The balance among corporate criminal liability, private civil suits, and regulatory enforcement.

• Author: Moohr, Geraldine Szott
• Position: Achieving the Right Balance: The Role of Corporate Criminal Law in Ensuring Corporate Compliance

[W]e see no good reason why corporations may not be held responsible for and charged with the knowledge and purposes of their agents, acting within the authority conferred upon them. If it were not so, many offenses might go unpunished and acts be committed in violation of law.... (1)

To indict a corporation, as a legal matter, is like shooting fish in a barrel. (2)

INTRODUCTION

As the Supreme Court made clear in 1909, corporate criminal liability based on the doctrine of respondeat superior is justified by the utilitarian goal of preventing harm. (3) And as Mary Jo White's succinct analogy indicates, it is indeed very easy to indict a corporation. Under the respondeat superior doctrine, it is also very easy to convict a corporation.

The current federal standard of respondeat superior imposes vicarious liability on a corporation for an agent's crime when the agent acted within her authority for the benefit of the firm. (4) The simplicity of using vicarious liability to obtain a conviction bespeaks a certain unfairness; shooting fish in a barrel does not seem fair to the fish--nor to a business entity. The condemnation and stigma that follow a criminal conviction should require that the fish have a fighting chance.

Unfairness to the fish results because, under the vicarious liability standard, accused firms cannot defend themselves on the basis of either conduct or culpability. The standard thus transfers extraordinary power to federal prosecutors and away from judges and juries. (5) Prosecutors use that power to negotiate deferred prosecution and nonprosecution agreements, essentially private settlements that impose large fines and burdensome supervision on corporations. (6) The agreements are negotiated without judicial oversight or the discipline imposed by grand jury indictments and trials, raising the concern that criminal treatment was not merited. Finally, prosecutors encourage directors and executives to save their firms by sacrificing other executives and employees to federal prosecution. (7)

John Hasnas has offered three ways to mitigate these effects of vicarious liability: (1) adopt a variant of the Model Penal Code (MPC) solution; (2) introduce a mens rea element by requiring that upper management were willfully blind or negligent as to the agent's misconduct; and, (3) follow general principles of respondeat superior but institute an affirmative defense of good faith. (8) Elizabeth Ainslie supports the first choice and suggests that jury instructions be based on the MPC standard. (9) Following the third choice, Ellen Podgor recommends adopting an affirmative defense of good faith based on the firm's efforts to secure compliance, (10) an approach that Andrew Weissman (11) and Larry Thompson also endorse. (12) My contribution focuses on the second option, rather than using respondeat superior, corporations should be charged with knowingly aiding and abetting the crimes of their agents when firms are complicit or encourage criminal conduct. (13) Miriam Baer offers a fourth choice, to replace entity liability with insurance schemes that evaluate compliance efforts and the risk of criminal conduct and charge accordingly. (14)

Yet none of these ideas address the reasons why corporations are charged with criminal offenses in the first place. In brief, first, the expansive criminal laws that govern white-collar frauds facilitate charging individual executives, and thus their firms, for conduct that may not have been defined as criminal. Second, private civil actions and regulatory enforcement are now ineffective in motivating firms to monitor business practices or encouraging law-abiding business conduct. Thus, those seeking redress or change effectively have only one option, criminal law.

Because the commission of a crime by an individual agent is a prerequisite for corporate criminal liability, this essay takes the substantive law as its starting point. In Part I, I review the general trend to overcriminalize and examine specific white-collar criminal provisions. The ambiguity and breadth of the fraud statutes, combined with ancillary offenses, facilitates conviction of company agents and are the most significant reason for corporate criminal liability.

Against this background, I consider the two alternative ways to secure effective compliance and assess how they relate to criminal law. Viewed through the lens of securities enforcement, the inquiry assesses civil suits and agency enforcement to determine their effectiveness in securing law-abiding behavior. In Part II, I examine private civil suits as an alternate remedy to encourage firms to comply with the law, with particular reference to securities laws. It is clear that the combination of legislative actions and judicial holdings makes it increasingly difficult to bring civil securities fraud claims to trial. In Part III, I briefly survey regulatory remedies to find that they are beset with inherent conflicts, inconsistent policies, and budget problems that make administrative enforcement problematic.

In Part IV, I explain that the three enforcement mechanisms are seriously out of balance and skewed toward criminal enforcement. In these circumstances, it is hardly surprising that enforcers turn to criminal law. The course for those opposed to holding corporations criminally liable becomes clear. In order to reduce the risk of corporate criminal liability, opponents should support efforts to restore the balance among criminal law, civil lawsuits, and regulatory law.. Correcting the balance will, in the long term, return criminal law to its most appropriate use as a last resort so that firms are criminally charged only after other enforcement efforts have failed. In order to succeed at that long-term task, businesses, as well as practitioners and scholars, might profitably support reform of the substantive white-collar criminal laws, restoration of non-frivolous civil suits, and expansion of regulatory authority.

1. WHITE-COLLAR CRIMINAL LAW

   The Federal Criminal Code is a Disgrace (15)

   Simply stated, a criminal act by a human agent is a necessary condition for corporate criminal liability. The starting point, then, is to consider federal criminal law in general and the substantive white-collar criminal law in particular. As Julie O'Sullivan notes, the terrain is not promising. It is, however, well-traveled, and I briefly highlight the general trend to rely on criminal law to effect social policy and also examine a few specific statutes that reflect this development.

   1. The Trend to Overcriminalize

      A general characteristic of American criminal law is the tendency to rely excessively on it to implement social policies by bringing more conduct into the orbit of criminal law; in a word, to overcriminalize. (16) The trend has many characteristics, and I focus here on two that beset the federal criminal justice system: the propensity to increase terms of punishment and to enact more criminal laws.

      Recourse to criminal remedies reflects a punitive attitude to misconduct that has evolved over the past thirty years, (17) to which white-collar offenders are not immune. The corporate scandals that began with Enron sparked a preference for punishment that has yet to run its course, epitomized by lengthy prison sentences. The 150-year sentence of Bernie Madoff far surpasses those of Jeffrey Skilling and Bernie Ebbers, which only recently represented the outer limit of punishment of former executives. (18) The virulent reaction to the death of Ken Lay, ex-CEO of Enron, because he had cheated victims once again, indicates a populist expectation that white-collar offenders actually endure punishment. (19)

      In the aftermath of the Enron and WorldCom bankruptcies, Congress significantly increased punishment levels for white-collar offenses. The maximum sentence for mail and wire fraud, often implicated in business crimes, was increased from five to twenty years, a four-fold increase. (20) The new insider trading statute authorized a maximum term of twenty-five years, two- and-a-half times greater than the maximum punishment previously authorized for the same conduct. (21)

      Overcriminalization also affects the substantive law, and the scandals stimulated legislators to enact yet more white-collar criminal laws. (22) In addition to increasing penalties of existing crimes, Congress also added new obligations, enforced solely by criminal law. Criminal provisions now require executives to certify personally that SEC reports comply with regulatory requirements, (23) and another law authorizes punishment for knowingly and intentionally retaliating against whistleblowers. (24) The first action was probably unnecessary given existing laws, and the second is disingenuous because Congress neglected to offer an incentive for employees to blow the whistle in the first place. Congress also inserted a new securities fraud crime into Title 18. (25) Earlier this year, Congress passed the Fraud Enforcement Recovery Act, whose provisions prohibit conduct that was already covered by other statutes. (26)

      Recourse to criminal law by legislators is now, for all practical purposes; a reflexive--almost mechanical--reaction. (27) A simple reason is that legislators are driven by vote-getting political considerations. (28) While that is undoubtedly so, institutional imperatives also drive over-criminalization, and these make it difficult to reverse the trend. (29) Legislative action, executive branch enforcement priorities, and judicial interpretations of existing laws all contribute to overcriminalization. As in an elaborate minuet, each branch bows to the others and avoids the debate that would constrain the use of criminal law.

      Many federal criminal laws are neither necessary nor wise, and the negative effects of overusing criminal law may easily exceed any benefit of its use. (30) Overuse of criminal law can dilute its stigmatizing effect and, when application seems unjust...