Now that oil is no longer pouring into the Gulf, everyone can breathe easier --except the people responsible for the spill. They may go to prison. The Justice Department has a criminal investigation underway. Admittedly, governmental investigations of business torts are more likely to result in fines than prison time.
Joseph Hazelwood, who captained the Exxon Valdez when it ran aground, was the only person indicted in connection with that accident and he was sentenced to community service after being convicted on a misdemeanor charge.
The BP spill is different, of course. Eleven people died when the Deepwater Horizon caught fire, and the environmental damage is unprecedented. The feds may reasonably decide that the magnitude of the catastrophe requires a high profile criminal prosecution, the same conclusion President Bush's Justice Department reached in the wake of the Enron debacle. Still, if history provides any guidance, years will pass before anyone is indicted and few people, if any, will spend much time in prison.
We know that a criminal investigation is underway because Eric Holder, the Attorney General, has said so many times. He first announced it at a press conference on June 1. Since then, he has commented on it and clarified its scope, emphasizing that BP is not the only potential target.
Both for launching the investigation and discussing it openly, Holder has taken serious heat. Initially, political opponents of the Obama Administration contended that the investigation diverted BP's attention from its efforts to plug the well and deal with the consequences of the spill. The merits of this allegation never were clear. Even before the probe was acknowledged, BP's managers knew the EPA would punish the company severely. The reputational damage and civil consequences flowing from the spill were also known to be enormous.
BP's executives must also have expected a criminal investigation. In 2007, the company pled guilty to felony violations of the Clean Water Act after a refinery outside Houston, Texas exploded, killing 15, injuring 170, and ultimately saddling BP with $373 million in criminal and civil fines.
The prospect of being prosecuted criminally may even have strengthened BP's resolve to make every possible effort to get matters under control. The U.S. Sentencing Guidelines, which apply to every federal criminal felony conviction, mandate significantly lower sentences and fines for corporations and individuals who cooperate with federal investigators. Reductions are even greater (and may include deferred or non-prosecution agreements, called DPAs and NPAs) when corporations police themselves by creating compliance programs and reporting potential federal criminal and civil violations before to getting caught.
Conservatives also slammed Holder for publicly acknowledging the investigation. They claimed, first, that he departed from Justice Department policy which, they said, is neither to confirm investigations nor to deny them. They also charged that, by speaking about the investigation in public, Holder caused BP's stock to tank. Finally, several commentators and editorial boards criticized Holder for participating in the negotiations, headed by President Obama, which led to the creation of the $20 billion BP victim compensation fund.
The Washington Post argued that Holder's "presence inevitably raised the specter of the criminal probe -- and the possibility that it could be used to pressure BP on the size and terms of the fund." Texas Representative Joe Barton (in)famously characterized to BP as the victim of a "shakedown." In a column endorsed by Sarah Palin and many others, conservative commentator Thomas Sowell argued along the same lines, while raising the level of hyperbole considerably. Sowell accused President Obama of following in Adolf Hitler's footsteps by using a crisis as an excuse for subjecting a private enterprise to an illegal and unprincipled exercise of raw power.
None of these criticisms makes sense to us. Start with the claim that Holder acted wrongly by acknowledging that a probe was underway. True, the general policy of the Justice Department is to disclose neither the existence of a criminal investigation nor its details. But in two sections (1-7.401C and 1-7.530B), the U.S. Attorneys' Manual expressly recognizes that "[t]here are exceptional circumstances when it may be appropriate to have press conferences ... about ongoing matters before indictment or other formal charge, ... includ[ing] cases where ... the heinous or extraordinary nature of the crime requires public reassurance that the matter is being promptly and properly handled by the appropriate authority."
Disciplinary rules governing public statements by prosecutors similarly permit communications needed to inform the public of the nature and extent of the government's response to high-profile crimes. The BP oil spill is the worst environmental disaster in U.S. history. If a crime was committed in connection with it, then the crime was extraordinary by definition and is obviously a matter of great public interest. By confirming the existence of the investigation, Holder acted properly and responsibly.
Now consider the charge that Holder's public statements caused the value of BP's shares to tumble. Assuming the charge is correct (something that is not self-evident, given the fairly continuous decline in the price of BP stock from April 23rd to June 25th), one must ask, So what? Holder is the highest law enforcement officer in the land. The criticism supposes that he should have acted so as to enhance the value of a private company rather than to protect the public interest. That can't be right. Public officials are supposed to advance the public good. Shareholders can protect themselves from these extraordinary occasions which require public disclosure by diversifying their stock holdings.
Finally, consider the charge that Obama and Holder acted improperly by using the crisis to twist BP's arm. Although we certainly believe that governmental coercion of private persons, including companies, should be regulated by law, when creating the compensation fund the federal government neither confiscated BP's money nor coerced the company into paying victims of the spill. Thomas Sowell recognized this, but he thought it an irrelevant nicety. In fact, this is the heart of the matter.
The compensation fund is creature of a contract between BP and the federal government. Like all contracts, this one created value for both sides. President Obama showed Americans that he was focused on the disaster and trying to protect them. BP showed the world that its word was good. Hoping to salvage some measure of goodwill, BP had verbally promised to cover losses stemming from the spill. The agreement to create the compensation fund made that promise formal. It also gave BP an opportunity to stretch out its payments and reduce the volume of spill-related civil litigation greatly. As an article in the New York Times pointed out, in return for agreements not to sue, BP is offering to quickly reimburse victims for their full economic losses, thereby sparing them years of delay and the burden of paying attorneys. The compensation fund is an example of mutual gain, not Hitler-esque subjugation.
Years or decades will pass before all civil and criminal liabilities stemming from the disaster in the gulf are resolved. Real arm-twisting will occur at many points. Plaintiffs' attorneys will threaten BP with enormous punitive damage awards to squeeze as much money as they can from BP for their clients. The federal government will hit the responsible companies with billions in penalties and may threaten to put their executives in prison.
Fortunately, given the magnitude of the disaster, intense media interest, reporting requirements for public companies, and the transparency of the compensation fund, the negotiations that resolve these complaints will likely be open and above board. Attorney General Holder can and should be involved in these negotiations.
Global settlements, DPAs and NPAs, which have been utilized under both Republican and Democratic Administrations, provide many advantages when compared to criminal prosecutions and concurrent civil regulatory actions by multiple federal agencies. Such agreements encourage full disclosure to the investing public, allow targeted reform of mismanaged or corrupt corporations, ensure restitution to victims, and may protect shareholders and employees from bankruptcy proceeding, all while minimizing the collateral consequences on the current law-abiding customers, shareholders, and the general public.
Attempting this type of negotiation in the wake of a national disaster of this magnitude is something that cannot be done on the down low.