strategy on an ongoing basis? Any corporate pocket picked for payment will
take money from “persons" one way or another. The
stockholders will receive less, the retirement funds less; the cafeteria
will not be built, or the product line will not be upgraded.
Somewhere, somehow, the fine will be passed on to someone.
When Congress created the
Sentencing Commission in 1984, legislators discussed organizational
probation and warned the commission against the very kind of risky
experiment now being suggested. In its 1983 report, the Senate
Judiciary Committee noted, “It is not the intent of the Committee that the
courts manage organizations as a part of probation supervision."
proposed probation guidelines have a low threshold and overwhelmingly
intrusive conditions. They are far from what Congress had in mind and
far from realistic. Regrettably, what the Sentencing Commission sends
to Congress can become law without any legislative action. In an
election year, few members will want to become mired in the intricacies of
such a complex subject. It is up to the commissioners to take another
look at their own proposal.