Fisch, Jill

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Journal of Business & Technology LawVolume 2 | Issue 1 Article 9The Impact on Shareholders and OtherConstituentsJill FischFollow this and additional works at: http://digitalcommons.law.umaryland.edu/jbtlPart of the Business Organizations Law CommonsThis Reflective Essay is brought to you for free and open access by the Academic Journals at DigitalCommons@UM Carey Law. It has been acceptedfor inclusion in Journal of Business & Technology Law by an authorized editor of DigitalCommons@UM Carey Law. For more information, pleasecontact smccarty@law.umaryland.edu.Recommended CitationJill Fisch, The Impact on Shareholders and Other Constituents, 2 J. Bus. & Tech. L. 91 (2007)Available at: http://digitalcommons.law.umaryland.edu/jbtl/vol2/iss1/9JILL FISCH*CRIMINALIZATION OF CORPORATE LAWThe Impact on Shareholders and OtherConstituentsAs I UNDERSTAND IT, THE FOCUS OF THIS PANEL IS CORPORATE criminal liability. Iam going to emphasize the distinction between criminal liability of the corporationand that of individual corporate actors. We have talked a lot about the latter, andabout the advantages and disadvantages of imposing criminal liability on corporateofficials. I am not going to discuss that here. Rather, I am going to focus on theentity, and let me start with the perspective that was expressed earlier this morning.What exactly is the purpose of holding the corporate entity criminally liable?In seeking to answer this question, I started by considering the purposes of crim-inal liability generally. This took me through the standard litany of rationales forcriminal liability-deterrence, punishment, and removal from society-as well asarguments to the effect that criminal penalties establish or reinforce norms.The distinctive tool that criminal liability uses in achieving these objectives isimprisonment. The prison sanction does a lot of the work of criminal liability inthe individual context; it is probably the key factor that distinguishes criminal fromcivil liability. People argue that prison deters in a different way, arguably to agreater extent than large fines. In addition, prison removes convicted criminalsfrom society. Thus, the availability of the prison sanction is one justification forusing criminal prosecutions to address misconduct.Focusing on sanctions is useful, because it may explain one of the rationales forcriminally prosecuting corporations. Of course, when we move from the individualto the corporate context, imprisonment is no longer an available sanction. At thesame time, criminal liability has traditionally offered additional sanctions againstcorporations. Donna Nagy pointed out that one reason for prosecuting corpora-tions is that there have not been adequate civil or enforcement alternatives to en-sure adequate legal compliance.' Indeed, when the Supreme Court upheldcorporate criminal liability in 1909, it explained that adhering to "the old and ex-ploded doctrine that a corporation cannot commit a crime would virtually take. T.J. Maloney Professor of Business Law, Fordham University School of Law.1. See Donna Nagy, Criminalization of Corporate Law: The Impact of Criminal Sanctions on CorporateMisconduct, 2 J. Bus. & TECH. L. _ (2007).JOURNAL OF BUSINESS & TECHNOLOGY LAWCRIMINALIZATION OF CORPORATE LAWaway the only means of effectually controlling the subject-matter and correctingthe abuses aimed at."2 In contrast, from today's perspective, a substantial variety ofnon-criminal sanctions are available, particularly for violations of the federal secur-ities laws. The Securities and Exchange Commission (SEC) can collect substantialfines (through both enforcement and administrative proceedings), issue cease anddesist orders, obtain injunctions, and so forth? We even have corporations operat-ing under the supervision of court-appointed monitors.' Many civil sanctions andremedies are, however, relatively new.' Additionally, moving beyond the securitieslaws to other regulatory areas, there are substantial differences in the scope of rem-edies and the availability of civil enforcement.6 In some areas, civil remedies maycontinue to provide insufficient deterrence.So if we cannot achieve adequate deterrence through civil litigation, criminalprosecution seems like an obvious alternative. One way in which academics may beable to add value in the debate over corporate criminal liability is by identifyingalternative sanctions and remedies. If there are problems-and our discussion thismorning has identified several-with prosecuting corporations and corporate offi-cials criminally, new types of civil sanctions may be the solution. David Skeel hasdone work on shaming as a mechanism for deterring and punishing corporatemisconduct.7 Michael Klausner was talking before about taking money away fromthe individual corporate decision-makers, taking away their salaries or some por-tion of their net worth. Sarbanes-Oxley has a provision that requires disgorgementof incentive-based compensation in the event of a restatement! The Enron and2. N.Y. Cent. & Hudson River R.R. Co. v. United States, 212 U.S. 481, 496 (1909).3. See Matthew Scott Morris, The Securities Enforcement Remedies and Penny Stock Reform Act of 1990.: ByKeeping Up With the Joneses, the SEC's Enforcement Arsenal is Modernized, 7 ADMIN. L.J. AM. U. 151, 160-66(1993) (describing new sanctioning powers given to the SEC by the Securities Enforcement Remedies Act of1990).4. See, e.g., SEC v. WorldCom, Inc., No. 02 Civ. 4963, 2002 U.S. Dist. LEXIS 14201, at *2-4 (S.D.N.Y.Aug. 1, 2002) (implementing court's prior orders creating and appointing corporate monitor to oversee opera-tions at WorldCom).5. See, e.g., Morris, supra note 3, at 166-67 (explaining that, prior to the adoption of the Remedies Act,the SEC's power to impose monetary penalties was extremely limited).6. See, e.g., Robert Pitofsky, Antitrust at the Turn of the Twenty-First Century: The Matter of Remedies, 91GEO. L.J. 169, 171 (2002) (explaining that prior to the 1990s, the primary civil remedy in antitrust was a ceaseand desist order). The 1986 amendments to the Federal False Claims Act, by expanding the viability of the quitam provision, dramatically increased civil enforcement of fraud by government contractors. For example, in1987, the first year after the False Claims Act was amended, cases brought under the Act resulted in a total ofalmost $86.5 million in settlements and judgments. In 2005, the total recovery under the Act was $1.4 billion.Department of Justice False Claims Act Statistics for FY 1987-2005, Taxpayers Against Fraud Education Fund,available at http://www.taf.org/fcastatistics2006.pdf. See generally, Jill E. Fisch, Class Action Reform, Qui Tam,and the Role of the Plaintiff, 60 LAw & CONTEMP. PROBS. 167, 184-86 (1997) (describing Federal False ClaimsAct and 1986 amendments).7. See David A. Skeel, Jr., Shaming in Corporate Law, 149 U. PA. L. REV. 1811 (2001).8. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, § 304, 116 Stat. 778, 116 Stat. 778 (codified asamended at 15 U.S.C. § 7243).JOURNAL OF BUSINESS & TECHNOLOGY LAWJILL FISCHWorldCom settlements which require payment by individual outside directors alsoreflect limited efforts in this direction.9Expanding upon this, we could imagine a variety of sanctions that do not de-pend on the traditional labels of criminal versus civil liability but instead are tai-lored more closely to societal goals. Removal-the equivalent of imprisonment-could be achieved in the criminal context by dissolving the corporation, takingaway its charter, which is after all, a right that is granted by the State. Similarly,corporations could be disciplined by preventing them from accessing the publicmarkets and raising capital through the sale of securities. In the government fraudcontext, corporations may be barred from bidding on future government contracts.All these sanctions can be imposed without the procedural complications associ-ated with criminal prosecution. At the same time, they offer increased potential formeeting the objectives behind criminal liability, including punishment and removalas well as deterrence.If the key distinction between criminal and civil liability is not about the choiceor availability of sanctions-and I believe that, in the corporate context, it is not-then evaluating entity level liability raises a second issue: who is being sanctioned?We have discussed the fact that corporate criminal liability and large criminal finesin particular have the effect of punishing the corporation's shareholders.' This ofcourse is the whole idea of derivative liability-punishing some people for the badacts of others. In the criminal context, criminal fines punish shareholders for thebad acts of corporate managers.One can argue that shareholders are responsible for these bad acts, that they arein a position where they should monitor their agents and where they benefit fromthe crime. I do not think these statements are accurate. I think the average investor,who holds an indexed mutual fund in his or her retirement account is in no posi-tion to monitor the actions of the officers running those portfolio companies. Hav-ing spent a lot of time discussing corporate misconduct with institutional investors,who are supposedly the surrogates in terms of monitoring," I do not believe it isrealistic to expect them to monitor effectively against criminal activity either.'2In terms of benefit, some commentators have argued that the risk of corporatecriminal activity is simply another risk that investors bear, and that, in the contextof a diversified portfolio, investors sometimes win by benefiting from misconduct9. Bernard Black, et al., Outside Director Liability, 58 STAN. L. REV. 1055, 1057-58 (2006).10. To the extent that criminal prosecution destroys a business, as in the case of Arthur Andersen, it mayhave the effect of punishing employees and other stakeholders as well.11. See, e.g., Bernard S. Black, Agents Watching Agents: The Promise of Institutional Investor Voice, 39 UCLAL. REV. 811, 830-49 (1992) (describing potential for institutional investors to monitor corporate officials andimprove corporate decision-making).12. See, e.g., Jill E. Fisch, Relationship Investing: Will It Happen? Will It Work?, 55 OHIO ST. L.J. 1009, 1011(1994) (questioning the incentives for and likely effectiveness of monitoring by institutional investors).VOL. 2 NO. 1 2007CRIMINALIZATION OF CORPORATE LAWand sometimes lose when the corporation is caught and pays a penalty. 3 Oneproblem with this argument is that it is not clear that the winners and losers fromcorporate wrongdoing are the same investors. The investors who benefit from cor-porate crime are the short-term traders, those who are in and out of the company'sstock. The reason for this is that corporate crime is unlike other forms of risktaking. By definition, criminal activity is finite in duration; almost invariably thecompany will get caught. When this happens, who is going to be left holding thebag? It will be those same retirement investors who are holding the indexed mutualfund. The indexed fund is not going to get out of a company. In fact, during thefraud at Enron, as Enron's market capitalization increased, its weight in the marketindices increased, so indexed investors wound up buying more and more Enron, at$90 per share, and were left holding the bag.The in and out investors benefited from the fraud at Enron and other compa-nies. They sold their stock before the fraud was revealed, and before the price wentdown. Similarly, if they are no longer shareholders in a company at the time thatcriminal fines are assessed, they do not pay those penalties. Systematically, thetypes of investors who benefit from corporate misconduct differ from those whobear the financial consequences, both in terms of the effect of the prosecution onstock price, and the civil and criminal penalties imposed on the corporation. Giventhe subject of this panel, that is something with which we need to be concerned.One final point-what is the harm in imposing criminal liability upon the cor-poration? I have raised some questions about the value of corporate criminal liabil-ity, and I have talked about harm in terms of the corporation's shareholders, but Ithink the harm associated with prosecuting corporations goes beyond that. I thinkthere is a risk associated with bringing the criminal justice process, and its tools,into corporate operations unless it can be shown that corporate criminal prosecu-tions are socially valuable. Anecdotal evidence suggests that it has become relativelyeasy for government prosecutors to use the availability of criminal sanctions to behigh-handed with corporate actors who are essentially innocent-uninvolved man-agers, independent directors and so forth. The government's attitude is that it isdealing with a criminal. This attitude enables the government to vilify the corpora-tion, and the attitude spills over into negotiations over a range of issues such as thewaiver of attorney-client privilege, cooperation, internal investigations, and pay-ment by the corporation of defense fees for corporate officials. It causes the govern-ment to overweigh the costs of corporate misconduct and to undervalue the socialharm imposed by its prosecutions."13. See, e.g., Christopher Kennedy, Criminal Sentences for Corporations: Alternative Fining Mechanisms, 73CAL. L. REV. 443, 452 (1985).14. For the past several years, the government's policies with respect to prosecution of business organiza-tions have been reflected in the Thompson Memorandum. See Memorandum from Larry D. Thompson, Dep-uty Attorney Gen., to Heads of Dep't Components U.S. Attorneys, Principles of Federal Prosecution ofBusiness Organizations (Jan. 20, 2003) (setting forth DOJ policies behind the decision to bring criminalJOURNAL OF BUSINESS & TECHNOLOGY LAWJILL FISCHOne consequence of relying increasingly on criminal sanctions is that it shifts theprimary authority for enforcing corporate compliance with the law to the Depart-ment of Justice. We have not really focused on this development. I think, however,that there is a difference between agencies such as the SEC or Federal Trade Com-mission that have expertise in evaluating and understanding the impact of regula-tory decisions on business operations, and the Department of Justice, which doesnot. The agenda of the Department of Justice is fighting crime, not evaluating therelationship of criminal liability to business operations. In our discussion today, wehave debated both the effectiveness of corporate criminal liability and a variety ofsocial costs associated with corporate criminal prosecutions. Expecting the Depart-ment of Justice to be sensitive to these concerns is really at odds with the rest of itsmission and decisional structure.charges against business entities and on evaluating corporate cooperation), available at http://www.usdoj.gov/dag/cftf/corporate-guidelines.htm. The Thompson Memorandum has been widely attacked. See, e.g., Brief forThe Securities Industry Association, et al., as Amicus Curiae, United States v. Stein, No. 05-888 (S.D.N.Y filedApril 13, 2006), 51 05 Crim. 888 (2006), available at http://www.uschamber.com/NR/rdonlyres/ex5w7czpkhxrrtituyi2g6j5r6zyp463rc6jqzxj77a553r2qynp47kqxynvd2o5rdygaugptnhqwm/resusvsteinmotionbrief.pdf (argu-ing that government policies reflected in the Thompson Memorandum "violates key criminal justice princi-ples"). In December 2006, the Department of Justice announced revisions to its policies in the McNultyMemorandum. See Memorandum from Paul J. McNulty, Deputy Attorney Gen., to Heads of Dep't Compo-nents U.S. Attorneys (Dec. 12, 2006), available at http://www.usdoj.gov/dag/speech/2006/mcnulty-memo.pdf.The extent to which the McNulty Memorandum reflects substantial differences remains unclear.VOL. 2 NO. 1 2007

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