Beyond Defensive Thinking

Letter from the Editor-in-Chief, Neil V. Getnick, Esq.

Published in Civil Prosecution News, Vol 1, No. 2, Winter 1995

Most businessmen think of the Federal Sentencing Guidelines in purely defensive terms. No wonder. Most lawyers do as well.

By now savvy businessmen and their counsel know that the guidelines provide for sentencing of organizations to be determined primarily by these factors: (a) the steps taken by the organization prior to the offense to ensure that it has an effective program to prevent and detect violations of the law; (b) whether high level personnel either participated in, condoned or were wilfully ignorant of the criminal activity; and (c) whether the organization reported the offense it detected promptly, fully cooperated in the investigation, and accepted responsibility for its criminal conduct.

The guidelines provide a minimum standard for businesses. Once a company compliance program is undertaken, however, it can produce a whole new perspective and mode of conduct. For one, such a program can become a potent weapon against fraud both within and without the company. Civil prosecution, by seeking civil remedies against commercial fraud, is wholly compatible with the guidelines. It offers much more than that, however. Civil prosecution can provide the means for a company to resist and fight fraud by outsiders who would seek to do it harm for their own personal gain.

IBM v. Brown, 857 F.Supp 1384 (C.D. Cal.1994), one of the cases discussed in this issue of CPN under “Recent Developments,” underscores this aspect of civil prosecution. There, IBM alerted the Los Angeles Police Department to the suspected theft and fraudulent sale of IBM computer equipment by a corrupt IBM employee to a purported data products business. What developed thereafter highlights the benefits to a company which moves beyond the guidelines in an active partnership with law enforcement to fight fraud.

The LAPD commenced an undercover operation in which IBM cooperated, resulting in the execution of search warrants on the premises of the defendants and the recovery of many millions of dollars in stolen IBM equipment. IBM assisted the LAPD in identifying the stolen property, tracing the path of the stolen equipment, explaining how IBM’s computer ordering system was manipulated to achieve the fraudulent sales, and interpreting various IBM documents seized from the defendant’s offices. In the course of that cooperation IBM reviewed and photocopied certain of the seized documents.

The defendants were charged criminally with various theft, receiving stolen property and conspiracy offenses, and were sued by IBM civilly under RICO. The defendants argued that IBM and the LAPD had engaged in misconduct by sharing information during the investigation, particularly with respect to the viewing and copying of the seized documents. The court found nothing “remotely improper” in this, and specifically no violation of the defendants’ statutory or constitutional rights.

The court took the opportunity to make several observations about the propriety of cooperation between corporate fraud victims and the government. Noting that government resources to combat fraud will never be able to cope with the demand without aid from white collar victims, the court stated: “Business frauds very often involve complex schemes. As a result, very large expenditures of funds and resources are often necessary before a bona fide suspicion of fraud can be affirmed. Where private investigation reveals that a crime had been committed, why should the government be precluded from using the investigation as a basis for prosecution simply because the government has not paid for it?”

The District Court ruled that the defendants in IBM’s civil RICO case were not entitled to a stay of that action during the pendency of parallel criminal proceedings. Pointing to the interest of the victims of crimes in obtaining redress for their losses, the court reasoned that delaying the civil case would only assist the defendants to further dissipate their assets and to render themselves judgment proof.

Such are the benefits to be reaped by businessmen and lawyers who allow themselves to go beyond purely defensive reasoning and behavior. Presented in this issue of CPN is another such example, namely the “Alliance Case”, where a consortium of insurance companies led by Fireman’s Fund joined with law enforcement to shut down one of the largest cases of insurance fraud cases ever. Civil prosecution offers an approach that takes off where the guidelines leave off. Defensive thinkers view the guidelines and compliance programs as a hedge against whistleblowers and law enforcement, “Can do” individuals are able to reap the benefits of coupling compliance programs with the civil prosecution approach: detecting and preventing potential losses and, ultimately, demonstrating the profit in fighting fraud.