Paradigms Lost: The Blurring of the Criminal and Civil Law Models-And What Can Be Done About It

Ken Mann\u27s professed goal is to shrink the criminal law. To realize this worthy end, he advocates punitive civil sanctions that would largely parallel criminal sanctions, thereby reducing the need to use criminal law in order to achieve punitive purposes. I agree (heartily) with the end he seeks and even more with his general precept that the criminal law should be reserved for the most damaging wrongs and the most culpable defendants. But I believe that the means he proposes would be counterproductive – and would probably expand, rather than contract, the operative scope of the criminal law as an engine of regulation and social control. The differences in our analyses follow from differences in our perspectives. Professor Mann\u27s focus is largely doctrinal and basically centers on the question of whether courts will accept candidly punitive civil penalties. My perspective is more behavioral and focuses on incentives: what would regulators and private enforcers do under a legal system that largely overlaid punitive civil sanctions on top of criminal penalties? We also begin from different starting points. Although we both agree that the line between civil and criminal penalties is rapidly collapsing, Professor Mann sees (and favors) the encroachment of the civil law upon the criminal law. I see more of the reverse trend: the encroachment of the criminal law into areas previously thought to be civil or regulatory in character. Thus, I want to resist encroachment, while he wishes to encourage it in order to give enforcement authorities the less drastic remedy of civil penalties

Crime and the Corporation: Making the Punishment Fit the Corporation

The debate over corporate criminal liability has long involved a fight between proponents who argue that corporate liability is necessary for effective deterrence and opponents who claim that it “punishes the innocent.” This Article agrees and disagrees with both sides. Corporate criminal liability could play a critical role in establishing an effective deterrent to organizational misconduct, but today it largely fails. Currently, we have a system that combines Deferred Prosecution Agreements, Non-Prosecution Agreements, and extraordinarily generous sentencing credits for compliance plans that have failed, and the result is a system that is more carrots than sticks. The evidence seems clear that corporate fines seldom affect the company’s stock price (even when they are record penalties), that companies rarely self-report their misconduct (despite legal incentives to do so), and that courts impose penalties that can be easily absorbed as a cost of doing business. This analysis leads many to favor a system that focuses only on corporate executives and dispenses with the corporation as a target of the criminal law. Unfortunately, that approach has even higher costs. Although executives are deterrable, high-ranking corporate executives are much harder to identify and prosecute for a variety of reasons. In this light, the critical role of corporate criminal liability is that it gives the corporation a stronger incentive to self-report, monitor its employees, and turn in those responsible. But this requires that we extend leniency only for objective conduct that generates deterrence. A principal goal of this Article is to provide a roadmap for how we can make the punishment fit the corporation. Leniency can be used as a tool but should not be extended gratuitously. To curb corporate misconduct, society has long faced a choice between either vicarious liability for executives (which is contrary to our legal tradition and would shock civil libertarians) and vicarious liability for shareholders (which has existed for over a century but is always bounded by the ceiling of limited liability). Either choice has its costs, and this Article suggests some possible alternatives

Ratings Reform: The Good, the Bad, and the Ugly

Although dissatisfaction with the performance of the credit rating agencies is universal (particularly with regard to structured finance), reformers divide into two basic camps: (1) those who see the issuer pays model of the major credit ratings firms as the fundamental cause of inflated ratings, and (2) those who view the licensing power given to credit ratings agencies by regulatory rules requiring an investment grade rating from an NRSRO rating agency as creating a de facto monopoly that precludes competition. After reviewing the recent empirical literature on how ratings became inflated, this Article agrees with the former school and doubts that serious reform is possible unless the conflicts of interest inherent in the issuer pays model can be reduced. Although the licensing power hypothesis can explain the contemporary lack of competition in the ratings industry, increased competition is more likely to aggravate than alleviate the problem of inflated ratings. Still, purging conflicts is no easy matter, both because (1) investors, as well as issuers, have serious conflicts of interest (for example, investors dislike ratings downgrades) and (2) a shift to a subscriber pays business model is impeded by the public goods nature of credit ratings. This Article therefore reviews recent policy proposals and considers what steps could most feasibly tame the conflicts of interest problem

Accountability and Competition in Securities Class Actions: Why Exit Works Better than Voice

The rules of litigation governance in class actions are diametrically different from the rules of corporate governance, in large part because the former works off an opt out rule while the latter employs an opt in rule. This results in higher agency costs in the former context. To address this problem, reformers have long favored remedies such as the lead plaintiff provision of the Private Securities Litigation Reform Act ( PSLRA ), which in theory give class members a stronger voice. Empirically, however, such voice-based reforms appear to have had no more than a modest impact. But an alternative remedy appears to be more promising: exit-based reforms that seek to provoke greater competition between class counsel and attorneys soliciting class members to opt out of the class and file individual actions with them in state court. Unnoticed by academics, a major trend towards institutional investors opting out of securities class actions has developed over the past five years. More importantly, these opt outs appear to be recovering per share amounts that are a multiple of the class per share recovery. This development poses a variety of issues that this paper examines: (1) Why do opt outs do better?; (2) Do the opt outs gains come at the expense of those who remain in the class?; (3) Can defendants feasibly restrict opt outs and how should courts respond to such attempts?; (4) Are pension funds and other institutional investors under a fiduciary or ERISA-based duty to opt out?; and (5) Will greater competition produce greater accountability