May 07, 2015
Why is B Lab making all B-Corps become Benefit Corps?
Posted by Usha Rodrigues

I blogged last week about Etsy's IPO, but it took me until now to figure out what bothered me about the story.  It came to me while I was explaining to a local entrepreneur the difference between a B-Corp and a benefit corporation.  A B-Corp can be a for-profit entity, but is certified "to meet rigorous standards of social and environmental performance, accountability, and transparency)"   A benefit corporation is a different kind of corporation--one organized not just for profit, but for some other social purpose as well. If you think that entity choice matters--as I do--then the choice to become a benefit corporation is a much stronger statement than just being a B-Corp, because that choice is baked into that organization's constitutive document.   It's a more credible commitment, if you will, to social values. 

Let me be clear, I'm skeptical of the need for benefit corporations on principle.  Unless you're Craigslist or Henry Ford, I think corporate law gives you plenty of flexibility.  But if you buy into the presumption that benefit corporations do provide value, they matter as signals to investors and consumers.  As I explained to the Athens entrepreneur, currently if you want to show that social enterprise matters to you, you can become a B-Corp. And if you really want to show that it matters, you can become a benefit corporation.  But if B Lab requires certified B-Corps to become benefit corporations within 4 years, entities have fewer modes to express their degree of social commitment.  And I don't think that's a good thing.  

 

Permalink | Business Organizations| Social Responsibility | Comments (0) | TrackBack (0) | Bookmark

April 29, 2015
NFL: tax exempt no more!
Posted by Usha Rodrigues

The NFL is a nonprofit corporation. That should be no surprise when you stop to think about it.  Many--indeed, most--trade associations are nonprofit, because their point is to create benefit for their members, not to create profits at the trade association entity level.  IRC 501(c)(6) exempts from taxation for chambers of commerce (and professional football leagues) for just this reason.

Yet because the general public equates "nonprofit" with "charity" or "do-gooder,"the NFL has taken a lot of flak for its status.  From Vox via Paul Caron:

For years, the NFL's tax-exempt status has been the subject of scrutiny and ridicule. To many people, the fact that a league headed by a commissioner making $44 million a year was categorized as a nonprofit was absurd.

This is not absurd, it's fuzzy thinking.  Each NFL teams individually still pays tax on all its profits, since each is a for-profit entity.  They teams pay taxes on any money the NFL distributes to them.  But as an entity, it's not supposed to make a profit.  Just because you're a nonprofit doesn't mean you can't make a profit.  Harvard's endowment was $36.4 billion on June 30 of last year.  It's doing quite well.

It's unclear exactly how much the NFL will save per year by forgoing its 501(c)(6) status--this WSJ article has estimates costing from $10.9 million to $91 million annually--this for a $10 billion-a-year organization.  Commissioner Goodell's letter to the owners characterized the NFL's tax-exempt status as a "distraction,"--but even at the low-end estimate of costing $11 million per year, wouldn't you put up with the distraction?  Reading between the lines, the reason is clearly that Goodell doesn't like the public disclosure attendant with 501(c)(6) status.  Particularly the disclosure of his salary, which totaled $35 million in 2014. 

Costing your organization $10 million a year because you don't like having your salary being public?  Now that strikes me as absurd.

 

Permalink | Business Organizations| Sports | Comments (0) | TrackBack (0) | Bookmark

April 26, 2015
The Corporation As Invention That Changed The World
Posted by David Zaring

Friend of the Conglomerate Larry Cunningham points to Popular Science's September roundup of 100 inventions that changed the world, only one of which is a legal innovation: the corporation (link not available - ask your librarian!).  It's a strong contender; indeed, I can't really think of another legal fiction with such significance, though patents probably come close, and I guess I wonder if an agency is a legal fiction.  But you can have your constructive trusts, trade secrets, and asset-backed securities!  Readers are invited to provide their own suggestions for similarly consequential legal inventions in the comments.

Permalink | Blogs and Blawgs| Business Organizations | Comments (0) | TrackBack (0) | Bookmark

February 22, 2015
New Article: The Limited Liability Partnership in Bankruptcy
Posted by Christine Hurt

I hope everyone is having a great Oscar Sunday!  Scholastica and ExpressO tell me that I have successfully submitted my latest paper, but I think they mean that I have successfully uploaded my latest paper.  Anyway, months before it is published (if at all), you can get <i>The Limited Liability Partnership in Bankruptcy</i> here.  Here is the abstract:

Brobeck. Dewey. Howrey. Heller. Thelen. Coudert Brothers. These brand-name law firms had many things in common at one time, but today have one: bankruptcy. Individually, these firms expanded through hiring and mergers, took on expensive lease commitments, borrowed large sums of money, and then could not meet financial obligations once markets took a downturn and practice groups scattered to other firms. The firms also had an organizational structure in common: the limited liability partnership.
In business organizations classes, professors teach that if an LLP becomes insolvent, and has no assets to pay its obligations, the creditors of the LLP will not be able to enforce those obligations against the individual partners. In other words, partners in LLPs will not have to write a check from personal funds to make up a shortfall. Creditors doing business with an LLP, just as with a corporation, take this risk and have no expectation of satisfaction of claims by individual partners, absent an express guaranty. In bankruptcy terms, creditors look solely to the capital of the entity to satisfy claims. While bankruptcy proceedings involving general partnerships may have been uncommon, at least in theory, bankruptcy proceedings involving limited liability partnerships have recently become front-page news. The disintegration of large, complex LLPs, such as law firms, does not fit within the Restatement examples of small general partnerships that dissolve fairly swiftly and easily for at least two reasons. First, firm creditors, who have no recourse to individual partners’ wealth, wish to be satisfied in a bankruptcy proceeding. In this circumstance, federal bankruptcy law, not partnership law, will determine whether LLP partners will have to write a check from personal funds to satisfy obligations. Second, these mega-partnerships have numerous clients who require ongoing representation that can only be competently handled by the full attention of a solvent law firm. In these cases, the dissolved law firm has neither the staff nor the financial resources to handle sophisticated, long-term client needs such as complex litigation, acquisitions, or financings.  These prolonged, and lucrative, client matters cannot be simply “wound up” in the time frame that partnership law anticipates. The ongoing client relationship begins to look less like an obligation to be fulfilled and more like a valuable asset of the firm.
Partnership law would scrutinize the taking of firm business by former partners under duty of loyalty doctrines against usurping business opportunities and competing with one’s own partnership, both duties that terminate upon the dissolution of the general partnership or the dissociation of the partner. However, bankruptcy law is not as forgiving as the LLP statutes, and bankruptcy trustees view the situation very differently under the “unfinished business” doctrine. The bankruptcy trustee, representing the assets of the entity and attempting to salvage value for creditors, instead seeks to make sure that assets, including current client matters, remain in partnership solution unless exchanged for adequate consideration, even if the partners agree to let client matters stay with the exiting partners. This Article argues that the high-profile bankruptcies of Heller Ehrman LLP, Howrey LLP, Dewey & LeBeouf, LLP, and others show in stark relief the conflict between general partnership law and bankruptcy law. The emergence of the hybrid LLP creates an entity with general partnership characteristics, such as the right to co-manage and the imposition of fiduciary duties, but with limited liability for owner-partners. These characteristics co-exist peacefully until they do not, which seems to be at the point of dissolution. Then, the availability of limited liability changes partners’ incentives upon dissolution. Though bankruptcy law attempts to resolve this, it conflicts with partnership law to create more uncertainty.

Permalink | Bankruptcy| Business Organizations| Law Schools/Lawyering| Limited Liability| Partnerships | Comments (0) | TrackBack (0) | Bookmark

January 30, 2015
The Ethical Slide, Train Tickets, and Helping the Next Generation of Corporate Leaders to Choose Differently
Posted by Josephine Sandler Nelson

It has been a pleasure to guest-blog for the last two weeks here at the Glom. (Previous posts available here: one, two, three, four, five, six, seven, eight, and nine.) This final post will introduce the book that Lynn Stout and I propose writing to give better direction to business people in search of ethical outcomes and to support the teaching of ethics in business schools.

Sometimes bad ethical behavior is simply the result of making obviously poor decisions. Consider the very human case of Jonathan Burrows, the former managing director at Blackrock Assets group. Burrows’s two mansions outside London were worth over $6 million U.S., but he ducked paying a little over $22 U.S. in train fare each way to the City for five years. Perhaps Burrows had calculated that being fined would be less expensive than the inconvenience of complying with the train fare rules. Unluckily, the size of his $67,200 U.S total repayment caught the eye of Britain’s Financial Conduct Authority, which banned Burrows from the country’s financial industry for life. That’s how we know about his story.

But how do small bad ethical choices snowball into large-scale frauds? How do we go from dishonesty about a $22 train ticket to a $22 trillion loss in the financial crisis? We know that, once they cross their thresholds for misconduct, individuals find it easier and easier to justify misconduct that adds up and can become more serious. And we know that there is a problem with the incentive structure within organizations that allows larger crises to happen. How do we reach the next generation of corporate leaders to help them make different decisions?

Business schools still largely fail to teach about ethics and legal duties. In fact, research finds “a negative relationship between the resources schools possess and the presence of a required ethics course.” Moreover, psychological studies demonstrate that the teaching of economics without a strong ethical component contributes to a “culture of greed.” Too often business-school cases, especially about entrepreneurs, venerate the individual who bends or breaks the rules for competitive advantage as long as the profit and loss numbers work out. And we fail to talk enough about the positive aspects of being ethical in the workplace. The situation is so bad that Luigi Zingales of the University of Chicago asks point-blank if business schools incubate criminals.

New business-school accreditation guidelines adopted in April 2013 will put specific pressure on schools to describe how they address business ethics. Because business schools are accredited in staggered five-year cycles, every business school that is a member of the international accreditation agency will have to adopt ethics in its curriculum sometime over the next few years.

We hope that the work outlined in my blogposts, discussed at greater length in my articles, and laid out in our proposed book will be at the forefront of this trend to discuss business ethics and the law. We welcome those reading this blog to be a part of the development of this curriculum for our next generation of business leaders.

Permalink | Business Ethics| Business Organizations| Businesses of Note| Corporate Governance| Corporate Law| Crime and Criminal Law| Economics| Education| Entrepreneurs| Entrepreneurship| Fiduciary Law| Finance| Financial Crisis| Financial Institutions| Law & Economics| Law & Entrepreneurship| Law & Society| Management| Politics| Popular Culture| Social Responsibility| White Collar Crime | Comments (0) | TrackBack (0) | Bookmark

January 29, 2015
The Intracorporate Conspiracy Doctrine and D&O Litigation Incentives
Posted by Josephine Sandler Nelson

My previous blogposts (one, two, three, four, five, six, seven, and eight) discussed the dangers of granting intracorporate conspiracy immunity to agents who commit coordinated wrongdoing within an organization. The last two blogposts (here and here) highlighted the harm that public and judicial frustration with this immunity inflicts on alternative doctrines.

In addition to exacerbating blind CEO turnover, substituting alternative doctrines for prosecuting intracorporate conspiracy affects an executive’s incentives under Director’s and Officer’s (D&O) liability insurance. This post builds on arguments that I have made about D&O insurance in articles here and here.

In traditional conspiracy prosecutions, the Model Penal Code (MPC) provides an affirmative defense for renunciation. The MPC’s standard protects the actor, who “after conspiring to commit a crime, thwarted the success of the conspiracy, under circumstances manifesting a complete and voluntary renunciation of his criminal purpose.” This means that the executive who renounces an intracorporate conspiracy faces no charges.

In contrast with conspiracy prosecutions, responsible corporate officer doctrine and its correlates fail to reward the executive who changes course to mitigate damages or to abandon further destructive behavior. Although the size of the damages may be smaller with lesser harm if the executive renounces an organization’s course of conduct, the executive’s personal career and reputation may still be destroyed by entry of a judgment. Modest whistle-blower protections are ineffectual.

Specifically, because of the way that indemnification and D&O insurance function, the entry of judgment has become an all-or-nothing standard: an employee’s right to indemnification hinges on whether the employee is found guilty of a crime or not. To receive indemnification under Delaware law, for example, an individual must have been “successful on the merits or otherwise in defense of any action, suit or proceeding.” Indemnification is repayment to the employee from the company; D&O insurance is a method that companies use to pass on the cost of indemnification and may contain different terms than indemnification itself.

Indemnification and D&O insurance are not a minor issues for executives. In fact, under many circumstances, employees have a right to indemnification from an organization even when the alleged conduct is criminal. Courts have acknowleged that “[i]ndemnification encourages corporate service by capable individuals by protecting their personal financial resources from depletion by the expenses they incur during an investigation or litigation that results by reason of that service.” And when hiring for an executive board, “Quality directors will not serve without D&O coverage.” Because of this pressure from executives, as many as ninety-nine percent of public U.S. companies carry D&O insurance.

So what does this standard mean for executives prosecuted under responsible corporate officer doctrine instead of for traditional conspiracy? Executives are incentivized either not to get caught, or to perpetrate a crime large enough that the monetary value of the wrongdoing outweighs the potential damage to the executive’s career. Because an executive’s right to indemnification hinges on whether he is found guilty of a crime or not, he has an enormous incentive to fight charges to the end instead of pleading to a lesser count. Thus, unless the executive has an affirmative defense to charges, like renunciation in traditional conspiracy law, there is no safety valve. Litigating responsible corporate officer doctrine cases creates a new volatile high-wire strategy. Moreover, as discussed in my last blogpost, responsible corporate officer doctrine imposes actual blind “respondeat superior” liability. Regardless of the merits, the executive may be penalized. So you can see the take-home message for executives: go ahead and help yourself to the largest possible slice pie on your way out the door.

I argue that in sending this message, and in many other ways, our current law on corporate crime is badly broken. My last blogpost for the Glom will introduce the book that Lynn Stout and I propose writing to give better direction to business people in search of ethical outcomes.

Permalink | Agency Law| Business Ethics| Business Organizations| Corporate Governance| Corporate Law| Crime and Criminal Law| Economics| Employees| Entrepreneurs| Entrepreneurship| Financial Crisis| Financial Institutions| Law & Economics| Law & Entrepreneurship| Law & Society| Management| Masters: Dodd-Frank| Masters: Dodd-Frank@1| Politics| Roundtable: Corps/B.A.| Social Responsibility| Torts| White Collar Crime | Comments (0) | TrackBack (0) | Bookmark

January 28, 2015
The Intracorporate Conspiracy Doctrine and CEO Turnover
Posted by Josephine Sandler Nelson

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.

Permalink | Agency Law| Business Ethics| Business Organizations| Businesses of Note| Corporate Governance| Corporate Law| Crime and Criminal Law| Economics| Financial Crisis| Financial Institutions| Law & Economics| Law & Entrepreneurship| Law & Society| Management| Masters: Dodd-Frank| Masters: Dodd-Frank@1| Politics| Roundtable: Corps/B.A.| Social Responsibility| Torts| White Collar Crime | Comments (0) | TrackBack (0) | Bookmark

January 27, 2015
Frustration with the Intracorporate Conspiracy Doctrine Distorts Other Areas of Law
Posted by Josephine Sandler Nelson

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:

piercing the corporate veil,

responsible corporate officer doctrine, and related control person liability,

denying the retroactive imposition of the corporate veil, and

reverse piercing of the corporate veil.

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.

Permalink | Agency Law| Bankruptcy| Business Ethics| Business Organizations| Businesses of Note| Corporate Governance| Corporate Law| Crime and Criminal Law| Economics| Employees| Entrepreneurs| Entrepreneurship| Financial Crisis| Financial Institutions| Law & Economics| Law & Entrepreneurship| Law & Society| Management| Masters: Dodd-Frank| Masters: Dodd-Frank@1| Politics| Roundtable: Corps/B.A.| Social Responsibility| White Collar Crime | Comments (0) | TrackBack (0) | Bookmark

January 26, 2015
The Silenced Connecticut Sex-Abuse Case
Posted by Josephine Sandler Nelson

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.

Permalink | Agency Law| Business Ethics| Business Organizations| Businesses of Note| Corporate Governance| Corporate Law| Crime and Criminal Law| Employees| Finance| Financial Crisis| Financial Institutions| Law & Economics| Law & Entrepreneurship| Law & Society| Management| Masters: Dodd-Frank| Masters: Dodd-Frank@1| Politics| Popular Culture| Roundtable: Corps/B.A.| Social Responsibility| White Collar Crime | Comments (0) | TrackBack (0) | Bookmark

January 23, 2015
How We Should Have Tried Monsignor Lynn
Posted by Josephine Sandler Nelson

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.

Permalink | Agency Law| Business Ethics| Business Organizations| Businesses of Note| Corporate Governance| Corporate Law| Crime and Criminal Law| Current Affairs| Economics| Employees| Financial Crisis| Financial Institutions| Law & Economics| Law & Entrepreneurship| Law & Society| Management| Masters: Dodd-Frank| Masters: Dodd-Frank@1| Politics| Popular Culture| Roundtable: Corps/B.A.| Social Responsibility| White Collar Crime | Comments (0) | TrackBack (0) | Bookmark

January 22, 2015
Sex Abuse, Priests, and Corporate Conspiracy
Posted by Josephine Sandler Nelson

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.

Permalink | Agency Law| Business Ethics| Business Organizations| Businesses of Note| Corporate Governance| Corporate Law| Crime and Criminal Law| Financial Crisis| Financial Institutions| Law & Economics| Law & Entrepreneurship| Law & Society| Legal History| Management| Masters: Dodd-Frank| Masters: Dodd-Frank@1| Politics| Religion| Roundtable: Corps/B.A.| Social Responsibility| Torts| White Collar Crime | Comments (0) | TrackBack (0) | Bookmark

January 21, 2015
Where are the Prosecutions for Corporate Conspiracy?
Posted by Josephine Sandler Nelson

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.

Permalink | Agency Law| Business Ethics| Business Organizations| Corporate Governance| Corporate Law| Crime and Criminal Law| Economics| Entrepreneurs| Entrepreneurship| Finance| Financial Crisis| Financial Institutions| Law & Economics| Law & Entrepreneurship| Law & Society| Management| Masters: Dodd-Frank| Masters: Dodd-Frank@1| Politics| Popular Culture| Roundtable: Corps/B.A.| Social Responsibility| White Collar Crime | Comments (0) | TrackBack (0) | Bookmark

January 20, 2015
Corporate Conspiracy Charges for the Financial Crisis
Posted by Josephine Sandler Nelson

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?

Permalink | Agency Law| Business Ethics| Business Organizations| Businesses of Note| Corporate Governance| Corporate Law| Crime and Criminal Law| Economics| Entrepreneurs| Entrepreneurship| Financial Crisis| Law & Economics| Law & Entrepreneurship| Law & Society| Management| Masters: Dodd-Frank| Masters: Dodd-Frank@1| Politics| Popular Culture| Roundtable: Corp Fin| Roundtable: Corps/B.A.| Social Responsibility| White Collar Crime | Comments (0) | TrackBack (0) | Bookmark

J.P. Morgan’s Witness and the Holes in Corporate Criminal Law
Posted by Josephine Sandler Nelson

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.

Permalink | Agency Law| Business Ethics| Business Organizations| Businesses of Note| Corporate Governance| Corporate Law| Crime and Criminal Law| Current Affairs| Economics| Entrepreneurs| Entrepreneurship| Finance| Financial Crisis| Financial Institutions| Law & Entrepreneurship| Law & Society| Masters: Dodd-Frank| Masters: Dodd-Frank@1| Masters: Exec Comp| Politics| Popular Culture| Roundtable: Banking| Roundtable: Corp Fin| Roundtable: Corps/B.A.| Rules & Standards| Social Responsibility| White Collar Crime | Comments (0) | TrackBack (0) | Bookmark

January 01, 2015
Larry Ribstein was wrong
Posted by Usha Rodrigues

My thoughts around the end of the year inevitably turn to the late, great Larry Ribstein, whom we lost two years ago.  The first time I met Larry I was pretty scared of him.  He was a big deal (I wasn't); he knew a lot (I didn't); he was a blogger (I wasn't); and he was acidly opinionated (nope, not me).

We talked about BA, and he said, chidingly, "I'll bet you teach corporations and partnerships, and then have a week or 2 on LLCs crammed in at the end, right?"  

Me: yes?

Larry (aka "Mr. Unincorporation"): Even though most of your students will spend most of their careers dealing with LLCs, won't they.

Me (sheepish): You're right. 

But I thought at the time, and didn't have the guts to say, "I'm right, too, Larry!"  So I'm saying it now.  I don't leave LLCs til the end of the semester because I think they're unimportant.  It's because the cases are so damn thin.  It's still such a new form, I just don't see much there there.  Most of them wind up being trial courts who read the statute in completely stupid ways.  Blech.

So I teach corporations and partnerships emphasizing fiduciary duty, default vs. mandatory rules, and the importance of the code.  In fact, one semester I confess that I would ask a question and then intone, "Look to the code!" so often I felt like a Tolkien refugee.  By the time I get to the LLCs cases, which are pretty basic, the class is ready for my message: the LLC is a new form.  When dealing with something new, judges look both to the organizational statutes and to the organizational forms they know as they shape the law.  Plus the LLC is such an interesting mix between the corporate and partnership form, it just makes sense to get through them both before diving in.

So I think Larry was wrong on this one.  I know he'd disagree, but I also know he'd appreciate this blogpost telling he was wrong.  Which is a lot of what made him so great.

 

Permalink | Business Organizations| Teaching | Comments (0) | TrackBack (0) | Bookmark

Bloggers
Papers
Posts
Recent Comments
Popular Threads
Search The Glom
The Glom on Twitter
Archives by Topic
Archives by Date
August 2015
Sun Mon Tue Wed Thu Fri Sat
            1
2 3 4 5 6 7 8
9 10 11 12 13 14 15
16 17 18 19 20 21 22
23 24 25 26 27 28 29
30 31          
Miscellaneous Links