1: Corporate Criminal Liability I. Intro



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Outline
1: Corporate Criminal Liability


  • I. Intro

    • New York Central & Hudson River RR v. US

      • A corporation can be criminally liable, not just the individuals

      • Corporation is essentially its stockholders

      • Policy against the holding:

        • Wrongfully punishes stockholders for individuals doing wrong

        • However, stockholders have to gamble that they have competent, honest management

      • Policy for holding:

        • Stockholder doesn’t have any personal liability

          • Only his shares decrease value

        • No stigma of criminal conviction

        • If the corporation has been benefited for years b/c of the criminal conduct, then the stockholders deserve to lose some of that value

    • Keep in mind:

      • Corporate prosecution is the exception not the rule

      • More often there is deferred prosecution

        • If you cooperate fully and correct all the problems, we won’t prosecute you and drop the criminal charges

    • US v. CR Bard Inc

      • Facts: there were serious problems w/the catheters they made, and they produced the catheters w/out FDA approvals and did illegal tests

      • Holding: Plea agreement is ok where there is adequate deterrence/punishment and where individuals are still being pursued

        • Because the corp. was cooperating and there was still prosecution of individuals

        • Would not accept the plea agreement if the individual prosecution was not going forward
      • The reason for prosecution of corp. is deterrence and punishment


        • There needs to be a change of corp. culture (Greed needs to end)

        • Can’t afford to do business this way if they keep getting sued

      • Compliance program

        • Checks and balances in place to ensure that the program works

        • Monitor can come in and review the compliance program to see if it is sufficient to prevent the conduct from occurring again

      • Opens the corporation up to civil liability

      • No one was willing to blow the whistle

        • Frustrated the government

        • Why?

          • Didn’t want to expose themselves to criminal/civil liability

          • Didn’t want to get fired

        • There needs to be whistle blower protection

    • Charging Corporations: Eight Factors of US Federal Guidelines

      • 1) Nature/seriousness of offense, risk of public harm

      • 2) Pervasiveness of wrongdoing w/in corp

      • 3) Corp’s history of similar conduct

      • 4) Corp’s timely and voluntary disclosure

      • 5) Existence/adequacy of compliance program

      • 6) Corp’s remedial actions

      • 7) Collateral consequences, disproportionate harm to innocent shareholders/employees

      • 8) Adequacy of non-criminal remedies

      • (Prosecution corporation should never be a substitute to prosecuting individuals)

  • II (A). The Respondeat Superior Rule: Criminal Acts

    • Allows imposition of corporate liability for criminal acts performed by officers and agents in the course of their employment, w/o regard to their status in the corporate hierarchy
      • Federal court rule, not MPC


      • Agent who commits crime must be acting w/in scope of authority & on behalf of the corp

    • Commonwealth v. Beneficial Finance Co

      • Facts: Corporate employee is bribing public officials

      • Holding: When an employee is acting within the scope of authority of his employment and on behalf of the corporation, the corporation can be liable for his actions

      • The corporation was a beneficiary of the criminal conduct of the employee

      • The corporation itself was funding the bribes

      • Rejects the MPC approach that the corporation is only liable for employee action when the action is authorized, encouraged or ratified by high managerial agent

      • However, there is no public records to show that managers approved this action

        • Very unlikely that there will be paper trial to the top

      • The lower employees are more likely to be involved w/the day to day opportunities

      • Prosecutors should not let corporations use lower employees to be scapegoat

        • However, other individuals should be also be pursued

    • US v. Hilton Hotels Corp.

      • Facts: Sherman Act violation; offenses are usually motivated to enhance profits

      • Employee violated the act, even though his managers told him to abide by the act

      • Pervasive effort in corporations to produce the highest profit

      • The only way to deter this behavior by employees is to punish the corporation

        • If the corporation really wanted the employee to stop doing the behavior they could have fired him
        • The bottom line is that the employee is doing something w/in the scope of his employment and is still acting within his authority


      • Its not enough that the company has a “policy,” they have to have an effective method to enforce this policy

        • Must monitor employees and make sure they do what they are supposed to do

      • Federal Guidelines: Rule 5

        • Look at the existence and adequacy of the corporation’s compliance program

      • Within the scope of their employment includes not only that which has been authorized by the corporation, but also that which outsiders could reasonably assume the agent would have authority to do

      • If behavior is done regularly enough by employee, then the employee has apparent authority, and thus the corporation can be liable

  • II (B). The Respondeat Superior Rule: Criminal Intent

    • US v. Bank of New England

      • A corporation can commit a crime that has a knowing standard

      • Knowingly= voluntarily

      • Willfully=specific intent to do the action and violate the law

      • There can be collective knowledge to prove knowingly

        • B/C many corporations are compartmentalized

      • Multiple transactions, internal memo, and chose not to file

        • Actions were deliberate

        • Suspected the man was a bookie

        • Cant still find knowing conduct if people consciously avoided learning the truth

      • Can impute state of mind of employees to corporation by looking at the circumstances of what the employees should have known

      • Look at the culture of the corporation and the flagrant indifference



2. Personal Liability in an Organizational Setting
  • II. Direct Participants


    • US v. Booker * Sentencing Guidelines

      • Two Opinions

      • Stevens

        • Blakely applies to the federal sentencing guidelines

        • Judge cannot unilaterally decide aggravating factor to increase sentencing

      • Breyer

        • Blakely applies in the federal sentencing guidelines as well

        • Sentencing guidelines are advisory only

        • Sentencing can still be appealed

          • Maybe sentence not reasonable?

          • Abuse of discretion?

        • Congress needs to fix the system and fix the sentencing guidelines

    • US v. Wise

      • A corporate officer is subject to prosecution whenever he knowingly participates in effecting the illegal conduct, regardless of whether he is acting in a representative capacity

    • Federal law recognizes no distinction between principles and accessories

    • US v. Brown

      • Corporate officer could be held criminally liable for the illegal actions of subordinates if they knowingly authorized or consented to such behavior

      • Officer doesn’t have to have hands on role

      • Knowingly participating in illegal conduct of subordinates requires more than purely passive behavior, however, encouraging, advising, or assisting for the purpose of furthering the conspiracy is enough

      • Can be passive (but has power to control conduct)




  • III. Responsible Corporate Officials

    • Dotterwich
      • As long as corporate officer has a responsible share in the illegal conduct that violated a public welfare statute, they can be found guilty


      • Officer in a better position to make sure the violations are not committed

    • US v. Park

      • Facts: CEO found guilty of shipping adulterated food, public welfare statute

      • Received letter from FDA, but did not do everything in his power to clean up the problem

      • Not just responsible because of this title, but because corporate employees have a responsible share in the furtherance of the transaction which the state outlaw

        • Principles applied whether or not the crime requires conscious of wrongdoing

      • The bylaws of the company shows that he has overall responsibility

        • Has a duty to exercise the highest degree of foresight and vigilance

      • Defense: If objectively impossible to prevent or correct the problem, then not guilty?

        • BUT He was on notice of the problem and could have relied on his system of delegation to subordinates to prevent or correct the problem

      • Strict liability!!

        • No mental state

        • Failed to fulfill duty

        • Prior history of notice is enough to negate the defense

    • Problem 2-2

      • If on notice that there is a violation, must follow up to make sure clean up has occurred

    • SUMMARY: Individual Liability for Corporate Crime

      • Highest standard of foresight and vigilance is necessary in order not to be personally liable for breaking the law



4. Mail Fraud: 18 U.S.C. § 1341

  • I. Intro

    • Definition: Use of mail for fraudulent activities
    • The fraud itself does not have to be punishable for an independent crime


    • Congress does not have to have the authority to punish the underlying fraud

  • II (A). Schemes to Defraud: Intent to Defraud

    • United States v. Hawkey

      • Facts: Money was raised for benefit concert for Sheriff’s association through the mail

        • Sheriff used some of money raised for his own personal and business expenses

        • However, he did put some of the money back, and the concert did go on

      • Holding: Since person gave funds in order for those funds to go to charity, they didn’t get what they bargained for, and this it was a fraudulent scheme

      • Statute prohibits the use of the mails to execute “any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises”

      • To obtain a conviction, the government must prove:

        • (1) The existence of a scheme to defraud; and

        • (2) the use of the mails… for purposes of executing the scheme




      • To act with intent to defraud means:

        • to act knowingly and with the intent to deceive someone for the purpose of causing some financial loss… to another or bringing about some financial gain to oneself or another to the detriment of a third party

      • False or fraudulent representations must be material

        • Material if:

          • A reasonable man would attach importance to its (non) existence in determining his choice of action OR
          • The maker of the representations knows or has reason to know that its recipient regards or is likely to regard the matter as important in determining his choice of action, although a reasonable man would not so regard it


        • However, material statement has to be backed up with intent to defraud in order to violate the mail fraud statute (Not all lies or misrepresentations are fraudulent)

    • Lustiger v. United States

      • Facts: subdivision sold on 32-page color brochure filled with fraudulently misleading and deceptive pictures

      • Mail fraud statute protects the gullible

      • Average person of ordinary intelligence may rely on the mailed brochure

      • Rule:

        • If a scheme is devised with the intent to defraud, and the mails are used in executing the scheme, the fact that there is not misrepresentation of a single existing fact is immaterial

  • II (B): Schemes to Defraud: Protected Interests

    • United States v. George

      • Facts: Exclusive K between Accurrate (Greensphan) and Zenith (Yonan)

      • No competition allowed

      • Yonan is getting kickbacks; George is getting a huge kickback too

      • Court says it is fraud even though Zenith is getting the price and services it expected

        • If this was really on the up and up, why was it under the table?

      • Breached a duty of honest and loyal services

    • Carpenter v. United States

      • Facts: A reporter for the WSJ, was giving up confidential business information to friends to make money (This information has economic value)

      • The lost of the right to be exclusively publishing this information has an economic impact on the WSJ
      • In order to be found guilty of violating the mail fraud statute, there has to be a scheme to defraud citizens of their property


      • Congress didn’t intend the statute to be so expansive to include honest and loyal service

        • (McNally: must be money or property taken away)

      • However, confidential business information is intangible property that is included in the statute

    • § 1346: Congress said that we want mail fraud statute to be expansive

      • Honest and loyal services are covered by the statute

      • Intangible rights are thus part

      • Statute punishes: Infliction of harm OR unearned benefits

    • Cleveland v. United States

      • Question after Carpenter is: what is property?

      • Facts: Video poker licenses scheme: properties of Louisiana?

        • NO, licenses are not property

    • Fountain v. United States

      • Facts: Scheme to transport cigarettes from Canada in order to defraud Canada of taxes

        • Taxes are different from licenses or tax credits

      • Taxes are considered property under the wire fraud statutes

    • United States v. Czubinski

      • Unauthorized assess of files in the IRS database from an employee is reprehensible conduct, but not fraud were there was no deprivation of property and no gain from this usage

        • Has to be a very serious breach of duty, not just every kind of misconduct

        • Must go to the heart of your responsibility as a public official, and call into question your impartiality/trustworthiness

      • Didn’t take any additional steps to confirm his fraudulent intent

        • Didn’t create the dossiers, or sell the information

    • United States v. Devegter


      • Facts: Hired to give rec. for who would be best underwriter for Fulton Country

        • Only one party gets a chance to get the underwriting business, adjusted bid to win

      • Economic harm to the County comes from the fraud

      • Private sector honest services IS sufficient to sustain § 1346 charges

        • In this case, because of the nature of the services, Devegter was more like a public servant, b/c Fulton County was relying exclusively on his honest services

      • Honest Services: Public v. Private servant

        • Private Sector

          • Fiduciary duty

          • Breach

          • Foreseeable economic harm

        • Public Sector

          • Inherent fiduciary duty to public

  • III. Use of the Mails

    • Sufficient that use of the mails was “incident to an essential part of the scheme”

      • Government can use circumstantial evidence to prove the mails were used to further an alleged scheme to defraud

      • Government just merely show that the routine is normally handled in such a way involving the mail

    • Schmuck v. United States

      • Facts: D rolled back odometers of cars so that he could get more money from dealers, and then title applications would be mailed before the cars were sold to the owners

      • Argues that mailing was tangential to the scheme

    • United States v. Sampson

      • Facts: Advanced fees for a loan

      • Sent out a form letter saying the loan was accepted after receiving the fees


        • The letters were to lull them by assurances, allowing Ds to continue their scheme

      • Even though the letter doesn’t provide any more money, the letters do advance the scheme, and thus in furtherance of the fraud

  • IV. Mail and Wire Fraud Affecting a Financial Institution

    • Wire Fraud:

      • Must be interstate

      • Don’t need knowledge of jurisdictional state to be in violation

    • United States v. Bouyea

      • Mail and wire fraud statutes increase their penalties if financial institutions are affected

      • Longer statute of limitations for fraud to financial institution

    • Untied States v. Archer, 486 F.2d 670

      • Manufactured Jurisdiction

  • V(A). Statutes Prohibiting Specific Frauds: Bank Fraud

    • 18 U.S.C. § 1344

      • 1) knowingly executing/attempting to execute a scheme to defraud a financial institution

      • 2) knowingly executing/attempting to execute a scheme to obtain money, assets, or other property owned by or under the custody/control of a financial institution through false or fraudulent pretenses, representations, or promises

    • United States v. Doke

      • Facts: Bank lends Bass (lawyer) money w/o the disclosure that Doke was his partner

        • Both Bass and Doke are insiders in the bank

        • Doke has already borrowed money from the bank and couldn’t lend him as much money that he needed

      • There was an intent to deceive the bank
        • Doke was the true beneficiary of the loan (Knowingly put the bank at risk)


        • Goes against banking regulations

      • Jurisdiction comes from the scheme being directed toward a bank

  • V(B). Statutes Prohibiting Specific Frauds: Compute Fraud

    • 18 U.S.C. § 1030

      • 7 categories of crimes that target harms resulting from accessing “protected computers” w/o authorization or in excess of one’s authorization

      • § 1030(e) (2) “Protected computer” means:

        • A) Exclusively for the use of a financial institution or the US gov; or computer not exclusively for that use but affects that use

        • B) which is used in interstate or foreign commerce or communication

    • United States v. Middleton

      • Facts: A disgruntled x employee hacked into the former employers comp and changed administrative passwords, altered the computer’s registry, deleted the entire billing system, and deleted two internal databases

      • Under the statute, prohibits a person from knowingly transmitting a program information, code, or command, and as a result of such conduct, intentionally causing damage without authorization, to a protected computer

        • If you are hooked up to the internet, you are a protected computer because you are involved in interstate communication

      • Damage must be to one or more individuals, and a corporation is an individual, or any other fictional person or legal entity

        • § 1030(e)(8) Damage must be more than $5000 in one year, and this loss includes that which was a foreseeable consequence of his criminal conduct, including those costs necessary to “resecure” the computers
          • Hourly rates of employees to fix the computer(s) can be added to the damage


      • See § 1030(a) (4) & (5) p. 146

    • United States v. Czubinski

      • Unauthorized use without obtaining anything of value from this use does not violate the computer fraud statute

        • If he had used to information for something more, then he may have violated § 1030(a)(4), need “something of value” to violate statute

5. Securities Fraud

  • I. Intro

    • Statute to promote truth in the offering and selling of securities

    • SEC cannot bring criminal charges, only civil actions

      • The SEC can only refer possible criminal cases to the DOJ

    • However, often the DOJ and SEC investigate together, and sometimes they coordinate their efforts, often plea w/one branch will cause dropping of charges from the other

  • II. Willfulness

    • Does not require specific intent to disregard the law; only that conduct is deliberate and intentional as opposed to accidental or inadvertent

    • United States v. Weiner

      • Serious financial accounting problems for years

      • Auditors should be held responsible criminally

        • These accounting problems go beyond mere negligence

        • Didn’t comply with the basic auditing standards

          • Made up to “innovative” accounting practices

          • Court couldn’t believe that the auditors didn’t actually know because the numbers were so unbelievably inflated

        • The auditors have a serious conflict of interest because they are not independent, but involved as part of the company
      • Thus, it was WILLFUL conduct


      • Deliberate ignorance is the same as positive knowledge

        • Primary function of auditor is to run a series of checks to make sure the financial statements truly reflect the financial status of the company

        • Thus, when you see something suspicious, you must investigate it or withdrawal

      • Auditors are now scrutinized far more than they were at the time of this case

    • See p. 138, 15 U.S.C. §78ff: Penalites, changed by Sarbanes-Oxley Act

    • Private Securities Litigation Reform Act of 1995

      • If auditors find something wrong that may be material, the auditor must report it to senior management then the board then the SEC

    • Sarbanes-Oxley Act of 2002
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