Corporate criminal liability versus corporate securities fraud liability: analyzing the divergence in standards of culpability.

AuthorKircher, Ashley S.

Many criminal and civil offenses require proof of a corporation's intent in order to find it guilty of wrongdoing. (1) Intent, or mens rea, plays a pivotal role in criminal law, and the concept of intent is dispositive in civil securities fraud cases brought against corporate defendants under Section 10(b) of the Securities and Exchange Act of 1934. (2) A central problem in this area is the question of how a corporation, which is only a "person" by an act of legal fiction, can be said to possess a "unitary, discrete, and demonstrable state of mind." (3) In the United States, the doctrine of respondeat superior has been the most traditionally accepted method of imputing criminal liability to a corporation. (4) By contrast, in civil securities fraud suits, courts are in notable disarray when analyzing the intent of corporations sued under the securities laws, with some courts rejecting the application of a doctrine referred to as collective scienter, and other courts embracing the doctrine with varying degrees of strength. (5) The questions then become, what are the optimal standards, and are there valid reasons for analyzing corporate intent differently in the criminal and civil securities fraud contexts?

Part I of this Note examines the standards of culpability and intent applied by courts in prosecutions brought against corporations. Next, Part II analyzes the vastly different approaches that courts in the United States have taken in examining the intent of corporations in civil securities fraud suits. Part HI then examines the various ways in which legal systems in other parts of the world have analyzed corporate intent. Part IV explores the several stated purposes behind imposing civil and criminal liability on corporations, and Part V outlines the proposed alternative standards to those currently used in the United States for determining corporate culpability. The Note concludes with a discussion of the optimal standards for imposing corporate criminal and securities fraud liability and the suggestion that the United States adopt a standard for imposing corporate criminal liability that is a combination of a corporate ethos and accomplice liability theories. This combination would arguably further the goal of imposing criminal and securities fraud liability only on those corporations that are deserving of punishment.


    Over time, the criminal law has been forced to develop a series of responses to the problem of corporate mens rea to effectively achieve the goals of punishment, retribution, and deterrence. (6) Although corporations generally do not have the nature or qualities of human beings, criminal law, as the result of strong social encouragement, has always attempted to hold corporations to the same standards that apply to individuals. (7) In the landmark case New York Central and Hudson River Railroad Company v. United States, (8) the United States Supreme Court reasoned that if, due to the application of agency principles, a corporation would have civil liability for injuries caused by its agents, the Court would be within its rights to go "only a step farther" and hold a corporation criminally liable for "the act of the agent [done] while exercising the authority delegated to him." (9) Thus began the prominence of the doctrine of respondeat superior in the context of corporate criminal prosecutions.

    1. Respondeat Superior

      The traditional respondeat superior approach is a common law rule, which provides that a corporation can be held criminally liable for the acts of any of its agents who commit a crime within the scope of their employment with the intent to benefit the corporation. (10) This broad definition of agency includes all individuals who work in the corporation, regardless of their rank. (11)

      Criticisms of the application of the doctrine of respondeat superior to corporations in the criminal context abound. The doctrine can be both underinclusive and overinclusive. It is criticized as imposing liability too easily on a corporation and as leading to unfairly broad liability in certain cases. (12) This is because the doctrine does not distinguish between "offenses committed with the participation, pressures, or encouragement of upper management," and those that are "committed by the proverbial 'black sheep' employee whose act violated company policy and could not have been prevented by monitoring and corporate compliance programs." (13) Respondeat superior is also criticized as underinclusive, because when a corporation's policy, procedure, or surreptitious encouragement of wrongful behavior results in the perpetration of an offense, but there is no single identifiable guilty agent, the doctrine fails to impose liability on the corporation. (14) "[C]riminal conviction should be more, not less, likely where evidence of multiple guilty agents exists." (15) Fairness requires that "a corporation should neither escape criminal liability nor be held criminally responsible simply because it is a collective body." (16)

      It is further argued that particularly with respect to specific intent crimes, the respondeat superior approach is highly problematic because the corporate structure can make it difficult to locate and establish the guilt of agents who possess the requisite intent, and thus, the corporate defendant has the advantage of being able to create reasonable doubt as to each agent and to escape liability altogether. (17) Yet another argument against applying the doctrine of respondeat superior to corporations in the criminal context is that its imposition of strict and vicarious liability is inconsistent with a basic requirement of criminal law, which is that the accused must engage in conduct with the requisite culpability. (18) Vicarious liability does not take into account the corporation's contribution to its agents' wrongdoing. (19) Many critics point out that the Department of Justice's consideration of compliance programs when deciding whether to indict a corporation and the Sentencing Guidelines' Contemplation of such factors when devising punishment reflect a basic antipathy toward the use of respondeat superior in the area of corporate criminal liability. (20)

    2. Model Penal Code

      The Model Penal Code (MPC), formulated by the American Law Institute (ALI), is another approach to assessing the criminal liability of corporations, and may be an effective response to respondeat superior's overinclusiveness. The MPC generally 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." (21) The MPC standard thus uses a respondeat superior model, but in a more limited fashion, as it only holds the corporation liable for the conduct of its directors, officers, or other higher level employees. (22)

      Proponents of the MPC approach argue that it is preferable to the application of respondeat superior for multiple reasons. They point out that criminal sanctions against corporations result in negative spillover effects on innocent third parties such as blameless employees and shareholders, and therefore courts should not be too quick to impose criminal liability on corporations. (23) Under the respondeat superior standard, all individuals who work in a corporation are considered its agents, and thus, the corporation is always criminally liable, even if the offense is committed by those located at the lowest levels of the organization. (24) By contrast, the MPC holds corporations criminally liable only when it is found that a corporate director or high managerial agent authorized, commanded, or recklessly tolerated an offense by a corporate employee or agent. (25) Proponents of the MPC approach argue that its application will reduce the negative spillover effects caused by excessive and essentially unwarranted corporate liability. However, the MPC standard has been criticized as both unrealistic and naive because authorization of criminal conduct is hardly ever overt, and in large corporations, employees outside the higher level of leadership often have the authority and ability to bind the corporation. (26)

    3. Collective Knowledge

      The perceived shortcomings of the application of respondeat superior in criminal cases against corporations have led some courts to depart from the traditional application of the doctrine. In some extreme instances of corporate wrongdoing, where no culpable employee can be found, some courts have decided to aggregate corporate agents' actions and states of mind and impute them to the corporation. (27) This approach may be an effective response to respondeat superior's perceived underinclusiveness. The First Circuit pioneered this ground-breaking theory in United States v. Bank of New England, N.A. (28) In that case, the defendant bank's knowledge was said to have been the sum of the knowledge of all of its employees, and the factors necessary to impute "willfulness" to the organization included whether the bank as an organization consciously avoided learning about and observing the statutory reporting requirements, and whether the bank possessed some flagrant organizational indifference to the reporting requirements. (29) Thus, the corporation could be found guilty if the required mens rea was "present in the sum of its parts." (30)

      Some critics caution that the collective knowledge doctrine is potentially dangerous in scope, and that the definition of corporate collective knowledge is not necessarily synonymous with the definition of collective criminal intent. (31) With this concern in mind, some scholars have opined that the best way to apply the collective knowledge doctrine is "in conjunction with other considerations that may more accurately point to culpability, most notably...

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