Stuck in the middle: the US struggles to prosecute senior executives
When the DoJ issued the Yates memo, it put pressure on prosecutors to charge the most senior culpable executives accused of corporate crimes. At the DoJ’s antitrust division, that’s always been the mantra. Now, GCR has used data from Professor John Connor’s global cartel dataset to examine exactly what kind of employees the antitrust division has tended to charge with antitrust crimes. Ron Knox reports.
“You got all this stuff from customers, your salespeople are complaining, but goddamn it that’s our job! As managers, that’s our job”
Terry Wilson, former head of Archer Daniels Midland’s corn processing business
The image of Terry Wilson as he says these words is famous now, at least in the antitrust world. There he sits at one end of a couch, white hair, silver-framed glasses, left arm draped over the armrest and holding a drink. He wears a short sleeved button-up shirt and light-coloured trousers – the uniform of the businessman who’s escaped to Hawaiian paradise.
The image comes from a video, filmed by a camera hidden by the FBI in a nook of a Maui hotel room in March 1994. Wilson is surrounded by other businessmen, most of them dressed more formally. Most are Japanese. He and the others work for companies that should have competed with one another to make and sell different chemicals. Yet here they are, in this hotel room, hatching this conspiracy, agreeing that their customers – not each other – were their real enemies, and that it was their job to ensure that their employers made nice, steady profits without the hassle of cutthroat rivalry.
But in his rant, perhaps the most notorious two-and-a-half minutes of verbiage in antitrust history, Wilson also makes clear the positions of the men in the room. They have bosses who will praise or pan that year’s earnings depending on how Wilson and his cohorts perform. They also have salespeople below them, clearly – as Wilson announces, they are managers, and steadying the business is their job. The men in this room are bosses, for sure, but not the bosses. Their authority remains sequestered in their own corners of the business. Their bailiwick includes the daily trudge of pricing and sales – things that their superiors hadn’t touched in years. The men in that smoky hotel room in Hawaii 22 years ago were, by definition, middle managers.
Wilson, who was sentenced to two years in federal custody for his crimes, has been one of dozens of middle managers to take the fall when the DoJ charged and convicted their companies of cartel crimes, according to a GCR analysis of more than 450 executives charged in US antitrust cases since the turn of the millennium. Spurred by a recent Department of Justice memo that encouraged the DoJ to prosecute the most senior executives possible when investigating corporate crimes, GCR examined the DoJ’s track record in prosecuting executives to glean exactly who the antitrust division has put behind bars over the past two-plus decades of international cartel enforcement.
The results were stark: men like Wilson – managers and directors outside of the C-suite – are the people who have most often spent time in US prisons for antitrust crimes.
According to cartel-related data compiled by Purdue University professor emeritus John Connor and bolstered by GCR’s original research, employees with the titles of manager or director have been prosecuted for antitrust conspiracies far more often than any other type of worker. Managers and directors appear a total of 173 times in Professor Connor’s database of executives charged with antitrust crimes. Vice president, another role often wedged between upper management and lower-level staff and managers, appears the third-most frequently in our data, at 73 times. Those employees most often considered upper management – C-suite executives and presidents – appeared in the data relatively infrequently: 50 employees categorised as executives have been charged with cartel crimes in the US, while 48 employees with the title of president have been charged.
Those numbers suggest that, while there is no massive disparity between one group of executives and the next, the antitrust division of the DoJ has tended to prosecute lower-level employees working at companies accused of fixing prices or dividing markets more frequently than top corporate executives. The memo, written by DoJ deputy head Sally Yates, has clearly injected a new sense of urgency in the antitrust division, but the agency’s stated mission when targeting the employees of accused cartelists has always been to charge and prosecute the highest-ranking, most-culpable executive it could. With so many managers and lower-level executives spending time in prison for their companies’ wrongdoing, it raises the question: has the DoJ fulfilled that mission over the past two decades? And will the Yates memo matter when prosecutors decide whom to charge with antitrust crimes?
Former senior DoJ officials and other antitrust observers suggest the memo will matter to enforcement, but perhaps not as Yates or DoJ officials expected. Meanwhile, observers say, the obstacles to prosecuting top executives for antitrust crimes remain myriad and difficult to overcome.
Since taking over as the top criminal enforcement official in the US Department of Justice’s antitrust division in November 2013, Brent Snyder has racked up frequent flyer miles on the competition conference circuit. He’s appeared a dozen or so times at events from New York to Tokyo, preaching the gospel of criminal enforcement at each stop along the way. While the antitrust division’s message has changed little since the 1990s, when then-deputy assistant attorney general Gary Spratling delivered criminal antitrust sermons from lecterns near and far, the point is no less poignant: if your company does the crime, be prepared to do the time.
Over the past year, Snyder has delivered that message with new emphasis. In September 2015, the DoJ published the Yates memo, which urged the department’s prosecuting divisions to do what they could to charge, try and convict top company executives if and when there is evidence of their culpability for the crimes of their employers. Yates wrote the memo amid widespread criticism of the DoJ for failing to punish top banking executives in the wake of the financial crisis. The memo was intended to allay that public outcry and, moreover, remind federal prosecutors that human beings are ultimately responsible for the actions of a company, and should be punished when the evidence suggests that they broke the law.
But at the DoJ’s antitrust division, the requests in the Yates memo seemed superfluous. For decades, the division has explicitly aimed to punish the highest-ranking culpable executives they could. Division officials have stressed that goal in speeches over the years, and the architects of the modern leniency programme – the division’s primary tool for uncovering cartels and other criminal acts – built in incentives for companies to turn over evidence of executives’ involvement when such evidence exists. “This has been a mantra for so long,” one former senior antitrust division official says of the agency’s goals of punishing culpable executives. “It’s always been the policy.”
In fact, sources say that while the antitrust division was not the prosecuting section Yates had in mind when she drafted the memo, it may have indirectly helped motivate her to write it. Frustration had grown within the top ranks of the DoJ over the enforcement record of the criminal division, especially when compared to the long list of executives the antitrust division has brought to justice through plea deals or jury trials. Indeed, sources say that the promotion of former antitrust division head Bill Baer to the DoJ’s front office reflects how pleased top department officials, and President Obama himself, have been with the antitrust division’s record.
So when Snyder and other division officials began speaking publicly on whether and how the Yates memo would affect the work at the antitrust division, they stressed that it would do little to change how the division conducted its business.
Why, then, have prosecutors so rarely charged those at the top of a company with its antitrust crimes? Sources with an intimate understanding of how the division makes its decisions, and how conspiracies often take place, say that a web of factors help to shield executives from prosecution. Employees’ extreme loyalty to their companies and bosses, the pressure to close cases and the nature of the crime itself all combine to keep executives out of DoJ crosshairs.
Antitrust crimes happen primarily in the corners of a company where certain kinds of business activities occur. Crimes that involve trading at a bank would involve traders and their direct managers, for example. The activities that most often break the antitrust laws – fixing prices and rigging bids – are typically carried out by those employees responsible for a company’s daily pricing decisions and contract bidding. More often than not, observers say, those employees are the easiest targets for the antitrust division because of the evidence: their names appear on the emails, they attended the meetings, they struck deals with rivals to set prices.
“It’s really more about the crime than the division’s policies or procedures,” says James Mutchnik, a former antitrust prosecutor and, for the past 16 years, a criminal antitrust defence attorney at Kirkland & Ellis. “The crime defines who is responsible, and that is often the vice president and directors,” rather than top executives, who may have known about and approved an agreement but avoided the dirty work of putting it in place.
Particularly in large corporations with multiple product divisions, the price of any one product is often delegated to those managers and directors responsible for the sale of the product, observers say. Bidding is an even more lowly duty that typically falls to even less senior employees. Smaller companies or one-product businesses can be exceptions, but even then a lower-ranking manager can control day-to-day price decisions.
“Price is a dirty concept, and it’s well below the senior executive positions,” Mutchnik says. The evidence that DoJ investigators collect reflects this reality.
It’s one of the highest and most persistent hurdles to prosecuting corporate bosses, observers say. In most cartel cases, prosecutors believe that senior executives knew of a conspiracy, and gave the scheme either tacit or explicit approval. But the DoJ often declines to prosecute those bosses because they lack the proof that they believe they need to convince a jury that those executives are guilty beyond a reasonable doubt. Emails vanish, or they never existed in the first place. Conversations happen privately with no record. A trail of tangible evidence, very often, never materialises.
Internally, sources say, the antitrust division has created three main categories of executives, primarily as a way to classify people according to the evidence available against them, which often coincides with their corporate rank. Antitrust investigators follow leads in the hope of moving corporate employees from one category – a group it calls “knowledge and authority”, meaning the executive should have been aware of a conspiracy and had the power to stop it – to the category of people the government most often prosecutes: those with “direct involvement”. If there’s scant evidence against an executive in the knowledge and authority group, he is unlikely to be charged, even if investigators believe they knew about and approved the crime.
The lack of evidence against bosses can be deliberate, sources say. Investigators have heard multiple accounts of top executives ordering subordinates not to copy them in on emails and not to inform them of decisions that could put them in a precarious legal position. One former official describes some corporate environments as mirroring that of the government, where top officials are shielded from the down-in-the-dirt stirrings of their staff. The evidence against those bosses was simply never created in the first place.
That jury-convincing evidence can also be rare in part because those top bosses honestly never know about the decisions their employees make, observers say. Their seniority protects them if and when price fixing plots unfold in the lower ranks of their company. “[Investigators] can often see the attempts to keep a conspiracy from superiors,” the former official says.
A source describes the DoJ’s struggle to prosecute top executives as a game of musical chairs. When the music stops – when the FBI raids an office or when the subpoenas come in the door – the president or chief executive of a company is very unlikely to be caught without a seat. Top executives might have been kept standing in that position a decade before, when they were in charge of day-to-day business decisions at the company. Now, their job involves oversight and strategy. “The guy who was left without a chair says: My boss made me do it,” the source says. “But his boss is usually the vice president, not the president.”
Kimitoshi Yabuki, at Yabuki Law Offices in Tokyo, says that in Japanese companies, top executives are often not invited to take part in cartel conspiracies and are unaware of their existence.
“Large companies have a lot of sections and departments so that, even if one of such sections or departments was engaged in collusions, top leaders did not know it,” Yabuki says. “Even in small-sized and mid-sized companies, employees do not report collusions to top leaders.”
The evidence that does surface against those presidents and chief executives typically appears in the form of testimony from employees who, after promises of lighter prison sentences or due to their own frustration about their crime, rat out more senior executives who they claim knew and approved of the conspiracy. But the use of such testimonial evidence at trial rarely succeeds on its own.
The testimony of co-conspirators helped to put Wilson and other Archer Daniels Midland executives behind bars. But four years ago, when the government put liquid-crystal-display maker AU Optronics and its executives on trial for price fixing, the DoJ relied heavily on the handful of industry executives who had agreed to testify in exchange for shorter sentences.
Lai-Juh Chen, president and chief operating officer of AU Optronics at the time he was indicted, was in the weeds of LCD pricing and capacity when the cartel was active. With email and other document evidence scarce, testimony from alleged co-conspirators would be crucial to a conviction. During closing statements, Chen’s attorney, Brian Getz, compared the government’s case against his client to an apple that looks nice from the outside but is actually rotten, and he called Jau-Yang Ho and others testifying against Chen “the worms of paid witnesses” that infected that apple. The jury acquitted Chen.
Speaking now, Getz says the case was an example of the DoJ’s frequent tactic of indicting lower-level executives with the hope that they will turn on their bosses – a tactic that former officials freely admit. He says the government overreached when attempting to convict Chen and others who, the evidence showed, had only a glancing association with the cartel’s “crystal meetings”, where prices were fixed.
“They tried to go after the higher people, but they did so on the backs of the lower-level people,” Getz says. The government’s witnesses “were pointing a finger at these other guys, while there were three fingers on their hand pointing at themselves”.
A source close to the investigation points out that the jury did find LJ Chen's bosses at AUO at the time, Hsuan Bin Chen and Hui Hsiung, guilty of price fixing and sent them to jail. "Of course, it’s always hard to know why juries do what they do," the source says. "But I think it’s likely that LJ Chen was acquitted in part because the jury felt that his bosses were truly calling the shots at AUO and were the ones who needed to be held accountable."
Successful or not, prosecutors can only use employee testimony when those employees agree to take the stand. Lower-ranking managers and directors are not always willing to do so, observers and former officials say. Employees can be stubbornly loyal to company and boss, particularly in some Asian countries, where the business culture still expects workers to stay at one company for the entirety of their careers and rewards them for doing so.
“They are very reluctant to tell on anybody, not just their bosses or superiors, but their co-workers,” says one former senior DoJ official who now advises accused cartelists in private practice.
“The company is going to protect me,” the source says of the thinking of middle managers working for Asian companies caught in an antitrust probe. “They own my home. So I can’t screw this up. I came for life and I’m going to stay for life.”
Former officials say government investigators believe they can find the evidence needed to go after top executives, if they can keep searching records, pressuring managers and directors, and using all of the division’s tools for pursuing suspected cartelists. But those investigators – and, more importantly, their bosses in the antitrust division’s front office – must ask whether the resources needed to find potentially useable evidence against a company’s top bosses might be better spent on another company, or another conspiracy.
“If we push this for another six months, we might be able to connect up one of these vice presidents or presidents,” a former official says of the thinking inside the DoJ “But we don’t have them now. Is it worth it to keep pushing, or can we move on and bring three or four more cases?”
John Terzaken, a partner at Allen & Overy and the former head of criminal enforcement at the antitrust division, says that because not every case is built the same, not every case can be given the same resources. Inside the division, officials view cases in terms of their effect on consumers and the market, and use that as something of a guide when deciding what kind of resources to put towards that investigation. “The biggest cases are going to get the most resources,” Terzaken said.
This resource pressure can be acute, depending on the antitrust division’s caseload and the resources available at any one time. For example, the agency has continued its sprawling auto parts investigation during budget constraints that eventually forced the DoJ to freeze hiring and shutter offices. DoJ officials have stressed over the years that the antitrust division’s budget constraints never affected prosecution, and it shuffled resources as needed to manage the avalanche of companies and cases involved in the auto parts plot. But at least one former prosecutor suggested that in major cases – auto parts, air cargo and the like – the pressure to let top executives go rather than spend months in pursuit is far stronger.
That pressure comes from multiple sides. Internally, investigators live with the pressure to follow internal prosecutorial policies, which basically dictate that a DoJ prosecuting division will not pursue a case unless the evidence is compelling and abundant. And externally, whether spoken or not, the DoJ faces yearly pressure from the president and Congress to bring successful cases. The time and resources spent on one executive could be transformed into two or three more corporate pleas, and into more prison sentences for lower-level executives whose signatures are on smoking-gun emails. That’s good for consumers, and for the DoJ’s profile. “There is a pressure to resolve matters,” the source says – and that means middle managers may be the only company executives to face jail time.
Whether the Yates memo will push antitrust division prosecutors to work those longer hours to bring cases against top executives remains to be seen. But after initially shrugging off the memo as simply restating existing antitrust division prosecutorial priorities, DoJ officials have lately suggested it will affect how they do their jobs.
At GCR Live Litigation USA, antitrust criminal enforcement chief Snyder said the Yates memo has pushed the division to bring cases against executives even when prosecutors believe they will result in lengthy, difficult trials. This suggests that division investigators will pursue executives where, in the past, they might have decided to move on to the next case. “I often tell defence counsel that after the Yates memo, when applying the principles of federal prosecution weighs in favour of bringing a case against an individual, we are even more inclined than before to charge and try even the toughest cases,” Snyder said at the June conference.
The division has changed other internal procedures in response to the memo, he said. Investigators work quickly to identify individuals who are potentially involved in cartel crimes and gather evidence against them, to forestall the statutory limits and fuzzy memories that can stifle prosecutions that drag on too long. The agency has increased its scrutiny of companies’ organisational structures to ensure that it investigates all potentially culpable executives involved with a cartel crime.
This is all in an effort to succeed in the antitrust division’s long-time foundational mission of prosecuting culpable executives no matter how high up the corporate ladder they may have climbed, Snyder said.
However, Allen & Overy’s Terzaken says he can see the Yates memo having quite the opposite effect: compelling the antitrust division to go after lower-ranking company employees than it typically would in a cartel case.
In GCR’s data, we classified only 12 of the more than 400 executives prosecuted for antitrust crimes as “employees” – very low-level salespeople or others who took orders from senior management. Division officials never saw much merit in punishing the poor saps who were sent to cartel meetings to deliver a message to competitors and note their responses. Again, the reason “highest-ranking” is part of the antitrust division’s goals for prosecuting executives is to deter future bad behaviour, both inside the company and out. Sending some salesmen to prison helps no one.
But Terzaken said that under the guidance of the Yates memo, the antitrust division may no longer be able to carve those low-level people out of corporate plea agreements, even if the company secures protection or a smaller fine under the leniency programme. The evidence will almost always allow these “implementers”, as the division categorises them, to be charged with a crime.
“The Yates memo doesn’t give you a lot of discretion to make an offence if you have the evidence,” Terzaken said. “My guess... is that it will be a much more difficult evaluation of people on the implementation level.”
For top executives, the path to prosecution remains difficult, he said. Even if the division thinks the president of a company or a C-suite boss knew of a conspiracy, the DoJ has to prove its suspicion beyond a reasonable doubt. That standard will always thwart some marginal cases; Snyder himself stressed that the division would not bring a case where the evidence of a crime was thin.
“The division is interested in ultimately getting to the truth,” Terzaken said. “And what can’t be proven isn’t the truth. It’s your job to prove it, and if you can’t make the case, you can’t make the case.”
Diamond Electric and the pursuit of Asian executives
The Ikenaga family meant everything to Diamond Electric. The old man, Shigeji Ikenaga, helped to found the modern version of the Japanese auto parts maker and ran it as its chairman and chief executive for more than 55 years. He brought his sons Shigehiko and Tatsuo into the business, and they climbed to the upper reaches of the company’s tight-knit executive structure, just below their father. All three owned considerable stakes in the company. Diamond Electric was intertwined with the Ikenaga name. They were one and the same.
The parts maker opened for business in the US in the early 1990s and expanded quickly once Shigehiko took over as president a few years later. The father and his sons appeared at almost every Diamond Electric event at the company’s US headquarters in Michigan, and eventually at the company’s Eleanor, West Virginia plant.
Diamond Electric was celebrated in rural West Virginia, historic mining country where the mines had all but dried up. The Diamond Electric factory in Eleanor – a prefab community born of the New Deal and and named after Eleanor Roosevelt – created jobs at a time when few existed. Those jobs attracted the presence and praise of politicians major and minor, and a procession of West Virginia governors and senators kicked shovels at groundbreakings and flipped switches at assembly line openings. State and local leaders praised Shigeji and the Ikenaga family as job creators and honorary West Virginians.
Then, in January 2014, federal prosecutors announced that the government had charged Shigehiko and Tatsuo Ikenaga with conspiring with rivals to fix the price of ignition coils sold to carmakers in the US and elsewhere. The charges devastated the company. Tatsuo, the youngest son, was chief executive of its US subsidiary, while Shigehiko had taken over operations of the parent company from Japan. They were the top executives in their company – their father Shigeji died in August 2012 – and despite their spotless records and extensive cooperation, they were both going to spend time in US prisons.
The Ikenaga brothers are among an exceedingly small set of top executives sent to jail for antitrust crimes. They led a Japanese company charged with taking part in a cartel, and they were imprisoned for their oversight of and participation in the conspiracy. It has not happened often, according to the data. Just 12 Japanese executives at the highest levels of their companies – C-suite executives or presidents – have been charged with price-fixing crimes over the past two decades of international antitrust enforcement. In that same time, the DoJ has charged 52 US citizens holding those titles with violating the Sherman Act.
The opposite also holds true, the data shows. Japanese managers and directors – those employees who are often most easily linked to cartel crimes – have been charged in the US 96 times. Only 32 US citizens with those titles have faced criminal antitrust charges over the same time period.
Observers and former antitrust enforcers say the reasons for the disparity have to do with issues specific to Japanese corporate culture, and the barriers that exist to any cartel prosecution. Those general obstacles, as detailed in our main story, mainly have to do with what evidence exists and what prosecutors can access. Top executives everywhere typically avoid being copied on emails having to do with sales and pricing, and they rarely, if ever, meet with competitors. The evidence of a price-fixing conspiracy most often ensnares managers and directors involved with a particular subset of a company’s business, so those managers, not their bosses, face charges.
But that does not explain the clear discrepancy between the number of Japanese senior executives versus Japanese managers who go to prison for cartel crimes, as that same discrepancy does not exist for US executives. What does help explain it, observers say, is the tendency for Japanese workers to protect their companies and their bosses when being investigated for a crime. “They are very reluctant to tell on anybody, not just their bosses or superiors, but their co-workers,” said one former prosecutor who has represented dozens of Japanese clients in cartel investigations.
Other, less visible issues may be affecting the data as well. For example, the US companies charged with antitrust crimes may be smaller than their Asian counterparts, leaving top US executives with more hands-on responsibility for pricing and sales. US nationals at the “executive” level charged with cartel crimes were involved with smaller, local conspiracies, the data shows – including municipal bonds, e-rate bid rigging, cable-stayed bridges and so on. “Oftentimes the CEO is the company, especially in domestic matters,” says James Mutchnik, a partner at Kirkland & Ellis. “They’re going to fight to the death. So cases get a lot harder.”
Meanwhile, the foreign companies charged in international cartel cases by definition must be large enough to sell their products internationally. That also means most companies pegged for price fixing have international sales divisions with their own subsets of managers responsible for pricing and bidding.
Diamond Electric wasn’t one of those companies. In fact, the Ikenaga brothers and their counsel suggested in court documents that it was precisely because of their smaller size that they became embroiled in the price-fixing plot to begin with. Roxann Henry, a partner at Morrison Foerster in Washington, DC, and counsel to Tatsuo Ikenaga, declined to comment for this story but pointed toward transcripts of their joint hearing in which Shigehiko said, through a translator, that his company had grown very quickly to become an international auto parts supplier and had struggled to compete with its much larger rivals.
“At the time that this case began, we were a subcontracting firm, a very tiny company,” Shigehiko Ikenaga told the court during his sentencing hearing, at which he was given 16 months in federal prison – far less than what the US sentencing guidelines recommended, though in accordance with what the DoJ sought for guilty pleas. “Eventually, we were put into a position of competing against enormous companies. At the time in order to survive against such companies, I felt it necessary to involve my company in discussions with competitor companies, and thus allowed for this to happen.”
During the hearing at the Detroit, Michigan, federal court, Judge George Steeh observed that Diamond Electric had also paid a steep price for the cartel – a US$19 million fine to the DoJ. He did not mention just how closely entwined Diamond Electric was with the defendants who stood before him.
A guide to our research
For this story and our data analysis, GCR grouped executives charged with antitrust crimes into six broad categories to try to better understand the kinds of executives the US Department of Justice typically targets in their investigations. Because the actual job duties of the executives were not transparent in every case, some executives may be miscategorised because their duties do not match their apparent titles. But based on descriptions of job duties contained in court documents, and our reporting, we believe that our descriptions of the executives included in the dataset are broadly correct and give a clear picture of prosecution trends at the DoJ. Our categories, starting with the most senior employees in our dataset:
• Executives: This category generally includes the top decision-makers in a company. Chief officers, directors of corporate boards and owners of a company fall into this category.
• Presidents: Employees with the title of “president” in a company. This includes the president of the overall corporation, or the president of the branch of the business involved in the cartel conspiracy.
• Directors: The directors in our data include employees with the title of director who oversee a specific segment of a corporation, including sales directors, marketing directors and so on. This category does not include directors on corporate boards.
• Vice presidents: Employees with the title of vice president in our data. While their job duties can vary, this typically includes executives who manage a broad area of the business but who are involved in day-to-day operations.
• Managers: Our broadest category includes anyone in our data with the title of manager. While this typically refers to hands-on, day-to-day managers, the data also include those with the title of “general manager”, the duties and seniority of which can vary from company to company.• Employees: Anyone in our data without specific management or oversight duties, including salespeople.