Trends in corporate criminal prosecutions.

• Author: Bucy, Pamela H.
• Position: Symposium: Corporate Criminality: Legal, Ethical, and Managerial Implications

This essay suggests that in the years ahead the number of corporate criminal investigations is likely to increase but fewer businesses will be indicted. Part I briefly reviews the legal standards for imposing corporate criminal liability and the policy issues surrounding the issue of corporate criminal liability. Part II looks at why the number of criminal investigations of corporations is likely to increase and suggests two reasons. The first is law enforcement's response to the corporate scandals in recent years. (1) Law enforcement was caught unaware by the scope of corporate fraud and, understandably doesn't want that to happen again. Law enforcement officials will be more vigilant for the foreseeable future. The second reason is the recent growth in various "carrot and stick" incentives for disclosing corporate wrongdoing to law enforcement. These incentives include whistleblower statutes, Department of Justice policies, Securities and Exchange Commission rules, U.S. Sentencing Guidelines, and American Bar Association ethical rules for attorneys. (2) Together, they mean that more corporate wrongdoing will come to law enforcement's attention. Part III discusses why we can expect relatively few of the increasing number of corporate investigations to result in indictment. The main reason is Arthur Andersen, the accounting firm that was convicted for obstruction of justice, went out of business as a result of its prosecution, and then saw its conviction overturned by the United States Supreme Court. (3) Because of the Arthur Andersen experience, prosecutors now are more cautious when targeting a corporate entity. In addition to the concern that aggressive prosecution may destroy a viable business, law enforcement wants corporations to disclose any wrongdoing that may have occurred. Foregoing indictment, in lieu of "deferred prosecution" agreements, for example, provides a strong incentive for such disclosure.

1. STANDARD FOR IMPOSING CORPORATE CRIMINAL LIABILITY

   1. Why Prosecute a Corporation?

      Why prosecute something that has "no soul to damn" and "no body to kick?" (4) The major argument in favor of prosecuting corporations is as follows: corporations are major actors in today's word; the criminal law is the most effective method of influencing behavior by rational actors; therefore, criminal prosecution is the most effective way to influence corporate actors. The major argument against corporate criminal liability is that it makes no sense. The distinguishing feature of the criminal law, as contrasted to civil law, is its focus on intent, and no matter what fiction we employ, a corporation has no intent. (5)

      Regardless of the merits of this debate, there is no question that criminal prosecution of a corporation has a tremendous impact on the corporation and its community, employees, customers and lenders. (6) For starters, the tangible and intangible costs of responding to any corporate criminal investigation are significant. Company employees must gather thousands of documents in response to subpoenas. Prior to supplying subpoenaed documents, legal counsel must review each document to verify compliance and to ensure that privileged information is not being released. This process is time consuming and expensive. In addition, any company under investigation should undertake its own internal investigation. If outside counsel is hired to do this investigation, the legal fees are large. If in-house counsel undertakes the investigation, counsel is diverted from other corporate projects and tasks and this diversion hurts a company in small and large ways. Also, once the existence of an investigation becomes public, stock prices of publicly traded companies often drops, sometimes precariously. For example:

      * Adelphia stock plummeted from $23.10 per share to $1.16 per share within months of the public disclosure of its accounting fraud. (7)

      * Enron stock fell from $83 per share to $.26 per share when its fraud became public. (8)

      * Tyco fell from $97 per share to $10.10 per share after its fraud was disclosed. (9)

      * WorldCom stock tumbled from $64.50 per share to $.20 per share when its fraud was disclosed. (10)

      Additionally, lenders may raise short term interest rates, terminate lines of credit, or call in loans. Moreover, business is often disrupted by an investigation. Deals and plans are put on hold because of the uncertainty surrounding the targeted company. Employee morale plummets. Competing businesses swoop in and lure away star employees who are reluctant to remain with a business under investigation. Customers leave for competitors.

      In short, a company may not survive the distractions, costs, and damage to its reputation and business that a corporate criminal investigation brings. (11)

   2. Standards for Imposing Corporate Criminal Liability

      American jurisprudence employs two major standards to determine when a corporation should be criminally liable. Both impose vicarious liability by imputing the criminal acts and intent of corporate agents to the corporation. The traditional or respondeat superior approach is a common law rule developed primarily in the federal courts and adopted by some state courts. Derived from agency principles in tort law, it provides that a corporation "may be held criminally liable for the acts of any of its agents [who] (1) commit a crime (2) within the scope of employment (3) with the intent to benefit the corporation." (12)

      The American Law Institute's (ALI) Model Penal Code (MPC) provides the major alternative standard for corporate criminal liability currently found in American jurisprudence. The MPC sets forth three standards for corporate liability, each depending on the type of offense or violation. The option that applies to most criminal offenses provides that a corporation is criminally liable if the criminal conduct was "authorized, requested, commanded, performed or recklessly tolerated by the board of directors or by a high managerial agent acting in behalf of the corporation within the scope of his office or employment." (13) The MPC standard still uses a respondeat superior model, but in a limited fashion: a corporation is liable for the conduct of only some agents (its directors, officers, or other higher echelon employees).

      Both the traditional and MPC standards have been criticized for their inability to meaningfully capture the existence of corporate intent. (14) There are additional criticisms of each. The respondeat superior standard is criticized for imposing liability too easily on a corporation. Especially when the notion of "apparent authority" (15) of any agent to act for the corporation and the fiction of "collective intent" (16) is employed to prove intent, the respondeat superior standard allows for imposition of corporate criminal liability even when a low level employee violates the law. (17) The MPC standard is criticized as unrealistic (authorization of wrongdoing rarely is overt), as well as naive (in large corporations individuals outside the "higher echelon" of leadership have the authority and ability to bind a corporation). (18) While alternative approaches to assessing corporate criminal liability have been suggested, (19) the respondeat superior and MPC standards persist. And although the MPC approach is narrower than the respondeat superior standard, the bottom line for corporations is that both easily allow for corporate criminal liability.

2. WHY CORPORATE INVESTIGATIONS FOR CRIMINAL BEHAVIOR ARE LIKELY TO INCREASE

   The corporate scandals that unfolded in 2002 were stunning in their grandiosity and harm. To take one example, Enron, which in early 2001 was the seventh largest company in the United States, had declared bankruptcy by the end of 2001 because of fraud. (20) Most of Enron's fraud took place when it moved its debt off corporate books to off-shore partnerships whose financial records were shielded from public view. (21) The results were disastrous. At its peak, in January 2001, Enron's stock was trading at $83 per share. (22) One year later, once the fraud became known, its stock was trading at 26 cents per share, (23) a plunge of 99%. When it declared bankruptcy, Enron's debts totaled $13.12 billion. (24) It laid off 4000 employees, who lost not only their jobs but also their savings which were invested in 401(k) retirement funds with heavy concentrations of Enron stock. (25) While Enron was hiding its debt with off-shore sleights of hand, it received clean bills of health from its outside auditor and the law firm that Enron retained to investigate reports of fraud. (26) At the time of these reviews, both the auditing firm and law firm had long-standing, lucrative retainers with Enron. (27)

   Congress, the United States Department of Justice (DOJ), and the Securities Exchange Commission (SEC), among others, responded forcefully to Enron and other high profile frauds of 2001 and 2002. Congress passed Sarbanes-Oxley, (28) which profoundly "changed the (business) world." (29) Sarbanes-Oxley not only enacted new crimes aimed at corporate fraud and beefed up existing crimes, (30) it affected corporate culture by requiring public companies to review their internal controls and disclose all material weaknesses in their financial reporting systems. (31) Corporate CEOs and CFOs are now required to certify the accuracy of their corporate financial reports. (32)

   The Department of Justice formed a Corporate Fraud Task Force to respond in "real time" to corporate wrongdoing. (33) Immediately after the Corporate Fraud Task Force was created there was a surge in white collar prosecutions (34) which has since tapered off as the chart below shows: (35)

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   Prosecutorial priorities have always come and gone--the focus on corporate wrongdoing is not likely to dissipate, at least not any time soon. The "genie is out of the bottle" and won't go back in easily. This is for several reasons. Recent corporate scandals have...