John Hasnas is a professor of ethics and law at Georgetown University’s McDonough School of Business and is the author of the new book, Trapped: When Acting Ethically is Against the Law (Cato 2006), which is an adaptation of Hasnas’ article Ethics and the Problem of White Collar Crime.
In this superb Cato Institute op-ed (first published in the Wall Street Journal), Professor Hasnas addresses a common topic on this blog — the perverse effect that implementation of the Department of Justice’s Thompson Memo has had on companies serving up their employees as sacrificial lambs to avoid an Arthur Andersen-like meltdown:
Say you run a financial services firm that markets tax shelters to wealthy clients. Although the shelters are aggressive, you firmly believe they’re legal. Indeed, you have sent one of your tax partners to testify before Congress to that effect. The IRS hasn’t challenged the shelters in court, and no court has declared them to be illegal. Nevertheless, the Department of Justice has opened an investigation of your firm for tax fraud and indicted the partner who testified before Congress.
As a responsible executive, what should you do? Instruct corporate counsel to conduct an internal investigation to ensure that no law has been broken? Have the legal department begin to work on the corporation’s defense? Enter into a joint defense agreement with the partner under indictment? Advance the partner’s legal fees in accordance with the company’s policy of supporting employees sued for employment related actions?
Or should you have the corporation accept responsibility for tax fraud, officially declare that several of your tax partners engaged in unlawful conduct, refuse to enter into a joint defense agreement or advance the legal fees of any of these partners, fire those who refuse to cooperate with the government, waive the firm’s attorney-client and work product privileges, disclose all information that may incriminate your employees to the government, and agree to pay a several hundred million dollar fine?
[The latter approach], surprisingly, is the answer. Under current federal law and Department of Justice policy, it would be irresponsible management to attempt to defend the corporation or its employees.