Despite Expectations, Corporations Could Face More Cases of Criminal Liability

Despite Expectations, Corporations Could Face More Cases of Criminal Liability

Mary Jo White, the nominee to be chairwoman of the Securities and Exchange Commission, has stated that she is not a fan of pursuing cases of criminal liability against corporations. Such views are likely to draw scrutiny during her confirmation process, but it does not necessarily mean companies facing sanctions can expect an easy ride in Washington.

Corporate criminal liability has been a fixture of American law for more than a century, ever since the Supreme Court said a corporation could be charged with a crime in the 1909 decision in New York Central v. United States. Corporations have long complained about their potential liability, especially because the Justice Department has ramped up prosecutions of business crime over the last 20 years.

Ms. White explained in a speech in 2005 as part of a securities law program just how broad the principle of corporate criminal liability is under the New York Central case: “If a single employee, however low down in the corporate hierarchy, commits a crime in the course of his or her employment, even in part to benefit the corporation, the corporate employer is criminally liable for that employee’s crime. It is essentially absolute liability.”

In an interview in 2012 with the law firm career Web site Chambers Associate, Ms. White said she would limit “or abolish corporate criminal liability entirely.” In a 2005 interview with the Corporate Crime Reporter, she said that for publicly traded companies, it “should be the very rare case where an entire entity is subject to a criminal charge.”

Those words might be music to the ears of corporations hoping that Ms. White will cut them a break over violations of the securities laws. The Wall Street Journal quoted Senator Charles E. Grassley as stating that her views were “concerning” because she might “take a more corporate-friendly view of civil laws under the S.E.C.’s jurisdiction.”

But it looks as though the opposite may be true. The S.E.C. does not prosecute criminal charges but only has the power to pursue civil enforcement actions. But corporations do have another regulator to answer to: the Justice Department’s criminal division.

In her Corporate Crime Reporter interview, Ms. White’s took the position that the S.E.C. and other regulatory agencies were better equipped to police corporations than prosecutors by imposing structural changes on organizations to ensure future compliance with the law. She viewed the use of criminal charges as something that should be reserved for egregious cases.

Ms. White’s approach could well signal more vigorous enforcement by the S.E.C. against companies found to have violated the law by requiring extensive changes in their operations in addition to the usual financial penalties.

But a critical issue worth examining during Ms. White’s Senate nomination hearings will involve the S.E.C.’s practice of allowing companies to settle cases without admitting or denying any wrongdoing.

This policy has drawn the ire of some, including a United States District Court judge, Jed S. Rakoff. A case before the United States Court of Appeals for the Second Circuit involves a settlement that Judge Rakoff rejected between the S.E.C. and Citigroup over the bank’s sale of a faulty security tied to subprime mortgages because the bank was not required to admit any guilt or fault as part of the agreement.

A court ruling involving Judge Rakoff’s case could decide that an admission of wrongdoing is not required, but it would be worth asking Ms. White whether she was open to toughening up the S.E.C.’s settlement policy. This issue is much more important than whether corporations should be charged with a crime, which is not directly in her purview in her new position.

There is also some irony in raising an issue about Ms. White’s views pursuing criminal charges against corporations. A frequent criticism of the S.E.C. and Justice Department in the wake of the financial crisis has been the dearth of prosecutions against individual corporate managers while cases against the companies have been settled by deferred or nonprosecution agreements.

The issue has not been the number of cases filed against corporations, but the seeming ease with which the cases are settled through payment of fines and a promise of future compliance.

In addition, few individuals have been held accountable for corporate misconduct. A recent PBS “Frontline” program called “The Untouchables” raised questions about why the government had not pursued the prosecution of individuals involved in pushing subprime mortgages.

The dearth of such prosecutions and the use of deferred and nonprosecution agreements in cases of corporate misconduct could be a prime topic at the confirmation hearings for the next nominee to lead the Justice Department’s criminal division, now that Lanny A. Breuer has announced his resignation.

The lack of criminal prosecutions has also emerged as a criticism in more recent cases against banks over violations of money laundering laws and manipulation of interest rates. Even the case against UBS — which did involve a rare, corporate guilty plea — was structured so that a foreign subsidiary with no real exposure to the United States was used to limit the potential consequences to the broader organization.

While she was in private practice, Ms. White did ask whether deferred and nonprosecution agreements were being used too easily by prosecutors to resolve cases as a substitute for making the more difficult decision about the appropriateness of filing criminal charges against a company. Such a question would be worth raising again this year, but it is perhaps best directed at the person nominated to take Mr. Breuer’s place at the Justice Department.


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