A new approach to corporate criminal liability.

AuthorWeissmann, Andrew
PositionSymposium: Corporate Criminality: Legal, Ethical, and Managerial Implications
  1. THE CURRENT DOCTRINE OF CRIMINAL CORPORATE LIABILITY II. RETHINKING CRIMINAL CORPORATE LIABILITY A. Deterrence and Retribution in Criminal Corporate Liability B. Civil Law Limitations on Corporate Vicarious Liability C. The Benefits of Limiting Criminal Corporate Liability III. DEFINING AN EFFECTIVE COMPLIANCE PROGRAM A. The DOJ's Internal Approach: The Thompson Memorandum B. Deferred Prosecution Agreements CONCLUSION I. THE CURRENT DOCTRINE OF CRIMINAL CORPORATE LIABILITY

    It is time to take a new look at the standard for criminal corporate liability. Under current federal common law, a corporation is liable for the actions of its agents whenever such agents act within the scope of their employment and at least in part to benefit the Corporation. (1) The theory that has evolved is simple and seemingly logical: a corporation, being merely a person in law only, and not a real one, can act only through its employees for whom it should be held responsible.

    But the simple application of vicarious liability principles can have far-reaching effects. Courts applying federal common law have upheld convictions based on vicarious criminal corporate liability even where the agent was acting contrary to express corporate policy (2) and where a bona fide compliance program (3) was found to be in effect. Many of these doctrines were developed in the context of antitrust law, (4) but have since been generalized to other contexts.

    As to the limitation that employees must be acting within the scope of their actual or apparent authority, this requirement has been interpreted so expansively that it is practically invisible in many contexts. (5) Similarly, the requirement that an employee act to benefit the company has likewise been relaxed by a permissive interpretation; under the current doctrine, it "is not necessary that the employee be primarily concerned with benefiting the corporation, because courts recognize that many employees act primarily for their own personal gain." (6) Indeed, such is the state of the modern doctrine of vicarious criminal corporate liability that under federal law, a corporation can be held liable for agents no matter what their place in the corporate hierarchy (7) and regardless of the efforts in place on the part of corporate mangers to deter their conduct. (8)

    Prosecutors have inordinate leverage due to the current application of the doctrine of vicarious liability. A single low-level employee's criminal conduct can be sufficient to trigger criminal liability on the part of the corporation. Moreover, it may not even be necessary for the jury to agree unanimously upon the identity of the same criminal employee in order to find the employer guilty. (9) Where such potential liability exists, corporations as a practical matter can rarely afford to take criminal cases to trial because liability can be triggered by such minimal employee conduct. (10)

    A prosecutor's leverage is further enhanced because a criminal indictment can have devastating consequences for a corporation and risks the market imposing what is in effect a corporate death penalty or at the very least a significant drop in stock price. The willingness of companies post-Enron to agree to strict deferred prosecution agreements so as to avoid an indictment was greatly enhanced when Wall Street saw first hand the consequences of the decision by Arthur Andersen LLP to reject the government's offer of a deferred prosecution agreement in the winter of 2002. Although the company was at the time hemorrhaging clients and may have likely folded even absent prosecution, the company's decision to face indictment rather than enter into a deferred prosecution agreement was widely viewed as effectively extinguishing any hope of Andersen's continued viability absent an acquittal. Corporate America could see both the resolve of the government to prosecute even the largest of corporations, as well as the consequences that could ensue from a company's refusal to settle. (11) Accordingly, a corporation has little choice but to accede to the government's demands. (12) It is now a commonplace position among the white-collar bar post-Enron--amongst both defense and prosecution--that corporate defense consists largely of being an arm of the prosecutor. (13)

    Rethinking the standard for criminal corporate liability to require the government to show that the company did not have a bona fide compliance program to detect and deter the criminal conduct will serve to correct at least in part the imbalance in power between the government and a corporation facing possible prosecution for the action of an errant employee. Knowing that in the post-Enron world it is the rare corporation that will risk indictment by the Department of Justice, the government has virtually unfettered discretion to exact a deferred prosecution agreement from a corporation, mandating fines and internal reforms. Contrary to the system of checks and balances that pervades our legal system, including the criminal law with respect to individuals, no systemic checks effectively restrict the government's power to go after corporations. Grossly disproportionate power may be warranted in situations where the corporation failed to take the necessary steps to prevent the illegality of its employee, since it enables the government to bring a swift and righteous action. But for a corporation that has already put in place the controls which the criminal law would seek to impose, the primary effect of the current system is to render the corporation unable to defend itself and thus powerless in its dealings with a prosecutor who may be misguided or worse.

    Corporations like Enron and WorldCom, where fraud was rampant and engaged in by senior management, will never be able to demonstrate that they have taken the measures necessary to prevent and detect crime in their midst. Prosecutors under this proposed revision to criminal corporate liability standards will still wield an enormous stick in dealing with such companies. Moreover, since corporate management will be greatly incentivized to protect the corporation from criminal liability by creating a strong and effective compliance program, the proposed new vicarious liability standard will have the advantage of maximizing the chances that such criminality will not take root in the first place.

    For the responsible corporation, the new standard will provide a systemic check on the power of the overly-aggressive, ill-informed, or even unethical prosecutor. For instance, the Citigroup and JPMorgan Chase cases may be examples of situations where this new criminal standard may cause the altered balance of power to lead to more condign results. Both of these major financial institutions entered into settlements with state prosecutors after criminal charges were threatened in relation to the companies' "prepay" transactions with Enron. (14) At the announcement of the multi-million dollar criminal and civil settlements, the state criminal prosecutor was reported to say that there was insufficient evidence of criminal conduct. (15) That admission was startling given that evidence of a crime is supposed to be a prerequisite for action by the criminal authorities, and suggests that even institutions as powerful in the financial world as Citigroup and JPMorgan Chase can cave under the pressure to settle to avoid an indictment, even an unjust one. (16)

    A standard of criminal liability that cabins government discretion to those cases in which the corporation in fact is guilty of not taking all reasonable action to prevent and detect crime by its employees will lead to more just determinations; it will channel government inquiry toward the relevant criteria for evaluating criminal corporate liability. Notably, because the legal standard for liability informs settlement discussions, where a corporation can effectively show the government that it had an effective compliance system in place at the time of a misdeed, the responsible or wary prosecutor will relent.

    Under current practice, apart from evolving DOJ internal guidelines, there is little by way of systemic checks on the overly-aggressive, misinformed, or unethical prosecutor. The imbalance in power between the two sides places enormous weight on two things that are both in the exclusive discretion of the government. First, the system counts on the government attorney ethically wield her power and not threatening indictment simply to coerce a favorable settlement. Save for her personal integrity, a prosecutor may seek to charge for improper reasons, such as personal or political advancement, or exact sanctions that are unwarranted, such as fines disproportionate to the harm. Second, even in the normal circumstance where a prosecutor believes she is acting ethically, the system places great weight on the prosecutor getting it right both in terms of the assessment of the facts and the legal consequences to the corporation that should result from those facts. There are few systemic checks on those government determinations.

  2. RETHINKING CRIMINAL CORPORATE LIABILITY

    Wholesale adoption of vicarious liability agency principles flies in the face of the precepts that govern criminal liability. Curtailing the current practice of imputing the acts and intent of an employee to the employer finds support in the traditional goals of the criminal law as well as in Supreme Court interpretations of certain civil statutes, which has led, remarkably, to a narrower interpretation of corporate vicarious liability in certain civil contexts than in criminal cases. Notably, since the Supreme Court has yet to address the proper scope of vicarious liability in criminal corporate cases, examining the first principles of the criminal law and Supreme Court precedent in civil cases is particularly appropriate in assessing the current scope of criminal corporate liability articulated by the federal appellate courts.

    1. Deterrence and...

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