My previous blogposts (one, two, three, four, five, six, and seven) discussed why conspiracy prosecutions were the best method to penalize coordinated wrongdoing by agents within an organization. Using alternative doctrines to impose liability on behavior that would otherwise be recognized as an intracorporate conspiracy results in flawed incentives and disproportionate awards.
The fundamental problem with substituting responsible corporate officer doctrine and control person liability for reforming the intracorporate conspiracy doctrine is that these alternative doctrines represent exactly what Professor Martin objects to: actual imposition of blind “respondeat superior” liability. For example, under these doctrines, “in most federal courts, it is not necessary to show that the corporate official being charged had a culpable state of mind.” Instead, the issue before the court is merely whether the officer had control and responsibility for the alleged actions. Accordingly, it is not a defense to control person liability that the officer did not “knowingly participate in or independently commit a violation of the Act.”
But simply penalizing the officer who is in the wrong place at the wrong time does little to define and encourage best practices. Moreover, with these and other explosive hazards for corporate service, it should be no surprise that top executives are demanding and receiving ever-increasing compensation for often short-term positions. Since 2009, the year that the NSP case establishing “control person” liability was settled, the discrepancy in pay between top management and the average worker has been growing dramatically. In 2013, the CEO of J.C. Penny Co., for example, was exposed for making 1,795 times what the average U.S. department store employee made. From 2009 to 2013, as measured across Standard & Poor’s 500 Index (S&P 500) of companies, “the average multiple of CEO compensation to that of rank-and-file workers” has risen to 204, an increase of twenty percent.
It is true that the financial crisis did reduce executive compensation packages before 2009, and that there has been a historical trend towards the growth of executives’ salaries as a multiple of average workers’ salaries. For example, “[es]timates by academics and trade-union groups put the number at 20-to-1 in the 1950s, rising to 42-to-1 in 1980 and 120-to-1 by 2000.” But the jump in executives’ salaries from 2009 has been extraordinary. The new emphasis on vicarious liability for individuals under the responsible corporate officer doctrine since that date must be considered part of executives’ demands for such high compensation in exchange for their risky positions.
The average duration of a CEO’s time in office has diminished as well. In 2000, the average tenure of a departing S&P 500 CEO in the U.S. was ten years. By 2010, it was down to eight years. In 2011, merely a year later, the average tenure of a Fortune 500 CEO was barely 4.6 years. In 2013, that former CEO of J.C. Penny Co. served for only eighteen months.
With an eighteen-month tenure, how much can the chief executive of a large company discover about the wrongdoing that his or her new company is committing? Furthermore, how much can that person design and institute good preventative measures to guide his or her subordinates to avoid that harm? A blindly revolving door for CEOs does not help those interested in effectively reducing the wrongdoing of agents within the corporation. Incentives without intracorporate conspiracy immunity would be different because they would reward the agent who abandons a conspiracy. (More about this argument here, here, here, and here.)
My next blogpost will examine how substituting alternative doctrines for prosecuting intracorporate conspiracy affects incentives under Director’s and Officer’s (D&O) liability insurance.
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Peter Henning has a nice overview of recent claims made against the SEC's growing inclination to take fraud cases before its handful of agency-judges (ALJs), instead of to court. Why should that be okay?
From a policy perspective, there's reason to worry. I did some litigation before an administrative tribunal, and it's not that different from in court litigation, with the exception of evidence admissability and objections. But it could be really quite different. Hearsay is in theory fine, there's no requirement that you be able to present evidence in person, and the judge works for the agency that is suing you. It's fair to say that defendants get less process from an ALJ than they would from a federal judge.
But not that much less. ALJs are required to hold hearings, permit the introduction of rebuttal evidence, the statute that governs them makes what they do ("formal adjudication" in the verbiage of administrative law) pretty similar to a trial.
That matters for the equities, as does the almost absolute discretion that agencies have to prosecute in the way they see fit. The SEC can drop claims, send scoldy letters, use ALJs, take you to court, or refer you to the criminal lawyers at DOJ with the recommendation that imprisonment could be sought. Because we wouldn't want judges second guessing the decisions to, say, emphasize insider trading prosecutions over accounting fraud claims, we leave those policy calls to the agency.
Which then begs the question: why now with the constitutional case against the ALJ, a thing that has existed since the end of WWII?
Well, the SEC hasn't used its ALJs for high profile cases very often, at least until recently. But the claims against the turn to administrative tribunals aren't getting a lot of love, and I predict that will continue to happen. Judge Lewis Kaplan, who isn't afraid to savage a government case alleging financial wrongdoing, concluded that he didn't have the power to judge whether an ALJ proceeding violated due process or equal protection standards, given that other, similar cases had been brought in court. The SEC recently ignored a declaratory relief case filed by an S&P executive when it brought an administrative complaint against her.
Some well-heeled defendants may have been emboldened to bring these cases by the Free Enterprise Fund decision in the Supreme Court, which constrained the number levels of tenured officials that could separate the president from policymakers. But administrative adjudication is simply too resource intensive and carefully done to be rendered illegal because of its insulation. The alternative would be to replace ALJs with political hacks, and no one wants that. So I'm not predicting a lot of luck for the defendants in these cases.
My previous blogposts (one, two, three, four, five, and six) discussed why conspiracy prosecutions should be used to reach coordinated wrongdoing by agents within an organization. The intracorporate conspiracy doctrine has distorted agency law and inappropriately handicaps the ability of tort and criminal law to regulate the behavior of organizations and their agents.
My Intracorporate Conspiracy Trap article argues that the intracorporate conspiracy doctrine is not properly based in agency law, and that it should most certainly not be applied throughout tort law and criminal law. As a result of the immunity granted by the doctrine, harmful behavior is ordered and performed without consequences, and the victims of the behavior suffer without appropriate remedy. My Corporate Conspiracy Vacuum article argues that public and judicial frustration with the lack of accountability for corporate conspiracy has now warped the doctrines around it.
Courts have used a wide variety of doctrines to hold agents of enterprises responsible for their actions that should have prosecuted as intracorporate conspiracy. Some of these doctrines include:
But the new applications of these alternative doctrines are producing distortions that make the doctrines less stable, less predictable, and less able to signal proper incentives to individuals within organizations.
An example of how piercing the corporate veil has been used to defeat intracorporate conspiracy immunity can be seen in the Morelia case. A previous blogpost discussed how the intracorporate conspiracy doctrine has defanged RICO prosecutions of agents and business entities. In Morelia, which was a civil RICO case, the federal district court, obviously outraged by defendants’ behavior in the case, explicitly permitted plaintiffs to pierce the corporate veil to avoid application of the intracorporate conspiracy doctrine. In a creative twist invented from whole cloth to link the two doctrines, the Morelia court overruled its magistrate judge’s recommendation to announce:
"Since the court has determined that plaintiffs have properly alleged that the corporate veil should be pierced, the individual defendants may be liable for corporate actions and any distinction created by the intra-corporate doctrine does not exist."
Regarding its test for piercing the corporate veil, the Morelia court further overruled its magistrate’s recommendation by focusing on plaintiffs’ arguments regarding undercapitalization, and its decision included only a single footnote about the disregard of corporate formalities.
The Morelia court is not alone in its frustration with the intracorporate conspiracy doctrine and in its attempt to link analysis under the intracorporate conspiracy doctrine with the stronger equitable tenets of piercing the corporate veil. More subtly, courts across the country have started to entangle the two doctrines’ requirements as intracorporate conspiracy immunity has become stronger and courts have increasingly had to rely on piercing the corporate veil as an ill-fitting alternative to permit conspiracy claims to proceed. Even large public companies should take note. No public company has ever been pierced, but a bankruptcy court recently reverse-pierced corporate veils of the Roman Catholic Church, which is far from a single-person “sham” corporation. My Corporate Conspiracy Vacuum article discusses additional examples and repercussions for incentives under each of these alternative doctrines.
My next blogpost will examine how frustration with intracorporate conspiracy immunity has led to volatility in responsible corporate officer doctrine and related control person liability. Ironically, executive immunity from conspiracy charges fuels counterproductive CEO turnover.
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OK, so I try not to just vote my interest. If I'm in tax bracket A, I try not to root for tax cuts to A and cheer for tax hikes for tax bracket B and so forth. I know it's human to vote one's interest, but I try to vote the interest of the country. (Ha!)
BUT, I have to say I hate this new proposal. Currently 529 programs allow anyone to save money for future education benefits for any named beneficiary, with all returns on investment growing tax-free. Distributions for educational purposes are tax-free as well. There are no phase-outs or maximum income rules for using 529s. Well, the White House proposes that this end. Any future deposits into a 529 will be subject to taxation on returns upon distribution.
Aargh. Here, voting for this proposal is in my own interest, but I also think it's a bad policy. Yes, I am in the 529 generation. We had our first child in 1999, about the same time as details were being hammered out in early versions of the 529 that would become part of what is now known as "the Bush Tax Cuts" in 2001. We have relied heavily on the 529 vehicle for all our kids, and I would be very upset personally if this tax benefit would disappear (going forward). And no, I doubt we would continue to use the 529 vehicle for that purpose if earnings were taxed on distribution given the educational limit on use. Now, we are taking the risk that one or more of our children will somehow get scholarship dollars for all their education and be unable to use all of their funds for educational use.
I also do not believe that it is a rationalization to say this proposal is bad. The optics are bad; the result is bad. If you ask anyone in higher education what the biggest problem today is, the answer would have to be student debt. So, why would you want to suddenly discourage earmarked savings for higher education? If we are concerned about the cost of education, then maybe we should quit using federal money to subsidize student debt, not quit using federal money to subsidize student savings.
My previous blogposts (one, two, three, four, and five) introduced why conspiracy prosecutions should be used to reach wrongdoing by agents within an organization. The 2012 prosecution of Monsignor Lynn for twelve years of transferring predator priests from parish to parish at the command and for the benefit of the Archdiocese of Philadelphia was defeated by the intracorporate conspiracy doctrine. Moreover, this was not the first time that the Roman Catholic Church had used the doctrine to help its bureaucrats escape liability for suppressing sex abuse cases.
In 1997, employees of the Roman Catholic Church in Connecticut were alleged—very much like Lynn—to have covered up the sexual misconduct of a priest, enabling him to continue to abuse children entrusted to the Church’s care by virtue of his office. When sued for civil conspiracy by the victims, the employees’ defense was that they were acting in the best interest of the corporation.
The Connecticut court found that the test for whether an agent is acting within the scope of his duties “is not the wrongful nature of the conspirators’ action but whether the wrongful conduct was performed within the scope of the conspirators’ official duties.” If the wrongful conduct was performed within the scope of the conspirators’ official duties, the effect of applying the intracorporate conspiracy doctrine is to find that there was no conspiracy. Because covering up the priest’s sex abuse was in the best interest of the corporate organization, the court found that the employees were all acting on behalf of the corporation. The court never reached the issue of whether the employees’ actions rose to the level of a civil conspiracy. Under the intracorporate conspiracy doctrine, it was a tautology that no conspiracy could be possible.
This case is interesting not only because it documents the way that the intracorporate conspiracy doctrine protects enterprises from inquiry into conspiracies, but also because of the subsequent history of its allegations. The full extent of the Bridgeport Diocese’s wrongdoings—if current public knowledge is indeed complete—only came to light in December 2009, twelve years after the 1997 case. It took twelve years, the combined resources of four major newspapers, an act displaying public condemnation of the Roman Catholic Church by members of the state legislature, and finally a decision by the U.S. Supreme Court to release the documents that could have become the basis of the intracorporate conspiracy claim in 1997. There is still no conspiracy suit or any criminal charge against the Diocese. Additional details about the case are available in my article The Intracorporate Conspiracy Trap. The article will be published soon in the Cardozo Law Review, and it is available in draft form here.
Astonishingly, none of the extensive news coverage about the sexual abuse cases in Bridgeport over those additional twelve years has connected these facts to the original 1997 case defeated by application of the intracorporate conspiracy doctrine. If the intracorporate conspiracy doctrine had not provided immunity, the case might have revealed the Diocese’s pattern of wrongdoing long beforehand and in a much more efficient way.
My next blogpost reveals additional dangers from the spread of the intracorporate conspiracy doctrine: frustration with the intracorporate conspiracy doctrine has started to distort other areas of law.
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So, after swearing never to look at Above the Law again, I ventured over there to see if David Lat had posted an update on the Faruqi trial and found something relevant and interesting without the Judd Apatow feel of most ATL posts. Here, "guest conversationalist" Zach Abramowitz intereviews Carolynn Levy, long-time Wilson, Sonsini attorney turned Y Combinator partner. The interview focuses on Levy's contractual innovation, the safe. (She says it's not capitalized or acronym-ed so that it will one day be a word as commonplace as "note"). However, a safe is a "simple agreement for future equity." In other words, a convertible security, which founders and angel investors would use for early rounds of funding. The advantages to a safe over a convertible note seems to be (1) it avoids clunky California lender licensing regulations (that were amended last year, however) and (2) according to Levy, much faster to negotiate than a note because a safe has neither a maturity date or an interest rate.
So, what is it? According to the "safe primer," the safe is not debt (because no maturity date or interest rate), but it is an instrument that converts to a subset of preferred stock at the first equity round over a minimum valuation. If there is no equity round, then the safe does not mature but just stays in place. If the company fails, then the safe has a liquidation preference for the purchase price/principal. If there is an acquisition liquidity event, then the safe holder has the option of converting to common or getting the purchase price returned.
Of course, the stickiest wicket is the conversion rate for an equity round. At the time the safe is executed, the parties will negotiate for a Valuation Cap and/or a Discount Rate, and depending on whether the parties chose one or the option of both, the holder will receive a subset of preferred stock either based on the Valuation Cap if it is lower than the equity round valuation, the equity round valuation if it's lower than the Valuation Cap, or a discount from the share price of the preferred. Either way, Levy believes that having only one key term in the safe will create an easy negotiation and a six-page instrument.
I searched SSRN for any scholarly treatment of the safe and found this informative paper, Contractual Innovation in Venture Capital by John Coyle (UNC) and Joseph Green (Gunderson Dettmer). It explains that the California regulation required lenders in venture capital debt to be licensed unless the notes in question had a maturity of no more than a year, requiring founders and angel lenders to renegotiate every 11 months. In 2014, that limit was raised to 3 years. In the meantime, however, Y Combinator produced the safe.
From the ATL interview, it seems that many lawyers are unfamiliar with the new convertible security, and others wondered whether it would be treated for tax purposes as debt or equity. Zero coupon convertible bond? Valuation Cap is the face value? I don't have the asnwer for that, but will stay tuned.
I'm also interested in if this could be used for crowdfunding.
My previous blogposts (one, two, three, and four) introduced why conspiracy prosecutions should be used to reach wrongdoing by agents within a business organization. The same legal analysis applies to religious organizations.
We should have been able to charge Monsignor Lynn and the Archdiocese of Philadelphia that directed his actions to hide the sexual abuse by priests with criminal conspiracy. Instead, Pennsylvania charged Lynn with two things: child endangerment and conspiracy with the priests.
As international news outlets later reported, Lynn could not be guilty of child endangerment because the state’s statute could not apply to an administrative church official who did not directly supervise children.
Lynn could not be guilty of conspiracy with the priests because he did not share their “particular criminal intent.” As the jury understood, Lynn was not trying to help a predator priest get from parish to parish so that “he can continue to enjoy what he likes to do.” Lynn was trying to protect the reputation of his employer, the Archdiocese—if the priests benefitted, that was a side issue.
So why didn’t the prosecution charge Lynn and the Archdiocese with conspiracy? It was the Archdiocese that directly coordinated and profited from Lynn’s actions. The intracorporate conspiracy doctrine, as discussed before, would bar that prosecution. In Pennsylvania, it is “well-settled that a corporation cannot conspire with its subsidiary, its agents, or its employees.”
Finally, considering other options, Lynn could not have been charged with possible crimes such as obstruction of justice. Lynn was too good: Lynn and the Archdiocese were so successful at covering up the sexual abuse and silencing victims, there was no ongoing investigation to obstruct. “Aiding and abetting” the Archdiocese’s cover-up of the sex abuse would have been difficult to pursue (see more here) and is not allowed under RICO in the Third Circuit.
My next blogpost will demonstrate that the Monsignor Lynn case was also part of a pattern by the Roman Catholic Church in America to use the intracorporate conspiracy doctrine to hide the coordinated wrongdoing of its agents to cover-up sexual abuse by priests. Fifteen years before prosecutors attempted to try Monsignor Lynn, the silenced Connecticut sex-abuse case showed the Church how effective this defense could be.
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My previous blogposts (one, two, and three) introduced the topic of how the intracorporate conspiracy doctrine prevents the prosecution of coordinated wrongdoing by individuals within organizations. This post illustrates the doctrine’s effect in the context of a specific organization—here a religious one: the Roman Catholic Archdiocese of Philadelphia and the systematic transfer of predator priests. This post is based on my article The Intracorporate Conspiracy Trap to be published soon in the Cardozo Law Review. The article is available in draft form here.
For twelve years, from 1992 to 2004, as Secretary for Clergy, Monsignor William Lynn’s job within the Philadelphia Archdiocese was to supervise priests, including the investigation of sex-abuse claims. In 1994, Monsignor Lynn compiled a list of thirty-five “predator” priests within the archdiocese. He compiled the list from secret church files containing hundreds of child sex-abuse complaints. On the stand, Lynn testified that he hoped that the list would help his superiors to address the growing sex-abuse crisis within the Archdiocese. But for twelve years Lynn merely re-assigned suspected priests, and he hid the abuse within the church. His superiors never acted on the list that Lynn gave them—in fact, they ordered all copies of the list destroyed—and Lynn never contacted outside authorities. As late as 2012, one of the “predator” priests on Lynn’s list was still serving in a parish.
All parties agree that Lynn’s actions in transferring priests who molested children allowed those priests to continue to abuse children, sheltered the priests from potential prosecution, and directly protected the Philadelphia Archdiocese’s reputation.
In fact, Lynn’s actions had been ordered by the archbishop on behalf of the Archdiocese. Lynn reported what he was doing to his superiors, who rewarded Lynn with twelve years of employment and a prominent position within the Archdiocese for doing his job as they saw it. Moreover, the archbishop himself inadvertently revealed the existence of the number thirty-five “predator” priests to the media, and he was the one who ordered all copies of the list to be shredded to keep it from being discovered in legal proceedings.
The instinct here is that this behavior—the transferring of predator priests to cover-up the sexual abuse of children—should have been illegal for Monsignor Lynn to pursue. But the Commonwealth could not prosecute Monsignor Lynn and the Archdiocese for conspiracy. Furthermore, immunity for Lynn’s behavior is now the rule in most state and federal jurisdictions around the country. As described in an earlier blogpost, the intracorporate conspiracy doctrine provides immunity to an enterprise and its agents from conspiracy prosecution, based on the legal fiction that an enterprise and its agents are a single actor incapable of the meeting of two minds to form a conspiracy.
My next blogpost will further investigate why this behavior was not illegal under our current system, and how we should have tried Monsignor Lynn.
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My first and second blogposts introduced why conspiracy prosecutions are particularly important for reaching the coordinated actions of individuals when the elements of wrong-doing may be delegated among members of the group.
So where are the prosecutions for corporate conspiracy??? The Racketeer Influenced and Corrupt Organizations Act of 1970 (“RICO”, 18 U.S.C.A. §§ 1961 et seq.), no longer applies to most business organizations and their employees. In fact, business organizations working together with outside agents can form new protected “enterprises.”
What’s going on here? In this area and many other parts of the law, we are witnessing the power of the intracorporate conspiracy doctrine. This doctrine provides immunity to an enterprise and its agents from conspiracy prosecution, based on the legal fiction that an enterprise and its agents are a single actor incapable of the meeting of two minds to form a conspiracy. According to the most recent American Law Reports survey, the doctrine “applies to corporations generally, including religious corporations and municipal corporations and other governmental bodies. The doctrine applies to all levels of corporate employees, including a corporation’s officers and directors and owners who are individuals.” Moreover, it now extends from antitrust throughout tort and criminal law.
What is the practical effect of this doctrine? The intracorporate conspiracy doctrine has distorted agency law and inappropriately handicaps the ability of tort and criminal law to regulate the behavior of organizations and their agents. Obedience to a principal (up to a point) should be rewarded in agency law. But the law should not immunize an agent who acts in the best interest of her employer to commit wrongdoing. Not only does the intracorporate conspiracy doctrine immunize such wrongdoing, but the more closely that an employer orders and supervises the employee’s illegal acts, the more the employer is protected from prosecution as well.
My next blogpost illustrates how the intracorporate conspiracy doctrine operates to defeat prosecutions for coordinated wrongdoing by agents within an organization. Let’s examine the case of Monsignor Lynn.
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Apparently, people love Paddington, especially critics. Paddington currently has a 98% rating on Rotten Tomatoes. What else has a 98% rating? Not much, really. Here are the top Rotten Tomatoes movies for 2014, and movies with that high a rating are artsy movies you and I will never see because they won't be in a movie theater near us. Boyhood is 98% -- a movie that took 12 years to make by Richard Linklater is vying with Paddington for top honors.
Why am I so persnickity? (British movies make me start speaking like Mary Poppins, especially since Ancestry DNA tells me I'm 69% British, more British than the average British citizen.) I'm not. It's a cute movie. One might even say "twee." But why it is a critical darling is a little beyond me. Here is one review on Rogerebert.com -- the movie deftly walks the line between old-fashioned and technical wizardry, with some political pro-immigration overlay. People love this bear.
I do not dislike bears. One of my favorite movies (and very few people can say this) is The Country Bears, which has a 30% Rotten Tomatoes score, even with a great soundtrack. Perhaps I don't get the Paddingtonmania because I never read the original books by Michael Bond. Either way, I will solidly report that the movie was perfectly enjoyable, but not anywhere near recent children's movies hits, such as Big Hero 6.
The movie begins with some magical realism -- a British explorer travels to Darkest Peru (treated as a separate country here) forty years ago, befriending two "civilized" bears, who learned to speak English and conduct themselves as Englishmen using the explorer's books and other paraphrenalia he left with them. They eventually came to look after their nephew, until an earthquake destroyed their tree-home. The aunt put Paddington on a steamship as a stowaway to London to find the explorer and then went to the retirement home for bears outside of Lima. Paddington sails along and gets to Paddington station (for which he is eventually named), living off jars of marmalade he has brought with him.
Paddington is taken home by the Brown family, fairly reluctantly. Though his aunt told him that the English will of course welcome orphans with notes around their neck, just as English child evacuees were welcomed in the countryside during WWII. This, predictably, did not happen when our bear landed at Paddington station. So, our little bear is fairly sad to hear that the Browns will only host him for one night until suitable arrangements with an orphanage can be made. And no, the Browns do not seem overly surprised to see a bear in the train station, nor do any other humans seem startled by a talking bear. "Bear" does seem to be a substitute hear for a type of immigrant: neighbors complain that a bear has moved in but at least it is just one; there is a complaint that a bear might play "jungle music" into the wee hours; the villain plays on this feeling by hinting "it's never just one bear."
Of course, this is a happy family movie, so fairly soon the Browns plus Paddington are a happy family. As the housekeeper notes, the family needed Paddington more than Paddington needed them, evoking every type of stray animal movie one could think of. The movie could end once this small tension was resolved, but there is a larger plot at work: an evil villain (Nicole Kidman) wants to literally stuff Paddington and make him part of a collection at a natural history museum. So, the family must join together with Paddington to save the day. ( I will say that under scrutiny, the larger plot device makes no sense to me. The villain's origin story dates back to the explorer's return to London, when no one believed that he met two bears who were civilized and stripped him of respectability. Yet, in present-day London everyone takes for granted that talking bears would be walking around, clothed and articulate, having tea and marmalade-covered toast.)
Of course, Mr. Brown is the most reluctant to accept Paddington (dragging his heels by 10 or 15 minutes more than the rest). Mr. Brown is also Lord Grantham from Downton Abbey, or Hugh Bonneville as real people call him. He has a particularly amusing scene in which he must dress as a cleaning woman. All in all, we spent an enjoyable holiday Monday at the theater with Paddington.
In my previous blogpost, I granted the merit of defense counsel’s argument that the actions of discrete individual defendants—when the law is not permitted to consider the coordination of those actions—may not satisfy the elements of a prosecutable crime.
But what is the coordination of individuals for a wrongful common purpose? That’s a conspiracy. And, for exactly the reasons that defense counsel articulates, these types of crimes cannot be reached by other forms of prosecution. The U.S. Supreme Court has recognized that conspiracy is its own animal. “[C]ollective criminal agreement—partnership in crime—presents a greater potential threat to the public than individual delicts.” When we consider the degree of coordination necessary to create the financial crisis, we are not talking about a single-defendant mugging in a back alley—we are talking about at least the multi-defendant sophistication of a bank robbery.
Conspiracy prosecutions for the financial crisis have some other important features. First, the statute of limitations would run from the last action of a member of the group, not the first action as would be typical of other prosecutions. This means that many crimes from the financial crisis could still be prosecuted (answering Judge Rakoff’s concern). Second, until whistle-blower protections are improved to the point that employees with conscientious objections to processes can be heard, traditional conspiracy law provides an affirmative defense to individuals who renounce the group conspiracy. By contrast, the lesson Wall Street seems to have learned from the J.P. Morgan case is not to allow employees to put objections into writing. Third, counter to objections that conspiracy prosecutions may be too similar to vicarious liability, prosecutors would have to prove that each member of the conspiracy did share the same common intent to commit wrongdoing. The employee shaking his head “no” while saying yes would not be a willing participant, but many other bankers were freely motivated by profit at the expense of client interest to cooperate with a bank’s program.
My next blogpost will ask: where are the prosecutions for corporate conspiracy?
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The government’s response to the financial crisis was dramatic, enormous, and unprecedented, and nothing about it has been overseen by the courts. In our federal system, the courts are supposed to put the policies of presidents and congresses to the test of judicial review, to evaluate decisions by the executive to sanction individuals for wrongdoing, and to resolve disputes between private parties. But during and after the financial crisis, there has been almost none of that sort of judicial review of government, few sanctions on the private sector for conduct during the crisis, especially criminal ones, for the courts to scrutinize, and a private dispute process that, while increasingly active, has resulted in settlements, rather than trials or verdicts. This Article tells the story of the marginal role of courts in the financial crisis, evaluates the costs of that role, and provides suggestions to ensure a real, if not all-encompassing, judicial role during the next economic emergency.
Do give it a download, and let me know what you think. And thanks in advance for supporting us around here - we do like downloads!
It is a pleasure to be guest-blogging here at The Glom for the next two weeks. My name is Josephine Nelson, and I am an advisor for the Center for Entrepreneurial Studies at Stanford’s business school. Coming from a business school, I focus on practical applications at the intersection of corporate law and criminal law. I am interested in how legal rules affect ethical decisions within business organizations. Many thanks to Dave Zaring, Gordon Smith, and the other members of The Glom for allowing me to share some work that I have been doing. For easy reading, my posts will deliberately be short and cumulative.
In this blogpost, I raise the question of what is broken in our system of rules and enforcement that allows employees within business organizations to escape prosecution for ethical misconduct.
Public frustration with the ability of white-collar criminals to escape prosecution has been boiling over. Judge Rakoff of the S.D.N.Y. penned an unusual public op-ed in which he objected that “not a single high-level executive has been successfully prosecuted in connection with the recent financial crisis.” Professor Garett’s new book documents that, between 2001 and 2012, the U.S. Department of Justice (DOJ) failed to charge any individuals at all for crimes in sixty-five percent of the 255 cases it prosecuted.
Meanwhile, the typical debate over why white-collar criminals are treated so differently than other criminal suspects misses an important dimension to this problem. Yes, the law should provide more support for whistle-blowers. Yes, we should put more resources towards regulation. But also, white-collar defense counsel makes an excellent point that there were no convictions of bankers in the financial crisis for good reason: Prosecutors have been under public pressure to bring cases against executives, but those executives must have individually committed crimes that rise to the level of a triable case.
And why don’t the actions of executives at Bank of America, Citigroup, and J.P. Morgan meet the definition of triable crimes? Let’s look at Alayne Fleischmann’s experience at J.P. Morgan. Fleischmann is the so-called “$9 Billion Witness,” the woman whose testimony was so incriminating that J.P. Morgan paid one of the largest fines in U.S. history to keep her from talking. Fleischmann, a former quality-control officer, describes a process of intimidation to approve poor-quality loans within the bank that included an “edict against e-mails, the sabotaging of the diligence process,… bullying, [and] written warnings that were ignored.” At one point, the pressure from superiors became so ridiculous that a diligence officer caved to a sales executive to approve a batch of loans while shaking his head “no” even while saying yes.
None of those actions in the workplace sounds good, but are they triable crimes??? The selling of mislabeled securities is a crime, but notice how many steps a single person would have to take to reach that standard. Could a prosecutor prove that a single manager had mislabeled those securities, bundled them together, and resold them? Management at the bank delegated onto other people elements of what would have to be proven for a crime to have taken place. So, although cumulatively a crime took place, it may be true that no single executive at the bank committed a triable crime.
How should the incentives have been different? My next blogpost will suggest the return of a traditional solution to penalizing coordinated crimes: conspiracy prosecutions for the financial crisis.
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As I blogged last month, I've been thinking a lot (by which I mean, writing frantically) about the political economy of securities regulation. One point I'll make in my hopefully-upcoming article is this: securities deregulation doesn't often occur. We can cite 2 chief instances: the PSLRA and the JOBS Act. Both were passed with a divided Congress and executive branch. And both had the backing of Silicon Valley.
Last year we saw Republicans employ a scorched earth strategy, ramming repeal of a Dodd-Frank provision in must-pass Cromnibus legislation. With their newfound majority status, those rascally Republicans are at it again, as Christine blogged last week. What's interesting is that the new legislation includes not only paring back Reg S-K, but also including a grace period for change of status for emerging growth companies and implying disclosure requirements for them. Many technology startups take advantage of at least some EGC benefits when going public, so these particular anti-regulatory measures should prove popular in tech circles.
It may be that these bills won't pass, but based on my current research, I'll hazard that financial institutions are making a shrewd move by aligning themselves with traditionally Democratic Silicon Valley. Uber is a lot more sympathetic to the masses than UBS.