5D

Criminal Law and Business

Chapter 5

Meiners, Ringleb & Edwards

The Legal Environment of Business, 13th Edition

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Chapter Issues

 Crime and Types of Crimes

 Crimes & Elements of Crimes

 Defenses

 Evidence

 Prosecution Process

 White-Collar Crime

 Sentencing Guidelines and Compliance

• Crime: Positive or negative action that violates a penal law

• Not civil law

• Acts against a state, local, or federal government

• Congress and state legislatures decide the criminality of actions – by statute – including punishment possibilities.

• Computer and technology have created new versions of old criminal laws.

• e.g. Unauthorized entry into computer systems is the new version of the old “breaking and entering” laws

Crime Categories • Felonies more serious than misdemeanors

• Classifications (Class A, Class B) and degrees (First degree, Second degree) denote seriousness of criminal charge.

• Violent crimes – murder, manslaughter, forcible rape, aggravated assault

• Non-violent victim crimes – vehicle theft, burglaries

• Victimless crimes – i.e., possession of illegal drugs

• White collar crimes – embezzlement, bribery, fraud

• Punishment depends on the category under which a person is convicted

• A few crimes may be punished by death • Most crimes: Imprisonment/Fines • If convicted of a felony—unable to own a firearm, removed from

public office and disqualified from voting in most states.

Crimes & Elements of Crimes • Government agencies decide who will be charged with a crime. Prosecutors receive reports of alleged crime and results of investigation. Prosecutors decide whether or not to bring charges.

• Not all claims of criminal activity are investigated.

• Politics & personal preference may affect prosecutors’ decisions. Process not perfect.

• Standard for criminal conviction: “Beyond a reasonable doubt.”

• Corporations cannot be sent to prison: May pay fines or be subject to various controls if culpability is assigned. May be barred from public contracts.

• Criminal negligence: “a degree of carelessness amounting to a culpable disregard of rights and safety of others” Example: Drunk driver drives wrong way down highway and kills a person

• Requirements for prosecution: • Actus reus – the guilty act • Mens rea – criminal intent

Elonis v. U.S.

• After wife left him, Elonis used Facebook to post rap lyrics • Contained violent language; images of wife; co-workers at

amusement park; a kindergarten class & law enforcement • He was fired for threats to co-workers. • Wife was granted a “protection-from-abuse” order against him. • FBI arrested him.

• Charged him federal crime: transmitting in interstate commerce “communication containing any threat . . . To injure the person of another.”

• Trial Court: Instructed jury that Elonis could be found guilty if a reasonable person would foresee his statements were a threat.

• Jury convicted him. Cont.

Elonis v. U.S., cont.

• Appeals court affirmed. He appealed. • Defense by Elonis: Indictment failed to allege he intended to

threaten anyone. • At trial Elonis testified:

• His posts emulated rap lyrics of Eminem, which involve fantasies about killing his ex-wife.

• Said he posted “nothing. . .that hasn’t been said already.” • All victims said they were afraid & viewed posts as serious

threats. • Court said: Defendant must be “blameworthy in his mind.”

• Such as scienter or mens rea • Must consider defendant’s mental state • “Wrongdoing must be conscious to be criminal. . . .”

• HELD: Conviction cannot stand.

Constitutional Right: 5th Amendment

Miranda Rights must be read if a person is accused of or held in suspicion of a crime

 Right to remain silent (under the 5th Amendment)

 Statements made can be used as evidence against you in court

 Right to be represented by counsel

 If accused cannot afford an attorney, one will be provided by the court

• Raise doubts in jurors’ minds through alibi • Evidence that crime was not committed • Affirmative Defenses: Even if prosecution’s claims are true,

other facts prevent the claims from constituting the crime. • Intoxication and insanity (rarely successful). • Improper procedure (such as tainted evidence) in prosecution • Statute of Limitations expired (time varies by crime)

• Unsolved murders – statute of limitations may never end • Statute of limitations can “toll” to stop the running of time (e.g.

if criminal flees country to avoid prosecution) • Action was justifiable, i.e. self defense with reasonable force • Self-defense in violent crimes cases (use of force justifiable to

protect oneself against another) • Entrapment (Law enforcement sets a trap to lure someone

into committing a crime he/she had no intention of committing

Evidence

• Strict standards for gathering and presentation at trial • Evidence was handled properly in the “chain of custody”

• If improperly obtained or presented, evidence is excluded (under procedural due process) • Called the exclusionary rule (a 4th Amendment protection) • May be referred to as ”fruit of the poisonous tree”

• Authorities may • Search property • Seize documents and other physical items

• Warrants usually needed for search of property, persons, or seizure of property.

• Warrant issued by a judge or magistrate • There is a “hot pursuit” exception. • Also a plain view exception

• Law enforcement officials must show probable cause to a judge to obtain a warrant.

Prosecution Process

Occurs when prosecuting attorney has enough evidence to make criminal charges

Charge will be a misdemeanor or felony

In some cases, a grand jury will review a potential felony case

If grand jury determines probable cause, usually it issues an indictment against the accused

• Accused is placed under arrest based on a warrant. • In non-violent matters, accused turns herself in, rather than be taken

into custody by the police. • Suspect is booked at police station, photographed, finger printed,

and searched. • Chance given to the accused to contact an attorney. • Arraignment – court appearance of the accused (before a judge or

magistrate). • Accused may plead guilty, nolo contendere (no contest) or innocent. • Judge may release accused or require bail and will set a court date. • Violent criminals, or those who court fears might flee before trial are

held without bail, or bail is set very, very high. • Often defendants plea bargain – allow matter to be settled under

court supervision. • Defendant pleads guilty to charges or lesser charge or pleads no contest

in exchange for agreed punishment.

• Civil Law: To reduce surprises both sides must turn over anything requested by other side.

• Criminal Law: Parties do their own investigations. Disclose only subset of what is found to the other side prior to trial.

• Prosecution must disclose any exculpatory evidence • Evidence that may show defendant is not guilty • The choice to disclose left up to prosecutions lawyers

• Defendant has no obligation to disclose to prosecution evidence showing guilt

• 5th Amendment protects defendants • Right before criminal trial, prosecution & defense exchange

witness and exhibits lists.

• If matter goes to trial, government attorney (often district attorney) presents prosecution’s case.

• Defendant must be found guilty “beyond a reasonable doubt.”

• If jury finds defendant innocent – trial ends. Double jeopardy prevents a defendant from being tried a 2nd time for same criminal charges. But new charges can be brought and another trial occur.

• If jury can’t agree on verdict, there is a mistrial, and prosecutor will decide whether to proceed again.

• If guilty, there may be prison time, jail time (usually less than a year), probation, fines, restitution to victim

WHITE COLLAR CRIME

• 1939 reputed origination of term: “Crime committed by a person of respectability and high social status in the course of his occupation.”

• Criminal activity for financial advantage occurring in business.

• FBI estimates such crimes create 1/3 of a trillion dollars in losses each year.

• Most cases are against individuals; corporations may also be prosecuted.

White Collar Crimes

Antitrust: Violation under the Sherman Act and Clayton Act. May be prison terms involved especially for in price fixing

Bankruptcy Fraud: Person or corporation hides or lies about assets in bankruptcy proceeding (also applies to creditors giving false information or illegal pressure to bankruptcy petitioners).

Bribery: Offer or taking of money, goods, services, etc. to influence official actions or decisions.

Counterfeiting: Copying of genuine items without authorization – money, designer clothing, other products.

Credit Card Fraud: Unauthorized use of a credit card.

White Collar Crimes

• Computer and Internet Fraud: • Credit card fraud involving a computer or the internet • Unauthorized access to financial accounts • Unauthorized use of computers and computer files • Sabotage of computers

• Economic Espionage: Theft or misappropriation of valuable business information, such as a trade secret

• Embezzlement: Person in position of trust takes money or property for his own use.

White Collar Crimes

Environmental Law Violations: Federal (EPA) and state laws

Data fraud, e.g. submit false environmental data Hazardous waste dumping Ocean dumping by cruise ships Oil spills International smuggling of CFC’s Illegal handling of hazardous substances (pesticides, asbestos, etc.) EPA averages 1,500 criminal investigations/year; hundreds of years of prison and jail time imposed

Financial Fraud: Regulation of banks and financial institutions

Firms and employees subject to criminal liability Fraud in loans, financial documents, mortgages, etc.

White Collar Crimes

Government Fraud: Based on contracts with public agencies  Billing for goods not delivered  Double billing  Inferior goods  Government payment programs Farm subsidies Public housing Educational programs

Healthcare Fraud: Over-billing and scams by hospitals, doctors ambulance services, laboratories, pharmacies, extended care facilities

 Insider Trading: Person trades a security while in possession of material, non-public information.

White Collar Crimes

Insurance Fraud: Insurance companies commit fraud, charging higher rates than allowed by state regulators. Policy holders lie to get lower rates. Policy holders pad claims to get paid more.

Mail Fraud: Sending of fraudulent materials through U.S. Postal Service to communicate fraudulent activities.

Money Laundering: Hiding the truth about the origins of money, especially illegal activities. Obligation to report income even from illegal income for tax

purposes.

White Collar Crimes

Racketeer Influenced and Corrupt Organizations (RICO) Act • Originally an extra weapon against organized crime, such

as the Mafia • Racketeering meant activities such as bribery or

extortion. • Meaning expanded to include activities such as mail

fraud, etc. • Successful RICO claim receives triple actual damages +

attorneys’ fees through civil claims • Government can seek injunction, seize defendant’s

assets, prevent asset transfer, or require defendant to post a performance bond.

• Government may press for imprisonment. • Complicated and unpredictable area of the law now used

in suits against persons, businesses, political protest groups and terrorist organizations by government and private parties.

Bridge v. Phoenix Bond & Indemnity Co. • Cook County, Illinois holds auctions for tax liens on delinquent

taxpayers’ properties. • Buyers must submit bids in own names. Cannot use “agents,

employees or other related entities” to disguise the real bidder. • Phoenix Bond and other bidders sued Bridge for fraudulently

getting tax liens by filing false documents about name of bidders. • Claimed defendants violated RICO through racketeering involving

mail fraud by sending false documents related to tax lien purchases.

• District court dismissed RICO claims. Held that plaintiffs not protected by mail fraud statute because scam not directed at them.

• If there was a scam, it was directed at County & property owners (not plaintiffs) so plaintiffs had no cause of action.

• Appeals court reversed in favor of plaintiffs. • Defendant appealed. Continued

Bridge v. Phoenix Bond & Indemnity Co.

• Supreme Court affirmed in plaintiff’s favor. • Plaintiff asserting RICO claim based on mail fraud need not show

reliance on defendants misrepresentations. • The basis of mail fraud is a mailing that furthers a scheme to

defraud – even if the mailing does not contain false information. • Here, mail was used to submit false attestations of compliance

with the Bidder Rule to the County. • RICO is strictly construed. Private plaintiffs may assert RICO

claims. • Congress can change the statute, but Court will not change

RICO’s strict outcome.

White Collar Crimes

• Internal Fraud: Many small businesses do not know they are defrauded Study shows 1/4 of companies with fewer than 100 employees

suffered from check tampering (Company checks used for improper purposes) 21% suffered from skimming

(When cash is taken before it is recorded on the books) Rigging Payroll/Falsifying Reimbursement Expenses (such as

for travel) are common

• Securities Fraud: Different kinds • Misinformation or omission of information • Insider trading gets a lot of press • Market rigging • Theft from accounts of clients of securities firms

White Collar Crimes

Tax Evasion: Failure to file tax returns Failure to report income Overstating expenses Not reporting illegal income

IRS devotes significant resources to track down violators – jurisdiction can be international, i.e. money hidden in foreign bank accounts. Hundreds of billions recovered in thousands of cases annually. Whistleblowers may collect percent.

White Collar Crimes

• Telephone & Telemarketing Fraud: Any scheme to defraud using the telephone as means of communication with victims Trying to persuade them to send money to scheme Solicits people to buy goods and services, invest

money or donate to bogus charitable causes

• Fraud on the Internet: Essentially the same as telephone & telemarketing fraud Chat rooms, e-mail, message boards or Websites

presenting fraudulent solicitations to victims

White Collar Crimes

Wire Fraud: Any electronic communication involved in illegal activities (like mail & telephone/internet fraud)

Traditionally only state prosecution Now often federal prosecution There is a sweeping nature to the statutes seen in cases Includes “a scheme or artifice to deprive another of the right to honest services”

Ex: Pasquantino v. U.S.: Americans bought liquor in U.S. and smuggled it into Canada for resale, avoiding high Canadian taxes. Because electronic (wire) communications were used and originated in the U.S., two people convicted in the U.S. sent to prison for 5 years each for cheating the Canadian government.

Business Implications From Money Laundering

• Obligations exist in normal business operations • $1 to $2 trillion laundered worldwide each year • Money laundering is taking proceeds of criminal activities (i.e.

drug smuggling) & transforming cash in the appearance of legitimate business by putting in bank, buying real estate, etc. to try to avoid law enforcement attention.

• Tony Soprano example: • Tony earns $1 million from loan sharking and drug dealing • He creates Soprano Coin Laundry, Inc. • Deposits cash into corporate bank account as income from

laundry • Pays himself a salary • Looks like legitimate income

Anti-Money Laundering (AML)

Regulations making money laundering more difficult Banks (and any other organization receiving cash) must comply with federal regulations. Require financial organizations to use Know Your Customer (KYC) or Customer Due Diligence (CDD) Programs Track It Down: Tracing asset flows – large cash transactions are suspect Who Is Up to What? Must suspicious transactions – cash deposited over certain amounts ($10,000) and unusual activities.

Consequences for Non-compliance

Failure to File suspicious activity report Civil/criminal penalties, or both Civil penalties – willful violation of reporting requirements Civil penalties can be up to the greater of the amount involved in a transaction Willful violations may lead to criminal penalties

Fines up to $250,000 or 5 years in prison

Sentencing Guidelines and Compliance

• Congress mandated that courts be given clear rules about imposing sentences for criminal law violations.

• Sentencing Commission created list of factors to consider for each conviction.

• Punishment is reduced under Sentencing Guidelines when a company has a program in place to reduce chance of problems

• DOJ has Guidelines for effective compliance programs. • Some companies have accounting and financial reporting to

audit committees to reduce likely problems. • Other companies hire an outsider to be on the compliance

committee. • Companies have whistleblower hotlines to encourage

anonymous tips. • However, some European countries, such as France, prohibit

hotlines saying person accused of impropriety has right to know who complained.

• Supreme Court HELD: Guidelines are advisory, not mandatory, for judges to use, but judges are expected follow them closely.

United States v. Allmendinger • Allmendinger and Oncale ran insurance investment scam. $100

million losses for 800 investors • Misrepresented what they were selling; pocketed cash rather than

investing it • When federal investigators closed in, Allmendinger hid assets. • Ringleaders were indicted by grand jury for Mail Fraud, Money

Laundering & Securities Fraud • Court ordered them to freeze all accounts. • Allmendinger did not; transferred money to secret accounts. • After convictions, judge imposed sentences based on Sentencing

Guideline measures. • Due to size of loss, lack of cooperation with investigators by

Allmendinger, and hiding his money, he was given a 45-year sentence.

• Oncale, who cooperated, was given a 10-year sentence.

United States v. Allmendinger

• Appeals Court considers whether district court committed procedural error in calculating guideline range or explaining sentence imposed.

• If so, sentence vacated and remanded for resentencing. • If not, then appeals court considers if sentence was “substantively

reasonable” under “abuse of discretion” standard. • Allmendinger and Oncale were viewed the same initially, but acted differently. • District court gave lengthy explanation for the sentence imposed and reasons

for selecting sentence it did. • Oncale plead guilty. Gave assets to the government and helped in investigation.

Allmendinger refused to accept responsibility for his actions. Anticipating his indictment, sought to hide cash Continued to live a lavish lifestyle with the money Hid money in violation of the restraining order Attempted to flee just days before the trial

• HELD: No error in Allmendinger’s convictions and sentence