Month: May 2024

The Limits of Leniency

The mission of the U.S. Justice Department is to enforce federal law, but when it comes to corporate offenders the DOJ often exhibits a puzzling reluctance to carry out that function.

A current example of this hesitancy involves Boeing. In 2021, in the wake of two crashes linked to defects in the company’s 737 MAX airliner, DOJ initiated a criminal investigation into whether Boeing conspired to mislead the Federal Aviation Administration about the safety of the plane.

Yet instead of filing charges, DOJ offered Boeing a deferred prosecution agreement (DPA) under which it would pay about $2.5 billion in penalties while not having to plead guilty. DOJ declined to require the appointment of an independent monitor, but it required the company to strengthen its compliance and ethics procedures.

More than three years have passed, and the DOJ has concluded that Boeing has not lived up to its obligations. Rather than announcing it will now bring actual criminal charges, Boeing sent a letter to the federal judge overseeing the case saying it is “is determining how it will proceed in this matter.”

This sounds like a prelude to some other kind of leniency deal with the company. That might mean a modification of the current DPA or a new one.

Boeing’s failure to comply with the DPA is hardly unprecedented, and there have been plenty of examples of corporations that have been offered more than one leniency arrangement. Among the more than 500 deferred prosecution and non-prosecution agreements documented in Violation Tracker, there are about three dozen parent companies that have received more than one. Among those is Boeing, which in 2006 was allowed to enter into a non-prosecution agreement to resolve a case involving federal contracting violations.

Amazingly, there are ten parents that have been given more than two leniency agreements. These are mostly banks, both domestic (such as JPMorgan Chase and Wells Fargo) and foreign-based (such as Deutsche Bank and HSBC). The DOJ is willing to go to great lengths to help rogue banks avoid a guilty plea.

The rationale for leniency agreements is that they will prompt companies to clean up their practices. In all too many cases, that is not what happens. After getting its deal, the corporation ends up violating the same or other laws. At that point, DOJ should throw the book at the offender. When DOJ instead offers up more leniency, that makes a mockery of the process.

In the case of Boeing, more leniency would be especially ridiculous, given that the company is already the subject of a new criminal investigation stemming from an incident earlier this year in which a fuselage panel blew off an Alaska Airlines 737 MAX mid-flight.

At the very least, DOJ should file real criminal charges against Boeing for violating the DPA. The Department should also use this as an opportunity to rethink its entire approach to corporate criminality. The reliance on leniency is not working.

It is time to explore new forms of punishment that will compel large companies to take their legal obligations more serious—and thereby protect the public from the consequences of their misconduct.

Private Equity is Bad Medicine for Hospitals

One day after 60 Minutes aired a laudatory story about the efforts of an executive at KKR to promote partial employee ownership at firms he takes over, the more common consequences of private equity were on display in the announcement that Steward Health Care was filing for Chapter 11. The company then put its 31 U.S. hospitals up for sale.

Bankruptcy was the unsurprising destination for a company that has been on a downward trajectory since 2010, when Cerberus Capital Management took over what had been a Catholic non-profit hospital chain known as Caritas Christi Health Care and turned it into a for-profit operation. As is common in private equity deals, the new business assumed the cost of the acquisition.

It appeared that Cerberus was less interested in turning a profit and more focused on looting the company. It accomplished this by selling the firm’s facilities for over $1 billion to a real estate investment trust, which then started collecting hefty rents from Steward while Cerberus and its investors reaped hundreds of millions of dollars in gains. While Steward went deeper into debt and struggled to pay its bills, Cerberus exited the company in 2020.

While Steward’s financial woes have received a fair amount of coverage, it is also worth pointing out how the company’s ordeal with private equity ownership and its aftermath is also reflected in its dismal compliance record.

As shown in Violation Tracker, Steward has racked up millions in regulatory penalties since Cerberus converted Caritas Christi. In 2020, for example, Steward Holy Family Hospital in Massachusetts paid a penalty of more than $6 million to the U.S. Department of Health and Human Services for failing to maintain physician certifications, recertifications, and treatment plans for inpatient psychiatry services in violation of Medicare billing requirements.

In 2022 Steward paid over $4 million to settle a case brought by the Justice Department alleging that the Steward Good Samaritan Medical Center in Brockton, Massachusetts made improper payments to a local urology practice for referring patients. The payments were supposed to compensate the  practice to operate a Prostate Cancer Center of Excellence at the hospital that did not actually exist.

In 2016 the Steward Carney Hospital in Dorchester, Massachusetts was fined by OSHA for failing to provide puncture-resistant gloves to staff members in the psychiatric unit who were required go through patient belongings where sharp objects such as knives and needles had been found.

In 2017 Steward acquired IASIS Healthcare, which had its own tainted record, which included a penalty of $1.5 million for implanting cardiac devices in Medicare patients who were not eligible for the procedure.

For-profit hospitals were not a good idea to begin with, but adding private equity to the mix only makes things worse. Steward is a glaring example of how PE deteriorates both working conditions for hospital staff and the quality of care for patients. If its hospitals fall to find responsible buyers, entire communities may suffer adverse consequences as well.

What Does a Billion-Dollar Settlement Accomplish?

The news that the Dutch company Royal Philips has just agreed to pay $1.1 billion to settle U.S. litigation concerning defective breathing machines was reported on page B3 of the print edition of the Wall Street Journal and page B5 of the New York Times. In other words, it was not considered a major story of the day.

There was a time when a billion-dollar class action settlement would be front-page news and might have an impact on a company’s stock price and its reputation. That was especially true with regard to the $368 billion settlement the tobacco industry reached with state governments. That deal merited a banner headline stretching across the entire front page of the Times in 1997.

A great deal of attention was also paid to the multi-billion settlements reached in 2012 with BP with regard to the Deepwater Horizon disaster and in 2016 with Volkswagen in connection with its emissions cheating scandal.

These days, major settlements receive less notice despite a spate of what might be called mega-settlements—those with a price tag of $5 billion or more. Last year, Johnson & Johnson agreed to pay around $9 billion to settle lawsuits alleging that its talcum powder causes ovarian cancer. 3M agreed to pay $6 billion to settle litigation over hearing loss said to be caused by defective combat earplugs supplied to members of the military.

This year 3M agreed to pay $12.5 billion to settle litigation alleging it was responsible for contaminating thousands of public water systems with dangerous PFAS chemicals. Visa and Mastercard agreed to a $30 billion settlement of antitrust litigation concerning the fees they charge to merchants.

A mega-settlement has also appeared in Brazil, where joint venture partners Vale and BHP have agreed to provide an estimated $25 billion to communities ravaged by the 2015 collapse of a tailings dam.

These examples are limited to private litigation. Companies are also paying billions in cases brought by government agencies, especially with regard to the opioid crisis.

There are positive and negative aspects to these settlements. On the plus side, it is good that giant corporations are being compelled to pay sizeable compensation packages to groups of people harmed by their misconduct. It is true that a big chunk of these payouts goes to plaintiffs’ lawyers, though the hope it that they will use the proceeds at least in part to fund future class actions.

The problematic part is that corporations can view the settlements—whose size often falls short of the estimated harm caused by the company—as a tolerable cost of doing business. They may then feel little pressure to change their practices in a fundamental way.

Major litigation is not just a way to punish corporations financially for wrongdoing. It is supposed to serve as a deterrent against future bad acts. That fact seems to be getting forgotten as companies regard settlements as mere transactions, and the public pays less attention. Normalization of corporate misconduct will result in more of it.