ADW Draft 2/13/12
AP edits 2/19/12
Chapter 12 Corporate Criminality
Primary Sources Used in this Chapter
DGCL §122
11 Del Code Ann. §281
State v. Christy Pontiac-GMC, Inc.
Concepts for this Chapter



Potential criminal actors
o
Corporate agents
o
Corporate supervisors
o
Corporate entity
Corporation as criminal
o
Finding corporate intent
o
Fines borne by shareholders
Corporate supervisors as criminal
o
Strict liability
o
Legal compliance programs
o
Sentencing guidelines
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Introduction
This chapter describes when the corporation can be convicted of crimes for wrongful conduct of
its agents and identifies the different ways that courts find criminal intent within the corporation.
It also considers the nature of corporate sanctions (fines) on corporate behavior and explains the
“corporate death penalty” and “deferred prosecution agreements” – and their effects on corporate
behavior. In addition, this chapter looks at respondeat superior criminal liability for corporate
directors and officers
A.
Corporation as Criminal Actor
The common law treated criminal conduct by corporate agents as ultra vires: because the
corporation by definition was not set up to have an illegal purpose or require illegal acts. In the
last half-century, however, states have begun to define the corporation as a person for purposes
of criminal liability. As discussed in the Breakout Box on p. 340, as corporate civil liability
expanded, corporate criminal liability followed.
Delaware corporate law gives corporations specific powers, including the power to “transact any
lawful business,” but does not say “commit criminal acts.”
Delaware General Corporations Law § 122 Specific Powers
Every corporation created under this chapter shall have the power to:
…
(4)
Purchase and own property . . .
(8)
Conduct its business . . .
(12) Transaction any lawful business,
(13) Make contracts,
(14) Lend money
http://delcode.delaware.gov/title8/c001/sc02/index.shtml
Question: How can the corporation be criminal?
Answer: There are two aspects of corporate criminal liability: prosecution of the
corporation for the bad acts of its agents, and criminal liability of directors and executives
of the corporation who are charged with monitoring the business. In the former, agents
have, in the course of conducting the corporation’s business (and creating wealth for the
corporation) committed criminal acts. The corporation may be responsible for those
wrongful acts.
Question: How is corporate criminal liability different from government regulation?
Answer: If you make the corporation liable, you have, as an unwanted side effect, taken
the personal responsibility off of the agents if the focus of criminality is on the
corporation. It also allows management to exonerate themselves and use someone else’s
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money (the shareholders) to pay the fines.
Question: How is corporate criminal liability different from toher ways that the corporation
externalizes?
Answer: With corporate criminal liability, you are not trying to get to the individual (like
in PCV cases). Instead, you are trying to get from the agents/individuals to the
corporation.
Why?
In these cases, if you just go after the agent/actor and not the whole corporation, you will
not have the deterrent value of going after the whole organization.
Question: What are the problems with this approach?
Answer: There are two main problems with this approach:
(1)
(2)
Making a corporation liable also may take personal liability off of the actor, so
that there is less personal accountability for wrong actions by corporate agents
Corporate criminal liability ultimately punishes shareholders because they are the
ones paying the fine, not the wrongdoers themselves.
PCV operates to hold investors and management responsible to contract and tort creditors, and
sometimes to government regulators, instead of only the corporate entity. Corporate criminality,
on the other hand, operates to hold the corporate entity (and thus indirectly the investors)
responsible to corporate prosecution, instead of only management individuals.
Question: Which state was the first to pass a statute providing for corporate criminal liability?
Answer: Delaware, in 1972
11 Del. Code Ann. § 281. Criminal Liability of Organizations.
An organization is guilty of an offense when:
(1)
(2)
(3)
The conduct constituting the offense consists of an omission to discharge a
specific duty of affirmative performance imposed on organizations by law; or
The conduct constituting the offense is engaged in, authorized, solicited,
requested, commanded or recklessly tolerated by the board of directors or by a
high managerial agent acting within the scope of employment and in behalf of the
organization; or
The conduct constituting the offense is engaged in by an agent of the organization
while acting within the scope of employment and in behalf of the organization
and:
a.
The offense is a misdemeanor or a violation; or
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b.
The offense is one defined by a statute which clearly indicates a legislative
intent to impose such criminal liability on an organization.
http://delcode.delaware.gov/title11/c002/index.shtml
As discussed in the Breakout Box on p. 332, Delaware’s motivation may have been
mixed. A provision for criminal liability of the corporation may serve to protect
management.
State v. Christy Pontiac-GMC, Inc 354 N.W 2d 17 (Minn. 1984)
Facts: A dealership salesman submitted a backdated sales form in order to receive a
factory rebate. The dealership, which was owned by a sole shareholder (Christy), pocketed
the rebate money Christy Pontiac was indicted, and convicted by the trial court of four
offenses.
Issues: (1)
(2)
Can a corporation be a criminal?
Can a corporation have criminal intent?
Holding:
(1)
(2)
Yes. Criminal statues can apply unless they are specifically taken
away by statute as long as the acts of the individual agent constitute
acts of the corporation
Yes, if it satisfies three requirements:
(a)
The agent was acting within the scope of his employment, with
authority to act for the corporation with respect to the
business that was conducted criminally ;
(b)
The agent was acting at least in part in furtherance of the
corporation’s business interests; and
(c)
The criminal acts were authorized, tolerated or ratifies by the
corporate management
Reasoning: In examining the evidence to support the three requirements for specific intent,
the court found:
(a)
The salesman (forger) had authority and responsibility to handle new car sales and
rebate applications;
(b)
Christy Pontiac (not the salesman) got the rebate so the salesman was furthering
the corporation’s business interests; and
(c)
Management signed the backdated rebate application, Christy himself was
involved in negotiations with the car owner to settle the dispute, and,
perhaps most influential, the corporation took the money.
Question: Is this the same standard of proof used for liability for an agent’s civil tort?
Answer: No. There is a different burden of proof. Vicarious liability in tort does not
require the second element. The agent has to be acting at least in part in furtherance of
the corporation’s business interests. In addition, for corporate criminal liability, you have
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to show that the corporation, though management, authorized, tolerated or ratified the
criminal activity.
Question: Why didn’t GM go after Christy Pontiac itself?
Answer: Perhaps it was not worth it for GM to sue on such a small amount. Perhaps GM
wanted the dealership be convicted criminally, since it might enable GM to sever ties
with that dealership (which was otherwise difficult under dealership agreements).
Question: But if it was not important enough to GM to pursue, why use public resources to
prosecute this?
Answer: It could be a minor private harm, but a major social harm. Criminal prosecution
might deter other crime, and send a message to all dealerships.
Question: Why is the corporation being prosecuted instead of the owner and the salesman
(agent)?
Answer: All three were indicted. The case against Christy (the owner) was dismissed for
lack of evidence of intent, despite some evidence that he knew that the bad rebates were
going on. The charges against the salesman were all dismissed except one misdemeanor.
Points for Discussion
1. Statutory Construction
Christy Pontiac shows that modern courts are willing to extend criminal statues to corporate
defendants, even if the legislature did not contemplate that possibility when it enacted the statute.
2. Vicarious Specific Intent
Question: What are the different approaches that courts have taken to whether the individual
was in some sense acting on behalf of the corporation for purposes of determining whether a
corporation harbors criminal intent.
Answer: Court approaches may be seen along a spectrum:

Some courts accept the same respondeat superior standard that applies for civil
liability: whether the agents’ acts fall within the scope of their employment
 Some courts (like the Christy court) go further and require the jury to find beyond
a reasonable doubt that (1) the agent was acting within the scope of his
employment, (2) the agent was furthering the corporation’s business interests ;
and (3) corporate management authorized, tolerated or ratified the conduct
 Some courts go even further and require the Model Penal Code standard that
criminal conduct be “authorized, requested, commended, performed, or recklessly
tolerated by the board of directors or by a high managerial agent acting on behalf
of the corporation within the scope of his office or employment” Model Penal
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Code §2.07(1)(c) (1962)
For an in-depth discussion of the Model Penal Code approach in the wake of the Arthur
Andersen prosecution, see American College of Trial Lawyers, Elizabeth Ainslie (Chairperson),
Indicting Corporations Revisited: Lessons of the Arthur Andersen Prosecution (2004) (including
a proposed corporate criminal liability jury instruction)
http://www.actl.com/AM/Template.cfm?Section=All_Publications&Template=/CM/ContentDisp
lay.cfm&ContentFileID=51
Question: Is corporate criminal liability fair? What if the corporation has forbidden the activity?
Answer: According to the Supreme Court in its first corporate criminal liability case in
1909, allowing the corporation to disown the crimes of its agents carried out in the
corporate name would raise serious questions about the corporation’s place as a social
institution.
Question: What does this mean for corporate compliance programs?
Answer: If the corporation has a set policy and procedures in place to prevent certain
criminal behaviors, should the corporation be excused from criminal liability? Wouldn’t
actual corporate authority, and the requisite intent, be impossible then? Should corporate
criminal liability should be reserved for companies which either actively pursue
questionable policies or at least which adopt a “head in the sand” approach to
management behavior?
A corporate compliance program should have some effect as a defense, because if it is
active the corporation can simply claim that it is a rogue agent, though that may not
always be enough.
Federal sentencing guidelines strongly encourage corporations to have compliance
programs.
3. Organizational Crime
Question: Is it fair to prosecute corporations for the actions of individuals? Is it fair to prosecute
individuals for actions on behalf of corporations?
Answer: Yes. Limiting prosecutions to responsible individuals would leave many
commercial crimes unpunished. Limiting prosecutions to corporations would not
encourage corporate decision makers to prevent violations.
4. Monetary Penalties
Question: What are the commonly accepted goals of criminal punishment?
Answer: Retribution, deterrence, rehabilitation and incapacitation
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Question: Do monetary penalties imposed on corporations effectuate those goals?
Answer: Probably not. The monetary fines often fall on investors/shareholders
5. “Corporate Death Penalty”
Question: What is meant by the “corporate death penalty”?
Answer: Some criminal fines may be so severe that they force a corporation to divest all
of its assets and go bankrupt, or at least prevent it from conducting business in its
industry.
The Breakout Box on p. 342 discusses the demise of Arthur Andersen after its criminal
conviction for shredding documents related to Enron prevented it from operating as a public
accounting firm.
Question: Does a “corporate death penalty” go beyond the goals of retribution, incapacitation
and deterrence? Is it fair?
Answer: Maybe not. A firm’s demise can impose significant hardship on innocent
corporate constituents like employees, suppliers, creditors, and even entire communities.
6. Deferred Prosecution Agreements
Question: What is a deferred prosecution agreement?
Answer: An arrangement with prosecutors (e.g. the Department of Justice) by which the
corporation avoids indictment and agrees to ceasethe illegal conduct, and to pay fines in
exchange for a promise not to prosecute. The agreements are normally for a specified
time and in some cases the prosecuting authority may require the corporation to install (at
its expense) a person to act as an in-house “monitor” during the DPA period.
7. Punishing Shareholders
Question: Are shareholders responsible for corporate criminal violations?
Answer: Maybe. They do elect the board, but the board oversees management.
Question: Do shareholders benefit from corporate crime?
Answer: They can. Short-term investors can profit if they sell before the crime is
uncovered and fines are incurred.
B.
Corporate Executives and Directors as Criminals
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Question: Give their oversight role, can directors be subject to individual criminal liability for
failing to supervise subordinate activities adequately?
Answer: The law is ambivalent. Criminal prosecution under statutes without a mens rea
requirement allow for prosecution of executives. Criminal prosecution under statutes
with a mens rea requirement are more difficult.
Points for Discussion
1. Strict liability regimes
Question: Is criminal prosecution under statues without a mens rea requirement the same as
strict liability?
Answer: Early corporate criminal prosecutions were under strict liability statutes where a
failure to supervise was enough.
United States v. Dotterweich, 320 U.S. 277 (1943)
Corporate managers could be held liable for criminal acts committed by their
subordinates. President was subject to criminal prosecution under the Food and Drug
Act, which required no criminal mens rea required
Question: Which managers are liable?
Answer: Responsible corporate agents.
United States v. Park, 421 U.S. 658 (1975)
The Supreme Court defined “responsible corporate agent” to preclude conviction based
solely on position. But, liability can attach if the jury finds that the agent has “a
responsible relation to the situation, and by virtue of his position, had authority and
responsibility to deal with the situation.”
Question: According to the Park court, what duty do responsible corporate agents have?
Answer: The duty to seek out and remedy violations when they occur, as well as the duty
to implement measures that will insure that violations will not occur (i.e. compliance
programs)
The Breakout Box on p. 343 points out that criminal corporate prosecution includes more than
just fraud and business cover-ups. Prosecutions include violations of, for example,
environmental and employment law as well.
For a discussion of the surge in criminal prosecutions of both corporations and individuals under
the U.S. Foreign Corrupt Practices Act, see Amy Deen Westbrook, Enthusiastic Enforcement,
Informal Legislation: The Unruly Expansion of the Foreign Corrupt Practices Act, 45 Georgia
L. Rev. 489 (2011).
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http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1670943
2. Wrongful failure to supervise
Question: What is a wrongful failure to supervise?
Answer: Liability may be imposed for a wrongful failure to supervise when the principal
had knowledge of the harm caused by the agent and acquiesced in some way. Thus, a
corporate actor who supervises other corporate actors can become liable for failing to
supervise them.
3. Failure to institute legal compliance programs
Question: What is the effect of the Federal Sentencing Guidelines for Organizations?
Answer: They virtually require corporate compliance programs. The Sentencing
Guidelines call for substantial fines for corporate crimes, but allow for reductions in the
fine amounts if the corporation has an “effective program to prevent and detect violations
of law” in place. Such a plan must be detailed and comply with all industry standards
and government regulations.
Question: Are the Sentencing Guidelines counterproductive?
Answer: Possibly. By asking for more harshness, they may induce judicial leniency.
4. Sentencing of white collar criminals
Question: What is the status of the Sentencing Guidelines for individual offenders?
Answer: The Sentencing Guidelines establish mandatory ranges of punishment of whitecollar crimes, but they were declared unconstitutional in United States v. Booker 543
U.S.220 (2005) and so are now advisory only.
The Breakout Box on p. 346 discusses the 24 year sentence handed out to Jeff Skilling for his
role in the Enron accounting fraud. Was this a fair sentence?
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Summary
The main points of this chapter are:







The modern trend is for corporations to be treated as criminals (no longer ultra
vires when agents commit crimes in furtherance of business)
Corporate intent can be established under
o
(1) regular agency principles
o
(2) agency + management acquiescence
o
(3) agency + clear top management guidance
Corporate punishment = fines (financial penalty on shareholders) which may have
a rehabilitative effect
Criminal indictment (as in Arthur Andersen) can effectively end a firm’s business
Prosecutors have leeway to threaten indictment and get full cooperation o a
corporation
Corporate criminal liability may allow executives to deflect attention (it is telling
that Delaware was the first to pass a comprehensive corporate criminal statute)
Corporate officers can be liable, sometimes strict liability for not supervising
corporate subordinates
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