Of bad apples and bad trees: considering fault-based liability for the complicit corporation.

• Author: Moohr, Geraldine Szott
• Position: Symposium: Corporate Criminality: Legal, Ethical, and Managerial Implications

Corporate crime is not new. For over 100 years, individual officers and employees of business firms and occasionally firms themselves have been charged and convicted of crimes. Nonetheless, corporate crime entered the public consciousness in a new way after Enron, and unfolding corporate and business scandals have kept it there. Another new element is that business entities, executives, and employees are now caught in the cross hairs of recently emerging trends that make it easier to convict. (1) Adding to the pressure, those injured by recent corporate malfeasance face significant hurdles in pursuing civil remedies (2) and they, along with regulators, legislators, and executive branch officials, have turned to the criminal system for redress.

In response to corporate malfeasance, federal authorities sought to restore investor confidence, largely by using criminal laws to go after the "bad apples." (3) Congress wove heightened penalties and new crimes into the regulatory reforms of the Sarbanes-Oxley Act, (4) and the executive branch instituted an aggressive enforcement strategy. (5) As a result, hundreds of officers and employees of well-known, generally respected business firms have been charged and convicted. (6) Many of those individuals, executives, and employees were bad apples who had acted for personal monetary gain. (7) These cases illustrate the classic conundrum of corporate law that the corporation, which can act only through human agents, can fall victim to those agents. But some corporations were also implicated in criminal conduct, indicating the presence of bad trees. Between 2003 and 2006, federal prosecutors found sufficient criminal evidence to indict thirty-one "bad trees," although none was prosecuted. (8) Such enforcement efforts against corporations and the prosecution of Arthur Andersen have given new urgency to the long-standing debate about punishing corporate entities. These cases indicate that the prosecutorial focus might profitably include not only the "bad apples" but also the "bad trees."

This essay does not revisit the question of whether to hold corporations liable for the crimes of their agents, but addresses when and how it is appropriate to do so. I suggest that when a corporation encourages or induces criminal conduct, the firm should be held criminally liable. How might corporations be held criminally liable? Although the much critiqued doctrine of respondeat superior could be used, this essay explores the mechanism of accomplice liability, a long-standing doctrine of criminal law. The analysis is developed in three parts.

Part I briefly traces the current enforcement effort to show how it has focused largely on individual bad apples. It goes without saying that agents who commit an offense should be held responsible and face punishment. But a review of the forces exerted on executives and employees in the corporate setting reveals that the story is not so straightforward. Bad trees produce bad apples. Characteristics of a complicit corporate tree are identified through a recent Fifth Circuit case, United States v. Brown. (9) The facts of Brown illustrate how executives and employees can be encouraged, even induced, to engage in unlawful conduct by firm policies and executive directives.

Part II considers how basic principles and elements of accomplice liability apply to corporate firms. Applying the standards of accomplice liability and the traditional offense of aiding and abetting, a firm is complicit in a crime when its policies and directives encourage, induce, or otherwise aid the commission of a crime by an executive or employee.

The final discussion in Part III evaluates fault-based liability of corporate bodies, assessing the benefits of using accomplice liability and identifying issues that might constrain its use. That discussion indicates that the interests of fairness, deterrence, and the problems associated with respondeat superior criminal liability support using accomplice liability doctrine to hold a firm criminally liable for fault-based conduct that encourages corporate crime.

This proposal may satisfy no one. Those who advocate criminal penalties for corporations will note that this proposal limits the number of possible corporate defendants. Those who advocate against criminal penalties for corporations will note that it provides a firm doctrinal basis with which to evaluate blame and assign responsibility. Even so this paper may begin a long-overdue discussion of alternate ways of dealing with deviant corporations.

1. THE CURRENT ENFORCEMENT EFFORT--A SEARCH FOR BAD APPLES

   AS of May 2004, the current enforcement effort had resulted in over 1000 convictions, almost all of them individuals. (10) Defendants included chief executives, chief financial officers, and those who founded and led their companies. Although some escaped with light penalties because of plea bargains and cooperation agreements, other executives and employees received unprecedented penalties for non-violent first-offenses. In one case, prosecutors recommended an eighty-five year sentence for a chief financial officer who had not disclosed fraudulent conduct that occurred under another executive. (11) Others were sentenced to serve what amounted to life sentences. (12) Yet by definition a corporate crime "takes two," the individual agent who commits the crime and the corporate entity.

   In contrast to the recent past, even when the putative target of an investigation is a firm, prosecutors now seem more interested in individuals. (13) Between 2003 and 2006, thirty-one firms avoided prosecution, and in slightly over half of those cases individuals were indicted. (14) A former prosecutor put it bluntly: firms now help convict their ex-employees. (15) Under Department of Justice policy, firms can avoid prosecution by cooperating with investigators, which means turning over documents and results of in-house investigations that inevitably implicate those who worked on the matter under investigation. In response to significant criticism, the policy has recently been adjusted. (16) It remains to be seen whether the tacit understanding that a firm can avoid indictment and/or prosecution by fully cooperating with investigators, providing privileged material, and incriminating former executives and employees can be reversed. (17)

   One reason for targeting individuals rather than firms is the view that corporate crime is a simple manifestation of the principal-agent problem that is inherent in corporate governance. (18) Under this view, executives and employees invariably act in their own self-interest, and their pursuit of individual goals is the primary reason for corporate crime. The firm's obligation is thus to monitor its agents to prevent executives and employees from pursuing their own goals. The corporation is rather helpless, engaged in the Sisyphean task of controlling the conduct of its agents. When corporate crime occurs, the corporation's fault rests on an omission, a failure to control its agents who have agendas of their own. (19) This conception of corporate crime essentially excuses the corporate entity. If the offense is primarily that of a deviant employee, the corporation bears less responsibility, suffers little moral opprobrium, and is not blameworthy. Thus it is not entirely appropriate to charge the corporation with the offense.

   While powerful, the assumption that corporate crime begins and ends with the ethical and moral lapses of executives and employees is not completely or always accurate. (20) Moral content can be found in the ethos of an organization, (21) and corporate policies can manifest fault and the deservedness of corporate punishment. (22) In many instances of corporate crime, the interests of the firm and the individual are aligned, and agents act, however misguidedly, for the benefit of the firm as well as for themselves. In these cases, the principal-agent conception tends to obscure the corporation's responsibility for the offense. The following discussion shows that the reality of corporate crime differs from assumptions about the ultimate responsibility of individual bad apples. Individuals commit criminal acts even when the interests of principals and agents converge, and firms can encourage unlawful conduct through executive directives and corporate policies.

   1. The Bad Apples--Executives and Employees

      A close look at the employment relationship and the institutional workplace setting complicates the story about bad apples. Generally speaking, the corporate context and its mandate to generate income for shareholders tend to constrain independent thinking, and institutional forces present in organizations and specific firm policies tend to influence the values and behavior of executives and employees. (23)

      More specifically, personal characteristics of business executives and employees can also contribute to misconduct within a firm. Optimistic, independent, risk-taking individuals are highly valued by business firms that seek people with these traits. But even positive characteristics can mutate into an excessive self-regard when firms reward bold, decisive management styles that, ironically, lead to arrogant over-confidence that can eventually harm the firm. (24) Otherwise law-abiding executives and employees often do not perceive that they are embarking on criminal conduct because they conceive themselves as ethical actors. (25) Yet another personal trait is the human tendency to interpret rules sympathetically, which can evolve into more pernicious conduct. (26)

      An institutional environment can also exert forces that undercut personal values and subvert law-abiding instincts. For instance, work that involves a team effort can lead an individual to unquestioningly support the group and never to develop a sense of personal responsibility for decisions made by the group. A law-abiding individual who sees a colleague or superior engage in...