July 17, 2015
It's Still Insider Trading If Your Firm Is Working On The Merger
Posted by David Zaring

There's not too much new in the indictment for insider trading of the former partner of Philly firm Fox Rothchild.  The partner didn't work on the deal, but he overheard a conversation between one who was working on the deal and the legal assistant they shared.  And then he traded so unbelievably transparently you can barely believe that he was a lawyer.  He bought shares in his wife's IRA account, and then he bought shares in his own IRA account.  The next day, the merger was announced, the shares went up 80ish percent, and he instantly sold, making $75 grand.  Which doesn't do his wife any favors, in the end.

The SEC’s complaint filed in federal court in Philadelphia names Sudfeld’s wife, Mary Jo Sudfeld, as a relief defendant for the purpose of recovering insider trading profits in her brokerage account through trades conducted by Sudfeld.  The complaint charges Sudfeld with violating antifraud provisions of the federal securities laws and an SEC antifraud rule.  The SEC seeks a permanent injunction and financial penalties against Sudfeld and return of allegedly ill-gotten gains and prejudgment interest from Sudfeld and Mary Jo Sudfeld.

That is insider trading of the most "please, catch me!" variety.  But maybe this guy hasn't head of the duties of quasi-insiders, and thought he was an accidental tippee.

 

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June 10, 2015
The SEC's Inferiority Complex
Posted by Usha Rodrigues

While reading this article I was pleased to find quotes from my good friend and colleague, Kent Barnett. I asked him to share with the Glom readers further insights on Judge May's recent ruling that the SEC's use of an ALJ in an insider trading case may be unconstitutional.  Here's Kent with more:

In, what is to my knowledge, an unprecedented decision this week, a federal district court in Atlanta preliminarily enjoined the SEC from proceeding with an enforcement action before an Administrative Law Judge (ALJ) because the ALJ’s appointment violated the U.S. Constitution.  
 
The court held (as I have argued elsewhere) that ALJs are not mere employees, but instead “inferior officers of the United States,” whose appointments are subject to the Appointments Clause. That clause requires that inferior officers be appointed in one of four ways: through presidential appointment and senatorial confirmation or through appointment “by the President alone, in the Courts of Law, or in the Heads of Departments.”  Here, the relevant appointment mechanism is the last one—appointment by the head of a department. According to the court’s opinion, the ALJ was not appointed by the SEC Commissioners (the head of the department), but instead by a Chief ALJ.
 
Is this sky going to fall for the SEC if ALJs were not appointed properly? Not based on my initial take. From what I can tell, there is an easy fix: the SEC merely needs to have the Commissioners reappoint current ALJs and approve future ALJs that the Chief ALJ selects. (But I hope that those with more knowledge about the SEC can correct me if I’m wrong.)
 
Congress does not need to take any legislative action; the SEC already has authority under Section 4(b) of the ’34 Act to appoint “officers . . . and other employees.” The problem here is that, despite the SEC’s broad legislative authority to delegate functions under Section 4A(a), the delegation of appointment power is unconstitutional. That does not mean, of course, that the SEC must interview and review the CVs of ALJ candidates going forward. Instead, for future ALJs, the SEC can simply preclude the Chief ALJ’s selection from becoming effective without the Commissioners’ approval. Indeed, retaining final say on appointments is not only constitutionally required but also expressly permitted by Section 4A(b), which says that the SEC retains discretion to review delegated actions. For current ALJs, the SEC can simply reappoint them. Agencies have done so successfully in the face of past Appointments Clause violations. SeeEdmond v. United States.
 
So, in light of the easy fix, is this decision much ado about nothing? No.
 
First, this is the only decision of which I’m aware that (correctly, I think) holds that ALJs are inferior officers. Most ALJs are likely appointed by heads of departments, and thus their appointments are valid regardless of their status. But other ALJs may be appointed by agencies that are not departments, such as the CFPB or FERC (as I’ve argued elsewhere). If so, their appointments would violate the Appointments Clause.
 
Second, the decision shows how little attention agencies may be giving to appointments internally, even if statutory authority otherwise permits a constitutional appointment. The SEC’s experience suggests that the heads of departments should, as a matter of default agency design, be required to sign off on all hiring for federal officials who may be deemed inferior officers. For agencies that list of officials may be relatively lengthy, considering that courts have held that the following were inferior officers:  district-court clerks, clerks within certain executive departments, assistant surgeons, cadet-engineers, election monitors, federal marshals, military judges, and general counsel for the Department of Transportation. Approving hiring decisions may be more onerous than agencies would like, but the Appointments Clause requires that minimal involvement by the head of the department.

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May 27, 2015
Indicting FIFA's Functionaries
Posted by David Zaring

The FIFA case by the US is interesting because:

  • It is a RICO case - so the government's using a statute designed to go after the mob to clean up an international organization.
  • It is the definition of the extraterritorial application of American laws.  To be sure, FIFA has availed itself of the American market, but only one American has been indicted in this case, and he looks like a minor player.  It's not clear how much time the defendants (they're all from this hemisphere) spend in America.  They are being indicted not because of what they have done to American victims, but rather how they have enriched themselves at the expense of FIFA, which has a relationship with America.  Absent diplomatic immunity issues, the same sort of theory could be used to go after officials in a wide array of international organizations.
  • Nonetheless, it looks like a typical white collar investigation.  They've got an informant - Chuck Blazer - and now they've used him to go after a bunch of functionaries he knew.  Surely they will try to get these defendants to turn on Sepp Blatter, the head of FIFA, and those close to him. 
  • For that reason, I could also see a deal done.  If Blatter drops his re-election bid, this investigation could stop with some promised reforms and a few convictions.
  • It looks like no government officials were bribed - this is not an FCPA case.  It would be surprising, but I guess sometimes RICO alone is enough.  The underlying counts are wire fraud - including the controversially expansive honest services wire fraud - and money laundering.
  • Here's a somewhat related paper by Christina Parajon Skinner on disciplining international actors through RICO.  Her case study is Donziger/Ecuador:  Download Skinner on rico and io ethics

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May 26, 2015
A Chastened Post-Newman USAO Isn't Yet Embracing Mercy
Posted by David Zaring

We rarely get to point to a story in the New York Post, but I've always enjoyed its business coverage.  Anyway, last week Gotham's finest tabloid took a quick look at the fate of those convicted under the pre-Newman standard, using Michael Kimmelman, a part of the Galleon conspiracy, as part of the network, as a case study.  The government is uninterested in reopening these cases just because Newman didn't go its way:

the government doesn’t think it matters, in large part because Kimelman never brought up the issue on appeal. His claim has been “procedurally defaulted,” the government said in court papers earlier this month.

During the trial, Judge Richard Sullivan did not tell jurors the government had to show that Kimelman knew the tippers received a substantial benefit.

The same instructions in the trial of Todd Newman and Anthony Chiasson led the appeals court to overturn their case — setting the new standard.

“The procedural default is irrelevant because under Newman, Kimelman is actually innocent,” said Kimelman lawyer Alexandra Shapiro in a recent filing.

Really, this is something that your average death penalty lawyer could answer pretty quickly.  If the law changes, does that make you "actually innocent"?  You get the idea - but the distance between finality and precision (or legal accuracy, at least) is always something that lawyers can fight about.  Kimmelman's judge, by the way, is the tough on white collar crime judge who gave the jury the government's preferred instructions in Newman.

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April 17, 2015
Preet Bharara And The Equitable Nature Of White Collar Crime
Posted by David Zaring

The corporate law community often places high hopes in judges as a mechanism for checking government or (in Delaware) defendant excesses.  They usually go along, sure, but may in dicta indicate displeasure, or give critical speeches, and sometimes, as in the Newman insider trading case, the refusal to accept the Citigroup settlement, the ethics critiques made during the KPMG prosecutions, that displeasure will sprout into an adverse ruling.

It's a pretty interesting, but pretty gauzy, was of thinking about adjudication, maybe Orin Kerr would find it persuasive in the Fourth Amendment context, but in other areas of public law, administrative law, for example, the small community of bench and bar just don't see their roles that way.  It's not, "SEC you've gone too far this time, and so we're cooking up a new reason to reverse you," it's "SEC [or EPA, or whoever], we substantively disagree with this policy, and we're cooking up a procedural reason to reverse it."  Different, in that administrative law is not governed by equity, it is governed by process.

Anyway, my theory about the way white collar works in New York - opaque, clubby, but almost chivalrous - gets what I'm taking as a vote of confidence in James Stewart's nice overview of the fight between the judges and the US Attorney's Office in Manhattan over the pushy, PR-savvy nature of the US Attorney.  The whole column is well worth reading - for one thing, it sounds like a bunch of judges talked to Stewart, which never happens, and there's the requisite, "greatest judges ever! but" from the prosecutors office and "whatta prosecutor! however" from the judges.  But here's an excerpt that illustrates the way that this weird "just do justice" method of handling white collar crime works:

[Former statehouse speaker Sheldon] Silver’s lawyers moved to dismiss his indictment because Mr. Bharara had orchestrated a “media firestorm” that tainted their client’s right to a fair trial. Such motions are considered long shots, but Judge Valerie Caproni of Federal District Court in Manhattan wrote that Mr. Silver had a legitimate argument that the case should be thrown out because Mr. Bharara, “while castigating politicians in Albany for playing fast and loose with the ethical rules that govern their conduct, strayed so close to the edge of the rules governing his own conduct.”

Judge Caproni ultimately sided with the government, so there’s no way of knowing how close she came to tossing the indictment. But the possibility she even seriously considered such a step has set off alarms among some of her fellow judges. Judge Caproni herself acknowledged that dismissing an indictment is a “drastic remedy” that is “rarely used.” She also noted that the motion was not a disciplinary proceeding against Mr. Bharara. That didn’t stop her from spending a good part of the opinion questioning his ethics and chastising him for his public comments about the case.

This is, as they say, developing, and if you think that Bharara may be AG some day, one question is whether he will be able to avoid being blackballed by the bench ... and whether a blackballing would work outside of the white hankie world of white collar crime administration (didn't seem to work out so badly for Rudy Giuliani).

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February 10, 2015
Mitchell on Cunningham On DPAs
Posted by David Zaring

Deferred Prosecution Agreements have been in vogue since the unwarranted death of Arthur Andersen, and over at Jotwell, Larry Mitchell glosses Larry Cunningham's take on what to do about them.  A taste:

DPAs can be useful, he tells us, but only if prosecutors approach the negotiation and structuring of an agreement as a governance problem. Ever since the 1996 Delaware Caremark decision, Delaware law at least formally has required that its corporations structure governance in a manner that discourages unlawful conduct and that makes it detectable when it occurs. Sarbanes-Oxley supplemented this approach with its own regulations. And who better to understand the governance of any particular corporation than its own board and executives? 

Do give it a look!

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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.

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January 29, 2015
SEC ALJ Orders: It's How It Does It's Anti-Bribery Rule
Posted by David Zaring

While defendants are gearing up to make arguments against the constitutionality of the SEC's increasing inclination to use its ALJs, rather than the courts, to serve as the venue for fraud cases, it looks like it has already flipped that way for foreign corrupt practices cases.  Mike Koehler did the counting:

More recently, the SEC has been keen on resolving corporate FCPA enforcement actions in the absence of any judicial scrutiny.  As highlighted in this 2013 SEC Year in Review post, a notable statistic from 2013 is that 50% of SEC corporate enforcement actions were not subjected to one ounce of judicial scrutiny either because the action was resolved via a NPA or through an administrative order.  In 2014, as highlighted in this prior year in review post, of the 7 corporate enforcement actions from 2014, 6 enforcement actions (86%) were administrative actions.  In other words, there was no judicial scrutiny of 86% of SEC FCPA enforcement actions from 2014.

It is interesting to note that the SEC has used administrative actions to resolve 9 corporate enforcement actions since 2013 and in none of these actions have there been related SEC enforcement actions against company employees.

Maybe we are seeing an agency decision to prefer administrative adjudication to, you know, adjudicative adjudication.

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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.

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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.

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January 27, 2015
The SEC's New Preference For Administrative Proceedings
Posted by David Zaring

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.

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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.

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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.

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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.

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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.

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