Under Guidelines, Judges Become Corporate CEOs/Corporations On Probation: Sentenced to Fail
Legal Times, February 12,1990
by Victoria Toensing
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 violation.
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 worker misconduct.
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:
requiring the corporation to submit to regular or unannounced audits by a probation officer or auditors and to "interrogation of knowledgeable" employees;
prohibiting the corporation from paying dividends or other distributions to equity holders without prior approval from the court;
prohibiting the company from issuing new stock or debt or obtaining new financing outside the ordinary course of business, unless the court permits; and
requiring 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 board?
Consumers Always Pay
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."
The 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.