CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, AND CAPITAL STRUCTURE Nathan Atkinson* Financial penalties imposed on malfeasant corporations can produce “collateral consequences,” or unintended negative impacts on employees, customers, and society more broadly. I show that the vast majority of government bodies that assess organizational penalties have adopted policies to reduce corporate liability where collateral consequences might otherwise result. Moreover, I demonstrate that officials do reduce penalties in line with these policies, undermining deterrence and compensation of harmed parties. However, evidence from reductions given to publicly-traded firms suggests that officials are often wrong in their assessment of firms’ financial health, thereby awarding reductions to healthy firms where collateral consequences are unlikely to occur. I discuss how officials should approach imposing penalties when they are concerned about prospective collateral consequences. I. Introduction ........................................................................... 2 * University of Wisconsin. Thank you to Anat Admati, Abhay Aneja, Jennifer Arlen, Ronen Avraham, Steve Callander, Scott Ganz, Jacob Goldin, Colleen Honigsberg, Curtis Milhaupt, Michael Ohlrogge, Paul Pfleiderer, Mitch Polinsky, George Triantis, Aneesh Raghunandan, Michael Sarinsky, Alan Schwartz, Kathy Spier, Alex Stremitzer, and seminar participants at George Mason Law School, Stanford Law and Economics Free Lunch, Oxford Faculty of Law, University of Texas Law School, ETH Zurich Center for Law and Economics, University of Wisconsin Law School, Northwestern Pritzker School of Law, the JLFA conference (NYU, 2019), the Law and Economic Theory Conference (Texas, 2019), and the European Association of Law and Economics Conference (2020) for helpful comments and discussions. Thank you to Cindy Alexander and Mark Cohen for sharing data. This project uses data from the Corporate Research Project of Good Jobs First’s Violation Tracker. Contact: natkinson@wisc.edu 2 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 II. The Expansive Legal Basis for Considering Collateral Consequences in Criminal and Civil Cases ................. 11 III. Reductions in Corporate Liability in Practice ................ 19 A. Empirical Evidence on Reductions of Corporate Criminal Penalties .................................................. 19 B. What is Driving Reductions? ................................... 24 IV. Imposing Liability Without Collateral Consequences .... 33 A. Determining Whether Collateral Consequences Will Occur ....................................................................... 33 B. The Government’s Options to Impose Fines ........... 38 V. Conclusion .......................................................................... 44 Appendix I. Case studies ........................................................ 45 A. Case Studies ............................................................. 45 1. Hynix Semiconductor ......................................... 45 2. Beazer Homes ..................................................... 48 3. Alcoa .................................................................... 50 4. Olympic Pipeline ................................................. 55 5. IAV GmbH .......................................................... 57 6. Technicolor .......................................................... 59 Appendix II. Federal Policies on Collateral Consequences .. 62 I. INTRODUCTION Corporate liability is meant to deter illegal behavior and to compensate victims of corporate misconduct. But in the pursuit of these goals, the imposition of civil or criminal liability can lead to a variety of collateral consequences, including financial distress, job losses, decreased consumer welfare, and insolvency, thereby impacting third parties such as employees, consumers, and society at large.1 When imposing liability on corporations, officials may face an 1 The primary cause of financial distress is high levels of debt. Gregor Andrade & Steven N. Kaplan, How Costly is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions that Became Distressed, 53 J. FIN. 1443, 1445 (1998). For an overview of the effect of financial structures on employees, see, e.g., David A. Matsa, Capital Structure and a Firm’s Workforce, 10 ANN. REV. FIN. ECON. 387 (2018). No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 3 apparent trade-off between the deterrence/restitution goals of liability and undesirable collateral consequences.2 This article considers the decision of whether to reduce corporate liability in order to avoid collateral consequences. I make four principal contributions. First, I show that there is an expansive legal basis for reducing liability in the face of potential collateral consequences.3 In fact, at least 96% of the monetary value of fines and penalties imposed at the federal level are imposed by an agency, department, or commission that allows for reductions. Second, I explore reductions in practice. Using data on criminal penalties, I find that 20.5% of solvent firms and 54.2% of financially distressed firms have had their penalties reduced because of concerns about inability to pay.4 Third, I explore several cases in depth to probe why officials reduce liability, and find that, in many cases, the evidence of collateral consequences is weak and that firms could have paid much larger fines.5 Finally, I step back and consider when and how collateral consequences should be considered.6 In particular, I argue that fines should not be reduced in most cases, but I provide a toolkit for determining when and how collateral consequences could be properly taken into account. The following example illustrates the issue. In 2005, Hynix Semiconductor Inc. pled guilty to price fixing for high-speed computer memory.7 Under the United States Sentencing Guidelines, the fine range should have been between $268 million and $537 million.8 Instead, the fine was $185 million, to be paid over five years, interest free.9 The settlement 2 See Matsa, supra note 1, at 389 (explaining the connection between job security for employees and the financial condition of the firm). 3 See infra Section II. 4 See infra Section III.A. 5 See infra Section III.B. 6 See infra Section IV. 7 Plea Agreement, United States v. Hynix Semiconductor Inc., No. CR 05-249 (N.D. Cal. May 11, 2005). 8 Id. at 3. 9 Plea Agreement at 6, United States v. Hynix Semiconductor Inc., No. CR 05-249 (N.D. Cal. May 11, 2005). 4 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 agreement with the Department of Justice stated that, even after adjusting the fine downward for “substantial assistance,” the fine still “would have exceeded Defendant’s ability to pay.”10 The fine was therefore further reduced “due to the inability of the Defendant to make restitution to victims and pay a fine greater than that recommended without substantially jeopardizing its continued viability.”11 This decision to lessen Hynix’s fine on account of the company’s solvency was consistent with Department of Justice’s policies and the United States Sentencing Guidelines, both of which support adjusting penalties downward to avoid financial distress.12 On first inspection, the fear of insolvency may seem reasonable. Shortly before the plea agreement, Hynix had $1.66 billion in liabilities that were due within one year.13 But Hynix only had $343 million in cash and cash equivalents, and an additional $552 million in short-term financial instruments.14 This meant that Hynix had an expected shortfall of $765 million for the year. However, Hynix was in a much stronger financial position than these numbers suggest. The firm reported total assets valued at $7.8 billion15 and the total liabilities at $3.7 billion,16 for a book valuation of $3 billion. The market value of Hynix’s outstanding equity was $2.16 billion.17 Moreover, Hynix reported an operating profit of $310 million in the first quarter of 2005.18 So, while 10 Id. at 7. 11 Id. 12 U.S. Dep’t of Just., Just. Manual § 9-28.300(A)(8) (2023); U.S. SENT’G GUIDELINES MANUAL § 8C3.3 (U.S. SENT’G COMM’N 2021). 13 HYNIX SEMICONDUCTOR INC., HYNIX 2005 ANNUAL REPORT at 44 (2005) (converted from Korean won using the exchange rate of December 31, 2004). 14 Id. at 43. 15 Id.at 43. 16 Id. at 44. 17 Id. at 44. 18 Hynix Semiconductor Inc. Reports the Results for the First Quarter of FY 2005, SK HYNIX NEWSROOM (May 4, 2005), https://news.skhynix.com/hynix-semiconductor-inc-reports-the-results-for- No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 5 the firm had current liabilities in excess of current assets, there is nothing to suggest that Hynix faced imminent financial distress or insolvency—firms frequently borrow against their assets and future earnings, and there is no reason to believe that Hynix could not have done so as well. The Hynix case illustrates that officials can and do reduce liability when concerned about collateral consequences. It also illustrates how these reductions may be based on unfounded concerns about financial distress. Allowing financially sound firms to avoid liability undermines the goals of corporate liability while providing little benefit in return. In this paper, I make four principal contributions related to corporate liability and collateral consequences. I first show that there is currently an expansive legal basis for considering collateral consequences when imposing corporate liability. I provide an extensive survey of statutes, regulations, and polices from across the federal government to show that there exists a broad legal basis for considering financial distress when imposing civil or criminal liability on corporations. I show that when imposing fines, government officials are allowed, encouraged, or even required to consider the effect of penalties on “innocent employees,” “customers,” “competition,” “ability to pay,” “ability to continue in business,” “others not proven personally culpable,” and “the public generally.”19 Using data on over 400,000 criminal and civil cases with penalties totaling more than $600 billion, I show that at least 96% of the monetary value of federal penalties are imposed by departments, agencies, and commissions governed by statutes, regulations, or policies that instruct officials to consider collateral consequences.20 Second, I show that government officials do, in fact, reduce corporate liability because of concerns about collateral consequences. I provide statistical evidence for the frequency of penalty reductions in corporate criminal proceedings. the-first-quarter-of-fy-2005/ [https://perma.cc/Q8G3-ZRLD] (converted from won using the exchange rate on March 31, 2005). 19 See infra Appendix II. 20 See infra Section II 6 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 Under the United States Sentencing Guidelines for organizations, liability may be reduced based on a defendant’s inability to pay so long as the “reduction under this subsection shall not be more than necessary to avoid substantially jeopardizing the continued viability of the organization.”21 I collect data from the United States Sentencing Commission on organizational defendants from 2002 through 2020 to gauge reductions in practice. I find that 20.6% of solvent firms and 54.2% of financially distressed firms have had their fines explicitly reduced because of concerns about financial distress.22 Third, I examine which aspects of a defendant corporation’s finances lead officials to reduce liability. To do so, I provide detailed case studies of instances where government officials explicitly reduced liability because of the fear of collateral consequences. The examples include liability arising from price fixing,23 bribery,24 fraud,25 and environmental harm.26 I analyze the settlement language and the firms’ financial conditions at the time of liability to judge whether the concerns about financial distress were well- founded and conclude that these concerns appear valid in some, but not most, cases. In the sample of cases that I consider, the reductions in fines seem to have been driven by misconceptions about corporate finance and financial accounting rather than by true financial distress. In particular, the firms that I analyze often have low or negative net current assets (i.e., cash on hand), despite having book and 21 U.S. SENT’G GUIDELINES MANUAL § 8C3.3 (U.S. SENT’G COMM’N 2021). 22 See infra Section III.A. 23 Plea Agreement at 2, United States v. Hynix Semiconductor Inc., No. CR 05-249 (N.D. Cal. May 11, 2005). 24 Plea Agreement at 1, United States v. Alcoa World Alumina LLC, No. 2:14-cr-00007-DWA (W.D. Pa. Jan. 9, 2014). 25 Deferred Prosecution Agreement at 1, United States v. Beazer Homes USA, Inc., No. 3:09cr113-w (W.D.N.C. Jul. 1, 2009). 26 Plea Agreement at 4, United States v. IAV GmbH, No. 16-CR-20394 (E.D. Mich. Jan.. 18, 2019). No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 7 market values well in excess of the fines imposed.27 These firms could have paid the full amount without facing distress. Fourth and finally, I discuss how government officials should better approach the decision of whether, and how, to take collateral consequences into account.28 I provide a simple corporate finance framework to help officials understand whether collateral consequences are in fact likely. I suggest that, in most cases, fines need not be reduced, because collateral consequences are unlikely. I also argue that when collateral consequences are likely to occur, reductions should not be a forgone conclusion. However, when officials do decide to take collateral consequences into account, I discuss how liability can be structured to maximize the fine while avoiding insolvency. The implications of this paper call into question the balance between ex ante regulation and ex post litigation as methods for controlling harmful actions.29 Regulation is imperfect because of regulators’ imperfect knowledge about risks.30 However, the more imperfect one system is, the more slack must be picked up by the other system. This paper shows a key way in which ex post litigation fails to create proper incentives for corporate actors. Avoiding liability because of collateral consequences means that corporations do not fully internalize their externalities. If the government ties officials’ hands’ ex post, then, in principle, regulation should be used to prevent misconduct in the first place. However, it is far from clear that further ex ante regulation can effectively combat large-scale corporate misconduct. Given the information disparities between the government and target corporations, it is difficult or impossible to detect and prevent many harmful corporate actions such as price fixing and bribery before significant harm is done. This in turn 27 In personal-finance terms, the corporations had large credit card balances and little money in the bank, despite having well-paying jobs and owning their houses outright. 28 See infra Section IV. 29 For an overview, see Steven Shavell, A Model of the Optimal Use of Liability and Safety Regulation, 15 RAND J.ECON. 271 (1984). 30 Id. at 271. 8 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 means that these actions need to be controlled largely through ex post litigation rather than ex ante regulation.31 The difficulty of preventing corporate misconduct through ex ante regulation makes it all the more remarkable that the government has limited the power of the vast majority of regulatory agencies to impose ex post litigation when collateral consequences may result. Before continuing any further, a note on terminology. I consider a wide variety of cases and law from a variety of jurisdictions, and I use the terms “liability,” “penalty,” and “fine” interchangeably. Moreover, I use the term “official” when discussing a generic or abstract case of “corporate misconduct.” Theoretical research on corporate misconduct has largely focused on how to structure liability in the presence of an agency conflict between managers and shareholders.32 In particular, scholars and policymakers have focused on how to obtain cooperation from the corporation when prosecuting individual actors within the corporation.33 However, if insufficient liability is imposed, corporate misconduct can be jointly profitable for both employees and shareholders.34 In 31 Steven Shavell, The Optimal Structure of Law Enforcement, 36 J. L. & ECON. 255, 262–63 (1993). 32 Alan O. Sykes, The Economics of Vicarious Liability, 93 YALE L. J. 1231, 1231-32 (1983); Harry A. Newman & David W. Wright, Strict Liability in a Principal-Agent Model, 10 INT’L REV. L. & ECON. 219, 219–20 (1990); A. Mitchell Polinsky & Steven Shavell, Should Employers Be Subject to Fines and Imprisonment Given the Existence of Corporate Liability?, 13 INT’L REV. L. & ECON. 239, 239–40 (1993); Steven Shavell, The Optimal Level of Corporate Liability Given the Limited Ability of Corporations to Penalize Their Employees, 17 INT’L REV. L. & ECON. 203, 209 (1997); Jennifer Arlen & Reinier Kraakman, Controlling Corporate Misconduct: An Analysis of Corporate Liability Regimes, 72 N.Y.U. L. REV. 687, 688–89 (1997); Nuno Garoupa, Corporate Criminal Law and Organization Incentives: A Managerial Perspective, 21 MANAGERIAL & DECISION ECON. 243, 243 (2000). 33 Id. 34 Roy Shapira & Luigi Zingales, Is Pollution Value-Maximizing? The DuPont Case 1 (Nat’l Bureau of Econ. Rsch., Working Paper No. 23866, 2017); Nathan Atkinson, Do Corporations Profit from Breaking the Law? Evidence from Environmental Violations 23 (June 25, 2020) (unpublished manuscript) (on file with the Columbia Business Law Review). No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 9 this paper, I put the agency conflict aside, and instead focus on the corporation as the primary actor.35 Notably, even if the manager-shareholder agency conflict is resolved, managers and shareholders can profit from misconduct under the current liability regime, undermining deterrence. The central insight of deterrence theory—whether civil or criminal—is that the punishment imposed should induce wrongdoers to internalize the harm that they cause, which extends to employees subject to personal liability for wrongdoing performed on the job.36 However, because many employees are shielded from liability, and because few employees have the financial resources to compensate victims of corporate malfeasance, most employees are not incentivized to fully internalize the social costs of the harms they cause,37 and personal liability is insufficient to deter corporate malfeasance. Optimal deterrence and compensation both therefore require imposing liability on the corporation.38 However, while there are clear benefits to imposing liability on corporations, fines may lead to financial distress, insolvency, and an attendant variety of collateral consequences. Financial distress occurs when a company struggles to pay its financial obligations.39 While there is no systematic evidence of fines leading to job losses, there is a substantial literature on the employment effects of financial 35 Nonetheless, if the goal is to induce cooperation, then a high base fine (i.e. not reducing liability because of concerns about collateral consequences) can improve corporate cooperation with individual prosecutions. 36 JEREMY BENTHAM, AN INTRODUCTION TO THE PRINCIPLES OF MORALS AND LEGISLATION 173, 178 (Hafner Press 1948) (1789); Gary S. Becker, Crime and Punishment: An Economic Approach, 76 J. POL. ECON. 169, 191 (1968); Sykes, supra note 32, at 1246. 37 Steven Shavell, The Judgement Proof Problem, 6 INT’L REV. L. & ECON. 45, 45 (1986). 38 Jennifer Arlen, The Potentially Perverse Effects of Corporate Criminal Liability, 23 J. LEGAL STUD. 833, 836 (1994); Garoupa, supra note 32, at 251. 39 Gregor Andrade & Steven N. Kaplan, How Costly is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions that Became Distressed, 53 J. FIN. 1443, 1447 (1998). 10 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 distress in general. Employment decreases substantially around a bankruptcy filing,40 and remains significantly lower for years following both Chapter 11 reorganization and Chapter 7 liquidation.41 Both debt defaults and covenant violations cause firms to cut employees.42 Moreover, while some employees retain their jobs at reorganized or liquidated establishments, these employees see significant earnings losses.43 Furthermore, employment declines substantially in other firms in the immediate neighborhood of liquidated establishments.44 Far from those that work at or near the firm, financial distress and insolvency can lead to antitrust concerns and may carry costs for industry concentration, competition, and consumer welfare.45 With fewer firms in competition, the remaining firms see higher profits,46 and consumers face higher prices.47 The potential for collateral consequences can loom large for officials contemplating imposing liability on corporations. The remainder of the article is structured as follows. In Section II, I show that there is currently an expansive legal basis for considering collateral consequences when imposing 40 Edith Shwalb Hotchkiss, Postbankruptcy Performance and Management Turnover, 50 L. J. FIN. 3, 11 n.13 (1995). 41 Shai Bernstein, Emanuele Colonnelli & Benjamin Iverson,, Asset Allocation in Bankruptcy, 74 J. FIN. 5, 18–19 (2019). 42 Ashwini Agrawal & David A. Matsa, Labor Unemployment Risk and Corporate Financing Decisions, 108. J. FIN. ECON. 449, 452 (2013); Antonio Falato & Nellie Liang, Do Creditor Rights Increase Employment Risk? Evidence From Loan Covenants, 71 J. FIN. 2545, 2556 (2016). 43 John R. Graham, Hyunseob Kim, Si Li & Jiaping Qiu, Employee Costs of Corporate Bankruptcy 1 (Nat’l Bureau of Econ. Rsch., Working Paper No. 25922, 2019). 44 Shai Bernstein, Emanuele Colonnelli, Xavier Giroud & Benjamin Iverson, Bankruptcy Spillovers, 133 J. FIN. ECON. 608, 608 (2018). 45 Tim C. Opler & Sheridan Titman, Financial Distress and Corporate Performance, 49 J. FIN. 1015, 1015 (1994) (showing that highly leveraged firms lose significant market share following financial distress, and the effect is even stronger in concentrated industries). 46 Gustavo Grullon, Yelena Larkin & Roni Michaely, Are US Industries Becoming More Concentrated?, 23 REV. FIN. 697, 697 (2019). 47 THOMAS PHILIPPON, THE GREAT REVERSAL: HOW AMERICA GAVE UP ON FREE MARKETS 8 (2019). No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 11 corporate liability. In Section III, I show that government officials do reduce corporate liability because of concerns about collateral consequences—often because of misplaced concerns. In Section IV, I discuss how government officials should better approach the decision of whether, and how, to take collateral consequences into account. I conclude in Section V. II. THE EXPANSIVE LEGAL BASIS FOR CONSIDERING COLLATERAL CONSEQUENCES IN CRIMINAL AND CIVIL CASES In this section, I show that, in both criminal and civil contexts, the law allows—or even requires—government officials to consider whether corporate liability would result in collateral consequences or financial distress. The federal government is comprised of hundreds of departments, agencies, and commissions, each governed by unique statutes and regulations. In this section, I summarize the expansive legal basis for reducing corporate liability when decisionmakers are concerned about collateral consequences, and Appendix II contains a more extensive list of policies dealing with collateral consequences. The statutes and regulations discussed in this section and in Appendix II cover departments, agencies, and commissions that impose over 96% of the monetary value of all corporate fines imposed by the federal government.48 In the criminal context, the explicit consideration of the collateral consequences arising from the prosecution of corporations dates back at least to a 1999 memorandum on corporate criminal liability by Deputy Attorney General Eric Holder (the “Holder Memorandum”).49 This memorandum is now codified in the United States Justice Manual: In conducting an investigation, determining whether to bring charges, and negotiating plea or other 48 See Appendix II. 49 Memorandum from Eric H. Holder, Jr., Deputy Att’y Gen., Dep’t of Just., to All Component Heads and U.S. Att’ys, Bringing Criminal Charges Against Corporations (June 16, 1999) (“The Holder Memorandum”). 12 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 agreements, prosecutors should consider the . . . collateral consequences, including whether there is disproportionate harm to shareholders, pension holders, employees, and others not proven personally culpable, as well as impact on the public arising from the prosecution[.]50 The United States Sentencing Guidelines (USSG) further stress collateral consequences in criminal proceedings against corporations. In principle, the Organizational Guidelines are “designed so that the sanctions imposed upon organizations and their agents, taken together, will provide just punishment, adequate deterrence, and incentives for organizations to maintain internal mechanisms for preventing, detecting, and reporting criminal conduct.”51 However, the USSG explicitly instruct prosecutors to consider collateral consequences, providing mechanisms to adjust sanctions downward to “avoid substantially jeopardizing the continued viability of the organization.”52 The Federal Rules of Criminal Procedure further provide that “[i]n determining whether to impose a fine, and the amount, time for payment, and method of payment of a fine, the court shall consider . . . the defendant’s income, earning capacity, and financial resources . . . [and] whether the defendant can pass on to consumers or other persons the expense of the fine[.]”53 There is ample scope to consider collateral consequences when imposing corporate criminal liability.54 However, while 50 U.S. Dep’t of Just., supra note 12. 51 U.S. SENT’G GUIDELINES MANUAL § 8 (U.S. SENT’G COMM’N 2018). 52 U.S. SENT’G GUIDELINES MANUAL § 8C3.3(b) (U.S. SENT’G COMM’N 2018). 53 18 U.S.C. § 3572(a). 54 To my knowledge, there are no court cases challenging the legality of reducing corporate liability in response to fear of collateral consequences. However, some courts have been receptive to reductions in sanctions against individual business owners for fear of collateral consequences to employees. In United States v. Milikowsky, the Second Circuit Court of Appeals supported the district court’s downward departure because of the “destructive effects that incarceration of a defendant may have on innocent third parties.” United States v. Milikowsky, 65 F.3d 4, 7 (2d Cir. 1995). The First Circuit has also allowed considerations of job losses when No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 13 the Holder Memorandum and the sentencing guidelines provide a framework for thinking about collateral consequences, the vast majority of corporate-liability cases are fully or partially civil in nature. Under many civil statutes, a violator’s ability to pay is one of the factors to weigh when determining a penalty.55 Under other statutes, agencies are directed to take into consideration “the economic impact” or “effect” of the penalty on the violator.56 In the following pages, I illustrate the broad scope of concerns about collateral consequences across the federal government. Attorneys prosecuting civil cases at the Department of Justice can settle with defendants for a fine of no less than 85% of the original claim,57 or when “a qualified financial expert has determined that the amount is likely the maximum that the offeror has the ability to pay.”58 Furthermore, the contemplating downward departures. See United States v. Olbres, 99 F.3d 28, 36 (1st Cir. 1996). Other Circuits have resisted downward departures because, “when a district court varies downward on the basis of the collateral consequences of the defendant’s prosecution and conviction, the defendant’s sentence will not reflect the seriousness of the offense, nor will it provide just punishment.” United States v. Musgrave, 761 F.3d 602, 608 (6th Cir. 2014). The lack of jurisprudence on downward departures in corporate cases is likely due to the fact that, unlike the sentencing of individuals, guidelines on the sentencing of organizations explicitly allow for the consideration of collateral consequences. And given that most corporate prosecutions end in settlements, and that district and appellate courts alike are generally deferential to agencies that craft settlement agreements, there is little likelihood of a challenge to penalties being reduced because of concerns about collateral consequences. See Rita v. United States, 551 U.S. 338 (2007). 55 See Clean Water Act, 33 U.S.C. § 1319(g)(3); Toxic Substances Control Act, 15 U.S.C. §§ 2615(a)(2)(B), 2647(c)(1)(C); see also Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. § 9609(a)(3); Emergency Planning and Community Right-to-Know Act, 42 U.S.C. §11045(b)(1)(C); Act to Prevent Pollution from Ships, 33 U.S.C. § 1908(b). 56 See Clean Air Act, 42 U.S.C. §§ 7413(e)(1), 7524(c)(2); Clean Water Act, 33 U.S.C. §§ 1319(d), 1321(b)(8); Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) 7 U.S.C. § 136l(a)(4); Safe Water Drinking Act, 42 U.S.C. § 300h-2(c)(4)(B)(v). 57 28 C.F.R. § 0.160(a)(1) (2021). 58 28 C.F.R. § 0.160(a)(2) (2021). 14 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 Justice Manual specifies that civil cases may be compromised if “[t]he United States Attorney believes that the full amount of a claim of the United States cannot be collected in full due to the financial condition of the debtor.”59 The Environmental Protection Agency, which imposes the next highest total monetary value of fines after the Department of Justice, has in place several policies allowing for fines to be mitigated in response to concerns for the payer’s financial distress and the collateral consequences that might result. Despite its general policy that “penalties generally should, at a minimum, remove any significant benefits resulting from failure to comply with the law,”60 the EPA will reduce liability when penalties would “result in plant closings, bankruptcy, or other extreme financial burden, and there is an important public interest in allowing the firm to continue in business.”61 The Agency further will “generally not request penalties that are clearly beyond the means of the violator. Therefore, EPA should consider the ability to pay a penalty in arriving at a specific final penalty assessment.”62 Various financial agencies also consider the effects that their fines potentially will have on the solvency of the penalized business. The Consumer Financial Protection Bureau stipulates that any penalty amount should “take into account the appropriateness of the penalty with respect to . . . the size of financial resources and good faith of the person charged.”63 While the Bureau requires firms to compensate consumers (“an adjustment”64) for willful violations intended to mislead, the statute clarifies that “no adjustment shall be ordered . . . if it would have a significantly adverse impact upon the safety or soundness of the creditor.”65 Other financial agencies that consider a violator’s financial 59 U.S. Dep’t of Just., Just. Manual § 4-3.200(D) (2018). 60 U.S. Env’t Prot. Agency, Policy on Civil Penalties, in EPA GENERAL ENFORCEMENT POLICY #GM-21, at 3 (1984). 61 Id. at 12. 62 Id. at 23. 63 12 U.S.C. § 5565(c)(3). 64 15 U.S.C. § 1607(e)(2). 65 Id. at § 1607(e)(3). No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 15 resources include: the Federal Housing Finance Agency, which takes into account “the effect of the penalty on the safety and soundness of the regulated entity;”66 the Federal Deposit Insurance Corporation, which mitigates penalties based on “the size of financial resources . . . of the insured depository institution or other person charged;”67 and the Federal Reserve Board, which gives parties “the opportunity to provide Board staff with any evidence, including financial factors, that would either weigh against assessment or mitigate the amount of the proposed penalty.”68 Likewise the Federal Trade Commission, when determining penalties for unfair competition, takes into account factors including a corporation’s “ability to pay [and the penalty’s] effect on [the corporation’s] ability to continue to do business.”69 Agencies and commissions that are meant to protect the bodily safety of workers, consumers, and the general public also allow for concerns about a corporation’s finances to impact the fines they levy. The Mining Safety and Health Administration stipulates that the determination of whether to impose a penalty should take into account the “appropriateness of such penalty to the size of the business . . . [and] the effect of the penalty on the operator’s ability to continue in business.”70 Furthermore, if “the penalty will adversely affect the operator’s ability to continue in business, the penalty may be reduced.”71 The Consumer Product Safety Commission takes into account “the appropriateness of such penalty in relation to the size of the business of the person charged, including how to mitigate undue adverse economic 66 12 U.S.C. § 4636(c)(2). 67 12 U.S.C. § 1818(i)(2)(G)(i). 68 Letter from Bd. of Governors of the Fed. Rsrv. Sys., Div. of Banking Supervision, to the Off. in charge of Supervision at each Fed. Rsrv. Bank, Civil Money Penalties and the Use of the Civil Money Penalty Assessment Matrix (June 3, 1991), (https://www.federalreserve.gov/boarddocs/srletters/1991/sr9113.htm [https://perma.cc/S9RF-H5VR]). 69 15 U.S.C. § 45(m)(1)(C). 70 30 C.F.R. § 100.3(a)(i)-(vi) (2009). 71 Id. at § 100.3(h). 16 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 impacts on small businesses.”72 Similarly, the National Highway Transportation Administration “may consider a person’s ability to pay, including in installments over time, any effect of a penalty on the respondent’s ability to continue to do business, and relevant financial factors such as liquidity, solvency, and profitability.”73 The concern for collateral consequences even extends to penalizing corporations for violating the nuclear non-proliferation treaty and the chemical weapons convention.74 The Securities and Exchange Commission and the Commodity Futures Trading Commission, which oversee securities and derivatives markets, also take into account the violator’s ability to pay. The Securities and Exchange Commission allows respondents to “present evidence of the respondent’s ability to pay such penalty,” and may consider “such evidence in determining whether such penalty is in the public interest. Such evidence may relate to the extent of such person’s ability to continue in business.”75 The Commodity Futures Trading Commission “may settle claims . . . at less than the principal amount of the claim if . . . [t]he debtor shows an inability to pay the full amount within a reasonable period of time; . . . or [t]he Commission’s enforcement policy would be served by settlement of the claim for less than the full amount.”76 Even departments that are not generally associated with enforcement actions have policies regarding the collateral consequences of the penalties they issue. The Department of Health and Human Services considers “[t]he financial condition of the covered entity or business associate, [including whether] . . . the imposition of a civil money penalty would jeopardize the ability of the covered entity or business 72 15 U.S.C. § 2069(b). 73 49 C.F.R. § 578.8(b)(7) (2016). Interestingly, this is the only regulation that I have found that discusses the potential for deliberate undercapitalization of a corporation: “NHTSA may also consider whether the business has been deliberately undercapitalized.” Id. 74 22 U.S.C. § 8142(a)(2)(D). 75 15 U.S.C. § 78u-2(d). 76 17 C.F.R. § 143.5. No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 17 associate to continue to provide, or to pay for, health care;”77 the Department of Defense takes into account “[f]inancial information relevant to a respondent’s ability to pay includ[ing] . . . the value of respondent’s cash and liquid assets and non-liquid assets, ability to borrow, net worth, liabilities, income, prior and anticipated profits, expected cash flow, and the respondent’s ability to pay in installments over time[;]”78 the Department of Homeland Security considers “the economic impact of the penalty on the violator[;]”79 and the Department of Energy states that “[r]egarding the factor of ability of DOE contractors to pay the civil penalties, it is not DOE’s intention that the economic impact of a civil penalty is such that it puts a DOE contractor out of business.”80 Statutes also allow officials concerned about collateral consequences to anticipate the effects of decreased competition on consumer welfare. For instance, when considering judgments regarding monopolization and restraints on trade, the Department of Justice considers “the impact of entry of such judgment upon competition in the relevant market or markets [and] upon the public generally.”81 Concerns about penalties adversely affecting competition are not restricted to the United States. The European Commission takes into account a corporation’s “inability to pay” in competition proceedings,82 and a survey by the Organization for Economic Co-operation and Development of competition authorities in twenty-one countries and the European Union finds that “[s]ome competition authorities believe that the fine cannot be as high 77 45 C.F.R. § 160.408(d). 78 32 C.F.R. § 767.25(c)(1). 79 33 C.F.R. § 159.321(c). 80 10 C.F.R. § 824, App. A (VIII)(2)(d). 81 15 U.S.C. § 16(e)(1)(B). 82 Guidelines on the Method of Setting Fines Imposed Pursuant to Article 23(2)(a) of Regulation No 1/2003, 210 OFF. J. EUR. UNION (Sept. 1, 2006). 18 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 as to put a company out of business,”83 and that “the inability to pay a fine is a factor that is generally considered in all jurisdictions in one way or another.”84 To understand the coverage of the policies of the agencies and departments below, I collected data from Good Jobs First’s Violation Tracker,85 which has data on fines imposed by governmental agencies. Examination reveals that most of the monetary value of fines is imposed by a small number of agencies. The 100 largest fines imposed since 2000 were imposed by just eleven agencies.86 Each of these eleven agencies has policies that allow or mandate that firms’ financial positions are taken into account when imposing penalties. Because the largest fines are outliers, I consider smaller fines as well. I therefore sum the monetary value of fines imposed by agency. I find that 94.7% of the monetary value of all fines imposed were imposed by just eleven agencies87 that 83 Semin Park, Sanctions in Antitrust Cases: Background Paper by the Secretariat, ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT (Oct. 14, 2016), at 23. 84 Id. at 52. 85 Violation Tracker, GOOD JOBS FIRST, https://www.goodjobsfirst.org/violation-tracker [https://perma.cc/9963- GDJH] (last visited Feb. 3, 2023). 86 These agencies are: the Department of Justice, the Environmental Protection Agency, the Federal Housing Finance Agency, the Federal Trade Commission, the Food and Drug Administration, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau, the Bureau of Industry and Security, the Commodity Futures Trading Commission, the National Highway Traffic Safety Administration, and the Securities and Exchange Commission. 87 In descending order of the total monetary value of fines imposed: Department of Justice (48.6%), Environmental Protection Agency (15.3%), Federal Housing Finance Agency (8.9%), Securities and Exchange Commission (6%), Food and Drug Administration (4.3%), Office of the Comptroller of the Currency (2.8%), Commodity Futures Trading Commission (2.6%), Consumer Financial Protection Bureau (1.9%), Federal Trade Commission (1.8%), Federal Reserve (1.3%), and National Highway Traffic Safety Administration (0.7%). The data from the Violation Tracker also includes fines levied by state governments, so these eleven agencies in fact make up more than 94.7% of total federal fines. The high proportion of No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 19 have policies to take collateral consequences into account. Extending the analysis to all of the agencies, departments, and commissions discussed in this section, I find that over 96.3% of the total monetary value of all fines imposed at the federal level were imposed by agencies, departments, or commissions with policies in place to take into account collateral consequences.88 This expansive legal basis shows that officials have the authority to reduce liability when concerned about collateral consequences that might arise from full enforcement of the allowable fine. In the next section, I show that reductions do in fact occur in practice. III. REDUCTIONS IN CORPORATE LIABILITY IN PRACTICE The previous section shows the expansive legal basis for reducing liability when collateral consequences might occur. In this section, I explore the degree to which reductions occur. I first provide empirical evidence showing that corporate criminal penalties are regularly reduced because of inability to pay. I then consider case studies in detail, look at why officials reduce liability, and provide evidence that they often do so mistakenly. A. Empirical Evidence on Reductions of Corporate Criminal Penalties The full degree to which fines are reduced because of fears about collateral consequences is unknowable. For criminal cases, the Sentencing Commission collects data on whether fines attributed to the Department of Justice is in part explained by multiagency referrals. Data on file with author. 88 This does not imply that all, or even the majority, of violations take collateral consequences into account. Agencies are vast enterprises, and different policies guide different aspects of agency decisionmaking. Nonetheless, the examples discussed in this section indicate that the consideration of the financial consequences of imposing liability is widely spread throughout the federal government. 20 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 fines were reduced according to USSG § 8C3.3.89 However, for civil cases, there is no equivalent reporting mechanism. This section uses data from the United States Sentencing Commission (USSC) to provide evidence that reductions occur in criminal cases. However, because of data issues, the USSC data provides only limited insight into the characteristics of these reductions. Section 3.2 provides qualitative evidence to understand the mechanics of these reductions. The federal sentencing of organizations is guided by Chapter 8 of the United States Sentencing Guidelines (USSG), which establishes a uniform sentencing policy across departments. Importantly, the sentencing guidelines provide an avenue for a reduction of the fine based on a defendant’s inability to pay: The court may impose a fine below that otherwise required by [the guidelines] if the court finds that the organization is not able and, even with the use of a reasonable installment schedule, is not likely to become able to pay the minimum fine required by [the guidelines]. Provided, that the reduction under this subsection shall not be more than necessary to avoid substantially jeopardizing the continued viability of the organization.90 Using the USSC data on business offenders from 2002 through 2020, I examine how frequently reductions are given.91 Because the focus of my analysis is on for-profit firms, I drop non-profits and governmental organizations. I further 89 Cindy R. Alexander, Jennifer Arlen & Mark A. Cohen., Evaluating Trends in Corporate Sentencing: How Reliable are the U.S. Sentencing Commission’s Data?, 13 FED SENT’G REP. 108 (2000). 90 U.S. SENT’G GUIDELINES MANUAL § 8C3.3(b) (2021). The application note to the section clarifies that “[f]or purposes of this section, an organization is not able to pay the minimum fine if, even with an installment schedule under § 8C3.2 (Payment of the Fine – Organizations), the payment of that fine would substantially jeopardize the continued existence of the organization.” Id. What constitutes “substantially jeopardizing” is not explicitly stated. 91 Commission Datafiles, U.S. SENT’G COMM’N, https://www.ussc.gov/research/datafiles/commission-datafiles#organization [https://perma.cc/DTV3-M249] (last visited Apr. 8, 2023). No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 21 drop observations with missing data on the firm’s financial condition, leaving a sample of 1,911 observations. Table 1 shows summary statistics for the data. The variable of interest is whether particular fines were reduced, as authorized by USSG § 8C3.3, because of a defendant’s perceived inability to pay all or a portion of the fine. I find at the time of sentencing, 55.2% of firms were “Solvent and Operating,” 11.8% of firms showed “Evidence of Substantial Distress,” and 27.6% of firms were defunct. Among these, 20.5% of solvent and operating firms received a reduction, and 54.2% of distressed firms received a reduction. In absolute numbers, 338 solvent and distressed firms had fines reduced between 2002 and 2020 because of a perceived inability to pay. This evidence, like other papers that have explored reductions in fines, is likely under-representative of the true frequency of reductions. Alexander et al.92 show that the USSC data is missing a significant number of observations, and like my results, other studies that rely on this data will likely have attenuated counts.93 Variable Mean Guilty Plea 91.3% Financial Status at Sentencing Solvent and Operating 55.2% Evidence of Substantial Distress 11.8% Defunct 27.6% Other 5.4% 92 Cindy R. Alexander, Jennifer Arlen & Mark A. Cohen, Regulating Corporate Criminal Sanctions: Federal Guidelines and the Sentencing of Public Firms, 42 J. L.& ECON. 393, 401–02 (1999); Cindy R. Alexander et al., supra note 89. 93 Jennifer Arlen, Corporate Criminal Liability: Theory and Evidence, in RSCH. HANDBOOK ON THE ECON. OF CRIM. L. 144, 192 (2012). It is well known that many firms that are criminally prosecuted are small or owner- operated. However, many firms are quite large. The USSC data includes the employment level at 106 firms that were either “solvent” or “distressed” and has their fines reduced. Among these firms, the average number of employees was 206. 22 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 Base Fine $11.2 million Fine Reduced Because Inability to Pay 39.5% Among Solvent Firms 20.5% Among Distressed Firms 54.2% Among Defunct Firms 69.1% Final Sentence Below Guideline Range* 10% Observations 1911 * Notes: Because of data availability issues, it is not possible in some observations to determine whether a sentence is below the guideline range, so the reported statistic accounts only for the 71% of observations for which this determination is possible. To account for this, Alexander and Cohen conduct an exhaustive effort to identify all NPAs, DPAs, and plea agreements entered into by public corporations between 1997 and 2011 and find 486 agreements.94 The authors find that twenty firms had their criminal fines reduced.95 However, this too is likely an undercount, due to the difficulty of observing whether the fine was reduced. While some plea agreements explicitly reference the Sentencing Guidelines, other agreements consider ability to pay without explicitly referencing the guidelines.96 Moreover, while the number of firms identified by Alexander and Cohen is small, the total reduction in liability is not. The authors identified thirteen firms for which fines were reduced because of inability to pay and where the authors were able to calculate the guideline ranges under the USSG. Summing these thirteen firms, the total that was paid in liability was only $1.08 billion, despite a guideline range of $9.2 billion to $10.8 billion. Therefore, 94 Cindy R. Alexander & Mark A. Cohen, The Evolution of Corporate Criminal Settlements: An Empirical Perspective on Non-Prosecution, Deferred Prosecution, and Plea Agreements, 52 AM. CRIM. L. REV. 537, 540 (2015). 95 Id. The authors have shared their data with me which allows me to further analyze the characteristics of these firms. 96 For example, the Beazer Homes’ settlement agreement which is discussed in the next section does not include a reference to U.S. SENT’G GUIDELINES MANUAL § 8C3.3(b) (U.S. SENT’G COMM’N 2021), and is not included in Alexander and Cohen’s count of firms that had fines reduced. No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 23 even if the number of cases is small, the economic impact can be large. Unfortunately, there is no clean way to estimate the extent to which the fines in the USSC sample were reduced, or how significant a reduction was necessary to maintain the solvency of the firm.97 Moreover, while it is not possible to determine from the data whether or not victims received adequate restitution, the cases studies in the next section show that reductions can be coupled with incomplete restitution.98 That 338 solvent and distressed firms had fines reduced between 2002 and 2020 because of a perceived inability to pay provides support for the proposition that reductions for fear of collateral consequences are not an uncommon event, but are instead a regular component of the corporate liability decision. The evidence on reductions from the Sentencing Commission data restricts attention to criminal fines. However, the vast majority of corporate fines are wholly or partially civil in nature. Moreover, the total monetary value of corporate civil fines far outstrips the total monetary value of all corporate criminal fines. According to data from the Corporate Research Project of Good Jobs First’s Violation Tracker,99 eighty-three of the largest 100 fines imposed on corporations since 2000 are wholly or partially civil in nature. Aggregating across all violations, only 0.3% are criminal, with the rest being civil.100 The total monetary value of corporate civil fines is also far greater than corporate criminal fines.101 Approximately 80% of the monetary value of all fines at the 97 A small minority of observations have a text field explaining the financial condition of the firm at the time of sentencing. Examples include: “seizure of assets put company in jeopardy,” “lost revenue since instant offense,” “very few assets,” and “active but no longer viable.” Data on file with author. 98 Of the solvent and distressed firms that received reductions, 212 paid $0 to $99,999 in restitution, eighty-one paid $100,000 to $1 million in restitution, and thirty-five paid more than $1 million in restitution. Data on file with author. 99 Violation Tracker, GOOD JOBS FIRST, supra note 85. 100 Id. 101 Id. 24 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 federal level are civil, 13% are criminal, and 7% are a combination of civil and criminal.102 Given the size and scope of civil fines, coupled with the legal basis for reducing these fines presented in Section 2, the number of reductions in corporate liability is likely to be considerably higher than what is presented here. While I cannot present statistical evidence on reductions in civil fines, the case studies in the next section include reductions in both civil and criminal liability. B. What is Driving Reductions? The data on corporate criminal penalties illustrate that reductions on account of corporations’ financial conditions are a regular part of the corporate-liability decision. However, the data do not indicate which factors shape the decision. In this section, I present case studies to explore how officials think about the potential for financial distress. Consider the following examples: • In 2005, Hynix Semiconductor pled guilty to price fixing.103 The settlement agreement states that even after having adjusted the fine downward for “substantial assistance,” the fine still “would have exceeded Defendant’s ability to pay.”104 The fine was therefore reduced further “due to the inability of the Defendant to make restitution to victims and pay a fine greater than that recommended without substantially jeopardizing its continued viability.”105 • In 2009, the Department of Justice settled charges of fraudulent lending practices with Beazer Homes.106 The settlement agreement states that “the imposition of additional criminal penalties or the requirement of 102 Id. 103 Plea Agreement at 4, United States. v. Hynix Semiconductor Inc., No. CR 05-249 PJH (N.D. Cal. May 11, 2005). 104 Id. at 7. 105 Id. at 7. 106 Deferred Prosecution Agreement, United States. v. Beazer Homes USA, Inc., No. 3:09cr113-w (W.D.N.C. Jul. 1, 2009). No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 25 additional payment at this time would jeopardize the solvency of Beazer and put at risk the employment of approximately 15,000 employees and full-time contractors not involved in the criminal wrongdoing.”107 • In 2014, Alcoa settled with the Department of Justice and the Securities and Exchange Commission following twenty years of bribery charges in violation of the Foreign Corrupt Practices Act.108 Prosecutors allowed for a final penalty significantly less than the amount Alcoa profited from its illegal activity, because a heftier fine would have “substantially jeopardiz[ed] Alcoa’s ability to compete . . . including, but not limited to, its ability to fund its sustaining and improving capital expenditures, its ability to invest in research and development, its ability to fund its pension obligations, and its ability to maintain necessary cash reserves to fund its operations and meet its liabilities.”109 • In 2012, the European Commission purportedly reduced by 85% the fine imposed on Technicolor for anticompetitive behavior, from €275.5 million to €38.6 million, because of Technicolor’s perceived inability to pay the larger amount.110 • In 2018, IAV GmbH pled guilty to working with Volkswagen to design, test, and implement software to cheat the U.S. emissions testing process.111 Prosecutors ultimately set the fine at $35 million, an amount far below the USSG guideline range, following their 107 Id. at 3. 108 Plea Agreement, United States v. Alcoa World Alumina LLC, No. 2:14-cr-00007-DWA (W.D. Pa. Jan. 9, 2014). 109 Id. 110 L. BUS. RSCH., THE PUBLIC COMPETITION ENFORCEMENT REVIEW 113 (5th ed. 2013); Arnold & Porter, The Public Competition Enforcement Overview, ARNOLD & PORTER (May 2013), https://www.arnoldporter.com/~/media/files/perspectives/publications/2013 /06/the-public-competition-enforcement- review/files/publication/fileattachment/european-union.pdf [https://perma.cc/8TV8-EPBR]. 111 Plea Agreement, United States v. IAV GmbH, No. 16-CR-20394 (E.D. Mich. Dec. 18, 2018). 26 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 determination that “the Defendant cannot and is not likely to become able (even on an installment schedule) to pay the minimum guideline fine.”112 • In 2003, the Olympic Pipeline Company entered into a consent decree to pay civil penalties arising from a pipeline explosion that killed three children.113 According to the decree, “[t]he United States has substantially reduced Olympic’s civil penalty and agreed to a payment schedule based on financial information that Olympic provided during settlement discussions demonstrating that Olympic lacks the economic ability to pay a larger penalty.”114 In the appendix, I explore each of these cases in considerable detail. For each case, I consider the fine imposed, the government’s reasons for reducing liability, and the corporation’s financial condition at the time. In this section, I discuss which aspects of the corporations’ finances appear to have driven the decisions to reduce liability. A corporation’s financial position depends largely on its assets and liabilities. An asset is any resource a corporation owns that is expected to generate future value. Assets may be tangible or intangible, and can include land, inventory, cash, investment securities, intellectual property, and goodwill. A liability is any debt that a corporation owes. Liabilities are usually represented as a sum of money, and can include loans, mortgages, and accounts payable. The corporation’s book value is the net value of its assets minus its liabilities.115 In theory, the book value is the corporation’s total present-day value if all assets were liquidated and all liabilities were repaid. All the firms profiled above (or their parent companies) had book values well in excess of the fines imposed. At the 112 Id. at 7. 113 Notice of Lodging of Consent Decrees, United States v. Shell Pipeline Company, No. CV-02-1178R (W.D. Wa. Jan. 17, 2003). 114 Id. at 2. 115 Marriott Pru, J.R. Edwards & Howard J. Mellett, INTRODUCTION TO ACCOUNTING 15 (SAGE Publications, Ltd., 3rd ed. 2002). No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 27 lowest end, Beazer’s book value was four times greater than its fine;116 at the highest end, Alcoa’s book value exceeded its fine by a multiple of seventeen.117 These ratios indicate that each of the firms could have liquidated their assets and used the proceeds to pay fines considerably higher than those imposed. But even in the event of more substantial fines, liquidation would have been unnecessary to satisfy the penalties. Corporations with positive book values can generally borrow against their assets and future earnings. The amount that a firm can borrow and the interest rate imposed on that loan will generally depend in part on the firm’s existing assets and liabilities. In the cases considered above, only Olympic Pipeline appears to have faced an imminent threat of insolvency. Not all assets and liabilities are the same. Assets and liabilities are considered current if they are short-term. Current assets are assets that are easily convertible into cash within one year, including cash and its equivalents, marketable securities, and accounts receivable. Likewise, current liabilities are debts that are due within one year, including accounts payable, short-term debt, and maturing long-term debt. Net current assets represent the difference between current assets and current liabilities. If a corporation’s net current assets are positive, the corporation can be expected to pay its financial obligations without raising external capital. If, however, the corporation has negative net current assets, it may need to raise capital to meet its debts. Low or negative net current assets appear to drive officials’ fears of collateral consequences and the resultant reductions in corporate liability. Of the firms above, only one had net current assets significantly greater than their originally- calculated fine.118 The others had low or even negative net current assets.119 Furthermore, all the firms owed more in the 116 See infra Appendix I.C. 117 See infra Appendix I.D. 118 See infra Appendix I. 119 See infra Appendix I. 28 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 next year than they had in cash on hand.120 This shortfall likely lent support to arguments about their inability to meet their upcoming obligations, and led officials to conclude that increased liabilities would “jeopardize [their] solvency”121 or their “ability to maintain necessary cash reserves to fund [their] obligations and meet [their] liabilities.”122 Negative current assets, however, should not be confused with financial distress. For example, at the time of its settlement with California prosecutors, Hynix had only $343 million cash on hand, yet owed $1.6 billion that was due to be paid within one year.123 One might be excused, knowing only these two figures, for concluding that a greater fine could not be imposed without “substantially jeopardizing Hynix’s continued viability.”124 But this oversimplified analysis would overlook that Hynix’s book value (total assets minus total liabilities) was $3 billion.125 Therefore, while Hynix’s liquid assets were few, the firm was profitable and had considerable total assets. There is little reason to believe that Hynix could not have borrowed against its long-term assets to cover the immediate shortfall caused by the penalty.126 Furthermore, concerns over sending these corporations further into financial distress overlook their market 120 See infra Appendix I. 121 Deferred Prosecution Agreement at 3, United States v. Beazer Homes USA, Inc., No. 3:09cr113-w (W.D.N.C. Jul. 1, 2009). 122 Plea Agreement, United States v. Alcoa World Alumina LLC, No. 2:14-cr-00007-DWA (W.D. Pa. Jan. 9, 2014). 123 GROWING IN THE TIME OF UNCERTAINTY: HYNIX 2005 ANNUAL REPORT 43–44 (2005). 124 Plea Agreement at 7, United States v. Hynix Semiconductor Inc., No. CR 05-249 PJH (N.D. Cal. May 11, 2005). 125 See infra Appendix I.A. 126 Compare Hynix’s position, for example, to a reckless driver protesting that they cannot afford to pay a speeding ticket because they have no income, no money in the bank, and a $10,000 credit card bill that comes due next month. Now suppose that the driver is voluntarily on sabbatical from a high-paying job and owns a $5 million home outright. Regardless of their bank account, income, and credit card bill, it’s plain that the driver can comfortably afford their speeding ticket, even if it requires accruing additional interest on a credit card until they are back at work. No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 29 capitalization. Market capitalization is the total market value of the company’s outstanding shares of stock, and it captures the value of a corporation as perceived by the wider market. Each of the above firms’ market capitalization (or that of a parent firm) was greater than the fine imposed. For example, Beazer’s market capitalization of $71.8 million was 40% higher than the fine imposed; Technicolor’s €415 million valuation was ten times greater than the fine imposed; Hynix’s market capitalization of $2.1 billion was eleven times greater than the fine imposed; and Alcoa’s $8 billion market capitalization was a full twenty-one times greater than the fine imposed by prosecutors concerned for their financial wellbeing.127 With market capitalization comes the ability to raise debt or equity, as explained in Section IV. These case studies suggest that officials see low cash and negative net current assets as signs of inability to pay. As Section IV shows, this is an incorrect conclusion—firms can be cash-poor but can have ample ability to pay large fines without subsequently experiencing financial distress.128 That firms can generally pay liability without reduction is supported beyond these case studies. Alexander and Cohen identified twenty public firms that had their liability reduced because of concerns about their inability to pay. 129 Using the authors’ data, I have identified financial characteristics of the firms at the time liability was imposed.130 Four of the firms were in insolvency proceedings, so I focus on the remaining sixteen. As in the case studies above, these firms are cash-poor relative to current liabilities. Fifteen of the sixteen (93.75%) firms had current liabilities in excess of cash on hand and marketable securities before the fine was imposed, with all having current liabilities in excess of cash on hand and marketable securities after the fine was imposed. Looking 127 See infra Appendix I. 128 See infra Section I.V. 129 Alexander & Cohen, supra note 94, at 584 n.193. 130 Firm financials are taken from the most recent annual or quarterly report that the firm filed before liability was imposed. Data on file with the author. 30 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 beyond just cash and marketable securities to all current assets, seven firms (43.75%) had negative net current assets— that is, current liabilities in excess of current assets at the time the fine was imposed. But again, while these numbers are an indication of a firm’s short-term liquidity, they should not be the final step in analyzing a firm’s ability to pay. In fact, when we move toward more comprehensive measures of firm value, these firms look less troubled. Only three of the sixteen firms (18.75%) had negative book values at the time the fine was imposed, with 25% having negative book values after the fine was imposed. So, while some could not afford to liquidate and pay the fine, most could. Moreover, after the fine was imposed, the mean (median) book value of these firms was a full $363 million ($1.3 billion). Restricting attention to the firms for which the authors were able to calculate the maximum guideline range, 55% would still have had a positive book value after paying the maximum fine, including four firms that would still have book values in excess of $1 billion. For these firms, claims of financial distress are dubious, given their strong book values. For public firms, the market capitalization gives the best picture of the firm’s ability to pay. I was able to calculate the market capitalization at the time liability was imposed for fourteen of the Alexander and Cohen firms.131 Of these firms, the fine as a percentage of the corporation’s market capitalization ranged from a high of 31% to a low of less than 1%, meaning that each corporation had the capacity to pay the fine imposed through borrowing or issuing equity. Moreover, restricting attention to the thirteen firms for which the authors were able to calculate the maximum guideline range, ten of those firms had a market capitalization greater than the maximum guideline range, indicating that these firms could have paid substantially more in liability. Taken together, the difference between the fine imposed and the maximum guideline fine for these firms was $8.7 billion. 131 Of the remaining six firms, four were insolvent or in the midst of bankruptcy proceedings, and the other two firms were solvent, but I could not find their market capitalization at the time that fines were imposed. Data on file with author. No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 31 So, there were many cash-poor firms that appear to have had ample means to pay much larger fines. However, were there in fact firms who truly could not pay off their liabilities? It appears so, but even then, it is not clear that officials should have reduced liability. Four of the firms were in the midst of insolvency proceedings, suggesting that they already failed to meet debt payments—but that doesn’t mean that the government should give up a claim on the firm’s assets in favor of the other creditors. Of the solvent firms, there were those that had negative book values despite having a positive market capitalization. Moreover, while negative net current assets or depleted cash stores are not in and of themselves cause for alarm, some of these firms may genuinely have had limited access to capital. It is conceivable that there was a genuine threat of collateral consequences from a small minority of the firms. A careful examination of the case studies, along with the Alexander and Cohen data, shows that, while fears of collateral consequences are sometimes well-founded, in many other cases these fears appear to be misplaced, due to misconceptions of corporate finance. Officials who are unsure whether imposing liability will lead to collateral consequences may deem it safer to reduce liability and not risk disastrous consequences. In a 2012 speech, the head of DOJ’s Criminal Division, Assistant Attorney General Lanny Breuer, said of the difficult decision: To be clear, the decision of whether to indict a corporation, defer prosecution, or decline altogether is not one that I, or anyone in the Criminal Division, take lightly. We are frequently on the receiving end of presentations from defense counsel, CEOs, and economists who argue that the collateral consequences of an indictment would be devastating for their client. In my conference room, over the years, I have heard sober predictions that a company or bank might fail if we indict, that innocent employees could lose their jobs, that entire industries may be affected, and even that global markets will feel the effects. 32 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 Sometimes—though, let me stress, not always—these presentations are compelling. In reaching every charging decision, we must take into account the effect of an indictment on innocent employees and shareholders, just as we must take into account the nature of the crimes committed and the pervasive- ness of the misconduct. I personally feel that it’s my duty to consider whether individual employees with no responsibility for, or knowledge of, misconduct committed by others in the same company are going to lose their livelihood if we indict the corporation. In large multi-national companies, the jobs of tens of thousands of employees can be at stake. And, in some cases, the health of an industry or the markets are a real factor. Those are the kinds of considerations in white collar crime cases that literally keep me up at night, and which must play a role in responsible enforcement.132 There can be real costs to imposing monetary liability on corporations. When reducing fines to preempt a larger judgment’s collateral consequences, however, public officials generally make two conceptual failures that undermine the laudable goal of protecting third parties. The first conceptual failure is a misunderstanding of corporate governance. Officials too often treat shareholders as another set of victims who need to be protected from a firm’s distress or insolvency.133 But the American system of corporate governance is firmly rooted in the idea that firms are run in the interest of shareholders. Shareholders are compensated for the risks that they bear, and shareholders who profit from malfeasance should not be protected from the 132 Off. of Pub. Affairs, Dep’t of Justice, Assistant Attorney General Breuer Speaks at the New York City Bar Association (Sept. 13, 2012), https://www.justice.gov/opa/speech/assistant-attorney-general-lanny- breuer-speaks-new-york-city-bar-association [https://perma.cc/ZA7G- TGZ2]. 133 However, with this being said, of all the statutes, regulations, and policies analyzed in Section 2, the Justice Manual is the only policy that explicitly states that officials should take shareholder interests into account. See supra Section II. No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 33 liability arising from that malfeasance. When corporate liability is reduced to protect shareholders, there is little incentive for shareholders, directors, and managers not to engage in malfeasance. In our shareholder-focused system of corporate governance, we as society should want shareholders to bear the costs. The second conceptual failure is a misunderstanding of corporate finance. Assistant Attorney General Breuer’s remarks, the Holder Memorandum, and the many statutes addressed in Section II all implicitly assume that corporate liability can result in collateral consequences. But officials are failing to carefully consider the mechanisms through which collateral consequences arise—or the circumstances in which they don’t. As a result, officials mistakenly reduce liability in cases where collateral consequences are unlikely to occur. In the next section, I make the corporate finance framework more explicit, and show how concerns about financial distress and the associated collateral consequences can be mitigated or dismissed entirely. IV. IMPOSING LIABILITY WITHOUT COLLATERAL CONSEQUENCES A. Determining Whether Collateral Consequences Will Occur Officials can and do lower liability to avoid potential collateral consequences. However, in many cases fears of collateral consequences are misplaced. In these cases, the goals of corporate liability would be better served by not reducing liability. Before allowing for reductions, officials must place more scrutiny on the target firm’s financials. In this section, I consider how to impose liability in the shadow of potential collateral consequences. The myriad federal policies on collateral consequences work though an assumption that a fine will lead to financial distress or insolvency and thereby to associated costs for third 34 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 parties.134 An official concerned about collateral consequences should ask the question: can the target firm pay the fine without becoming distressed or insolvent? For this purpose, it is helpful to distinguish between three types of firms. First are those firms for which insolvency is already likely—even before any fines are imposed. These firms may be either financially or economically distressed, and their prospective profits are insufficient to cover their costs.135 A second type of firm is one that is financially distressed but is otherwise viable as a going concern. These are firms that, in the absence of any additional liabilities, are likely to remain viable but are facing difficulties. The third type of firm is one that is generally healthy. Absent a significant shock, these firms can be expected to remain viable. An official concerned with collateral consequences should first figure out which type of firm they are dealing with. When looking at a firm’s ability to pay, a natural starting point is to ask whether the firm has enough cash to pay a given fine. “Quick Assets” are assets that easily convertible into cash, generally within 90 days.136 This includes cash, marketable securities, accounts receivable, and other liquid assets. Financial analysts frequently use the Quick Ratio or the Acid Test Ratio to determine whether a company can meet its short-term obligations.137 This can be defined in various ways, but a common formulation is: Quick Ratio = (Cash + Marketable Securities + Accounts Receivable)/(Current Liabilities). A high ratio means that a firm is liquid and can pay its short-term debts, whereas a low ratio indicates a firm 134 See supra Section II. 135 For a discussion of financial and economic distress, see Gregor Andrade & Steven N. Kaplan, How Costly is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions that Became Distressed, 53 J. FIN. 1443 (1998). 136 Adam Hayes, Quick Assets, INVESTOPEDIA (Apr. 21, 2021), https://www.investopedia.com/terms/q/quickassets.asp#:~:text=What%20A re%20Quick%20Assets%3F,assets%20held%20by%20a%20company [https://perma.cc/3FY7-DC7B]. 137 PRU MARRIOTT, J. R. EDWARDS, & H. J. MELLETT, INTRODUCTION TO ACCOUNTING 386 (SAGE Publications, Ltd., 2002). No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 35 may struggle to pay debts. As a rule of thumb, analysts look for a ratio at or above one, which indicates that the company is fully able to pay its short-term liabilities. Utilizing this test, a decision maker can simply add the fine imposed to the denominator (current liabilities) and check the Quick Ratio. If the value is above one, that is strong evidence that the firm can afford to pay the fine without facing short-term financial distress. The Quick Ratio is very conservative. It only considers assets that can be converted quickly to cash but includes all current liabilities (those due within the next year). Quick Assets thereby excludes inventory and other current assets that the firm could liquidate in order to pay a fine. A less stringent test is the Current Ratio,138 which is the ratio of all current assets to current liabilities. The Current Ratio gives a better picture of the firm’s financial state over the coming year. So even if the Quick Ratio is less than one, indicating that the firm may not have the ability to pay the fine speedily, the Current Ratio may be greater than one, indicating that the firm does have the liquidity to pay the fine within the next year. If a firm has a Current Ratio that is greater than one after paying the fine, officials should not look further into the firm’s finances. While it is possible that a firm may have a Current Ratio greater than one while having distressed longer-term finances, the Quick Ratio and Current Ratio give an indication of whether the firm can pay the fine without additional short- term financing, and officials should stop there. Recall that most of the public firms covered in Section IIIB had low Quick/Current ratios. However, a ratio below one does not in and of itself indicate that the firm is facing financial distress. A low Quick/Current Ratio can be an indicator of efficient supply chains and financing. For example, Walmart, in the decade from 2010–2020 had a Quick Ratio that generally averaged between 0.2 to 0.3 and a Current Ratio that 138 Id. at 385. 36 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 averaged between 0.8 and 0.9.139 All the while, Walmart was in a strong financial position. Officials should proceed to look at other aspects of the firm’s financing only in those cases where the target firm has a low Quick/Current Ratio. If the firm does not have sufficient cash on hand to pay the fine, the question then becomes whether the firm can raise the funds to pay the fine. There are three fundamental ways in which a firm can quickly raise money: equity financing, debt financing, and asset sales.140 In most cases, officials should not dwell on how the firm will raise the funds, but rather whether the firm can raise funds. To do this, we want to understand the underlying value of the firm. For public firms, this is a relatively straightforward task. Officials should focus on the firm’s market capitalization, which captures the total market value of the company’s outstanding shares of stock, and thereby the value of the corporation as perceived by the wider market.141 Market capitalization captures the expected discounted future stream of income to shareholders. A firm with positive market capitalization has the scope to raise money to pay a fine by borrowing money or issuing equity. In this sense, a fine paid to the government can be thought of as a diversion of the discounted cash flows away from current shareholders and towards the government. By borrowing money to pay the fine, the firm diverts future cash flows away from current shareholders to new creditors and uses that influx of cash to pay the fine. By issuing new equity to pay the fine, the firm diverts future cash flows away from current shareholders to new shareholders and uses that influx of cash to pay the fine. In either case, the fine will divert cash flows away from current shareholders, and for the most part, officials do not 139 Walmart Quick Ratio 2010-2023, MACROTRENDS LLC, https://www.macrotrends.net/stocks/charts/WMT/walmart/quick-ratio [https://perma.cc/F8M4-BB95] (last visited May 30, 2023). 140 Anat R. Admati, Peter M. Demarzo, Martin F. Hellwig, & Paul Pfleiderer, The Leverage Ratchet Effect, 73 J. FIN. 1, 145, 178 (2018). 141 See supra Section III.B. No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 37 need to question which option the firm will choose.142 How much money can be diverted away from shareholders without threatening the solvency of the firm is captured in the firm’s market capitalization.143 While market capitalization is the most useful element when looking at a public firm’s ability to pay, it is more difficult to determine the market value of private firms whose shares are not actively traded. Officials can approximate a private firm’s ability to pay by looking at its book value. Book value is a firm’s total assets minus total liabilities, and in principle, the book value is the firm’s total present-day value if all assets were liquidated and all liabilities were repaid.144 Of course, officials’ fears of collateral consequences are largely predicated on fears of liquidation and associated job losses, so they would want actual liquidation to be avoided. But companies with positive book values can generally borrow against their assets and future earnings, because lenders know that the firm could be liquidated to pay back the loan if necessary. The amount that a firm can borrow, and the interest rate imposed, will depend on the firm’s existing assets and liabilities. If a firm has a book value well in excess of the fine imposed, the firm should be able to divert future earnings away from shareholders by borrowing money or bringing on 142 Franco Modigliani & Merton H. Miller, The Cost of Capital, Corporation Finance and the Theory of Investment, 48(3) AM. EC. REV. 261, 295–296 (1958) (showing that in the absence of frictions, firms will be indifferent about how to raise funds); Anat Admati et al., supra note 219 at 188 (showing that indebted firms will be biased towards debt issuances); Nathan Atkinson, Avoiding Corporate Liability Through Strategic Capital Structure 7 (working paper, June 14, 2020) (showing how the choice can, in some cases, have an effect of prospective collateral consequences). 143 B. Espen Eckbo & Michael Kisser, Tradeoff Theory and Leverage Dynamics of High Frequency Debt Issuers, 25(2) REV. FIN. 275, 296 (2021) (showing that instead of issuing debt or equity, firms frequently raise money by selling assets; in particular, non-core asset sales can be particularly appealing in the presence of information asymmetries); Alex Edmans & William Mann, Financing Through Asset Sales 35-36 (Nat’l Bureau of Econ. Rsch., Working Paper No. 18677, 2013) (showing that firms may choose to raise funds through asset sales, but it would be difficult for an official to accurately predict which assets a firm would sell, and for how much). 144 See supra Section III.B. 38 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 new equity investors, and officials should be skeptical about claims of collateral consequences. If the firm has a market capitalization or book value well in excess of the contemplated fine, officials should be skeptical of claims of collateral consequences and should simply impose the desired fine. The case studies in Appendix I, coupled with the Alexander and Cohen data,145 show that many public companies had market capitalizations and book values that were hundreds of millions (or even billions) of dollars in excess of the imposed fine. When officials lower liability on these firms, they are effectively subsidizing corporate misconduct. Moreover, firms may be able to exploit officials’ reticence to impose fines through strategic financing. Nonetheless, some firms covered in Section IIIB were financially distressed and others were already in the midst of insolvency proceedings. The next section considers how to deal with these firms. B. The Government’s Options to Impose Fines In many cases, officials can simply impose the full fine without worrying about collateral consequences. Applying the framework in the previous section to the firms covered in Section IIIB shows that the firms generally could have paid liability without jeopardizing their solvency—while almost all of them had limited cash on hand, most of them had market capitalizations and book values well above the fine imposed. However, in some cases, fears of financial distress may be real: Beazer Homes’ market capitalization was not much more than the fine imposed, and Olympic Pipeline did subsequently file for bankruptcy. So, when a fine will potentially lead to financial distress or insolvency, what steps should officials take? Begin with the cases where—even in the absence of a fine—insolvency is probable or even a foregone conclusion. While there is empirical evidence on third-party costs of 145 Cindy R. Alexander & Mark A. Cohen, The Evolution of Corporate Criminal Settlements: An Empirical Perspective on Non-Prosecution, Deferred Prosecution, and Plea Agreements, 52 AM. CRIM. L. REV. 537, 540 (2015). No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 39 corporate bankruptcies, what is the effect of lowering liability on a firm that is already facing insolvency? Take Olympic Pipeline for example, where the government reduced Olympic’s civil liability following a deadly pipeline explosion in 2003 after determining that “Olympic lack[ed] the economic ability to pay a larger penalty.”146 Olympic was entirely owned by Royal Dutch Shell and British Petroleum, at that time the eighth and ninth most valuable publicly traded corporations in the world.147 Olympic filed for bankruptcy shortly after the settlement, listing assets of $106 million and liabilities of $401 million.148 In this case, the reduction in liability had no effect on Olympic’s prospective solvency. Moreover, because substantially all of Olympic’s debts were owed to these two parent companies, the ultimate effect of reducing Olympic’s fine was to allow Shell and BP to recover more in bankruptcy, effectively reducing the fine on two multi-billion-dollar companies that had ample ability to pay. However, even if a fine would lead to insolvency, that does not mean that there will be significant or undesirable collateral consequences. Olympic argued that its insolvency would inflict collateral consequences on its business partners and the region more broadly, claiming that its continued viability was “critical to Western Washington’s economy, as it transports most of this region’s retail gasoline and is the only method of transporting jet fuel to Seattle Tacoma International Airport.”149 However, while the pipeline itself may have been critical, it was never under threat. As a fixed, revenue-generating asset, it is implausible that the pipeline 146 Consent Decree at 2, United States v. Shell Pipeline Company, No. CV-02-1178R (W.D. Wa. Jan 28, 2003). 147 Global 500 2003, FINN. TIMES, https://web.archive.org/web/20080910101006/http://specials.ft.com/spdocs/g lobal5002003.pdf (last visited Apr. 3, 2023) [https://perma.cc/4JK5-B9J8]. 148 Order Confirming Plan of Reorganization and Authorizing Assumption of Executory at 1, In re Olympic Pipe Line Company, No. 03- 14059 (Bankr. W.D. Wa. Nov. 12, 2014); Olympic Pipe Line Files for Bankruptcy, MY PLAINVIEW (Mar. 27, 2003), https://www.myplainview.com/news/article/Olympic-Pipe-Line-Files-for- Bankruptcy-9000273.php. 149 Miletich, supra note 177. 40 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 would cease to operate as a result of Olympic shouldering full liability. In fact, when Olympic subsequently went bankrupt, the pipeline continued to provide fuel without delays.150 The same reasoning should be applied to cases where the fine may lead to distress. The key question needs to be whether distress/insolvency will lead to collateral consequences, and, if so, are those prospective collateral consequences so dire that they should be avoided. Consider Beazer Homes’ $50 million settlement, which was 70% of the firm’s market capitalization and 25% of the firm’s book value.151 Given the housing market in 2009, it is entirely reasonable to expect that the fine could lead to Beazer’s insolvency and subsequent collateral consequences. However, the DOJ’s statement that a higher amount would “put at risk the employment of approximately 15,000 employees and full- time contractors not involved in the criminal wrongdoing” is almost certainly an overstatement of the prospective risk.152 If Beazer were to file for bankruptcy, it, like most publicly- held firms, would likely file under Chapter 11 reorganization rather than Chapter 7 liquidation, meaning that many employees would stay in their jobs. And even if Beazer were to liquidate, divisions would be sold to new buyers and many employees would retain their jobs. Trying to protect employees is a laudable goal, and insolvencies will often lead to some job losses. But it is wrong to assume that insolvency will result in all of a firm’s employees losing their jobs. Officials should be skeptical when claims of collateral consequences are brought: insolvency does carry costs, but the claims made by government officials are often conjectural and highly unlikely. The examples considered in Section IIIB illustrate that claims of collateral consequences are often 150 Miletich, supra note 177. 151 In fact, as I discuss in Appendix A, Beazer was given a payment plan and ultimately paid only a fraction of this total. Moreover, this estimate of the firm’s market capitalization likely took into account the liability anticipated of the settlement. Beazer’s market capitalization increased following the announcement of liability and tripled within three months. 152 Deferred Prosecution Agreement at 3, United States v. Beazer Homes USA, Inc., No. 3:09cr113-w (W.D.N.C. Jul. 1, 2009). No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 41 spurious and officials should be reticent to reduce liability. However, suppose that there is a legitimate concern that a given fine will lead to financial distress and collateral consequences. The right answer in some cases is to simply impose the full fine and accept the collateral consequences— bankruptcy is a natural component of a functioning economy and propping up distressed firms can likewise lead to bad outcomes.153 But what other options are there? The two methods currently used are to reduce and/or delay the fine. Either of these methods will reduce the firm’s financial burdens. However, reducing or delaying fines also undermines the deterrent and restitution goals of imposing liability in the first place. Officials concerned about potential collateral consequences sometimes allow firms to pay their penalties in installments over time. In such cases, the settlement agreement will fix a payment schedule. However, because none of the cases that I profile in Section IIIB imposed interest on its outstanding fines, these plans were even less costly to the defendants than their pure dollar amounts would suggest. And even without charging interest, delayed payments are generally less expensive to firms than immediate payments because firms can either put their money to productive use in the short term or, in some cases, reduce the amount they need to borrow at any one time to afford the penalty. While a payment schedule reduces a firm’s financial burden, it does not eliminate it. Under the terms of its settlement agreement, Hynix owed $35 million per year for five years, a fairly manageable liability compared to the firm’s large asset base and positive revenues. However, for other firms, a recurring liability could lead to financial distress. At the time of its settlement agreement, Beazer Homes was in a more precarious financial position than Hynix had been. To avoid distress, Beazer’s 2009 settlement agreement with the Department of Justice required that the company make restitution payments equal to 4% of its adjusted EBITDA until 153 Ricardo J. Caballero, Zombie Lending and Depressed Restructuring in Japan, 98 AM. ECON. REV. 1943, 1945 (2008). 42 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 it had paid $48 million or through 2016. This framework was so effective at not adding to Beazer’s financial distress that, due to Beazer’s low EBITDA over the lifetime of the agreement, the firm only ended up paying $28.1 million in restitution to its victims. Anticipating this possibility of underpayment, the Justice Manual states that “[t]he United States Attorney should not accept a percentage of net profits in settlement or partial settlement of a claim. Such arrangements are speculative at best; policing is difficult; and there are too many ways in which the affairs of the debtor concern can be manipulated to avoid, minimize, or postpone realization of a net profit.”154 Simply reducing the fine or allowing it to be paid over time can lessen financial distress, but both will also undermine the goals of imposing liability in the first place. Officials can do better. One option is that officials issue “equity fines”—that is, force the corporation to issue new shares in the company to pay the fine.155 These equity fines would impose the full incidence of liability on shareholders, and thereby would avoid collateral consequences. However, these equity fines would also face practical barriers, and may be unnecessary in many cases. Instead, officials can impose regular monetary liability subject to some well-chosen stipulations to limit collateral consequences and to maximize the amount actually paid by the firm. Officials with legitimate concerns about collateral consequences could impose liability subject to three conditions. First, the fine does not have any set payment schedule—that is, the firm can pay the fine whenever it 154 U.S. Dep’t of Just., Just. Manual §4-3.210 (2018). 155 John C. Coffee Jr., Making the Punishment Fit the Corporation: The Problems of Finding an Optimal Corporate Criminal Sanction, N. ILL. U. L. REV., 3, 19 (1980) ; Atkinson, supra note 187, at 13 (analyzing capital structure and corporate malfeasance decisions in a rational expectations model). Because officials cannot commit to a fine schedule ex ante, they may ex post reduce liability because of collateral consequences, This has the effect of firms over-borrowing in order to exploit fears of collateral consequences. I show how mandatory equity issuances can overcome officials’ inability to commit and thereby lead to the first best. No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 43 wishes.156 The absence of fixed payments means that a distressed firm can pay other debts and avoid covenant violations. Second, because the fine is not paid immediately, the outstanding liability would continually accrue interest. This means that the firm is not saving money by paying a discounted fine in the future. Third, the firm cannot pay dividends or repurchase shares until the liability is fully repaid. This ensures that the government’s claim is higher in priority than those of shareholders. Taken together, this effectively structures liability akin to a callable preferred share of stock. There are obviously other considerations that would go into structuring the liability payment,157 and other innovations that could be made. But the key here is that there are clear improvements that can be made over simply reducing or delaying liability payments. Regardless of how officials proceed in terms of structuring or reducing liability, disclosures must be improved. A unifying theme in every case considered in Section III is the lack of effective disclosure by officials. In most of the cases where penalties imposed on public corporations were reduced, there is little indication that the firms faced true financial distress. Vague statements that higher fines would jeopardize a firm’s “solvency,” “ability to compete,” “ability to fund its pension obligations,” “continued viability,” or its “ability to make restitution to victims” are not enough. Neither are unsubstantiated claims about prospective job losses, inability to invest, or a more general inability to pay. If an official is going to reduce liability because of collateral consequences, that official should provide detailed evidence 156 For administrative reasons, it may make sense to set a maximum time limit (e.g., ten years) so that the government does not have to oversee the fine for an indefinite period. 157 Stewart C. Myers & Nicholas S. Majluf, Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have, 13 J. FIN. ECON. 187, 187 (1984); Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Cost and Ownership Structure,3 J. FIN. ECON. 305, 357 (1976); Structuring liability in this manner would be an improvement, but would not be perfect. By changing the firm’s capital structure, this liability may change its risk profile and actions. 44 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 supporting that claim. Moreover, settlement agreements do not generally make it possible to know how much a fine has been reduced by. This means that we simply do not know whether full liability would have led to collateral consequences. Hundreds of firms have had liability reduced under federal guidelines that permit reductions because of collateral consequences or inability to pay. Focusing on just the small number of public firms, the total penalties imposed are billions of dollars below guideline ranges. And in most cases, it appears that the reductions were unnecessary. However, because of poor disclosure, it is hard to even identify all the cases where liability was reduced—or by how much. Increasing disclosure is an important first step in ensuring that firms are not unduly profiting from claims of collateral consequences. V. CONCLUSION Corporate liability is meant to deter illegal behavior and to compensate victims of corporate misconduct. However, the imposition of civil or criminal liability can lead to a variety of collateral consequences that will ultimately be borne not only by the malfeasant corporation but also by its employees and society more broadly. In this paper, I have explored how concerns about collateral consequences affect officials’ decisions around corporate liability. The primary contributions of this article are: (1) that there is an expansive legal basis for reducing liability in the shadow of prospective collateral consequences;158 (2) that reductions do occur;159 (3) that reductions often appear unwarranted;160 and (4) to provide a framework for thinking more carefully about imposing liability in the presence of prospective collateral consequences.161 When liability is erroneously reduced, it undermines the deterrent and compensatory goals, effectively subsidizing 158 See infra Section II. 159 See infra Section III.A. 160 See infra Section III.B. 161 See infra Section IV. No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 45 corporate misconduct. In light of this article, officials should be skeptical of any claims that defendants make about collateral consequences.162 If officials are going to entertain a reduction, they should be careful to establish that liability will truly be the cause of substantial collateral consequences. And in that case, they should then structure liability in a manner that maximizes the fine imposed on the firm, subject to the constraint of avoiding collateral consequences. But perhaps most importantly of all, these officials should carefully detail the reasoning behind the reductions given rather than making vague claims about inabilities to pay, so that future officials and researchers can judge whether the myriad federal policies on collateral consequences and their application are in fact worthwhile. APPENDIX I. CASE STUDIES A. Case Studies The previous section illustrates the broad contours of how officials approach collateral consequences. In this section, I explore each of the case studies in more detail to provide additional information on the wrongdoing, the firm’s financial positions, and officials’ statements about why they reduced liability. 1. Hynix Semiconductor In 2005, Hynix Semiconductor Inc. pled guilty to having engaged in price- fixing for high-speed computer memory.163 162 Off. of Pub. Affairs, Assistant Attorney General Breuer Speaks at the New York City Bar Association, DEP’T OF JUST. (Sept. 13, 2012), https://www.justice.gov/opa/speech/assistant-attorney-general-lanny- breuer-speaks-new-york-city-bar-association [https://perma.cc/ZA7G- TGZ2]. 163 Plea Agreement at 2, United States v. Hynix Semiconductor Inc., No. CR 05-249 (N.D. Cal. May 11, 2005)). 46 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 The plea agreement with the Antitrust Division of the Department of Justice for $185 million stated: The United States and the Defendant agree that the applicable Guidelines fine range exceeds the fine contained in the recommended sentence set out [above]. The United States agrees that, based on Defendant’s ongoing cooperation, the United States would have moved the court for a downward departure pursuant to U.S.S.G. §8C4.1, but for the fact that the amount of the fine that the United States would have recommended as a downward departure for substantial assistance provided still would have exceeded Defendant’s ability to pay. The parties further agree that the recommended fine is appropriate, pursuant to U.S.S.G. §8C3.3(a) and (b), due to the inability of the Defendant to make restitution to victims and pay a fine greater than that recommended without substantially jeopardizing its continued viability.164 On first inspection, the fear of insolvency seems reasonable. As of January 1, 2005, Hynix had $1.66 billion in current liabilities—that is, liabilities that were owed to creditors within year. But Hynix only had $343 million in cash and cash equivalents and an additional $552 million in short term financial instruments (e.g., savings deposits and financial instruments maturing in less than one year). This meant that Hynix needed to cover an expected shortfall of $765 million for the year (its net current assets). According to the Federal Sentencing Guidelines, Hynix’s fine should have amounted to at least $268.5 million,165 which would have added to this shortfall.166 164 Id. at 7. 165 See Semin Park, Sanctions in Antitrust Cases, Background Paper by the Secretariat, 23-24 (OECD DIR. FOR FIN. AND ENT. AFFAIRS COMPETITION COMM., Global Forum on Competition Session IV, Dec. 2, 2016), https://one.oecd.org/document/DAF/COMP/GF(2016)6/en/pdf [https://perma.cc/HXE7-PDXP]. 166 Hynix’s short-term finances were not as dire as the balance sheet would make them appear. Included in the firm’s current liabilities was an No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 47 However, focusing on Hynix’s short-term financial position overlooks its relatively strong long-term financial position. It is regular for firms to have short-term liabilities, akin to someone owing more money on their credit card than they expect to earn in salary for the month. Firms can borrow money in the short-term if they have strong overall finances. While Hynix had negative net current assets, the firm’s total assets were reported at $6.7 billion, and the firm’s total liabilities were reported at $3.7 billion, for a book valuation of $3 billion. The market value of outstanding equity was $2.16 billion. So, while the firm had current liabilities in excess of current assets, its balance sheet was firmly positive, and the firm should have been able to raise the full $265.5 billion without jeopardizing its continued viability. In fact, while the DOJ imposed a fine of $185 million, the fine was payable over five years without interest.167 Discounting the firm’s payments to 2005 using the average U.S. firm’s weighted average cost of capital results in a cost of $143.8 million.168 “allowance for the charges regarding the violation of antitrust laws currently being investigated by the U.S. Department of Justice.” HYNIX 2005 ANNUAL REPORT, supra note 123, at 39. In effect, the imposition of liability was already factored into the company’s short-term financial calculus, and it would be incorrect to assume that imposing liability of $268.5 million would increase liabilities by the full $265.6 million. 167 Plea Agreement at 6, United States v. Hynix Semiconductor Inc., No. CR 05-249 (N.D. Cal. May 11, 2005) (“The United States and the Defendant agree to recommend, in the interest of justice pursuant to 18 U.S.C. § 3572(d)(1) and U.S.S.G. § 8C3.2(b), that the fine be paid in the following installments: within 30 days of imposition of sentence – $10 million; at the one-year anniversary of imposition of sentence (‘anniversary’) – $35 million; at the two-year anniversary – $35 million; at the three-year anniversary – $35 million; at the four-year anniversary – $35 million; and at the five-year anniversary – $35 million; provided, however, that the Defendant shall have the option at any time before the five-year anniversary of prepaying the remaining balance then owing on the fine.”). 168 See Nathan Atkinson, Do Corporations Profit from Breaking the Law? Evidence from Environmental Violations, (Jul. 29, 2022) (unpublished manuscript) (describing how federal agencies use the weighted average cost of capital to calculate the benefit from delayed payments of fines), https://osf.io/preprints/socarxiv/jk4r7/. [https://perma.cc/7SD5-DBWQ]. 48 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 Hynix Semiconductor Balance Sheet (millions $) Current Assets 895 Total Assets 6,700 Current Liabilities 1,660 Total Liabilities 3,700 Net Current Assets (765) Total Equity (Book Value) 3,000 Market Capitalization 2,160 Penalty Imposed 185 Effective Penalty Paid 143.8 2. Beazer Homes In 2009, Beazer Homes, one of the country’s largest home builders, settled civil and criminal charges with several state and federal agencies for a reported $50 million.169 The U.S. Attorney’s Office justified the $50 million settlement by stating that “the imposition of additional criminal penalties or the requirement of additional payment at this time would jeopardize the solvency of Beazer and put at risk the employment of approximately 15,000 employees and full-time contractors not involved in the criminal wrongdoing.”170 On June 30 (the day before the settlement agreement), Beazer had total assets of $2.1 billion and total liabilities of $1.94 billion.171 That is, Beazer’s book value was $196 million. So, while this indicates that it could have paid more than $50 million, doing so may have threatened its continued viability. While Beazer had substantial long-term liabilities, it had only $76 million of current liabilities, which could easily be covered by its $495 million of cash and short-term investments.172 169 Deferred Prosecution Agreement, United States v. Beazer Homes USA, Inc., No. 3:09cr113-w (W.D.N.C. Jul. 1, 2009). 170 Id. at 3. 171 Beazer Homes, Quarterly Report (Form 10-Q), at 4 (Aug. 7, 2009). 172 Id. No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 49 On the day that the settlement agreement was announced, Beazer had a market capitalization of $71.8 million. However, this valuation likely factored in expectations about liability. Following the imposition of liability, Beazer’s market capitalization doubled by early August and tripled by mid- October 2008. The settlement agreement with Beazer was, in fact, not for an immediate $50 million cash payment. Approximately $2 million was paid to the North Carolina Commissioner of Banks, with the remaining $48 million to be potentially contributed to a restitution fund: [U]nder these agreements, we were obligated to make payments equal to 4% of “adjusted EBITDA,” as defined in the agreements, until the earlier of (a) September 30, 2016 or (b) the date that a cumulative $48.0 million had been paid pursuant to the DPA and the HUD Agreement. Accordingly, after making the fiscal year 2016 payments described below, our obligations under the HUD Agreement will expire. As of September 30, 2016, we have paid a cumulative $28.1 million related to the DPA and the HUD Agreement.173 EBITDA (earnings before interest, tax, depreciation and amortization) is a measure of a company’s operating performance. The settlement agreement meant that Beazer would only pay the full $50 million if it had a cumulative EBITDA of at least $950 million over the period.174 Due to the financial difficulties that home-builders faced following the financial crisis, Beazer had a negative EBITDA for a number of years, so only paid 56% of the reported liability.175 173 Beazer Homes USA, Inc., Annual Report (Form 10-K), at 19-20 (Nov. 15, 2016). 174 The payment schedule stipulated that an additional $10 million would be paid in the first year regardless of EBITDA, so after the first year, Beazer had potential payments of up to $38 million, and $"#,%%%,%%% &% = $950,000,000. Deferred Prosecution Agreement at 2, United States v. Beazer Homes USA, Inc., No. 3:09cr113-w (W.D.N.C. Jul. 1, 2009). 175 Beazer Homes USA, Inc., Annual Report (Form 10-K), at 19-20 50 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 Beazer Homes Balance Sheet (millions $) Current Assets 495 Total Assets 2,100 Current Liabilities 76 Total Liabilities 1,940 Net Current Assets 495 Total Equity (Book Value) 196 Market Capitalization 71.8 Penalty Imposed 50 Effective Penalty Paid 28.1 3. Alcoa For twenty years beginning in 1989, Alcoa and a subsidiary company engaged in bribes in violation of the Foreign Corrupt Practices Act that generated substantial profits. From 2005 to 2009 alone, Alcoa World Alumina is estimated to have earned $446 million in gross profit “on the corruptly secured alumina- supply agreement.”176 In January 2014, Alcoa agreed to pay $384 million in settlement agreements with the Department of Justice and the Securities and Exchange Commission.177 Department of Justice Settlement. Under a violation of 15 U.S.C. § 78dd-2, the statutory maximum sentence that the court could impose is $2 million, or twice the pecuniary gain or gross pecuniary loss resulting from the offense, whichever is greatest.178 The investigation further found that the benefit (Nov. 15, 2016). 176 John W. Miller & Andrew Grossman, Alcoa Affiliate Pleads Guilty to Bribery, WALL ST. J. (Jan. 9, 2014). 177 Press Release, Sec. & Exch. Comm’n, SEC Charges Alcoa With FCPA Violations (Jan. 9, 2014), https://www.sec.gov/news/press- release/2014-3 [https://perma.cc/CA3R-VEPD]. 178 18 U.S.C. §§ 3571(c)(3), (d). No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 51 was received for more than $400 million.179 The guideline range for the violation was $446 million to $892 million.180 The fine was reduced to $209 million for a number of reasons, including cooperation with the Department of Justice and a commitment to maintain an anti-corruption compliance program.181 The first justification for the reduction was that: [A] fine of $209,000,000 is the appropriate disposition based on . . . the impact of a penalty within the guidelines range on the financial condition of the Defendant’s majority shareholder, Alcoa, and its potential to ‘substantially jeopardiz[e]’ Alcoa’s ability to compete, see U.S.S.G. § 8C3.3(b), including, but not limited to, its ability to fund its sustaining and improving capital expenditures, its ability to invest in research and development, its ability to fund its pension obligations, and its ability to maintain necessary cash reserves to fund its operations and meet its liabilities.182 Furthermore, the settlement agreement stipulated that “[b]ecause the immediate payment of the entire fine ‘would pose an undue burden on’ the Defendant and Alcoa,”183 the fine would be payable in five annual installments of $41,800,000.184 Discounting the firm’s payments to 2014 using the average U.S. firm’s weighted average cost of capital results in a discounted value of $179.9 million—a full $30 million less than the already-discounted fine.185 To understand the fine and the reduction based on “the financial condition,” we first need to understand the ownership structure of the defendant. The DOJ settlement was with Alcoa World Alumina LLC (“AWA”), a limited liability company. It was wholly owned by Alcoa World 179 Plea Agreement at ¶ 34(b), United States v. Alcoa World Alumina LLC, No. 2:14-cr-00007-DWA (W.D. Pa. Jan. 9, 2014). 180 Id. at ¶ 34(d). 181 Id. at ¶ 35(a). 182 Id. 183 Id. 184 Id. 185 See Atkinson, supra note 133. 52 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 Alumina and Chemicals (“AWAC”), which in turn was a joint venture between Alcoa Inc., which held a 60% stake, and Alcoa and Alumina Limited (“Alumina”), which held a 40% stake. Alumina is a holding company with its only asset being its 40% stake in AWAC.186 At the time of the settlement, AWAC had current assets of $1.79 billion and current liabilities of $1.77 billion, which meant that its net current assets were only $17 million—far less than the contemplated fine.187 However, AWAC’s total assets of $10 billion dwarfed its total liabilities of $3.2 billion188, meaning that it had a book value of $6.8 billion. Therefore, while it may not have had the cash on hand to pay a fine in the guideline range, it could easily have tapped capital markets to pay the fine. Furthermore, because AWAC was a private company, it did not have an actively traded stock. However, because AWAC was the only investment of Alumina, we can impute the market value of AWAC from the market capitalization of Alumina. At the time of the fine, the imputed market capitalization of AWAC was approximately $7 billion.189 However, the DOJ settlement agreement was chiefly concerned with “the financial condition of the Defendant’s majority shareholder, Alcoa.”190 At the time of the fine, Alcoa was in a much-diminished financial position. While Alcoa’s stock was trading at far less than before the 2007–2009 financial crisis,191 the idea that Alcoa could not pay the entire 186 Alumina Ltd., Annual Report (Form 20-F), at 5 (Apr. 24, 2014); About AWC, ALLUMINA LTD., https://www.aluminalimited.com/about-awac/ [https://perma.cc/U7BB-Y899] (last visted Apr. 8, 2023). 187 Id. at 23. 188 Id. at 29, 186. 189 Alumina owns 40% of AWAC, and AWAC was Alumina’s only meaningful investment. Id. at 5. This implies that the imputed market valuation of AWAC is the market capitalization of Alumina ($2.8 billion) divided by 40%. Id. at 127. 190 Plea Agreement at ¶ 35(a), United States v. Alcoa World Alumina LLC, No. 2:14-cr-00007-DWA (W.D. Pa. Jan. 9, 2014). 191 NYSE, Alcoa Corporation (AA) Stock Price Chart, YAHOO FINANCE, https://finance.yahoo.com/quote/AA?p=AA&.tsrc=fin-srch&guccounter=1 [https://perma.cc/U8K4-YYPL] (last visited May 30, 2023). No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 53 fine strains credulity. At its most recent securities filing, Alcoa had current assets of $6.9 billion and current liabilities of $6.1 billion, so net current assets were a full $800 million.192 Alcoa’s total assets of $35.7 billion and total liabilities of $22.2 billion gave it a book value of $13.5 billion.193 This implies that the firm could have tapped credit markets to raise the contemplated fine. Finally, despite being removed from the Dow Jones Industrial Average in late 2013 for having a market capitalization of only $8.5 billion,194 this market capitalization meant that it had substantial scope to raise funds through equity issuances. AWAC’s minority shareholder, Alumina, was in an even stronger financial position. Because Alumina’s only meaningful investment was AWAC, it had $2.9 billion in total assets and only $170 million in total liabilities, with a market capitalization of $2.8 billion.195 Alumina could easily cover any shortfalls through an equity issuance or borrowing against AWAC’s future dividends. However, Alumina’s exposure was considerably less than Alcoa’s because in a 2012 agreement, the owners agreed to split the costs with 85% payable by Alcoa and 15% payable by Alumina.196 SEC Action. A parallel SEC action found that Alcoa violated Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934.197 Alcoa was required to disgorge $175 million of ill-gotten gains.198 The SEC settlement noted: [The] impact of the disgorgement payment upon Respondent’s financial condition and its potential to 192 Alcoa Inc., Annual Report (Form 10-K), at 92 (Feb. 13, 2014). 193 Id. 194 Trefis, What Does Alcoa’s Exit From Dow Jones Mean?, NASDAQ, INC. (Sept. 12, 2013), https://www.nasdaq.com/articles/what-does-alcoas-exit- dow-jones-mean-2013-09-12. 195 Alumina Ltd., Annual Report (Form 20-F), at 127 (Apr. 24, 2014). 196 Id. at 153. 197 Alcoa Inc., Exchange Act Release No. 71261, 2014 WL 69457, at 11 (Jan. 9, 2014). 198 Id. 54 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 substantially jeopardize Alcoa’s ability to fund its sustaining and improving capital expenditures, its ability to invest in research and development, its ability to fund its pension obligations, and its ability to maintain necessary cash reserves to fund its operations and meet its liabilities.199 Because of this, the disgorgement payment was payable through five annual installments.200 Discounting the firm’s payments to 2014 using the average U.S. firm’s weighted average cost of capital, results in a discounted value of $152.6 million, or a savings of roughly $22.4 million.201 Together, the DOJ and SEC settlements collected far less from Alcoa than Alcoa’s estimated profits had collected from the bribery scheme. Alcoa Inc. Balance Sheet (millions $) Current Assets 6,900 Total Assets 35,700 Current Liabilities 6,100 Total Liabilities 22,200 Net Current Assets 800 Total Equity (Book Value) 13,500 Market Capitalization 8,00 Alumina Limited Balance Sheet (millions $) Current Assets 47.8 Total Assets 2,900 Current Liabilities 61.4 Total Liabilities 170 Net Current Assets (13.6) Total Equity (Book Value) 2,730 199 Id. at 11-12. 200 $46.2 million was due immediately, with the remaining to be paid in four installments of $32.2 million. Id. at 12. 201 See Atkinson, supra note 133. No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 55 Market Capitalization 2,820 Alcoa World Alumina and Chemicals Ownership: 60% Alcoa, 40% Alumina Balance Sheet (millions $) Current Assets 1,790 Total Assets 10,072 Current Liabilities 1,773 Total Liabilities 3,211 Net Current Assets 13 Total Equity (Book Value) 6,861 Market Capitalization (imputed) 7,050 4. Olympic Pipeline In 1999, a gas pipeline owned by Olympic Pipeline ruptured, killing three young people in a public park.202 In 2003 Olympic entered into a consent decree to pay $5 million in civil penalties. (This was in addition to private settlements with the families of the children and other fines.203) The consent decree stated that: [t]he United States has substantially reduced Olympic’s civil penalty and agreed to a payment schedule based on financial information that Olympic provided during settlement discussions demonstrating that Olympic lacks the economic ability to pay a larger penalty.204 202 Daryl C. McClary, Olympic Pipe Line accident in Bellingham kills three youths on June 10, 1999. HISTORYLINK.ORG .(June. 11, 2003) [https://perma.cc/6AWH-JXA7]. 203 Id. 204 Consent Decree at 2, United States v. Shell Pipeline Co., No. CV-02- 1178R (W.D. Wa. Jan. 13, 2003). 56 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 While not in the consent decree, Olympic’s case may have been strengthened by claims that it was “critical to Western Washington’s economy, as it transports most of this region’s retail gasoline and is the only method of transporting jet fuel to Seattle Tacoma International Airport,” and that without bankruptcy protection, Olympic would have to barge its fuel products at a much greater environmental risk.205 The agreement further stipulated that the fine was payable in installments over five years.206 The concerns about Olympic’s financial position seem reasonable—less than three months later Olympic filed for Chapter 11 bankruptcy protection.207 Olympic’s bankruptcy petition listed $106 million in assets and $402 million in liabilities.208 Under bankruptcy proceedings, pre-petition regulatory fines are paid pro rata with other general unsecured creditors. To properly understand the incidence of the liability, it is important to understand Olympic’s financing. Olympic was a joint venture that at the time was entirely owned by British Petroleum (62.5% stake) and Shell (37.5% stake).209 Olympic’s funding was also unique in that it was 100% funded through debt.210 The bulk of Olympic’s liabilities, $148 million, were loans or loan guarantees from BP and Shell.211 This financing structure meant that Olympic was entirely owned by BP and Shell. Furthermore, almost all of Olympic’s debts were owed to BP and Shell.212 In a typical bankruptcy, shareholders lose their investments and the value of the 205 Steve Miletich, Olympic Pipeline Seeks Bankruptcy, SEATTLE TIMES (Mar. 28, 2003). 206 Consent Decree at 7, United States v. Shell Pipeline Co., No. CV-02- 1178R (W.D. Wa. Jan. 13, 2003). 207 Olympic Pipe Line Files for Bankruptcy, MIDLAND DAILY NEWS (Mar. 27, 2003). 208 Id. 209 Order Granting Interim Relief, In Part, at 4, Wash. Util. & Transp. Comm’n v. Olympic Pipeline Co., No. TO-011472 (Wash. Util. & Transp. Comm’n, Jan. 31, 2002). 210 Id. at 7. 211 Miletich, supra note 177. 212 Id. No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 57 remaining assets passes to creditors. However, in this case, the shareholders and creditors were the same entities. This means that the effect of reducing liability because “Olympic lack[ed] the economic ability to pay a larger penalty,” was to effectively reduce liability on Olympic’s two multi-billion- dollar parents.213 These companies were able to avoid liability by exploiting the government’s perception that Olympic was unable to pay. Olympic was a limited liability company. Since it was not publicly traded, an equity issuance would not have been an easy solution. However, the intuition of Section 4 still applies—the goal of the government should be to impose liability on the firm’s shareholders. In this case, that is equivalent to imposing liability on the firm’s creditors. The public interest would likely have been better served by not reducing Olympic’s fine. 5. IAV GmbH IAV GmbH is a German company that engineers and designs automotive systems.214 IAV worked with Volkswagen to design, test, and implement software to cheat the U.S. testing process.215 On December 18, 2018 IAV pled guilty for its role in the Volkswagen emissions scandal and was fined $35 million.216 Under the sentencing guidelines, the base fine is the maximum of the pecuniary gain, the pecuniary loss, and the offense level table.217 However in the case of IAV, the government never even calculated the base fine, because 213 Consent Decree at 2, United States v. Shell Pipeline Co., No. CV-02- 1178R (W.D. Wa. Jan. 13, 2003). 214 Company Overview, IAV GLOBAL, https://www.iav.com/en/company/what-we-develop-moves-you/ [https://perma.cc/T2YV-L9WE] (last visited May 30, 2023). 215 Plea Agreement, United States v. IAV GmbH, No. 16-CR-20394, Exh. 2-11 (E.D. Mich. Dec. 18, 2018). 216 Id. at 7. 217 U.S. SENT’G GUIDELINES MANUAL § 8C2.4 (U.S. SENT’G COMM’N 2021). 58 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 prosecutors determined “the Guidelines fine range would still be well beyond the Defendant’s ability to pay.”218 The plea agreement explicitly states that the fine calculation should be based on the pecuniary loss caused by IAV’s actions, but that amount is not included.219 However, the plea agreement does explain that IAV had an offense level of 41, yielding a base fine of $72,500,000.220 This means that the true pecuniary loss was more than this. Ultimately, the government determined that: It is readily ascertainable that the Defendant cannot and is not likely to become able (even on an installment schedule) to pay the minimum guideline fine. The Offices and the Defendant agree that, pursuant to U.S.S.G. §8C3.3(b), reducing the fine to $35,000,000.00 based on Defendant’s inability to pay is not more than necessary to avoid substantially jeopardizing the continued viability of the Defendant.221 Around the time of the fine, IAV had low earnings, making only €8.4 million in earnings after tax in 2018. 222 At this rate it would take four years to pay the fine and could have taken considerably longer to pay a non-reduced fine from IAV’s earnings. However, a closer look at IAV’s financials draws into question the determination of its actual inability to pay. At the end of 2018 (two weeks after the fine was imposed), IAV had current assets of €352.1 million and current liabilities of €300.5 million.223 This €51.6 of net current assets meant that IAV did not have a very large asset buffer over the coming year. However, looking at total assets, IAV’s financial position 218 Id. at § 8C2.2 (stating no precise determination of the fine is required if it is clearly beyond the means of the defendant to pay). 219 Plea Agreement, at 6–7, United States v. IAV GmbH, No. 16-CR- 20394 (E.D. Mich. Dec. 18, 2018). 220 Id. 221 Id. 222 IAV GMBH, ANNUAL REPORT 2019, at 126, 162. 223 CONTINENTAL AUTOMOTIVE GMBH, 2018 SUSTAINABILITY REPORT (2019). No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 59 looks stronger, with the firm having a book valuation of €231.7 million. Therefore, the $35 million fine was a significant fraction of the firm’s book value, but may not have risen to the level where any additional fine would be “substantially jeopardizing the continued viability of the Defendant.”224 Looking at the value of IAV’s equity makes it appear more likely that IAV could have paid a larger fine. IAV is a private limited company under German law and is jointly owned by five manufacturers and suppliers from the automotive industry.225 Using the financial reports of these shareholders, it is possible to impute the market capitalization of IAV. At the end of 2018, Continental Automotive’s 20% equity stake in IAV was valued at €164.3 million.226 This means that the imputed value of IAV two weeks after the fine was imposed was over €820 million. This indicates that IAV could have paid a considerably larger fine. IAV Balance Sheet (millions $) Current Assets 404.9 Total Assets 682.8 Current Liabilities 345.6 Total Liabilities 416.3 Net Current Assets 59.3 Total Equity (Book Value) 266.5 Market Capitalization 944.2 Penalty Imposed 35 Effective Penalty Paid 404.9 224 Plea Agreement, at 8, United States v. IAV GmbH, No. 16-CR-20394 (E.D. Mich. Dec. 18, 2018). 225 The ownership is: Volkswagen AG 50%, Continental Automotive GmbH 20%, Schaeffler Technologies AG & Co. KG 10%, Freudenberg SE 10%, and SABIC Innovative Plastics B.V. 10%. See IAV GMBH, SUSTAINABILITY REPORT 2018, at 10 (June 30, 2019). 226 IAV GMBH, ANNUAL REPORT 2018, at 30. 60 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 6. Technicolor In 2012, the European Commission imposed a fine on several companies for participating in a cartel in the sector of cathode ray tubes (CRT).227 The companies shared markets, fixed prices, and restricted output.228 One of the cartel members, Technicolor, was reportedly assessed a fine of €257.5 million.229 However, Technicolor invoked its inability to pay the fine, which the Commission assessed under point 35 of the 2006 fines Guidelines, which allows fines to be reduced for inability to pay.230 The commission reduced Technicolor’s fine by €219 million, or 85%, to €38.6 million.231 An assessment of Technicolor’s financial position at the time lends some support to an argument for reduction. Technicolor had a number of difficult years in the lead up to the fine. In 2009, the company filed for bankruptcy and subsequently underwent a debt restructuring plan.232 Technicolor made net losses of €69 million and in 2010 and net losses of €324 million in 2011.233 In 2012, Technicolor reported a net profit of €17 million, excluding the €38.6 million fine.234 227 Commission fines producers of TV and computer monitor tubes € 1.47 billion for two decade-long cartels, EUR. COMM’N (Dec. 5, 2012), https://ec.europa.eu/commission/presscorner/detail/nl/IP_12_1317 [https://perma.cc/2YJB-JVZG]. 228 Id. 229 Stefano Berra, CRT cartelist obtains record inability-to-pay fine cut, GLOB. COMPETITION REV. (DEC. 18, 2012), https://globalcompetitionreview.com/article/crt-cartelist-obtains-record- inability-pay-fine-cut. 230 Commission Regulation 1/2003 of May 12, 2012, Case AT.39437— TV and computer monitor tubes, 352. 231 Berra, supra note 190. 232 Josh Stinehour, Analysis of Technicolour Restructuring, and a Serious Discussion about Post-Production, DEVONCROFT (Oct. 28, 2020), https://devoncroft.com/2020/10/28/analysis-of-technicolor-restructuring- and-a-serious-discussion-about-post-production/ [https://perma.cc/HS6P- QWHE]. 233 TECHNICOLOR S.A., ANNUAL REPORT 2011, at 7 (2012). 234 Id. No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 61 On December 31, 2012 (three weeks after the fine was announced), Technicolor reported €1.42 billion in current assets and €1.29 billion in current liabilities (including the €38.6 million fine).235 At the same time, Technicolor reported total assets of €3.24 billion and total liabilities of €2.99 billion.236 This resulted in a book value of equity of €241 million.237 Applying a fine of €257.5 million (after a 10% reduction for cooperation) would, in principle, lead to insolvency by increasing the firm’s liabilities above its assets. However, focusing on the book value of equity obscures the higher market value of Technicolor. Technicolor’s market capitalization on the day that the fine was imposed was €415 million, which quickly rose in the months following the fine and reached €1.3 billion one year later.238 So, while Technicolor’s book value was insufficient to pay the €257.5 million fine, its market value was high enough that it could have raised enough equity to pay the fine.239 Technicolor Balance Sheet (millions €) Current Assets 1,420 Total Assets 3,240 Current Liabilities 1,290 Total Liabilities 2,990 Net Current Assets 130 Total Equity (Book Value) 241 Market Capitalization 415 Penalty Imposed 257.5 235 Id. 236 Id. 237 Id. at 141. 238 Vantiva Market Cap, YCHARTS, https://ycharts.com/companies/TCLRY/market_cap (last visited Apr. 8, 2023). 239 At market capitalization of €415 million, raising €257.5 million from new shareholders would have reduced the value of the initial shares by 62% to €157.5 million. 62 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 Effective Penalty Paid 38.6 APPENDIX II. FEDERAL POLICIES ON COLLATERAL CONSEQUENCES This appendix contains a sampling of policies that allow or mandate that officials take firms’ financial conditions into account when assessing penalties. This list is far from comprehensive, as there are many laws and regulations that I have found that are not on the list. My goal in this appendix is to show that policies around firms’ financial positions span a wide variety of federal departments and agencies. Agency Policy Department of Justice In conducting an investigation, determining whether to bring charges, and negotiating plea or other agreements, prosecutors should consider the following factors in reaching a decision as to the proper treatment of a corporate target . . . collateral consequences, including whether there is disproportionate harm to shareholders, pension holders, employees, and others not proven personally culpable, as well as impact on the public arising from the prosecution.240 Department of Justice (Antitrust) Before entering any consent judgment proposed by the United States under this section, the court shall determine that the entry of such judgment is in the public interest. For the purpose of such determination, the court shall consider . . . the impact of entry of such judgment upon competition in the relevant market or markets [and] upon the public generally.241 Department of Justice (Tax) Job loss by innocent employees may justify downward departure in criminal tax evasion cases.242 240 U.S. Dep’t of Justice, Just. Manual § 9-28.300 (2020). 241 15 U.S.C. § 16(e)(1). 242 U.S. Dep’t of Justice, Just. Manual §6-4.000 (2020). No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 63 Department of Justice (Civil) Assistant Attorneys General are authorized [to] [a]ccept offers in compromise of claims asserted by the United States in all cases in which a qualified financial expert has determined that the offer in compromise is likely the maximum that the offeror has the ability to pay.243 United States Sentencing Commission The court shall reduce the fine below that otherwise required . . . to the extent that imposition of such fine would impair its ability to make restitution to victims. The court may impose a fine below that otherwise required . . . if the court finds that the organization is not able and, even with the use of a reasonable installment sched- ule, is not likely to become able to pay the minimum fine required.244 Environmental Protection Agency The economic benefit component may be mitigated where recovery would result in plant closings, bankruptcy, or other extreme financial burden.245 Environmental Protection Agency The agency will generally not request penalties that are clearly beyond the means of the violator. Therefore, EPA should consider the ability to pay a penalty in adjusting the preliminary deterrence amount.246 Consumer Financial Protection Bureau In determining the amount of any penalty . . . the Bureau or the court shall take into account the appropriateness of the penalty with respect to the size of financial resources and good faith of the person charged.247 Consumer Financial Protection Bureau [N]o adjustment shall be ordered – if it would have a significantly adverse impact upon the safety or soundness of the creditor, but in any such case, the agency may – require a partial adjustment in an amount which does not have such an impact; or 243 28 C.F.R. § 0.160(c)(2)(B). 244 U.S. Sent’g Comm’n, Guidelines Manual, § 8C3.3 (2021). 245 U.S. Env’t Prot. Agency, Clean Air Act Stationary Source Civil Penalty Policy, § II(A)(3)(b) (1991). 246 U.S. Env’t Prot. Agency, Clean Air Act Stationary Source Civil Penalty Policy, § IV (1991). 247 12 U.S.C. § 5565(c)(3). 64 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 require the full adjustment, but permit the creditor to make the required adjustment in partial payments over an extended period of time which the agency considers to be reasonable, if the agency determines that a partial adjustment or making partial payments over an extended period is necessary to avoid causing the creditor to become undercapitalized pursuant to section 38 of the Federal Deposit Insurance Act.248 Consumer Financial Protection Bureau In determining the amount of a penalty . . . consideration shall be given to such factors as the gravity of the offense, any history of prior offenses (including offenses occurring before December 15, 1989), ability to pay the penalty, injury to the public, benefits received, deterrence of future violations, and such other factors as the Director may determine in regulations to be appropriate.249 Securities and Exchange Commission In any proceeding in which the Commission or the appropriate regulatory agency may impose a penalty under this section, a respondent may present evidence of the respondent’s ability to pay such penalty. The Commission or the appropriate regulatory agency may, in its discretion, consider such evidence in determining whether such penalty is in the public interest. Such evidence may relate to the extent of such person’s ability to continue in business and the collectability of a penalty, taking into account any other claims of the United States or third parties upon such person’s assets and the amount of such person’s assets.250 Commodity Futures Trading Commission The Commission may settle claims . . . at less than the principal amount of the claim if . . . [t]he debtor shows an inability to pay the full amount within a reasonable period of time; . . . or [t]he Commission’s enforcement policy would be served by settlement of the claim for less than the full amount.251 Federal Reserve Board procedures require that before the setting of any final penalty amount, the parties to be assessed 248 15 U.S.C. § 1607(e)(3). 249 15 U.S.C. § 1717(b)(3). 250 15 U.S.C. § 78u-2(d). 251 17 C.F.R. § 143.5. No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 65 be offered the opportunity to provide Board staff with any evidence, including financial factors, that would either weigh against assessment or mitigate the amount of the proposed penalty.252 Federal Trade Commission In determining the amount of such a civil penalty, the court shall take into account the degree of culpability, any history of prior such conduct, ability to pay, effect on ability to continue to do business, and such other matters as justice may require.253 Federal Housing Finance Agency In determining the amount of a penalty under this section, the Director shall give consideration to such factors as the gravity of the violation, any history of prior violations, the effect of the penalty on the safety and soundness of the regulated entity, any injury to the public, any benefits received, and deterrence of future violations, and any other factors the Director may determine by regulation to be appropriate.254 Federal Deposit Insurance Corporation In determining the amount of any penalty imposed . . . the appropriate agency shall take into account the appropriateness of the penalty with respect to— the size of financial resources and good faith of the insured depository institution or other person charged.255 Department of Health and Human Services Factors considered in determining the amount of a civil money penalty . . . [include t]he financial condition of the covered entity or business associate, consideration of which may include but is not limited to ...[w]hether the imposition of a civil money penalty would jeopardize the ability of the covered entity or business associate to continue to provide, or to pay for, health care.256 252 Fed. Rsrv. Bank, SR 91-13, Civil Money Penalties and the Use of the Civil Money Penalty Assessment Matrix (1991). 253 15 U.S.C. § 45(m)(1)(C). 254 12 U.S.C. § 4636(c)(2). 255 12 U.S.C. § 1818(i)(2)(G). 256 45 C.F.R. § 160.408(d). 66 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 Mining Safety and Health Administration In determining whether to propose a penalty to be assessed . . . the Secretary shall consider the operator’s history of previous violations, the appropriateness of such penalty to the size of the business of the operator charged, whether the operator was negligent, the effect on the operator’s ability to continue in business, the gravity of the violation, and the demonstrated good faith of the operator charged in attempting to achieve rapid compliance after notification of a violation.257 Mining Safety and Health Administration [If] the penalty will adversely affect the operator’s ability to continue in business, the penalty may be reduced.258 Department of Defense Factors to be taken into account in assessing a penalty may include the nature, circumstances, extent, and gravity of the alleged violation; the respondent’s degree of culpability; any history of prior offenses; ability to pay; and such other matters as justice may require . . . . Financial information relevant to a respondent’s ability to pay includes, but is not limited to, the value of respondent’s cash and liquid assets and non-liquid assets, ability to borrow, net worth, liabilities, income, prior and anticipated profits, expected cash flow, and the respondent’s ability to pay in installments over time.259 Consumer Product Safety Commission In determining the amount of any penalty to be sought upon commencing an action seeking to assess a penalty . . . the Commission shall consider the nature, circumstances, extent, and gravity of the violation, including the nature of the product defect, the severity of the risk of injury, the occurrence or absence of injury, the number of defective products distributed, the appropriateness of such penalty in relation to the size of the business of the person charged, including how to mitigate undue adverse economic impacts on small 257 30 C.F.R. § 100.3(a). 258 30 C.F.R. § 100.3(h). 259 32 C.F.R. § 767.25. No. 1] CORPORATE LIABILITY, COLLATERAL CONSEQUENCES, & CAPITAL STRUCTURE 67 businesses, and such other factors as appropriate.260 Department of Energy (DOE) Regarding the factor of ability of DOE contractors to pay the civil penalties, it is not DOE’s intention that the economic impact of a civil penalty is such that it puts a DOE contractor out of business.261 Department of Homeland Security In determining the amount of a civil penalty . . . the court or the Secretary or his delegatee shall consider . . . the economic impact of the penalty on the violator, and other such matters as justice may require.262 Food and Drug Administration In determining the amount of a civil penalty . . . the Secretary or the court shall take into account the nature, circumstances, extent, and gravity of the act subject to penalty, the person’s ability to pay, the effect on the person’s ability to continue to do business, any history of prior, similar acts, and such other matters as justice may require.263 Department of Transportation (National Highway Transportation Administration (NHTS)) The appropriateness of such penalty in relation to the size of the business of the respondent, including the potential for undue adverse economic impacts . . . NHTSA may also consider the effect of the penalty on ability of the person to continue to operate. NHTSA may consider a person’s ability to pay, including in installments over time, any effect of a penalty on the respondent’s ability to continue to do business, and relevant financial factors such as liquidity, solvency, and profitability. NHTSA may also consider whether the business has been deliberately undercapitalized.264 Department of the Treasury (Office of Examiners should consider the . . . [p]otential adverse impact to bank customers, the Deposit Insurance Fund, or the public.265 260 15 U.S.C. § 2069(b). 261 10 C.F.R. § 824, App. A (VIII)(2)(d). 262 33 C.F.R. § 159.321(c). 263 21 U.S.C. § 335b(b)(2). 264 49 C.F.R. § 578.8(b)(7); 49 U.S.C. §§ 30161–30172. 265 Office of Comptroller of the Currency, PPM 5310-3, Bank Enforcement Actions and Related Matters 6 (2018). 68 COLUMBIA BUSINESS LAW REVIEW [Vol. 2023 the Comptroller of the Currency) Department of Commerce (Bureau of Industry and Security) In determining the amount of the penalty, the Secretary shall consider . . . the effect on ability to continue to do business, . . . ability to pay the penalty, and such other matters as justice may require.266 266 15 U.S.C. § 5408(b)(2).