Corporate Prosecutions Are All Over the Map

Sue Reisinger

January 03, 2011

The initials BP are by now a household word. It is a name that in the public mind at least has become synonymous with longtime legal, environmental, and safety issues.

The story starts two days after Christmas in 1965, when the oil rig Sea Gem collapsed and killed 13 crew members in the icy waters of the North Sea. Then came 40 years of toxic waste dumping, and oil and gas price manipulations, followed by the disastrous Texas City oil refinery blast of 2005 that left 15 workers dead and 270 injured.

The federal government ordered the company to fix some 300 safety problems at the refinery. BP paid a record $21 million fine and hired a new chief executive who vowed to make safety his top priority. But in 2009 the government cited BP again for failing to repair more than 200 of those violations and imposed another record fine.

Then, last April, faulty equipment at the refinery allowed thousands of pounds of cancer-causing chemicals to leak into the air for 40 days. Worse, no one told residents in the surrounding communities – or even BP’s own workers – that they were breathing toxic air.

Then came what may be its worst and most costly disaster yet. Last spring, BP’s Macondo oil well exploded in the Gulf of Mexico, killing 11 workers and causing the largest marine oil spill in history. Now the British company formally known as BP p.l.c. faces a criminal investigation and more than 300 civil suits over the spill. And that’s not all – a growing chorus of victims, their families, and their lawyers are calling for executives to be jailed and the company shut down if it doesn’t change.

BP North America general counsel John “Jack” Lynch declined to be interviewed for this story. But Lynch previously committed BP to take responsibility for the cleanup. The company also has set aside a $20 billion fund to pay damages claims, and it may sue other contractors on the rig for their alleged negligence.

Through the years BP has operated in an endless cycle of accidents, promises to do better, and record financial penalties. But the promises and costly punishment haven’t seemed to change how BP runs. That leaves legal scholars and prosecutors pondering: How should the criminal justice system punish – or reform – the BPs of the world?

The answer is critical to in-house counsel. That’s because when companies keep doing bad things, Congress generally steps in to “fix” the problem by imposing more work on the lawyers and costly reforms on their companies.

That’s what happened in 1989, when Congress reacted to the savings and loan crisis by passing the Financial Institutions Reform, Recovery and Enforcement Act that dramatically changed the industry and its regulation. It happened again after the Enron Corp. scandal, when Congress passed the Sarbanes-Oxley Act of 2002, which set enhanced standards for all U.S. public companies and accounting firms.

More recently, in 2010, Congress reacted to the financial meltdown and its excesses by passing the sweeping Dodd-Frank Wall Street Reform and Consumer Protection Act, parts of which also apply to all public companies, not just banks in trouble.

And that’s an issue that in-house counsel must bear. Larry Thompson, general counsel for PepsiCo, Inc., and former deputy attorney general in the Department of Justice, recently spoke at a legal symposium where he noted that reactive laws punish the innocent companies along with the guilty.

“No matter how gold-plated your compliance efforts, no matter how hard one tries, large corporations today are walking targets for criminal liability,” Thompson complained.

But Houston lawyer Brent Coon doesn’t see it that way. The founder of Brent Coon & Associates represented plaintiffs in the BP refinery blast, and now represents others in the Gulf oil spill. And he is outraged that the company keeps doing business as usual.

“Throw some of these bastards in jail, and in particular the corporate executives that make the decisions,” he urged.

Just to be clear, BP isn’t the only repeat offender. For example, before American International Group, Inc.’s risky behavior helped throw the world’s economy into chaos in 2008, the government knew that AIG was a company operating on the legal edge. It had already reached two settlements with prosecutors over wrongdoing – including a nonprosecution agreement in 2006 following a deferred prosecution deal in 2004, both of which imposed a corporate monitor, for all the good it did.

Former AIG chief executive Maurice “Hank” Greenberg, who was kicked out, always denied any wrongdoing. The New York attorney general’s office criminally charged Greenberg, but later dropped the charges in favor of civil litigation. He agreed to pay a $15 million civil penalty.

Then there’s GlaxoSmithKline plc. A Glaxo associate general counsel was indicted in November on charges related to off-label drug use. Before that the drug giant had already reached at least three separate settlements with prosecutors for alleged wrongdoing in 2003, 2005, and as late as October. In the October deal, which cost Glaxo $750 million in penalties, a subsidiary in Puerto Rico also pleaded guilty to a criminal charge for manufacturing contaminated drugs. The government has periodically imposed corporate integrity agreements on the drug company, without altering its behavior.

After the October settlement, Elpidio “PD” Villarreal, GSK’s head of global litigation, said Glaxo regrets how it operated its manufacturing facility. “Our commitment to compliance is demonstrated by the fact that we have not received an FDA warning letter at any plant since the [now-closed] facility was cited in July 2002,” Villarreal said. Three weeks later, the associate GC was indicted.

There are dozens of other examples of recidivist companies. But the pattern is clear. From fatal explosions to global financial meltdowns to health threats tied to drug company wrongdoing, prosecutors have settled for huge financial penalties and paper promises. Then the company returns to business as usual. Meanwhile, innocent companies are caught up in the consumer and government reactions.

So far, there is little evidence to show that higher fines and stricter monitoring are making the too-big-to-fail corporations change their behavior. And now, driven by recent corporate scandals and their consequences, critics are coming at the Justice Department from all sides.