Article in the News Chapter 6

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Chapter Six White-Collar Crime and the Business Community

Amidst the turmoil and fallout of the Enron scandal that led to the company’s declaration of bankruptcy, a number of former Enron officials faced charges for various offenses. One such official was former CEO Jeffrey Skilling, who was ultimately found guilty of 19 fraud related charges, including conspiracy, insider trading, securities fraud, and making false statements to auditors. As punishment for his misdeeds, the 52-year-old Skilling was sentenced in 2006 to 24 years and 4 months in a federal prison. In addition, he was fined $45 million, which was to be put into a fund to benefit those who had been harmed by Enron’s collapse. While serving his sentence in 2010, he won a minor victory when the U.S. Supreme Court found that instructions to the jury with respect to one of the charges were inaccurate, and threw out the conviction on that charge. The case was then sent back to the trial court judge to determine whether the inaccurate instructions regarding the one charge tainted the convictions on the other charges. In 2013, the case was finally resolved as he was resentenced to 14 years in a federal prison as part of a court ordered reduction and a separate plea agreement with the prosecution. Unfortunately, this story is just one of many recent large and complex white-collar crime scandals. During 2009, Internet crime resulted in losses in the United States of $559.7 million, more than two times as much as in 2008. 1  At the end of 2008, the FBI was investigating 545 corporate fraud cases each of which involved investor losses that exceeded $1 billion. 2  The Coalition Against Insurance Fraud reports that insurance fraud costs Americans more than $80 billion per year. 3

Internet Crime Complaint Center, IC3 Annual Internet Crime Report 2009; retrieved May 10, 2010, from National White Collar Crime Center,  http://www.nw3c.org/research/site_files .cfm?fileid=d1991bea-8a22-4e54-82f5-678d4d83581a&mode=r .

Federal Bureau of Investigation, Financial Crimes Report to the Public Fiscal Year 2008; retrieved May 10, 2010, from  http://www.fbi.gov/publications/financial/fcs_report2008/financial_crime_2008.htm#health .

Coalition Against Insurance Fraud, “Consumer Information.” Accessed May 10, 2010 at  http://www .insurancefraud.org/fraud_backgrounder.htm .

White-collar crimes—crimes committed in a commercial context—occur every day. Collectively, these crimes often result in millions of dollars of damages. In recent years, as corporate crimes such as the ones detailed in  Exhibit 6-1

Allen Stanford. Sentence: 110 years

Allen Stanford, 63, was a Texan financier accused of running a $7 billion Ponzi scheme. He had investors invest billions of dollars into his bank, and then spent the money on private jets, yachts, and acres of undeveloped Antiguan land among other expenditures. In December 2008, Stanford International Bank had $88 million in cash, but it fudged its numbers to say it had $1 billion in assets. In the same month it finally owed investors $7 billion when they tried to pull out their money, and the bank had no money to cover the costs.

In 2012, a jury found Stanford guilty of conspiracy, along with 12 other criminal charges including obstruction. He was found innocent of one wire fraud charge. Stanford was sentenced to 110 years in federal prison.

Bernard Madoff, Businessman. Sentence: 150 years

Madoff, 72, directed one of the largest Ponzi schemes in U.S. history. Madoff, in his role as CEO of Bernard L. Madoff Investment Securities LLC, stole from his clients in a $65 billion Ponzi scheme. Despite a continuing decline in the economy, Madoff continued to assure his clients that his numbers (investment returns) would continue rising. As the economy continued to decline, Madoff's increases became suspicious and clients began to contact him to get their money back. When the requests for returned funds reached $7 billion, Madoff met with his sons and told them that his business was fraudulent. The sons turned Madoff in to the authorities.

In 2009, Madoff pleaded guilty to, among other things, securities fraud, wire fraud, money laundering, making false filings with the SEC, and making false statements. He was sentenced to the maximum 150 years in prison for his offenses. His projected release date is November 14, 2159. Since Madoff's plea, David Friehling from his accounting department has pled guilty to securities fraud, investment advisor fraud, and making false filings with the SEC. Additionally, Frank DiPascali has pled guilty to securities fraud, investment advisor fraud, mail fraud, wire fraud, income tax evasion, international money laundering, falsifying books and records, and more.

Joseph Nacchio. Sentence: 6 years

Joseph Nacchio, 60, was the chief financial officer and chairman of the board for Qwest Communications International. Qwest is a telecommunications provider in the western United States. When the economy began to decline, Nacchio continued to assure Wall Street that the company would continue making large returns even though he knew that such returns would not occur. Based on inside information, Nacchio sold $52 million of Qwest stock just before the prices fell.

In 2007, Nacchio was convicted on 19 counts of insider trading and sentenced to 6 years in federal prison. Additionally, Nacchio was ordered to pay a $19 million fine and restitution of the $52 million he had made as a result of illegal stock transactions. Although his conviction was overturned in 2008 because of improperly excluded expert testimony, the conviction was reinstated in 2009 when he finally began serving his six-year term.

Jamie Olis, Vice President of Finance. Sentence: 24 years

Jamie Olis, 38, was vice president of finance and senior director of tax planning at Dynergy, a natural gas energy company. Olis attempted to conceal more than $300 million in company debt from public investors. When the attempted concealment was discovered, millions of investor dollars were lost, including a $105 million loss suffered by 13,000 participants in the California Retirement Plan.

In 2004, Olis was sentenced to 292 months in prison after being convicted of securities fraud, mail fraud, and three counts of wire fraud. The 24-year sentence is one of the longest terms for fraud in U.S. history, in part because of the large financial losses to thousands of investors. In addition to the jail time, Olis was fined $25,000. Olis, however, did not act alone in the concealment. Gene Foster and Helen Sharkey, both former Dynergy executives, pled guilty to conspiracy and aided in the investigation. They then entered into a plea bargain under which Foster and Sharkey were to receive sentences of up to 5 years in prison and $250,000 in fines.

Richard Scrushy, CEO of HealthSouth. Sentence: Almost 10 years

Richard Scrushy, the founder of HealthSouth, is no stranger to white-collar criminal allegations. After being acquitted of charges under the Sarbanes-Oxley Act for lack of evidence in 2005, Scrushy was indicted on new charges a mere four months later. The new charges were for bribery and mail fraud linked to former Alabama Governor Don Siegelman.

The charges involved fraud through exchanging campaign funds for political favors.

Scrushy was ultimately found guilty by a federal jury in 2006 for bribery, mail fraud, and obstruction of justice. He was sentenced in 2007 to almost 10 years' imprisonment, in addition to having to pay a fine of $150,000 and an additional $267,000 in restitution to the United Way. Scrushy is currently in jail.

Walter Forbes, CEO of Cendant Corporation. Sentence: 17 years and 7 months

In 2004, Walter Forbes went on trial for fraudulently inflating the company's revenue by $500 million to increase its stock price. Forbes was charged with wire fraud, mail fraud, conspiracy, and securities fraud. In addition, Forbes was also accused of insider trading of $11 million in Cendant stock only weeks before the accounting scandal was discovered The former vice president was also charged with similar crimes. The Cendant CFO testified against both the vice president and Forbes, saying that he was asked to be “creative” in reorganizing revenue.

Despite his persistent use of the “dumb CEO defense” (I did not know about the wrongdoing), Forbes was found guilty in his third trial, which lasted all of 17 days. In January 2007, Forbes was sentenced to 12 years and 7 months in fed eral prison. He was also required to pay $3.275 billion in restitution.

Kenneth Lay, CEO of Enron.

In 2004, Kenneth Lay went on trial, pleading not guilty to 11 felony counts, including wire fraud, bank fraud, securities fraud, and conspiracy, for his part in falsifying Enron's financial reports, and denying that he profited enormously from his fraudulent acts. The extent of the fraud was discovered when the energy company went bankrupt in late 2001. As a result of the accounting fraud, Enron's stock plummeted, leaving thousands of people with near-worthless stock, hitting retirement funds especially hard.

The Securities and Exchange Commission also filed a civil complaint against Lay, which could have led to more than $90 million in penalties and fines. Lay was accused of selling large amounts of stock at artificially high prices, resulting in an ille gal profit of $90 million.

On May 25, 2006, Lay was found guilty of 10 of the 11 counts against him. Each count carried a maximum 5- to 10-year sentence, which would have amounted to 50 to 100 years maximum, with most commentators predicting a 20- to 30-year sentence. On July 5, 2006, however, Lay died of a heart attack before the scheduled date of his sentencing. Due to his death, the federal judge for the Fifth Circuit, pursuant to Fifth Circuit precedent, abated Lay's sentence. The abatement made it as if Lay had never been indicted.

Bernie Ebbers, CEO of WorldCom. Sentence: 25 years

In 2004, Bernie Ebbers, former CEO of the bankrupt phone company WorldCom, pleaded not guilty to three counts of fraud and conspiracy. The accounting fraud, which involved hiding expenses and inflating revenue reports, left $11 billion in debt at the time of the bankruptcy. The former CFO of WorldCom, Scott Sullivan, pleaded guilty to fraud and agreed to assist in the prosecution of Ebbers. Sullivan faced up to 25 years in prison for his role in the accounting scandal. In addition, MCI sued Ebbers to recover more than $400 million in loans that he took from WorldCom, now called MCI.

Bernie Ebbers, in one of the longest prison sentences given to a former CEO for white- collar crimes, was sentenced in 2005 to a 25-year prison term in a federal prison. Ebbers, 63 years old at the time of his sentencing, began serving his term in federal prison in 2006.

Dennis Kozlowski, CEO of Tyco International. Sentence: 8 years and 4 months to 25 years

In a second trial in early 2005 after a mistrial, Dennis Kozlowski faced charges of corruption and larceny for stealing more than $600 million from Tyco International and failing to pay more than $1 million in federal taxes. Kozlowski had Tyco pay for such over-the-top expenses as a $15,000 umbrella holder and a $2,200 garbage can. Kozlowski's sentence could have been up to 30 years in prison.

Kozlowski, as well as former Tyco CFO Mark Swartz. was sentenced to 8 years and 4 months to 25 years. Unlike other CEOs convicted for white-collar crimes, such as Bernie Ebbers, Kozlowski was convicted in state court. In addition to his prison sentence, to be served in a New York state prison, Kozlowski, with Swartz, was also ordered to pay $134 million to Tyco. In addition, Kozlowski was also fined an additional $70 million. Kozlowski is currently serving his term in prison.

Exhibit 6-1 Recent Major White-Collar Crime Sentences

Critical Thinking About The Law

Why should we be concerned about white-collar crime? You can use the following critical thinking questions to help guide your thinking about white-collar crime as you study this chapter.

1. As a future business manager, you may be forced to make tough decisions regarding white-collar crime. Imagine that you discover that one of your employees planned to offer a bribe to an agent from the Environmental Protection Agency to prevent your company from being fined. Although the result of the potential bribe could greatly benefit your company, you know that the bribe is illegal. What conflicting ethical norms are involved in your decision?

Clue: Review the list of ethical norms offered in  Chapter 1 .

2. White-collar crime is typically not violent crime. Therefore, many people assume that street crime is more serious and should receive harsher punishment. Can you generate some reasons why that assumption is false? Why might white-collar crimes deserve more severe sentences?

Clue: Reread the introductory paragraphs that provide information about white-collar crime. Why might a business manager deserve a more severe sentence than a young woman who commits a robbery? What are the consequences of both actions? Think about white-collar crime against this background as you study this chapter.

3. If a judge strongly valued justice, do you think he or she would give a lighter sentence to a business manager who embezzled $50,000 than to a person who robbed a bank of $50,000? Why?

Clue: Think about the definitions of justice offered in  Chapter 1 .

become more publicized, people’s attitudes toward corporations and white- collar crime are being affected.

The future manager must be prepared to respond to a growing lack of public confidence and avoid becoming a corporate criminal. He or she must find ways to develop a corporate climate that discourages, not encourages, the commission of white-collar crime. This chapter will help readers prepare to face the challenges posed by corporate crime. The first section defines crime and briefly explains criminal procedure. Next, the factors that distinguish corporate crime from street crime are discussed. The third section explains in detail some of the more common white-collar crimes. The fourth section introduces some ideas on how we can reduce the incidence of white-collar crime. The fifth and sixth sections discuss the federal and state responses to white-collar crime. The chapter closes with an overview of the international dimensions of white-collar crime.

Crime and Criminal Procedure

Crime

Criminal law is designed to punish an offender for causing harm to the public health, safety, or morals. Criminal laws prohibit certain actions and specify the range of punishments for such conduct. The proscribed conduct generally includes a description of both a wrongful behavior (an act or failure to act where one has a duty to do so) and a wrongful intent or state of mind. The legal term for wrongful intent is mens rea (guilty mind). An extremely limited number of crimes do not require mens rea. These crimes are the “strict liability,” or regulatory, crimes. They typically occur in heavily regulated industries and arise when a regulation has been violated. Regulatory crimes are created when the legislature decides that the need to protect the public outweighs the traditional requirement of mens rea. Because of the absence of the mens rea requirement for regulatory crimes, punishment for their violation is generally less severe than it is for wrongful behavior. In some states, punishment is limited to fines.

Crimes are generally classified as treason, felony, misdemeanor, or petty crime on the basis of the seriousness of the offense. Treason is engaging in war against the United States or giving aid or comfort to its enemies.  Felonies  include serious crimes such as murder or rape; felonies are punishable by death or imprisonment in a penitentiary. Defendants charged with a felony are entitled to a jury trial.  Misdemeanors , which are considered less serious crimes, are punishable by a fine or by imprisonment of less than a year in a local jail. Examples of misdemeanors include assault (a threat to injure someone) and disorderly conduct. In most states,  petty crimes  are considered a subcategory of misdemeanors; they are usually punishable by a fine or incarceration for six months or less. A building code violation is an example of a petty crime. The statute defining the crime generally states whether it is a felony, misdemeanor, or petty crime. The more serious the offense, the greater the stigma that attaches to the criminal.

felony

A serious crime that is punishable by death or imprisonment in a penitentiary.

misdemeanor

A crime that is less serious than a felony and is punishable by fine or imprisonment in a local jail.

petty crime

A minor crime punishable under federal statutes, by fine or incarceration of no more than six months.

Criminal Procedure

Criminal proceedings are initiated somewhat differently from civil proceedings. The procedures may vary slightly from state to state, but usually the case begins with an  arrest  of the defendant. The police must, in almost all cases, obtain an arrest warrant before arresting the defendant and taking him or her into custody. A magistrate (the lowest-ranking judicial official) will issue the arrest warrant when there is probable cause to believe that the suspect committed the crime. A magistrate is a public official who has the power to issue warrants; he or she is the lowest-ranking judicial official.  Probable cause  exists if it appears likely, from the available facts and circumstances, that the defendant committed the crime. An arrest may be made by a police officer without a warrant, but only if probable cause exists and there is no time to secure a warrant. An arrest without a warrant is most commonly made when police are called to the scene of a crime and catch the suspect committing the crime or fleeing from the scene.

arrest

To seize and hold under the authority of the law.

probable cause

The reasonable inference from the available facts and circumstances that the suspect committed the crime.

The Miranda Warnings

At the time of the arrest, the suspect must be informed of her or his legal rights. These rights are referred to as the  Miranda rights , because they were developed in response to the Supreme Court’s decision in Miranda v. Arizona. 4  If the defendant is not informed of these rights, any statements the defendant makes at the time of the arrest will be inadmissible at the defendant’s trial. These rights are listed in  Exhibit 6-2 .

384 U.S. 436 (1966).

Before any questioning by authorities, the following statements must be made to the defendant:

1. "You have the right to remain silent and refuse to answer any questions."

2. "Anything you say may be used against you in a court of law."

3. "You have the right to consult an attorney before speaking to the police and have an attorney present during any questioning now or in the future."

4. "If you cannot afford an attorney, one will be appointed for you before the questioning begins."

5. "If you do not have an attorney available, you have the right to remain silent until you have had an opportunity to consult with one."

6. "Now that I have advised you of your rights, are you willing to answer any questions without an attorney present?"

Exhibit 6-2 The Miranda Warnings

Miranda rights

Certain legal rights—such as the right to remain silent to avoid self-incrimination and the right to an attorney—that a suspect must be immediately informed of upon arrest.

Despite the courts’ effort to create an “objective rule to give clear guidance to the police,” many arrests and interrogations create significant questions about the application of the Miranda warnings. In 2004 alone, the Supreme Court issued three separate decisions clarifying the application and use of the Miranda warnings. In United States v. Patane, 5  the Court held that physical evidence found through statements made without receipt of the Miranda warnings were admissible in court so long as those statements were not forced by the police; the incriminating statements, however, would not be admissible.

124 S. Ct. 2620 (2004).

In Missouri v. Seibert, 6  the Supreme Court found that a confession made after the Miranda warnings were given could not be admissible if the police first ask for the confession, then give the Miranda warnings and ask for the same confession. Delivering the opinion of the Court, Justice Souter wrote, “Miranda addressed interrogation practices. . . likely . . . to disable [an individual] from making a free and rational choice” about speaking, and held that a suspect must be “adequately and effectively” advised of the choice the Constitution guarantees. “The object of question-first is to render Miranda warnings ineffective by waiting for a particularly opportune time to give them, after the suspect has already confessed.”

124 S. Ct. 2601 (2004).

Finally, in Yarborough v. Alvarado, 7  the Court examined the ambiguity of when a person is “in custody” and, therefore, is entitled to the Miranda warnings. The “in custody” standard is whether a reasonable person would feel free to leave or end questioning. Such a standard, however, can be influenced by a person’s age and education. Nevertheless, the Court held that maintaining a clear and objective standard for police is of utmost importance, and noted that considerations of age and education “could be viewed as creating a subjective inquiry.” The Court found that the confession of guilt to police by Alvarado, age 17, during an interview was admissible even though he had not been read his Miranda warnings, because he was never “in custody.”

124 S. Ct. 2140 (2004).

Hundreds of cases have sought to clarify the Miranda warnings since they were first created in 1966 in Miranda v. Arizona. 8  The cases just discussed suggest the importance the judicial system places on informing suspects of their constitutional rights and privileges.

384 U.S. 436 (1966).

Applying the Facts of the Case . .

Adrienne was caught on camera robbing a gas station. Thus, the local police had probable cause and arrested her. Detective Joe walked up to Adrienne’s house, cuffed her, told her she was being arrested and began to question her about her whereabouts on the night of the theft. What part of the arrest process is missing from this scenario? Why is it important?

Booking and First Appearance

After the defendant has been arrested, he or she is taken to the police station for booking, the filing of criminal charges against the defendant. The arresting officer then files a criminal complaint against the defendant. Shortly after the complaint is filed, the defendant makes his or her  first appearance  before a magistrate. At this time, the magistrate determines whether there was probable cause for the arrest. If there was not, the suspect is set free and the case is dismissed.

first appearance

Appearance of the defendant before a magistrate, who determines whether there was probable cause for the arrest.

If the offense is a minor one, and the defendant pleads guilty, the magistrate may accept the guilty plea and sentence the defendant. Most defendants, however, maintain their innocence. The magistrate will make sure that the defendant has a lawyer; if the defendant is indigent, the court will appoint a lawyer for him or her. The magistrate also sets bail at this time.  Bail  is an amount of money that is paid to the court to ensure that the defendant will return for trial. In some cases, especially in white-collar crimes, if the magistrate believes that the defendant has such “ties to the community” that he or she will not try to flee the area to avoid prosecution, the defendant may be released without posting bail. In such cases, the defendant is said to be released “on his [or her] own recognizance.”

bail

An amount of money the defendant pays to the court upon release from custody as security that he or she will return for trial.

Information or Indictment

If the crime is a misdemeanor, the next step is the prosecutor’s issuance of an  information , a formal written accusation or charge. The information is usually issued only after the prosecutor has presented the facts to a magistrate who believes that the prosecution has sufficient grounds to bring the case.

information

A formal written accusation in a misdemeanor case.

In felony cases, the process begins with the prosecutor (the prosecuting officer representing the United States or the state) presenting the facts surrounding the crime to a grand jury, a group of individuals under oath who determine whether to charge the defendant with a crime. The grand jury has the power to subpoena witnesses and require them to produce documents and tangible evidence. If the grand jury is convinced, by a preponderance of the evidence, that there is reason to believe the defendant may have committed the crime, an indictment (a formal, written accusation) is issued against the defendant. A grand jury does not make a finding of guilt; it simply decides whether there is enough evidence that the defendant committed the crime to justify bringing the defendant to trial. Government resources are limited, and the prosecution may not always believe it has sufficient evidence to prove a case beyond a reasonable doubt, so not every crime is prosecuted. Usually, the decision to seek an indictment depends on whether the prosecution believes it can get a conviction and whether the interests of justice would be served by prosecuting the crime.

At the federal level, almost all criminal prosecutions are initiated by the indictment process, and the decision on whether to prosecute is generally guided by the Principles of Federal Prosecution, published by the Justice Department in 1980. These principles state that the primary consideration is whether the existing admissible evidence is sufficient to obtain a conviction for a federal crime. Even if sufficient evidence does exist, the prosecutor’s office might choose not to prosecute a crime if no substantial federal interest would be served by doing so, if the defendant could be efficiently prosecuted in another jurisdiction, or if an adequate noncriminal alternative to criminal prosecution exists. The factors influencing the substantiality of the federal interest are listed in  Exhibit 6-3 . The principles clearly recognize that other prosecutorial actions may offer fairer or more efficient ways to respond to the criminal conduct.

1. Federal law enforcement priorities established by the Department of Justice

2. Deterrent effect

3. The subject's culpability

4. The subject's willingness to cooperate

5. The subject's personal circumstances

6. The probable sentence

7. The possibility of prosecution in another jurisdiction

8. Noncriminal alternatives to prosecution

Exhibit 6-3 Factors for Determining a Substantial Federal Interest and the Principles for Federal Prosecution

Some alternatives might be to institute civil proceedings against the defendant or to refer the complaint to a licensing board or the professional organization to which the defendant belongs.

Another alternative to indictment is pretrial diversion (PTD). Pretrial diversion attempts to keep certain criminal offenders out of the traditional criminal justice system by channeling them into a program of supervision and services. A PTD participant signs an agreement with the government acknowledging responsibility for the act at issue but not admitting guilt. The participant agrees to be supervised by the U.S. Probation Office and comply with the terms established for the agreed-upon period of the agreement, up to 18 months. Terms, which vary according to the circumstances and the criminal activity, might include participating in community programs or paying restitution. If the participant complies with the agreement, the matter is closed. If not, he or she is then prosecuted.

After the indictment comes the  arraignment , a time when the defendant appears in court and enters a plea of guilty or not guilty. A not-guilty plea entitles the defendant to a trial before a petit jury. If the defendant declines a jury trial, the case is heard by a judge alone, in a procedure called a bench trial.

arraignment

Formal appearance of the defendant in court to answer the indictment by entering a plea of guilty or not guilty.

A defendant may also enter a plea of  nolo contendere . By making this plea, the defendant does not admit guilt but agrees not to contest the charges. The advantage of a nolo contendere plea over a plea of guilty is that the former cannot be used against the defendant in a civil suit.

nolo contendere

A plea of no contest that subjects the defendant to punishment but is not an admission of guilt.

Plea Bargaining

At any time during the proceedings, the parties may engage in  plea bargaining , which is a process of negotiation between the defense attorney and the public prosecutor or district attorney. The result of this process is that the defendant pleads guilty to a lesser offense, in exchange for which the prosecutor drops or reduces some of the initial charges. Plea bargaining benefits the criminal by eliminating the risk of a greater penalty. It benefits the prosecutor by giving her or him a sure conviction and reducing a typically overwhelming caseload. It saves both parties the time and expense of a trial.

plea bargaining

The negotiation of an agreement between the defendant’s attorney and the prosecutor, whereby the defendant pleads guilty to a certain charge or charges in exchange for the prosecution reducing the charges.

Plea bargaining is used extensively for white-collar crimes, generally at a much earlier stage than for street crimes. In white-collar cases, plea bargaining often occurs even before the indictment. This process, as well as other modifications of criminal procedures in white-collar crime cases, helps to make the white-collar criminal seem less of a criminal, and thus reduces the likelihood of severe punishment.

Burden of Proof

If the case goes to trial, the burden of proof is usually on the prosecutor. The burden of proof has two aspects: the burden of production of evidence and the burden of persuasion. The prosecution bears the burden of production of evidence of all the elements of the crime. Thus, the prosecution must present physical evidence and testimony that prove all elements of the crime. The burden of producing evidence of any affirmative defenses (defenses in which the defendant admits to doing the act but claims some reason for not being held responsible, such as insanity, self-defense, intoxication, or coercion) lies with the defendant.

The prosecution also bears the burden of persuasion, meaning that the prosecutor must convince the jury beyond a reasonable doubt that the defendant committed the crime. In some states, a defendant who presents an affirmative defense must persuade the jury of the existence and appropriateness of the defense by a preponderance of the evidence, meaning that the defendant’s lawyer must prove that it is more likely than not that the defense exists and is valid. In other states, the burden of persuasion lies with the prosecutor to show beyond a reasonable doubt that the defense does not exist or is invalid.

The actual trial itself is similar to a civil trial, and the role of the prosecutor or district attorney is similar to that of the plaintiff’s attorney. One major difference, however, is that the defendant in a criminal case cannot be compelled to testify, and the finder of fact is not to hold the exercise of this right against the defendant. This right to not testify is guaranteed by the constitutional provision in the Fifth Amendment that no person “shall be compelled in any criminal case to be a witness against himself.”

Defenses

Obviously, one of the most common defenses is that the defendant did not do the act in question. But even if the defendant did commit the act, a number of affirmative defenses might be raised to preclude the defendant from being convicted of the crime. Affirmative defenses may be thought of as excuses for otherwise unlawful conduct. Four of the most common are entrapment, insanity, duress, and mistake.

Entrapment  occurs when the idea for the crime was not the defendant’s but was, instead, put into the defendant’s mind by a police officer or other government official. An extreme example is a case in which a government official first suggests to an employee that the employee could make good money by altering certain corporate records. The official then shows up at the employee’s home at night with a key to the office where the records are kept and reminds the employee that the record keeper is on vacation that week. The official also reminds the employee that most of the other workers rarely stay late on Friday nights, so Friday after work might be an ideal time to get the books. If prosecuted for fraud, the employee could raise the defense of entrapment.

entrapment

An affirmative defense claiming that the idea for the crime did not originate with the defendant but was put into the defendant’s mind by a police officer or other government official.

Entrapment is not always easy to prove. Police are allowed to set up legitimate “sting” operations to catch persons engaged in criminal activity. The key to a legitimate sting is that the defendant was “predisposed” to commit the crime; the officer did not put the idea in the defendant’s head. If an officer dresses up like a prostitute and parades around in an area where prostitution is rampant, a potential customer who solicits sex could not raise the charge of entrapment against a charge of soliciting a prostitute. Most cases, however, fall between our two examples, so it is often difficult to predict whether the entrapment defense will be successful.

Insanity is one of the best-known criminal defenses, although it is not used nearly as frequently as its notoriety might imply. The  insanity defense  is used when a person’s mental condition prevents him or her from understanding the wrongful nature of the act he or she committed or from distinguishing wrong from right.

insanity defense

An affirmative defense claiming that the defendant’s mental condition precluded him or her from understanding the wrongful nature of the act committed or from distinguishing wrong from right in general.

Duress occurs when a person is forced to commit a wrongful act by a threat of immediate bodily harm or loss of life, and the affirmative  duress defense  can be used by a person who believes that he or she was forced to commit a crime. For example, if Sam holds a gun to Jim’s head and tells him to forge his employer’s signature on a company check or he will be shot, Jim can raise the defense of duress to a charge of forgery. This defense is generally not available to a charge of murder.

duress defense

An affirmative defense claiming that the defendant was forced to commit the wrongful act by threat of immediate bodily harm or loss of life.

mistake-of-fact defense  may sometimes be raised when that mistake vitiates the criminal intent. For example, if Mary takes Karen’s umbrella from a public umbrella rack, thinking it is her own, she can raise mistake as a defense to a charge of theft.

mistake-of-fact defense

An affirmative defense claiming that a mistake made by the defendant vitiates criminal intent.

A mistake of law, however, is generally not a defense. A person could not, for example, fail to include payment received for a small job on his or her income tax return because of a mistaken belief that income for part-time work of less than $100 did not have to be reported.

Any defendant who does not prevail at the trial court can appeal the decision, just as in a civil case. The steps of a criminal action are set out in  Exhibit 6-4 .

Distinguishing Features of White-Collar Crime

An initial problem with any discussion of white-collar crime is its definition. The term  white-collar crime  does not have a precise meaning. The term was first made popular in 1939 by sociologist Edwin Sutherland, who defined white-collar crime as “crime committed by a person of respectability and high social status in the course of his occupation.” Traditionally, it has been the classification for those crimes committed in a commercial context by members of the professional and managerial classes. It includes such diverse acts as bribery of corporate or government officials and violations of federal regulations such as the Occupational Safety and Health Act and the Internal Revenue Service Code. In this book, we will use the traditional definition. For illustrations of some white-collar criminals and the crimes of which they were convicted, see  Exhibit 6-1 .

white-collar crime

A crime committed in a commercial context by a member of the professional–managerial class.

The Corporation as a Criminal

One of the distinguishing features of white-collar crime is that sometimes the “criminal” may be difficult to identify. In a street crime, the identity of the criminal is fairly clear: It is the person who committed the act. If a person hires another to commit a crime, the person doing the hiring is likewise guilty of a crime. In the case of white-collar crime, the crime is often committed on behalf of a corporation, which is as an artificial legal entity or an artificial person. An important question, then, is whether liability can be imposed on the corporation for the criminal acts committed by employees of the corporation on behalf of the corporation.

Initially, the courts said no. A corporation had no mind, so it could not have the mental state necessary to commit a crime. This rule was first eroded by the imposition of liability on corporations for so-called  strict liability offenses , those for which no state of mind is required. These generally are cases in which corporate employees failed to take some action required by a regulation. For example, under most blue-sky laws (state securities regulations), it is a violation to file a false statement of a company’s financial condition with a state’s secretary of state. Filing a false statement is a crime, even if the corporate officer filing the statement believed it was true, as no state of mind is required to commit the crime.

strict liability offense

An offense for which no state of mind or intent is required.

The courts then began to impose liability on corporations for criminal acts of the employees by imputing the state of mind of the employee to the corporation. Today, as a general rule, the only crimes for which a corporation is not held liable are those that are punishable only by incarceration. Obviously, the rationale for this rule is that the punishment could not be carried out. Some states have eliminated this problem by passing a statute providing specific fines for corporations that commit offenses otherwise punishable by incarceration only.

Many corporate executives may not realize the extent to which a corporation today can be held liable for the acts of its employees. That liability can extend down to acts of even the lowest-level employees and even to acts in violation of corporate directives, as long as two conditions are met. First, the conduct must be within the scope of the employee agent’s authority. Second, the action must have been undertaken, at least in part, to benefit the corporation. Some examples of employee actions for which corporations have been held liable include employees physically harming a customer for not paying his bill, 9  an employee sexually harassing another employee, 10  and a car salesman’s obtaining automobile loans for the dealership’s customers by misrepresenting financial data to the lending bank. 11  In a move indicating that the Department of Justice (DOJ) is serious about pursuing white-collar corporate criminals, in 2006, Deputy U.S. Attorney General Paul McNulty issued a memorandum stating that prosecuting corporate crimes was a priority of the DOJ. In addition, McNulty advised federal prosecutors not to stop with finding corporate liability, but also to look for individuals within the firm who should be punished for the firm’s wrongdoings.

Crane Brothers, Inc. v. May, 252 Ga. App. 690, 556 S.E.2d 865 (2001).

10  Pennsylvania State Police v. Suders, 124 S. Ct. 2342 (2004).

11  Commonwealth v. Duddie Ford, Inc., 28 Mass. App. Ct. 426, 551 N.E.2d 1211 (1990).

Many states have passed statutes imposing criminal liability on partnerships under the same circumstances as those under which liability is imposed on a corporation. In the absence of such a statute, liability is not imposed on the partnership because a partnership is not a legal person.

Arguments in Support of Corporate Liability

Needless to say, there is no consensus about whether, as a matter of policy, corporations should be held criminally liable. Some of the arguments in favor of such liability include:

1. Imposing financial sanctions against the corporation will result in lower dividends for the shareholders, which, in turn, will prompt the shareholders to take a more active role in trying to make sure that the corporation behaves legally. They will carefully select directors who will scrupulously monitor corporate behavior and will express concern when anything appears to be unethical or illegal.

2. In situations in which the crime is an omission and the responsibility for performing the omitted duty is not clearly delegated to any specific party, the duty rests with no particular individual. Therefore, there is no one to blame, and the corporation cannot be held responsible. If no one, not even the corporation, is held liable, there is no incentive to obey the laws.

3. Closely related to reason 2 is the fact that there are a tremendous number of suspects in a corporation. Most enforcement agencies do not have the resources to investigate the large number of employees involved and to build cases against each. It is much easier and less expensive for the government to investigate and bring a case against the corporation as an entity.

4. The fact that many decisions are committee decisions—or else decisions made by an initial person or group and then approved by several tiers of management—again makes it hard to point the finger at one individual. Sometimes one individual is responsible for making an initial decision, and then someone else is responsible for implementing that decision.

5. A further reason is that corporate personnel are expendable. To lose a manager because of a conviction does not really harm the enterprise that profited from the wrongdoing. In fact, it allows the firm to externalize the costs of the criminal behavior; that is, to absolve itself of guilt in the eyes of the public. The manager takes the blame, and the corporation, which profited from the manager’s illegal act, continues to thrive.

6. Even if one could impose liability on one or two individuals, it is unfair to single them out for punishment when the behavior in question probably resulted from a pattern of behavior common to the entire corporation.

7. Some people assume that the beneficiaries of crime committed on behalf of the corporation are the shareholders, because they may get higher dividends if corporate crime keeps costs lower. To fail to impose sanctions on the corporation would be to allow the shareholders to benefit from the illegal activity.

8. If an action is taken against the corporation, the criminal act will be linked to the corporation in the public’s mind. In a market-oriented society such as ours, disclosure of full information about businesses is essential for consumers to make informed decisions about the types of firms with which they want to transact business.

Arguments in Opposition to Corporate Liability

The following are arguments against imposing liability on corporations:

1. Imposing fines on corporations is a waste of time and effort because the fines are never going to be severe enough to act as a deterrent. Even if more substantial fines were imposed, the firms would simply pass on the losses to consumers in the form of increased product prices. Thus, it would really be the consumers of the corporation’s products who would be punished.

2. Some people believe that the shareholders’ dividends may be reduced if fines are imposed on the corporation because the cost of the fines will reduce the profits available for dividend payments. Reducing dividends, it is argued, is unfair because in most corporations, the shareholders really do not have any power to control corporate behavior.

3. Because criminal prosecutions of corporations are not well publicized, they do not harm the corporation’s public image. The corporations have enough money and public relations personnel to easily overcome any negative publicity with a well-run advertising campaign designed to polish their public image. For example, the prosecution of Revco of Ohio for defrauding Medicaid of hundreds of thousands of dollars resulted in only a temporary decline in the value of Revco’s stock. 12

12  D. Vaughan, Controlling Unlawful Organizational Behavior: Social Structure and Corporate Misconduct (University of Chicago Press, 1983).

Imposition of Liability on Corporate Executives

Another potential candidate for liability in the case of white-collar crime is the corporate executive. Top-level corporate executives, as a group, have tremendous power through their control over national corporations. When these corporations earn record-setting profits, top-level executives rush forward to take credit for their corporations’ successes. These same executives, however, do not rush forward to take responsibility for their corporations’ criminal violations.

In fact, very few corporate officials are held liable by law enforcement for the actions of their companies. 13  This lack of liability is believed to occur because of the delegation of responsibility to lower tiers of management and reliance on unwritten orders, which frequently allow top-level management to protect itself from liability for the results of its policy decisions.

13  Timothy P. Glynn, “Beyond ‘Unlimiting’ Shareholder Liability: Vicarious Tort Liability for Corporate Officers,” 57 Vand. L. Rev. 329 (2004).

Traditionally, imposing liability on executives has been difficult because the criminal law usually requires an unlawful act to be accompanied by an unlawful intent (mens rea). In cases of violations of federal regulations, corporate executives often argue that they are not the ones directly responsible for filing the documents or conducting the studies. They certainly never explicitly ordered that such regulations be disregarded. In response to recent high-profile corporate scandals, Congress and the Securities and Exchange Commission have created more stringent certification requirements for CEOs, CFOs, and other corporate officials. For example, the Sarbanes-Oxley Act of 2002 holds high-ranking corporate officials responsible for the validity and accuracy of their companies’ financial statements. Failure to comply with the financial statement certification or certification of false information is a corporate fraud under the act, punishable with fines that range from $1 million to $5 million and prison sentences from 10 to 20 years. This act is discussed in greater detail in  Chapter 23 .

As the following case shows, however, the courts are recognizing that corporate executives who have the power and authority to secure compliance with the law have an affirmative duty to do so. Failure to uphold that duty can lead to criminal sanctions.

 Case 6-1 United States v. Park

United States Supreme Court 421 U.S. 658 (1975)

Defendant Park, the president of a national food-chain corporation, was charged, along with the corporation, with violating the Federal Food, Drug, and Cosmetic Act by allowing food in the warehouse to be exposed to rodent contamination. Park had conceded that he was responsible for the sanitary conditions as part of his responsibility for the “entire operation,” but claimed that he had turned the responsibility for sanitation over to dependable subordinates. He admitted at the trial that he had received a warning letter from the Food and Drug Administration regarding the unsanitary conditions at one of the company’s warehouses.

The trial court found the defendant guilty. The court of appeals reversed. The case was appealed to the U.S. Supreme Court.

Chief Justice Burger

The question presented was whether “the manager of a corporation, as well as the corporation itself, may be prosecuted under the Federal Food, Drug, and Cosmetic Act of 1938 for the introduction of misbranded and adulterated articles into interstate commerce.” In Dotterweich, a jury had disagreed as to the corporation, a jobber purchasing drugs from manufacturers and shipping them in interstate commerce under its own label, but had convicted Dotterweich, the corporation’s president and general manager.

In reversing the judgment of the Court of Appeals and reinstating Dotterweich’s conviction, this Court looked to the purposes of the Act and noted that they “touch phases of the lives and health of people which, in the circumstances of modern industrialism, are largely beyond self-protection.” It observed that the Act is of “a now familiar type” which “dispenses with the conventional requirement for criminal conduct—awareness of some wrongdoing. In the interest of the larger good it puts the burden of acting at hazard upon a person otherwise innocent but standing in responsible relation to a public danger.”

Central to the Court’s conclusion that individuals other than proprietors are subject to the criminal provisions of the Act was the reality that “the only way in which a corporation can act is through the individuals who act on its behalf.” The Court also noted that corporate officers had been subject to criminal liability under the Federal Food and Drugs Act of 1906, and it observed that a contrary result under the 1938 legislation would be incompatible with the expressed intent of Congress to “enlarge and stiffen the penal net” and to discourage a view of the Act’s criminal penalties as a “license fee for the conduct of an illegitimate business.”

At the same time, however, the Court was aware of the concern which was the motivating factor in the Court of Appeals’ decision, that literal enforcement “might operate too harshly by sweeping within its condemnation any person however remotely entangled in the proscribed shipment.” A limiting principle, in the form of “settled doctrines of criminal law” defining those who “are responsible for the commission of a misdemeanor,” was available. In this context, the Court concluded, those doctrines dictated that the offense was committed “by all who . . . have . . . a responsible share in the furtherance of the transaction which the statute outlaws.”

The rule that corporate employees who have “a responsible share in the furtherance of the transaction which the statute outlaws” are subject to the criminal provisions of the Act was not formulated in a vacuum. Cases under the Federal Food and Drugs Act of 1906 reflected the view both that knowledge or intent were not required to be proved in prosecutions under its criminal provisions, and that responsible corporate agents could be subjected to the liability thereby imposed. Moreover, the principle had been recognized that a corporate agent, through whose act, default, or omission the corporation committed a crime, was himself guilty individually of that crime.

The rationale of the interpretation given the Act in Dotterweich, as holding criminally accountable the persons whose failure to exercise the authority and supervisory responsibility reposed in them by the business organization, resulted in the violation complained of, has been confirmed in our subsequent cases. Thus, the Court has reaffirmed the proposition that “the public interest in the purity of its food is so great as to warrant the imposition of the highest standard of care on distributors.” In order to make “distributors of food the strictest censors of their merchandise,” the Act punishes “neglect where the law requires care, and inaction where it imposes a duty.” “The accused, if he does not will the violation, usually is in a position to prevent it with no more care than society might reasonably expect and no more exertion than it might reasonably extract from one who assumed his responsibilities.”

Thus, Dotterweich and the cases which have followed reveal that in providing sanctions which reach and touch the individuals who execute the corporate mission— and this is by no means necessarily confined to a single corporate agent or employee—the Act imposes not only a positive duty to seek out and remedy violations when they occur but also, and primarily, a duty to implement measures that will ensure that violations will not occur. The requirements of foresight and vigilance imposed on responsible corporate agents are beyond question demanding, and perhaps onerous, but they are not more stringent than the public has a right to expect of those who voluntarily assume positions of authority in business enterprises whose services and products affect the health and well-being of the public that supports them.

The Act does not, as we observed in Dotterweich, make criminal liability turn on “awareness of some wrongdoing” or “conscious fraud.” The duty imposed by Congress on responsible corporate agents is, we emphasize, one that requires the highest standard of foresight and vigilance, but the Act, in its criminal aspect, does not require that which is objectively impossible.

[I]t is equally clear that the Government established a prima facie case when it introduced evidence sufficient to warrant a finding by the trier of the facts that the defendant had, by reason of his position in the corporation, responsibility and authority either to prevent in the first instance, or promptly to correct, the violation complained of, and that he failed to do so. The failure thus to fulfill the duty imposed by the interaction of the corporate agent’s authority and that statute furnishes a sufficient causal link. The considerations which prompted the imposition of this duty, and the scope of the duty, provide the measure of culpability. *

United States v. Park, United States Supreme Court 421 U.S. 658 (1975).

Reversed in favor of the Government.

Critical Thinking About The Law

The Court in  Case 6-1  was guided by a fundamental principle that it did not explicitly state: To the extent that one has authority, he or she also has responsibility and can be liable for criminal action. This guiding principle played a significant role in the Court’s justification (i.e., reasoning) for its decision.

Context was very important in the formulation of this principle, as well as in its application to  Case 6-1 . Key facts, primary ethical norms, and judicial precedent were important elements of this context. Consequently, the questions that follow focus on those aspects of  Case 6-1 .

1. What key fact was very important to the Court in its determination of Park’s guilt?

Clue:  Think again about the Court’s guiding principle in this case. You want to identify the key fact that allowed the Court to apply the principle to this particular case.

2. Precedent plays a crucial role in the Court’s reasoning and, thus, in its decision. What key precedent in criminal law did the Dotterweich decision dispense with, thereby clearing the way for the guiding principle discussed previously to take on greater significance and make conviction in the present case possible?

Clue:  Reread the section in which Justice Burger discusses the Dotterweich decision.

Although the Park case demonstrates that corporate executives may be found guilty of committing a corporate crime, few are charged and even fewer are actually convicted. Even when they are convicted, harsh penalties are not likely to be imposed. Furthermore, even when executives do go to prison, because they are not seen as security risks they are often sent to prisons that some would argue are nicer than the motels many people can afford to stay in on vacations! See  Exhibit 6-5  for a glimpse of some of these prisons where white-collar criminals are likely to end up.

Exhibit 6-5 White-Collar Prison Camps

A primary reason for the limited number of convictions is the diffusion of responsibility. It is often difficult to establish who was responsible for the criminal act. Another problem related to corporate structure is that everyone usually has a specific job, and putting all of the pieces of the crime together is difficult. The reader should remember that the burden of proof is on the prosecution. Corporate executives also tend to have high-caliber counsel who specialize in defending white-collar criminals. These skilled attorneys, often paid for by the corporation or (when permitted by law) by an insurance carrier, usually get involved during the initial investigation of the case and perceive one of their key functions as keeping evidence out of the hands of the prosecutor. They often regard themselves as having lost the case if they do not prevent their client from being indicted or if they do not at least get the charge reduced to the lowest possible misdemeanor. 14  Another alleged reason for the limited number of convictions of corporate executives is that they are generally persons with a great deal of knowledge, including knowledge of inefficiencies and improprieties on the part of the government officials who are regulating them. It is argued that regulators are unlikely to press for prosecution when their own ineptness may be revealed in the process.

14  K. Mann, Defending White-Collar Crime 10 (Yale University Press, 1985).

Imposition of Liability on Lower-Level Corporate Criminals

Although much debate has been generated over the extent to which the corporation and its top executives should be held liable for crimes committed on behalf of the corporation, it is important to remember that lower-level and mid-level corporate employees can also be held liable for their individual criminal actions, and imposition of liability on the corporation does not in any way preclude imposition of liability on the individual actor as well. It is likewise no excuse on the part of employees that they were committing the wrongful act only because their employer instructed them to do so.

Factors Encouraging the Commission of White-Collar Crime

White-collar crime can be distinguished from street crime by some of the factors that facilitate its commission ( Exhibit 6-6 ). Recognition of these factors is not meant to excuse this behavior; instead, it may be used to help devise ways to

1. Societal stress on material success, without equal emphasis on means of achieving success.

2. Linkage of corporate rewards of salary and promotion to accomplishing shortterm goals.

3. Groupthink.

4. Ease of rationalizing illegal behavior.

5. Dispersion of decision making.

6. Retention of status by persons convicted of white-collar crime.

7. The lack of an adversarial relationship between the corporation and government regulators.

8. Poor personnel policies that leave employees feeling insecure, unappreciated, and underpaid.

Exhibit 6-6 Factors Facilitating the commission of White-Collar Crimes

control corporate crime. As an informed corporate manager, your knowledge of these factors may help you to avoid the temptation to engage in criminal activities and to discourage others from doing so.

Initially, we must recognize that many people in our society value material success above all else. When the focus of our energies is on material success, we are much more willing to engage in illegal means to achieve our goal than we would be if our focus were on, for instance, ethical conduct. With the stress on success, the line between illegality and a shrewd business deal becomes blurred. The culture of some corporations creates an atmosphere in which corporate crime may thrive. For instance, if rewards such as salary and promotion are tied to meeting short-term goals, employees may use whatever means are available to help them achieve those goals.

Once illegal behavior is initiated, it tends to become institutionalized because of a phenomenon referred to by social psychologist Irving Janis as groupthink. 15  In groupthink, there is an implicit agreement not to bring up upsetting facts. In the corporation, where junior managers’ success depends to some degree on the approval of senior managers, a junior manager would be extremely reluctant to criticize a senior manager’s actions. One dramatic instance of this dynamic is the E. F. Hutton case, in which the practice of writing illegal checks spread throughout the company. Nobody wanted to bring up the upsetting fact that perhaps the practice was illegal. Instead, managers just went along. 16

15  D. Goleman, “Following the Leader,” 85 Science 18 (Oct. 1985).

16  Id.

Another factor making white-collar crime easy to commit is the fact that decision making is often distributed among various individuals. Because responsibility is diffuse, individuals may feel only very limited personal responsibility for the results of their actions. This spreading of responsibility also results in an awareness that the likelihood of getting caught is small. Another factor related to the complex organizational structure of a corporation is that once a decision has been made, many people implement it. Thus, even if a manager has second thoughts about a decision, it is often too late to stop the process. Also, once a decision has been made, and when it is implemented by others, the decision maker feels limited responsibility.

The businesspersons who are unlucky enough to get caught do not automatically lose their status among their peers. Some, in fact, may be admired. Violations of the law are not necessarily violations of businesspersons’ ethical codes. It is important to note that, unlike street criminals, who usually recognize that they are committing crimes, white-collar criminals are frequently regarded by themselves and their peers as respectable, law-abiding citizens.

In some instances, corporate crime is facilitated because the supposed adversarial relationship between the corporation and the government agency “watchdog” does not exist. Top corporate executives and high-level government officials may share similar values and lifestyles. Business managers often make career moves directly to a government agency regulating that business and then back to business. These factors may make some government officials reluctant to crack down on businesspersons, and businesspersons’ awareness of this reluctance contributes to an environment in which white-collar crime is tolerated.

Finally, a corporation’s personnel and operating procedures often encourage its employees to commit white-collar crimes. Although many of the previously discussed factors are not easily amenable to change, personnel and operating policies are under the direct control of management and, therefore, business managers concerned about white-collar crime can have an impact on the likelihood of its occurrence by carefully examining their corporate policies. For example, employees are much more likely to commit white-collar crimes when corporate policies lead to a lack of job security, inadequate pay, a lack of recognition for outstanding work, perceived inequities in employee salaries, poor promotion opportunities, inadequate expense accounts or unreasonable budget expectations, poor training, or poor communication practices.

Sentencing of White-Collar Criminals

Another feature that some would say distinguishes white-collar crime is the attitudes of the judges who hand down the sentences for these crimes. A public perception that judges were not giving long enough sentences to white-collar criminals and were not imposing large enough fines led to the adoption of the 1991 Sentencing Guidelines for use by federal judges. These guidelines are said to provide “just punishment, adequate deterrence, and incentives for organizations to maintain internal mechanisms for preventing, detecting, and reporting criminal conduct in all aspects of their activity.” 17  Until early 2005, these guidelines were in fact mandatory restrictions on the judge’s sentencing authority. Today, these guidelines are just what their name implies: guidelines.

17  C. C. Dow and R. J. Muehl, “Are Policies Keyed to New Sentencing Guidelines?” 35 Securities Management 98 (Nov. 1992).

Under these sentencing guidelines, a fine is a product of a “base fine” and a “culpability score.” The base fine is the greatest of the company’s gain, the victim’s loss, or a dollar amount corresponding to an offense level. The culpability score provides a multiplier that is applied to the base fine. The culpability score is determined by looking at a chart of potential mitigating and aggravating factors. An example of an aggravating factor might be that high levels of management were aware of the criminal activity but did nothing to stop it. Mitigating factors would be having a meaningful compliance program in effect at the time of the offense and upper management’s taking steps to remedy the harm, discipline the offender, and prevent a recurrence. Because of the difference that these aggravating and mitigating factors can have on the amount of the fine—a crime with a base fine of $5 million, for example, could be as low as $2 million or as high as $20 million, depending on the culpability score—supporters hope that the guidelines will not only result in fairer penalties but actually have a major impact on the way firms operate.

When the sentencing guidelines were established, there was a concern about the lack of prison time served by most white-collar criminals and the general judicial leniency toward white-collar crimes. Consequently, some confinement was mandated for almost all white-collar offenses. Sentences are determined in a way similar to fines, with a base sentence and culpability factor. Judges, however, were given discretion, under extraordinary circumstances, to modify the sentence and depart from the guidelines, and may impose alternative penalties (as described later in this section). Some of the factors that allow departure include “substantial cooperation” of the defendant; extraordinary effects of a prison sentence on third parties, including the defendant’s family; an overstatement of loss from the crime; and diminished capacity.

Some critics of the guidelines argue that although prison sentences are required for a broad range of white-collar crimes, the sentences for these crimes are still much less than for street crimes. For example, the base sentence for an antitrust violation is as low as two to eight months. 18  During 2001, the average sentence in the 8,328 cases of fraud was 22.9 months.

18  G. N. Racz, “Exploring Collateral Consequences: Koon v. United States, Third Party Departures from Federal Sentencing Guidelines,” 72 N.Y. Univ. L. Rev. 1462 (1997).

The power of the sentencing guidelines began to crumble as a result of the 2004 U.S. Supreme Court decision in Blakely v. Washington, 19  in which the high court ruled that under the Sixth Amendment, juries, not judges, should determine the facts that increase sentences beyond guideline maximums. In that case, the facts admitted into evidence supported a maximum sentence of 53 months. The judge, however, imposed a sentence of 90 months after finding that the defendant had acted with deliberate cruelty, a statutorily enumerated ground for departing from the standard range. The Washington State Supreme Court had rejected the defendant’s argument that the judge’s acting on facts not admitted into evidence denied him his constitutional right to have a jury determine, beyond a reasonable doubt, all facts legally essential to his sentence. On appeal, the U.S. Supreme Court agreed with the defendant and overturned the state court’s decision.

19  542 U.S. 296, 125 S. Ct. 2531 (2004).

Although this case involved a state sentencing law, the decision immediately called into question the validity of the Federal Sentencing Guidelines. Within a month of the decision in Blakely, two circuit courts of appeal had ruled that the guidelines were unconstitutional, with the judge in one case stating that, “In order to comply with Blakely and the Sixth Amendment, the mandatory system of fixed rules calibrating sentences automatically to facts found by judges must be displaced by an indeterminate system in which the Federal Sentencing Guidelines in fact become ‘guidelines’ in the dictionary-definition sense.” 20  He further said that instead of judges viewing the guidelines as mandatory, they should “view the guidelines in general as recommendations to be considered and then applied only if the judge believes they are appropriate and in the interests of justice in the particular case.” 21

20  United States v. Montgomery, No. 03-5256, 2004 U.S. App. LEXIS 14384 (6th Cir. July 14, 2004).

21  Id.

A similar holding applied to the federal courts in the 2005 consolidated case of United States v. Booker 22  and United States v. Fanfan. 23  The key question in these cases was whether judges can increase criminal sentences based on arguments from prosecutors that juries never considered. The high court found that the mandatory guidelines are unconstitutional. The mandatory sentencing scheme of the guidelines when coupled with its reliance on judicial factfinding is incompatible with the Sixth Amendment. Although district courts still calculate sentencing ranges under the guidelines, these ranges are now considered merely advisory. Subsequent congressional action on the matter is anticipated.

22  No. 03-104 (2004).

23  No. 03-105 (2004).

Even before these rulings, judges had departed from the guidelines under extraordinary circumstances and, sometimes, also used alternative sentencing instead of imposing prison sentences or fines. One alternative to prison that judges favor for white-collar offenders is community service. Offenders have been assigned to perform such services as giving speeches about their wrongful acts to business and civic groups and working among the poor in drug rehabilitation clinics. A corporate criminal who dumped industrial waste into San Diego’s sewers, claiming it was domestic sewage, received a $250 fine and three years’ probation, with an unusual twist: For violating waste disposal laws, he was required to complete a hazardous materials course; perform 120 hours of volunteer work for the Veterans of Foreign Wars; and spend 40 hours at the city’s pump station where waste is discharged by trucks into the city’s sewage treatment system. The man was also ordered to inform the waste haulers who came into the pump station that he had falsified a report describing the type of waste he was discharging. 24

24  K. Balint, “Falsifier on Waste,” San Diego Union-Tribune (Aug. 21, 1993).

Another popular alternative to prison is occupational disqualification. The white-collar criminal is prohibited for a specific period from engaging in an occupation in which she or he would be able to commit the same crime again. Policing such a prohibition is difficult, so if a corporation really wants the convicted employee’s services, it can easily adjust the employee’s job title to make it appear that the job is one the employee can legally hold.

An alternative touted as saving money for the taxpayers is house arrest or home confinement. The criminal is not allowed to leave home for the period of incarceration and is compelled to wear an unremovable sensor that allows government officials to detect his or her location at all times. In some cases, the defendant is allowed to serve his or her prison term on weekends.

Common White-Collar Crimes

Thus far, we have focused on the white-collar criminal, but any study of white- collar crime must include consideration of who the victims are and what some of the precise crimes are. The victims of white-collar crime are widespread, and they vary according to the precise crime committed. White-collar crimes may be committed against the public in general, as when environmental regulations are violated; against consumers, as when they are forced to pay higher prices because of violations of the antitrust laws or when they die because the products they purchased were made without undergoing the tests required by the Pure Food, Drug, and Cosmetic Act; against the taxpayers, as when income taxes are not paid; and against the corporation itself, as when employees steal from their employer. When the victims are the corporation the criminal works for, we sometimes refer to the crime as an intrabusiness crime. Estimates of the annual costs of intrabusiness crime range from $4 billion to $44 billion. In this section, we examine some of the more common white-collar crimes, noting their elements and their victims.

But before we examine common crimes, we want to emphasize how important it is to business managers to be aware of the legal definitions of particular white-collar crimes. Judges do not decide in favor of prosecutors when the actions of the defendant do not match the definition of the crime.  Case 6-2  illustrates the importance of knowing the elements of possible crimes.

 Case 6-2 Sekhar v. United States

United States Supreme Court 133 S. Ct. 928

The Comptroller of the State of New York determines the Investment purchases made on behalf of the state pension system. In 2009, the Comptroller considered whether to invest in a fund managed by FA Technology. Based on its due diligence the General Counsel advised the Comptroller that such an investment would be unwise. The Comptroller followed this advice.

Four days later the General Counsel received an anonymous email warning the General Counsel that if he did not recommend the purchase from FA Technology, the General Counsel’s extramarital affair would be disclosed. Similar emails were sent over the next several days. The emails were traced to the managing partner of FA Technology, Giridhar Sekhar, who admitted that he had sent the emails.

For the crime of extortion to have occurred, the law requires that the recommendation of the attorney had to be “property.” Sekhar preferred to have the crime defined as “coercion” to avoid the more severe penalties attached to extortion. The United States claims that extortion is a subset of coercion, specifically coercion involving an economic element. The Hobbs Act is a Federal statute passed in 1948. The Court relied heavily for its decision on the language of that law. Both the federal district court and the Second Circuit Court of Appeals decided that the attorney’s advice was a form of property that could be obtained by threats. Sekhar appealed this decision to the U.S. Supreme Court.

Justice Scalia

Petitioner was indicted for, and a jury convicted him of, attempted extortion, in violation of the Hobbs Act, 18 U.S.C. § 1951(a). That Act subjects a person to criminal liability if he “in any way or degree obstructs, delays, or affects commerce or the movement of any article or commodity in commerce, by robbery or extortion or attempts or conspires so to do.” The Act defines “extortion” to mean “the obtaining of property from another, with his consent, induced by wrongful use of actual or threatened force, violence, or fear, or under color of official right.” . . . On the verdict form, the jury was asked to specify the property that petitioner attempted to extort: (1) “the Commitment”; (2) “the Comptroller’s approval of the Commitment”; or (3) “the General Counsel’s recommendation to approve the Commitment.” The jury chose only the third option.

The Court of Appeals for the Second Circuit affirmed the conviction. The court held that the general counsel “had a property right in rendering sound legal advice to the Comptroller and, specifically, to recommend—free from threats—whether the Comptroller should issue a Commitment for [the funds].” 683 F.3d, at 441. The court concluded that petitioner not only attempted to deprive the general counsel of his “property right,” but that petitioner also “attempted to exercise that right by forcing the General Counsel to make a recommendation determined by [petitioner].”

Whether viewed from the standpoint of the common law, the text and genesis of the statute at issue here, or the jurisprudence of this Court’s prior cases, what was charged in this case was not extortion.

“[W]here Congress borrows terms of art in which are accumulated the legal tradition and meaning of centuries of practice, it presumably knows and adopts the cluster of ideas that were attached to each borrowed word in the body of learning from which it was taken and the meaning its use will convey to the judicial mind unless otherwise instructed.” Morissette v. United States.

Or as Justice Frankfurter colorfully put it, “if a word is obviously transplanted from another legal source, whether the common law or other legislation, it brings the old soil with it.” . . . .

The Hobbs Act punishes “extortion,” one of the oldest crimes in our legal tradition. The text of the statute at issue confirms that the alleged property here cannot be extorted. Enacted in 1946, the Hobbs Act defines its crime of “extortion” as “the obtaining of property from another, with his consent, induced by wrongful use of actual or threatened force, violence, or fear, or under color of official right.” 18 U.S.C. § 1951(b)(2) (emphasis added). Obtaining property requires “not only the deprivation but also the acquisition of property.” Scheidler v. National Organization for Women, Inc., . . . . (citing United States v. Enmons, . . . ). That is, it requires that the victim “part with” his property. The property extorted must therefore be transferable—that is, capable of passing from one person to another. The alleged property here lacks that defining feature.

Instead of defending the jury’s description, the Government hinges its case on the general counsel’s “intangible property right to give his disinterested legal opinion to his client free of improper outside interference.” Brief for United States 39. But what, exactly, would the petitioner have obtained for himself? A right to give his own disinterested legal opinion to his own client free of improper interference? Or perhaps, a right to give the general counsel’s disinterested legal opinion to the general counsel’s client?

Either formulation sounds absurd, because it is. Clearly, the petitioner’s goal was not to acquire the general counsel’s “intangible property right to give disinterested legal advice.” It was to force the general counsel to offer advice that accorded with petitioner’s wishes. But again, that is coercion, not extortion. No fluent speaker of English would say that “petitioner obtained and exercised the general counsel’s right to make a recommendation,” any more than he would say that a person “obtained and exercised another’s right to free speech.” He would say that “petitioner forced the general counsel to make a particular recommendation,” just as he would say that a person “forced another to make a statement.” Adopting the Government’s theory here would not only make nonsense of words; it would collapse the longstanding distinction between extortion and coercion and ignore Congress’s choice to penalize one but not the other. That we cannot do. *

Sekhar v. United States, 133 S. Ct. 928, The Supreme Court of the United States.

Judgment reversed in favor of the United States.

Bribery

Bribery  is the offering, giving, soliciting, or receiving of money or any object of value for the purpose of influencing a person’s action, especially a government official. The law against bribery is necessary to protect the integrity of the government and to ensure that the government functions fairly and efficiently. Bribery would include paying a judge to rule in favor of a party and giving a senator free use of your condominium if he or she votes for a particular piece of legislation. For example, Antonio Bras pled guilty to bribing Department of Public Works (DPW) officials in Washington, DC, to falsify records showing that Bras’s company was providing more asphalt than it actually was, allowing Bras to overcharge the DPW. To enable his overcharging, Bras paid DPW officials to accept falsified records. Bras was sentenced to three years and one month imprisonment, which was less than the maximum of five years he could have received. 25

25  482 F.3d 560 (D.C. Cir. 2007).

bribery

The offering, giving, soliciting, or receiving of money or any object of value for the purpose of influencing the judgment or conduct of a person in a position of trust, especially a government official.

Some states broaden their definition of bribery to include certain payoffs in a commercial context. It is often considered bribery to offer to confer a benefit upon an employee or agent of another in an attempt to influence that agent’s behavior on behalf of his or her employer or principal without that employer or principal’s knowledge. Thus, an employee’s offer to pay a contracting officer $5,000 in exchange for that officer’s promise to purchase all the widgets the employer makes the next year would be considered a bribe in many states.

Violations of Federal Regulations

During the past few decades, regulatory agencies have been created and federal regulations enacted to control business. Analogous state regulations have also been enacted. Some primarily regulate economic matters; others are designed to protect the health, safety, and welfare of employees, consumers, and the public in general. You will study many of the regulations in the public law part of this book,  Chapters 18  through  25 .

Violation of any of these regulations constitutes a white-collar crime. The victims of these crimes vary according to the regulation that has been violated. For example, Occupational Safety and Health Act standards are established to protect the health and safety of workers. When these standards are violated, the violation is a criminal act that victimizes the employee, who is working under less safe or less healthful conditions than those required by law. When we examine these different regulations in later chapters of this book, the reader should consider who would be victimized by violations of each of the regulations. The reader who has a clear understanding of who might be hurt by such violations may be careful not to violate those regulations when he or she is a manager.

Violations of these regulations are often not perceived as criminal because they are frequently remedied outside the traditional courtroom setting. These regulations are often enforced by the appropriate regulatory agency through the issuance of a warning, a recall of defective products, or a consent agreement (a contract in which the violator agrees to cease engaging in the illegal activity). A cease-and-desist order may also be issued, ordering the corporation to cease violating the law and imposing a fine on the corporation for each day it violates the order. Warning letters are often the first approach of the regulatory agency, and the prudent businessperson should heed them. In cases of substantial violations, regulatory agencies may, of course, seek to impose fines on the corporation or manager responsible for the violation or may ask the court to impose a prison sentence on an offender.

The maximum monetary penalty that can be issued for violating federal regulations enacted to control business varies according to the regulation in question. For example, the maximum corporate penalty for violating the antitrust law is $100 million, a sum rarely awarded, which is larger than the previous maximum of $1 million but still not very large compared with the billions of dollars of assets and sales of some violators. For other acts, maximums are much lower. For example, $1,000 is the maximum for a first offense under the Pure Food, Drug, and Cosmetics Act, and $500,000 is the maximum for Occupational Health and Safety Act violations.

The maximum fines for individuals vary; a fine of $10,000 under acts such as the Pure Food, Drug, and Cosmetics Act and the Securities Exchange Act is typical. Maximum prison sentences usually range from six months to one year, with a few acts allowing up to five-year sentences. Maximum sentences are rarely imposed.

Criminal Fraud

Criminal fraud  is a generic term that embraces a wide variety of means by which an individual intentionally uses some sort of misrepresentation to gain an advantage over another person. State fraud statutes vary, but most require proof of three elements: (1) an intent to defraud, (2) the commission of a fraudulent act, and (3) the accomplished fraud. It is very difficult to prove fraud, especially the first element: the intent to defraud. Some fraudulent acts that commonly occur in the corporate setting are:

criminal fraud

Intentional use of some sort of misrepresentation to gain an advantage over another party.

1. Defalcation, the misappropriation of trust funds or money held in a fiduciary capacity.

2. False entry (entries), the making of an entry into the books of a bank or corporation that is designed to represent the existence of funds that do not exist.

3. False token, a false document or sign of existence used to perpetrate a fraud, such as making counterfeit money.

4. False pretenses, a designed misrepresentation of existing facts or conditions by which a person obtains another’s money or goods, such as the writing of a worthless check.

5. Forgery, the material altering of anything in writing that, if genuine, might be the foundation of a legal liability.

6. Fraudulent concealment, the suppression of a material fact that the person is legally bound to disclose.

This list is by no means all-inclusive, but it demonstrates the broad variety of actions captured by the term fraud.

A person or corporation that uses the mail to execute a scheme or artifice to defraud the public out of money or property may be prosecuted under the federal law that prohibits mail fraud. Likewise, a person or corporation that uses the telephone, telegraph, television, radio, or other device to transmit a fraudulent message may be prosecuted for the federal crime of wire fraud. Mail fraud claims can be brought in a wide range of situations. Seeking greater deterrence of mail and wire fraud, Congress passed the White-Collar Crime Penalty Act of 2002 as part of the Sarbanes-Oxley Act. The act increased maximum prison sentences for mail and wire fraud from 5 years to a new maximum of 20 years.

As the following case indicates, the likelihood that a fraudulent scheme will succeed is inconsequential to the decision of guilt or innocence.

 Case 6-3 United States v. Gray

Eleventh Circuit Court of Appeals 367 F.3d 1263 (2004)

The appellant, Kevin Gray, was found guilty of mail fraud. He had attempted to convince a businessman, Frank Patti, who was on trial for tax evasion and faced substantial jail time, that for $85,000 he would bribe the jury, thus avoiding the threat of jail for the businessman. The methods used by the appellant were, however, at times hardly believable. As a result, the appellant seeks a judgment of acquittal on the ground that his fraudulent scheme was “so absurd” that a person of ordinary prudence would not have believed it; the scheme, therefore, fell outside the realm of conduct proscribed by the mail fraud statute.

Circuit Judge Tjoflat

On May 8, 2002, a federal grand jury in the Northern District of Florida returned an indictment charging the appellant on one count of mail fraud. He pled not guilty, and the case proceeded to trial before a jury. The jury, having received evidence establishing the facts set forth above, found the appellant guilty, and the district court sentenced him to prison for 28 months. This appeal followed.

The appellant’s initial attack on his conviction is that the evidence was insufficient to make out a case of mail fraud. He argues that to prove the crime of mail fraud, the Government must establish that the defendant “intended to create a scheme ‘reasonably calculated to deceive persons of ordinary prudence and comprehension.’” Additionally, it must show that the defendant took some action in furtherance of his scheme—to bring it to fruition—in the form of a material misrepresentation made to the would-be victim that “a reasonable person would have acted on.” It is on this peg that the appellant hangs his hat, contending that a reasonable person would not have acted on his representations when considered as a whole. In bolstering his argument, he draws attention to his statement to Patti that $85,000 would be needed to bribe three of the jurors who would be trying his case: $35,000 for J-1, and $25,000 each for J-2 and J-3. The appellant contends that a reasonable person would know that since the pool from which these jurors would be selected would not be known until April 15—when the pool assembled at the courthouse for the trial—the representation had to be phony.

While it is true that statements like the one he cites would seem absurd or fanciful to a reasonable person, the mail fraud statute does not require that every representation a defendant utters while executing his scheme must be credible. Instead, the statute requires proof that the defendant’s scheme to defraud involved the use of material, false representations or promises. The initial representations the appellant made to Patti satisfy this requirement.

In the letter to Patti, the appellant made a false promise: “we can assure you . . . no imprisonment but you must pay the agreed tax settlement issued by the court.” In addition, he falsely represented that an undisclosed number of sympathizers—including “our mutual friend” and “our associates in Pensacola”—would work to extricate Patti from his legal predicament if the businessman would agree to follow certain instructions. True, the letter did not identify precisely how the writer and these sympathizers would help Patti, but this omission did not render the letter devoid of any material misrepresentations that were capable of prompting a reasonable person to act as Patti did. What the appellant overlooks is that the mail fraud statute “punishes unexecuted, as well as executed, schemes. This means that the government can convict a person for mail fraud even if his targeted victim never encountered the deception—or, if he encountered it, was not deceived.” All that the Government needs to show to establish the mens rea element of the offense is that the defendant anticipated the intended victim’s reliance, and the appellant’s anticipation of Patti’s reliance can be inferred from, among other things, the fact that he was prepared to call Patti at the pay phone at the time and location specified in the letter.

Because the letter received by Patti contained false material representations from the appellant as part of an effort to receive cash payments from the desperate businessman, the crime of mail fraud was complete when the appellant delivered the letter via FedEx to Patti. *

United States v. Gray Eleventh Circuit, Court of Appeals 367 F.3d 1263 (2004).

Affirmed in favor of the Prosecution.

Critical Thinking About The Law

The defendant in this case seems to misunderstand the law. His contention is that his offer to bribe is an absurdity and that Patti should have recognized it as such. His logic is that there can be no fraud unless the person who is allegedly being helped by the fraud reasonably believes the promised act will occur. In other words, the more outrageous the promise, the more the person charged with fraud can escape liability. The court in this case makes it clear that it is the act of the person initiating the fraud that is the key to the offense, not the response of the person being defrauded.

1. Does the rule of law in mail fraud cases require any particular action or belief on the part of the person being defrauded?

Clue: Study the quote in the next-to-last paragraph of the decision.

2. What ethical norm is being emphasized by the rule of law with respect to mail fraud?

Clue: Look back at the list of alternative ethical norms and make a determination about which of them is being advanced by the rule of law as it applies to mail fraud.

Fraud can range from a single act that victimizes one individual to a long-term scheme that victimizes thousands. In the corporate setting, fraud is sometimes committed by managers to make themselves look better so that they can secure promotions at the expense of others who perhaps deserve the promotions. Fraudulent entries in corporate records may result in artificially inflating the purchase price of stock at the expense of its purchasers. Fraud may also be committed against the corporation, and thus against the shareholders, as when an employee on a bonus system fraudulently reports sales before they have been completed to collect an early bonus or “pads” his or her expense account. The more autonomy employees have, and the fewer people overseeing their actions, the greater the likelihood of their committing fraud.

Consumers may also be victims of corporate fraud, as when businesspersons make false representations in advertising and labeling. Consumers may also be victimized by the fraudulent substitution of inferior goods for higher-quality ones. These substitutions even have the potential to give rise to fraud claims.

Even student loans can provide the opportunity for fraud. In 2010, Rachel Yould, a former beauty queen, Stanford graduate, and Rhodes Scholar pled guilty to fraud charges after having defrauded lenders out of over $680,000 in fraudulent student loans. She borrowed the maximum amount of student loan money allowed, and then was able to obtain a new Social Security number through a domestic violence protection program, and used that new number to fraudulently obtain more student loan money, which she used to purchase a condominium, start a journal, and invest in the stock market. 26

26  To read more about this white-collar crime, see Jeffrey Toobin, “The Scholar,” New Yorker Magazine (Oct. 4, 2010), available at  http://www.newyorker.com/reporting/2010/10/04 /101004fa_fact_toobin .

One of the fastest-growing forms of fraud over the last decade has been identity theft, whereby one’s credit card, Social Security number, driver’s license number, and other personal information are used for fraudulent purposes. According to Javelin Strategy & Research, a financial research company that has been tracking identity theft for the past decade, approximately 13.1 million Americans were victims of at least one identity theft in 2013, costing consumers more than $18 billion. 27  And in 2014, the IRS estimated that it mistakenly paid approximately $5 billion to identity thieves who filed fraudulent tax returns on behalf of unsuspecting citizens, and identified and stopped another $24.2 billion in attempted fraud. 28

27  “Every Two Seconds Another American Becomes a Victim of Identity Theft,” Money (Feb. 26, 2014), available at  http://money.cnn.com/2014/02/06/pf/identity-fraud/ .

28  Kara Brandeisky and Susie Poppick, “How Identity Thieves Stole $5.2 Billion from the IRS,” Money (Sept. 23, 2014), available at  http://time.com/money/3419136/identity-theft-social -security-number-tax-return/ .

To combat this costly form of fraud, Congress passed the Identity Theft and Assumption Deterrence Act of 1998, making identity theft a federal felony punishable by up to 25 years in prison. The act also requires the FTC to help victims restore their credit. In addition, the FTC and other federal agencies suggest methods for reducing the likelihood of identity theft, including restricting the use of your Social Security number to occasions when it is legally required, reviewing your credit report at least twice a year, and proceeding with caution before giving out personal information over the Internet.

Larceny

Another frequently occurring type of white-collar crime is larceny.  Larceny  is a matter of state criminal law, so the definition may vary slightly by state, but it can generally be defined as the secretive and wrongful taking and carrying away of the personal property of another with the intent to permanently deprive the rightful owner of its use or possession. The means of carrying out this crime is stealth: Larceny is not carried out by means of fear or force, which is the means of committing a robbery, and it is not carried out by means of false representation, which is one means of committing fraud. Larceny is commonly called theft by persons without legal training.

larceny

The secretive and wrongful taking and carrying away of the personal property of another with the intent to permanently deprive the rightful owner of its use or possession.

Most states distinguish petty larceny from grand larceny, with the distinction based on the value of the item. Grand larceny involves items of higher value than those involved in petty larceny. It is usually considered a felony and, thus, is punishable by either a more severe fine or a longer term of imprisonment, or both.

In the corporate context, larceny generally involves employees taking the employer’s property. Common instances of larceny include an employee’s taking home stationery or supplies from the office.

Embezzlement

Another white-collar offense is  embezzlement . This crime is commonly defined as the wrongful conversion of the property of another by one who is lawfully in possession of that property. In some states, by statute, the crime may be committed only by certain classes of people, such as fiduciaries, attorneys, and public officials. As the reader might guess, larceny and embezzlement sometimes overlap. Like larceny, embezzlement is usually divided into degrees based on the value of the property embezzled. Some states also treat different kinds of embezzlers differently; that is, those embezzling from different types of institutions or those holding different types of positions may be distinguished.

embezzlement

The wrongful conversion of the property of another by one who is lawfully in possession of that property.

Computer Crimes

As technology evolves, so do ways of committing corporate crime. With the arrival of the computer and the increasing automation of many facets of business, an area of crime has developed that society has not yet found an effective means of handling. No one knows the exact cost of computer crime each year, but estimates range from $300 million to $67 billion.

For the most part, computer crime, rather than being a new type of crime, is a means of making traditional crimes easier to commit. See  Exhibit 6-7  for examples of some typical computer-crime techniques. Think about how many employees have access to a computer at work. When the number of individuals with home computers is added, there are myriad opportunities available for computer crime. Computer systems must now be protected from management, lower-level employees, and outsiders, sometimes known as hackers. With all these individuals having access to computers, a continuing increase in the amount of computer crime seems highly likely. Not only do computers make crime easier, but it appears that computers also make crime more profitable. According to federal officials, the average loss in a bank robbery is $10,000, and the average loss in a nonelectronic embezzlement is $23,500. But in a computer fraud, the average loss is $24,000.

Computer crimes are also not frequently prosecuted; some analysts estimate that less than 1 percent of those who engage in computer fraud are

 PIGGYBACKING—A nonauthorized person gaining access to a terminal when an authorized person failed to sign off, or an unauthorized person discovering an authorized user's password and signs on using that password

 IMPOSTER TERMINAL—Using a home computer with a telephone modem to gain access to a mainframe computer by cracking the password code and then using the computer free of charge

 TROJAN HORSE—Covertly placing instructions in a computer program that will generate unauthorized functions

 SALAMI SLICING—Stealing tiny amounts of money off large numbers of inputs (such as taking a penny off each entry) and transferring them into one's personal account

Exhibit 6-7 Common Computer-Crime Techniques

actually prosecuted. One reason these criminals are so successful is that many computer crimes are extremely difficult to detect. Even if the crime is detected, if the victim is a business, it will often not prosecute because it does not want its competitors to know that its system was vulnerable. A final problem with convicting people of computer crimes is that the crimes sometimes do not fit precisely within the statutory definitions of traditional crimes.

Applying The Law To The Facts . .

Let’s say that Katie is a computer hacker, and hacks into the supposedly well-protected network system of a large corporation. Katie hacks into the corporation’s financial accounts and withdraws a moderate sum of money. When the corporation’s executives find out about the withdrawal, they fix the network so that Katie cannot reenter the network in the same way she did before, but they do not report the crime. Why might the corporation not report the crime?

Partially in response to this lack of adequate statutes under which to prosecute computer crime, Congress passed the Counterfeit Access Device and Computer Fraud and Abuse Act of 1984. The act not only imposes criminal sanctions, but also allows parties injured by a violation to bring a civil action to recover compensatory damages for the losses they incurred because of the violation. This act was subsequently amended by passage of the Computer Fraud and Abuse Act of 1986 (CFAA), which expanded the coverage of the original act. Congress continued to expand the scope of the law in 1989, 1990, 1994, 1996, and 2001. The most recent amendment to CFAA was passed as part of the USA PATRIOT Act to provide broader scope for prosecution of computer crimes. Under the latest version of the act, seven categories of activities are regulated:

1. The unauthorized use of or access to a computer to obtain classified military or foreign policy information with the intent to harm the United States or to benefit a foreign country

2. Accessing a protected computer (government computers, computers in financial institutions, or those used in interstate commerce) without authority or in excess of authority

3. The intentional, unauthorized access to a federal computer and the use, modification, destruction, or disclosure of data it contains or the prevention of authorized persons’ use of such data

4. Accessing a protected computer without or in excess of authority with the intent to obtain something of value

5. Knowingly causing the transmission of a program, code, or command, and as a result causing damage to a protected computer

6. The fraudulent transfer of computer passwords or other similar data that could aid unauthorized access that either (a) affects interstate commerce or (b) permits access to a government computer

7. Transmitting in interstate or foreign commerce any threat that could cause damage to a protected computer with the intent to extort something of value

One important issue that had to be clarified under this act was whether the act would be violated if persons knowingly accessed a computer without permission but did so not knowing what damage they would cause by their action. This issue was settled by U.S. v. Tappen, 29  in which the court held that the intent goes to the intent to access the computers because Congress added the intent element to ensure that people who inadvertently got into someone else’s computer systems were not punished under the act.

29  Second Circuit Court of Appeals, 928 F.2d 504 (1991).

Although it may seem as if the federal statute is fairly comprehensive, there are still a number of computer crimes that do not really violate that act. Those crimes must be prosecuted, if at all, under one of the state computer- crime statutes, which now exist in every state in some form, or under one of the traditional crime statutes.

As society attempts to find ways to respond to computer crimes, we have initially attempted to categorize the crimes. Following is just one way to categorize and think about these crimes.

Destruction of Data

 Destruction of data is one of the biggest problems facing business today. A person with expertise in programming can create what is commonly referred to as a  virus , a program designed to rearrange, replace, or destroy data. Once a virus is planted in a computer’s instructions, it can spread to other systems or programs by rapidly copying itself. Hence, if a computer virus is not caught early, it can be extremely destructive.

virus

A computer program that destroys, damages, rearranges, or replaces computer data.

A number of software programs have been developed to detect and destroy viruses. These programs, however, are reactive, not proactive. Every time a new type of virus is discovered, a new antiviral program must be developed. By 2006, there were more than 100,000 known viruses; hence, keeping antivirus software current is no easy task, though it is essential. In 2003, it was estimated that computer viruses and  worms  cost businesses more than $67 billion in damages.

worm

A program that travels from one computer to another but does not attach itself to the operating system of the computer it “infects.” It differs from a “virus,” which is also a migrating program but one that attaches itself to the operating system of any computer it enters and can infect any other computer that uses files from the infected computer.

Destruction of data may also be more limited. For example, a disgruntled employee who is fired might program his computer to destroy a section of data every time a file is saved. Before anyone realizes what has occurred, valuable data may be lost.

Unlawful Appropriation of Data or Services

 Employees at work are often provided with expensive computer systems and software. They have access to vast amounts of data. When employees use their work computers or data accessed through these computers in a manner not authorized by their employer, they have engaged in theft of computer services or data.

Entering of Fraudulent Records or Data into a Computer System

 Entering fraudulent records includes altering a person’s credit rating electronically and breaking into a university’s computer system and changing someone’s course grades. For example, in 2007, 34 people, including former student employees, were charged with computer fraud and conspiracy charges regarding a six-year-long cash-for-grades scheme at Diablo Valley College in California. Allegedly, some of the students charged with the crimes illegally gained access to records of student grades and would take cash payments to alter grades for other students. By 2008, two of the ringleaders agreed to cooperate with prosecutors in exchange for sentences of one year in jail and four years’ probation. Three others who were involved in changing grades were found guilty and charges against one were dropped because of a lack of evidence. The cases have not yet all been resolved. In May of 2010 another student implicated in the fraud was arrested, leaving four of those named in the scheme still at large.

Financial Crimes

 Fraud, embezzlement, and larceny are now easier to accomplish by computer. An employee could electronically transfer ownership of funds from a corporate account to a personal account. Any object subject to lawful transfer electronically can also be stolen electronically.

Keeping these differences in mind, it is easy to see why, when fraud is suspected, the wise manager may wish to hire a fraud examiner, rather than simply rely on either an internal or external audit, to settle the question of whether fraud has occurred.

Prevention of White-Collar Crime

We should all be interested in the prevention of white-collar crime because we are all its victims in more than one aspect of our lives. We are victims as consumers, shareholders, responsible employees, taxpayers, and citizens in general. The suggested ways for reducing white-collar crime are numerous and varied.

First, we will examine some of the ways in which corporate crime committed on behalf of the corporation may be prevented. One suggestion is to replace state chartering of corporations with federal chartering. Proponents argue that such chartering would prevent competition among states, which may lead to bribery and state officials’ routinely overlooking corporate violations of the laws. As a part of federal chartering (or until then, by state law), corporations could be required to have outside directors (directors who are not also officers or managers). A counterargument to that suggestion is that outside directors do not have a significant impact on the behavior of management. They have neither the knowledge nor the interest to provide effective supervision.

An even more innovative suggestion, put forward by Christopher Stone, 30  is that each corporation doing more than a certain amount of business be required to have a general public director (GPD). The GPD would have an office at the corporation with a small staff, would be given access to corporate books and records, and would represent the public interest in the ongoing functions of the corporation. General public directors would sit on corporate committees and advise corporate officials about the legality of their activities. These public-interest watchdogs would be full-time workers paid from tax money. Stone further suggested that special public directors (SPDs), who would function like GPDs except that they would work in a special area such as workplace safety or antitrust, be assigned to corporations that have committed a series of violations in any specific area. SPDs would attempt to prevent further violations of a similar nature.

30  C. Stone, Where Law Ends: The Social Control of Corporations 122, 183 (Harper & Row, 1976).

Two other proposals are to link the amounts of fines to the benefits obtained by the violations and to increase the amount of both corporate and individual

Linking Law and Business Accounting

When people initially think about how to detect fraud, they may think that fraud detection is the auditor’s responsibility. If you remember what you learned about the role of an auditor from your accounting class, however, you would quickly recognize that although an auditor may discover something that tips him or her off that fraud has occurred, fraud detection is not the auditor’s responsibility. It is useful, when thinking about fraud detection, to keep in mind the differences between the role of independent auditors and the role of fraud examiners, which are detailed in the following list:

· Auditors follow a program; fraud examiners look for the unusual.

· Auditors look for errors and omissions; fraud examiners look for oddities and exceptions.

· Auditors assess internal control risk; fraud examiners “think like a criminal” and look for holes in the controls.

· Auditors use the concept of materiality with amounts higher than a fraud examiner would use.

· Auditors usually start fresh with materiality each year; fraud examiners look at cumulative materiality.

· Auditors work with financial accounting and auditing logic; fraud examiners think about motive, opportunity, and integrity.

Technology and the Legal Environment Are We Prepared to Fight Cybercrime?

After the worldwide attack by the Philippine “love bug” virus, and the difficult time that nation had in prosecuting the perpetrator of the cybercrime, McConnell International LLC, a global technology policy and management consulting firm, undertook a study to determine the readiness of most countries to successfully prosecute those who committed cybercrimes. Their conclusion was that in most countries around the world, existing laws are likely to be unenforceable against such crimes, meaning that businesses and governments must rely solely on technical measures to protect themselves from those who would steal, deny access to, or destroy valuable information. This unfortunate state of the law is very important because the number of cybercrimes seems to be continually escalating. For example, according to the Computer Emergency Response Team Coordination Center (CERT/CC), the number of reported incidences of security breaches in the first three quarters of 2000 rose by 54 percent over the total number of reported incidences in 1999 (see  www.cert.org ). What makes these figures all the more frightening, however, is that some corporations and governments do not want to admit being victims of cybercrimes, so the figures must be an understatement of the scope of the problem.

McConnell International’s report analyzes the state of the law in 52 countries. It finds that only 10 of these nations have amended their laws to cover more than half of the kinds of crimes that must be addressed. Although many of the others have initiatives under way, most countries do not have laws that cover cybercrimes. For example, in many countries, laws that prohibit physical acts of trespassing or breaking and entering do not cover their “virtual” counterparts.

To prepare the report, McConnell International asked global technology policy officials in the 52 countries to provide copies of their laws that would be used to prosecute criminal acts involving both private- and public-sector computers. Countries that provided legislation were evaluated to determine whether their criminal statutes had been extended into cyberspace to cover 10 different types of cybercrime in four categories: data-related crimes, including interception, modification, and theft; network-related crimes, including interference and sabotage; crimes of access, including hacking and virus distribution; and associated computer-related crimes, including aiding and abetting cybercriminals, computer fraud, and computer forgery.

Thirty-three of the countries surveyed had not yet updated their laws to address any type of cybercrime. Of the remaining countries, 9 have enacted legislation to address 5 or fewer types of cybercrime, and 10 have updated their laws to prosecute 6 or more of the 10 types of cybercrime. Among those nations that had substantially or fully updated their laws were the United States, Canada, Japan, and the Philippines.

fines. More than 90 percent of the fines paid by corporations between 1975 and 1976 were less than $5,000. When imposed on a relatively small corporation, one with annual sales of $300 million, such fines are analogous to giving a person who earns $15,000 a year a two-and-a-half-cent fine. 31  Hence, fines as they currently exist do not really serve any deterrent function. Likewise, requiring greater and mandatory prison sentences for corporate executives who are found to have violated federal and state regulations might cause them to take these laws more seriously. Some also suggest elimination of the nolo contendere plea.

31  G. Stricharchuk and A. Pasztor, “New Muscle in False Claims Act May Help in Combating Fraud against the Government,” WSJ 19 (Dec. 19, 1986).

Because it is believed that the courts are unlikely to impose stiff fines on either corporations or convicted executives, the imposition of equity fines has been proposed. If a company is convicted of a white-collar crime, it would be forced to turn over a substantial block of its stock to a victim’s compensation fund. This relinquishing of the company’s stock would make its executives’ holdings worth less. It would also provoke the ire of shareholders, whose holdings would be diluted, and might prompt them to call for the ouster of the responsible executives. Finally, it might put pressure on managers, who realize that the existence of a block of stock in one place would make a takeover attempt easier.

Linking Law and Business Management

Responsibility is defined as the obligation to complete specific activities. Typically, managers will assign individuals to particular positions in which they are entrusted with the responsibility of carrying out a task. Job activities are often divided by the functional similarity method, which is a basic method for separating duties in an organization. There are four interconnected steps in this method: (1) Examine organizational objectives; (2) delegate appropriate activities to meet established objectives; (3) design specific jobs for each activity; and (4) place individuals with responsibility for each specific job.

Another guide to the functional similarity method suggests that overlapping responsibility should be avoided. Overlapping responsibility refers to situations in which more than one person has responsibility for a specific task. When more than one employee is assigned to a certain task, there is a greater likelihood for employee conflicts and poorer working relationships.

There is, however, a disadvantage to avoiding overlapping responsibility. When individuals are given greater responsibility and autonomy, there is also a greater possibility for fraudulent activities. When there are fewer people working along with an individual, there may be a greater temptation to engage in fraud. Thus, managers should weigh the costs and risks associated with the level of responsibility given to employees before dividing responsibility for various activities.

It is also believed that regulations are often broken because of ineffective monitoring by agencies. One remedy, it is argued, is to increase the operating budgets of the regulatory agencies to allow them to hire more people to monitor corporations and to improve the training of regulatory agency employees. A related argument is that the regulations themselves are often vague and complex. Simplification of these laws would make them more understandable and easier to follow. It would also make violations of these laws easier to recognize and prosecute.

These ideas and suggestions are all beyond the direct control of most corporate managers. There are, however, some very practical things that managers can do to reduce the likelihood that their employees or companies will commit white-collar crimes. First, have a well-defined company code of ethics that the employees read and sign. Make sure that the employees understand that dishonest and unethical behavior is not acceptable. Second, provide a hotline for anonymous tips. Employees should be encouraged to use the hotline to report any instances of fraud on the part of other employees. Third, provide an employee assistance program. Often employees commit fraud and other white-collar crimes because they are having problems with substance abuse, gambling, or money management. If they can get assistance with these problems, it may prevent their trying to solve them by committing crimes against the company. Finally, conduct proactive fraud auditing.

Federal Laws Used in the Fight against White-Collar Crime

The Racketeer Influenced and Corrupt Organizations Act (RICO)

In the eyes of many plaintiffs’ attorneys and prosecutors, a major weapon in the fight against white-collar crime can be found in Title IX of the Organized Crime Control Act of 1970, 32  the  Racketeer Influenced and Corrupt Organizations Act , or RICO, as it is commonly called. This statute was originally enacted to help fight organized crime, but its application in the commercial context soon became apparent. In fact, a study by the Task Force on Civil RICO of the American Bar Association revealed that only about 9 percent of the RICO cases involved what is commonly considered organized crime; 37 percent of the cases involved common-law fraud in a commercial setting; and 40 percent involved securities fraud allegations. 33

32  18 U.S.C. § 1961 et seq.

33  Stricharchuk and Pasztor, supra note 26.

Racketeer Influenced and Corrupt Organizations Act (RICO)

Federal statute that prohibits persons employed by or associated with an enterprise from engaging in a pattern of racketeering activity, which is broadly defined to include almost all white-collar crimes as well as acts of violence.

RICO is such a powerful statute because it allows any person whose business or property is injured by a violation of the statute to recover treble damages plus attorney’s fees in a civil action. Hence, this is an instance in which a civil lawsuit may help prevent criminal action.

How does one violate RICO? RICO prohibits persons employed by or associated with an enterprise from engaging in a pattern of racketeering activity. Judicial interpretations have interpreted “pattern” to mean more than one act. Thus, RICO cannot be used against the one-time violator. What constitutes “racketeering activity,” however, has been very broadly defined to include almost all criminal actions, including acts of violence, the provision of illegal goods and services, bribery, antitrust violations, securities violations, and fraud.

RICO has been used so successfully in white-collar crime prosecutions that many corporate and brokerage firm attorneys are making appeals to the legislature through the press to limit the application of RICO. They argue that the statute is unfair because it does not require that a defendant be convicted of the alleged criminal activity before a civil RICO suit can be brought. They argue that this lack of a requirement of a previous conviction leads to spurious lawsuits and encourages out-of-court settlements by intimidated legitimate businesspersons. Opponents also argue that the courts are, or will be, “flooded” with such lawsuits and that valuable resources will thus be wasted. They also argue that the law was designed to attack “organized crime,” not employees of “legitimate businesses,” against whom it is now being successfully used.

RICO has been used in a broad array of situations. For example, in 2015, RICO was used to attack alleged long-standing fraud and corruption in global soccer. According to federal prosecutors, in 2004, when FIFA, soccer’s governing body, voted on where to hold soccer’s World Cup, the vote of one of the governing body’s members was purchased for $10 million. Initially, indictments against 14 soccer officials and marketing executives were handed down for numerous alleged illegal acts including $150 million in bribes. Prosecutors hope that RICO can help clean up the corruption that appears to have permeated soccer. 34

34  Stephanie Clifford and Matt Apuzzo, “US Vows to Rid Global Soccer of Corruption,” New York Times, May 25, 2015.

Proponents of RICO argue that the law should continue in force as it is. They point out that fraud is a national problem, costing the nation more than $200 billion each year. 35  Proponents further believe that given our lack of success in prosecuting criminal fraud cases in the past, we should retain this tool, which may allow us to punish persons who have been able to escape criminal prosecution. Criminal activity in “legitimate” businesses is a major problem facing the country today, and curing it can only enhance the reputations of those in the business world. If a corporation and its officers are not engaging in illegal or quasi-legal activities, they have nothing to fear from RICO.

35  Mann, supra note 13, at 86.

False Claims Act

A largely ignored 141-year-old federal law has come back to life since 1986 and is now being used vigorously in the fight against white-collar crime. Under the False Claims Act, private citizens may sue employers on behalf of the government for fraud against the government. A successful party may receive 25 percent of the amount recovered if the government chooses to intervene in the action, or 30 percent if the government does not participate in the suit. Between the law’s amendment in 1986 to encourage private whistleblowers and the end of 2009, the government has recovered $2,399,854,364 under this act. 36  As of September 30, 2009, the U.S. government had a total of 996 “qui tam” cases under investigation. 37

36  The False Claims Act Legal Center. Accessed May 1, 2000 at www.taf.org/statistics.htm.

37  Id.

The act also offers protection to persons using the law to sue their employer. An employer may be held liable to the employee for twice the amount of back pay plus special damages if found guilty of retaliation. Between the law’s amendment in 1986 to encourage private whistleblowers and September 2006, the government paid whistleblowers a total of more than $1.6 billion. 38

38  Nolan Law Firm, “Qui Tam Frequently Asked Questions.” Accessed February 22, 2008 at  www .whistleblowerfirm.com/faq.html .

The Sarbanes-Oxley Act contains a provision that provides safeguards to protect whistleblowers, as does the Homeland Security Act of 2002. The new provisions were encouraged after whistleblowers received much attention with the rise in corporate fraud scandals. Perhaps no whistleblower is more notable in the business world than Sherron Watkins. As the vice president for corporate development at Enron, Watkins wrote several letters to chairman Kenneth Lay exposing corporate officials Andrew Fastow and Jeffery Skilling for committing the fraud. Although it was left for the courts to decide the facts of the Enron case and assign blame, Watkins played a significant role in exposing the company’s failures. Because of the important role whistleblowers can play in revealing fraud or other illegal behavior, Congress considered the Congressional Whistleblower Protection Act of 2007, which would have expanded safeguards for federal employee whistleblowers who are fearful of future employment discrimination, and would have amended the Whistleblower Protection Act of 1989, which also protects federal employees who act as whistleblowers against the government. However, while the bill passed in the House, it failed in the Senate, and is not likely to be revived again in the near future.

The False Claims Act has also been used in a wide variety of circumstances. For example, in 2010, it was used to force Schwarz Pharma Inc. to pay $22 million to settle a claim that charged the company with marketing two unapproved drugs, Deponit and Hyoscyamine Sulfate Extended Release (Hyoscyamine Sulfate ER). The federal government received $12.24 million and the state received $9.76 million. Whistleblowers Constance and James Conrad received $1,836,575 from federal settlement, plus a share of the state settlement. 39  It has been used by an employee claiming that his employer, a school, helped its students fraudulently obtain millions of dollars in federal financial aid; by an employee who claimed that his employer, a defense contractor, knowingly manufactured defective parts for use in a guided missile system; and more recently by employees of hospitals, doctors, and nursing homes that overbilled Medicare claims. Claims related to health care fraud make up the biggest share of the claims, whereas the second greatest percentage of claims comes from fraud in defense procurement contracts.

39  http://www.taf.org/.

Because of Justice Department estimates that fraud costs the taxpayers as much as $100 billion a year, 40  there are many proponents of the use of this act. Its use is encouraged because it motivates persons in the best positions to be aware of fraud to report its occurrence. Employers who know that their employees may bring an action if asked to engage in fraud may be deterred from engaging in such acts. Nonetheless, proving that a party may legally bring a claim under the False Claims Act is often not an easy task.

40  H. Berleman, “A Few Big Penalties Make for a Record Year,” NLJ (Oct. 24, 1994).

Opponents of the use of the False Claims Act cite a variety of reasons. Some fear that frivolous or politically motivated lawsuits may be brought. Others say that the 60-day time period during which the Justice Department has to decide whether to join in the action is too brief and places an undue burden on the DOJ. During that limited time period, the government must decide whether to join in a complex suit that may take years to resolve.

In addition, the government can use, or choose not to use, the False Claims Act for political reasons. Despite the fact that more than a dozen False Claims Act lawsuits were filed by whistleblowers because of fraud in the Iraq reconstruction, the government has yet to join in on a single one of these suits. Fraud in Iraq reconstruction is estimated to be in the tens of millions of dollars, but the government has not helped out a single citizen who has filed suit. Some commentators have remarked that the government’s refusal to sign on to a False Claims Act case frequently leads judges to doubt the validity of the claim, in that the government chose not to join the suit. 41

41  Deborah Hastings, “Those Who Blow Whistle on Contractor Fraud in Iraq Face Penalties,” Findlaw Legal Headlines, Aug. 27, 2007; retrieved Feb. 22, 2008, from news.findlaw.com/ap/o/51/08-26-2007/896d00a95e7ae2bf.html.

For now, at least, use of the False Claims Act is increasing; but as the rising number of large judgments to whistleblowers keeps making headlines—at least a dozen whistleblowers thus far have collected more than $15 million each—more people are starting to question whether the whistleblower “rewards” are a wise use of taxpayers’ money. In 2012, the top 30 settlements totaled $9,094,474,000. Some have proposed capping the amount a whistleblower can collect at $10 or $15 million. Those who have collected some of the awards above those amounts, however, have said that such a cap probably would have kept them from reporting the fraud. Because the majority of the awards are below $10 million, with the median award from 1986 to mid-2001 being around $150,000, it seems unlikely that amending the law to institute a cap will be a major item on the congressional agenda in the near future. And, as Kristin Amerling, President of Taxpayers Against Fraud says, “The False Claims Act is working exactly as it should, forging a public-private partnership that incentivizes integrity and discourages wrongdoing, even as it works to keep government and law enforcement more efficient.” 42

42  Taxpayers Against Fraud Education Fund, “FY 2012 Is Record Year for FCA Recoveries,” retrieved July 17, 2013 from http://www.taf.org/blog/fy-2012-record-year-fca-recoveries.

Sarbanes-Oxley Act

The large number of high-profile companies engaged in fraudulent acts during the end of the 1990s and beginning of the 2000s led to the passage of the Sarbanes-Oxley Act of 2002. This act, fully discussed in  Chapter 23 , establishes new rules regarding corporate accounting, government oversight, and financial regulations. Although the act applies only to publicly held companies, many of the act’s rules influence the behavior of private and nonprofit organizations. Specifically, the act seeks to eliminate the conflicts of interests that can lead to fraudulent activity. For example, the act establishes the Public Company Accounting Oversight Board, which seeks to ensure proper accounting practices; mandates the separation of audit and nonaudit services; and requires corporate officials to certify their financial statements, which makes those officials responsible and liable for fraudulent statements. In addition, the Sarbanes-Oxley Act contains provisions that prevent publicly traded companies from firing, demoting, suspending, and otherwise discriminating against or harassing any employee who reports (blows the whistle on) corporate wrongdoing to the government.

Whistleblower Protection Act

The Whistleblower Protection Act (WPA), similar to portions of the Sarbanes-Oxley Act, is intended to offer protections to those who act as whistleblowers. Whereas Sarbanes-Oxley protects private citizens, however, the WPA offers protections to federal employees who report illegal governmental activities. The WPA, originally enacted in 1989, offers protections to the vast majority of federal executive-branch employees. Congress explained the intent of the WPA as encouraging honest and responsible government by offering protections for those employees who know of governmental wrongdoing.

Generally, the WPA applies to present and past federal executive-branch employees, as well as applicants for such jobs. The WPA does not cover all of these federal executive employees, however. Positions that are related to policy making and policy determination, as well as positions related to foreign intelligence or counterintelligence, are not protected by the WPA. In addition, federal employees in the following areas are also not protected by the WPA: the postal service, the Government Accountability Office, the Federal Bureau of Investigation, the Central Intelligence Agency, the Defense Intelligence Agency, the National Security Agency, as well as several other agencies’ employees.

Despite its good intentions, the WPA is not always effective at protecting and encouraging open government and citizen reporting of governmental wrongdoing. For example, as during 2010, stories of governmental wrongdoing and fraud in Iraq and Iraqi reconstruction contracts were starting to come to light. In its final report issued to Congress, the Commission on Wartime Contracting in Iraq and Afghanistan estimated that by 2011, as much as $60 billion had been lost to contractor fraud and waste in America’s operations in Iraq and Afghanistan. Before the stories had started to make it into mainstream media, a number of governmental employees and officials, such as “Bunny” Greenhouse, were subjected to retaliatory actions for acting as whistleblowers. Bunny worked for the Army Corps of Engineers as a high-ranking civilian officer. In 2005, Bunny testified before Congress regarding widespread fraud in Iraq rebuilding contracts involving Halliburton. For her trouble, Bunny was demoted and moved to a different department where she now has no decision-making authority and is given little work to do. 43

43  Id.

To a large extent, because of all the fraud in Iraq and Afghanistan, in September of 2012, the Non-Federal Employee Whistleblower Protection Act was introduced. The Act was designed to reduce fraud within the government and save taxpayer dollars by expanding the whistleblower-protections covering to federal contractors, subcontractors and grantees. If passed, it would have meant that any contractor, subcontractor, or grantee who spoke out against the misuse of federal funds could not be discharged, demoted, or otherwise discriminated against as reprisal for blowing the whistle.

While that bill did not pass, a comparable result was achieved by Section 828 of the National Defense Authorization Act of 2013. That section, beginning July 1, 2013, protects disclosures made by government contractors to any

Comparative Law Corner Whistleblowers in the United Kingdom

The United Kingdom, like the United States, is concerned about white-collar crime. One way to prevent or reduce white-collar crime is through whistleblowing. Although the United States has several federal laws that offer protections for whistleblowers, the primary protections for whistleblowers are through state laws. Conversely, the United Kingdom uses a national law to protect whistleblowers. The UK’s whistleblower law is the Public Interest Disclosure Act of 1998 (PIDA). The United Kingdom’s law differs in many ways from whistleblower laws in the United States.

First, the emphasis of the PIDA is fixing the problem within the company. The preferred (and most protected) disclosure is disclosure to a manager within the company. The basic form of the law is that a good-faith disclosure based on genuine concerns about crime, civil offenses, miscarriage of justice, danger to health and safety, or the environment, and the cover-up of any of these protects the whistleblower from firing or retaliation. The first step is often to disclose the possible violation to a manager in the company. Disclosure to someone at the company is not always advisable or possible, so whistleblowers have other protections as well.

Disclosures to the appropriate ministry are acceptable, when applicable, as well as disclosures to the appropriate regulatory agency, such as the Health and Safety Executive. Rather than just having a suspicion of wrongdoing, whistleblowers must believe that their allegations are substantially true before disclosing to a regulator. Wider disclosure is protected under certain circumstances. If the whistleblower reasonably believed that he or she would be victimized for disclosure to the company or regulator, reasonably believed that a cover-up was likely and there was no prescribed regulator, or had already raised the issue internally or with a regulator and no action had been taken, he or she would be protected for a wider disclosure.

At no point may whistleblowing be protected for the purposes of personal gain. Unlike in the United States, UK whistleblowers do not get monetary rewards. They may be protected and compensated if action is taken against them, but they do not receive anything for the act of whistleblowing.

Although there are differences in the approach to whistleblowing, the PIDA in the UK and various whistleblower protections in the United States share the same goal: to encourage people to come forward if they know about wrongdoing.

member of Congress, an Inspector General, the GAO, a contract oversight employee in an agency, authorized DOJ or law enforcement agencies, a court or grand jury, or a management official at the employing contractor with authority to investigate wrongdoing.

And on November 27, 2012, President Obama signed into law the Federal Whistleblower Enhancement Act, which had been unanimously passed into law by the House and Senate. Reforms of the new legislation include protecting federal employees (in addition to already-existing scenarios) from reprisal if they: are not the first person to disclose misconduct; disclose misconduct to coworkers or supervisors; disclose the consequences of a policy decision; or blow the whistle while carrying out their job duties.

State Laws Used in the Fight against White-Collar Crime

Some states have whistleblower statutes that protect employees who testify against their employers. Some state acts also allow government whistleblowers to bring actions against the state government, and a few—Texas, California, and Alaska—even allow government-employee whistleblowers to seek punitive damages. Although a whistleblower statute with unlimited potential for recovery may sound like a good idea, not everyone supports such laws.

Global Dimensions of  White-Collar Crime

White-collar crime is not just a U.S. problem; it is a worldwide problem. Ironically, improvements in technology have increased the amount of white-collar crime on a worldwide scale by creating more opportunities for skilled employees to commit such crimes. For example, the availability of credit cards that can be used worldwide has increased the opportunities for credit card fraud.

When companies operate multinationally, they may be able to avoid regulation and escape the jurisdiction of any nation by not really basing their operations in any country. One example of a company that was able to successfully engage in criminal behavior for years without detection was Investor’s Overseas Services (IOS). This company was much admired until its collapse in 1970. Using sales representatives recruited worldwide, IOS was able to persuade clients to invest $2.5 billion in a variety of mutual fund companies. Sales kept growing until the company finally went broke and the investors lost their money.

To some extent, IOS had been able to operate in a fraudulent manner because the company was not domiciled in any country or group of countries, and thus it was subject to no particular country’s regulation. Managers registered and domiciled their funds wherever they could in order to avoid taxation and regulation. Consequently, they were able to do things that no company domiciled in a single country could do. The prudent manager should make sure that any multinational firm with which he or she does business is domiciled in some country.

Another factor leading to the commission of white-collar crime on an international scale is the unfortunate lack of cooperation among the police of different countries. This situation may be changing, however. In April 2001, the United States and 12 other countries agreed to start sharing confidential data about the complaints they receive from consumers, in a bid to crack down on cross-border Internet fraud. The FTC voted unanimously to begin pooling its U.S. complaints with those from other countries to create a single database, something an FTC spokesperson said would “greatly improve international law enforcement agencies’ ability to address cross-border Internet fraud and deception.” 44  The countries participating in the project, in addition to the United States, are Australia, Canada, Denmark, Finland, Hungary, Mexico, New Zealand, Norway, South Korea, Sweden, Switzerland, and the United Kingdom. Under the agreement, law enforcement agencies in each country will have access to the database through a single, password-protected website, the agency said. FTC officials said the information will tip them off to Internet scam artists.

44  “U.S., 12 Other Countries to Hit Internet Fraud,” April 25, 2001. Available at news.findlaw.com /legalnews/s/20010424/techinternetfraud.html.

Another important global initiative, the Convention on Cybercrime, is being undertaken by the United States, Canada, Japan, and the 43 members of the Council of Europe (COE). Initiated in 1997, after 27 drafts, a final version was agreed upon at the end of June 2001, paving the way for international rules governing copyright infringement, online fraud, child pornography, and hacking. The three main topics covered by the convention are harmonization of the national laws that define offenses, definition of investigation and prosecution procedures to cope with global networks, and establishment of a rapid and effective system of international cooperation. Full information about the treaty, including its text and a list of countries that have signed and ratified the treaty, can be found by doing a search at http://conventions.coe.int/.

The convention came into effect internationally on January 7, 2004, with the ratification by the fifth signing nation. As of December 2010, 46 nations had signed the convention, with 29 of the signators having ratified the convention. The United States officially ratified the Convention on Cybercrime on September 29, 2006, and the convention went into effect in the United States on January 1, 2007.

SUMMARY

Criminal law is that body of laws designed to punish persons who engage in activities that are harmful to the public health, safety, or welfare. A crime generally requires a wrongful act and a criminal intent.

Criminal procedure is similar to civil procedure, but there are some significant differences. A criminal prosecution begins with the issuance of an information by a magistrate or an indictment by a grand jury. The next step is the arraignment, which is followed by the trial, and then, in some cases, an appeal.

White-collar crimes—crimes committed in a commercial context—may be even more costly to society than street crimes are, but they are more difficult to prosecute and often carry relatively light sentences. Some of the more common white-collar crimes are larceny, the secretive and wrongful taking of another’s property; embezzlement, the wrongful conversion of property of which one has lawful possession; and violations of federal regulations. Increasingly, computers are being used to commit white-collar crime, making the detection and prosecution of these crimes even more difficult.

Attempts are being made to fight white-collar crime on the federal level through such statutes as RICO and the False Claims Act. Some states have now passed whistleblower statutes to help fight white-collar crime.

When thinking about white-collar crime, it is important to remember that one of the drawbacks of increasing globalization is that it has led to increasing amounts of cross-border white-collar crime. Criminals have taken advantage of the lack of international cooperation among law enforcement officials.

Review Questions

1. 6-1 What is the purpose of criminal law?

2. 6-2 Explain how crimes are classified.

3. 6-3 Explain the basic procedural stages in a criminal prosecution.

4. 6-4 State two alternative definitions of white-collar crime and give an example of one crime that fits under both definitions and another crime that would fit only one of the definitions.

5. 6-5 Explain the rationale for imposing criminal liability on corporations.

6. 6-6 Explain two sentencing alternatives to prison for white-collar criminals.

Review Problems

1. 6-7   Rawlsworth is an employee of General Sam Corporation. One of Rawlsworth’s jobs is to monitor the amount of particular pollutants and to record the results on a form that is submitted to the Environmental Protection Agency. This self-monitoring is required by law to ensure that firms limit the amount of particular pollutants they discharge. One day the firm’s equipment is malfunctioning, and so Rawlsworth records that the firm’s discharge is in excess of the lawful amount. When Matheson, Rawlsworth’s supervisor, sees what he has done, Matheson tells him to change the records to state that the firm is in compliance and, in the future, never to record such violations. When Rawlsworth calls the vice president to report this violation, he is told that the vice president does not take care of such matters and does not want to know about them. Rawlsworth then falsifies the records as instructed. When the falsification is discovered, who can be held criminally liable? Why?

2. 6-8   Several corporations were convicted of violating the Sherman Act as a result of an unlawful agreement among their agents that the suppliers who supported an association to attract tourists would be given preferential treatment over those who did not contribute financially to the association. The corporations appealed on the grounds that the corporate agents involved were acting contrary to general corporate policy. Was the defense valid?

3. 6-9   Defendant Laffal was the president of a corporation that operated a restaurant. It was alleged that prostitutes frequented the restaurant, picking up men there and returning them after a short time, thus making the restaurant an illegal “bawdy house” in violation of the state criminal law. Laffal argued that he could not be charged with operating a bawdy house because he was never present when any of the illegal acts took place and he did not even know they were going on. Was Laffal correct?

4. 6-10   Evans was a loan officer for a bank and in this capacity had approved several loans to Docherty, all of which were legitimate and were repaid on time. Evans asked Docherty to apply for a loan from the bank for $2,000 and then to give the money to Evans, who would repay the loan. Evans explained that he could not obtain the loan himself because bank policy did not allow him to borrow from the bank. Docherty agreed. Was Evans’s or Docherty’s behavior illegal?

5. 6-11   A defendant managed a corporation chartered for the purpose of “introducing people.” He obtained a loan from a Mrs. Russ by telling her that he wanted the loan to build a theater on company property and that the loan would be secured by a mortgage on the property. The loan was not repaid; the mortgage was not given to the lender because the corporation owned no property. The defendant, in fact, simply deposited the money in the corporate account and used it to pay corporate debts. What crime, if any, did the defendant commit?

6. 6-12   Jones worked for a small community college teaching business students how to set up inventories on various computer programs. The college had purchased the software and was licensed to use several copies of it for educational purposes. Jones started his own small business on the side and used the software for his own firm’s inventory control. He saw his own use as “testing” the product to make sure he was teaching students to use a process that really worked. Is his behavior lawful or unlawful? Why?

Case Problems

1. 6-13   Teresa Chambers worked as the Chief of the United States Park Police from February 10, 2002 to July 9, 2004, when she was removed from her position. The United States Park Police is a component of the National Park Service, which is an agency within the Department of the Interior. In 2003, when the Office of Management and Budget decided against increasing the Park Police budget, Chambers spoke with a reporter from the Washington Post and a staffer for the United States House of Representatives Interior Appropriations Subcommittee. Chambers was placed on administrative leave when the staffer told her supervisor about the conversation and the Washington Post ran an article attributing several remarks to Chambers.

On December 17, 2003, the supervisor suggested removing Chambers from her position based on six charges of misconduct. The two relevant charges were: (2) making public remarks regarding security on the National Mall, in parks, and on parkways in the Washington, DC, metropolitan area; and (3) improperly disclosing budget deliberations to a Washington Post reporter. Chambers claims that charges 2 and 3 concern statements that are protected under the Whistleblower Act.

Charge 3 concerns improper disclosure of budget deliberations and was tied to Chambers’s statement to the reporter from the Washington Post that “she said she has to cover a $12 million shortfall for this year and she asked for $8 million more for next year.” Chambers contends that the disclosure was protected under the Whistleblower Protection Act as disclosing a substantial and specific danger to public safety. The agency contends that because the budget for the coming year had not been submitted to Congress, the disclosure was premature and in violation of agency protocol.

Charge 2 concerns statements that Chambers claims are related to issues of public safety. Chambers made statements about how traffic accidents have increased in an area that has only two officers instead of the recommended four and how there are not enough officials to protect the green areas around Washington, DC. How do you think the court should rule? Chambers v. Department of the Interior, 602 F.3d 1370; 2010 U.S. App. LEXIS 8209 (Fed. Cir. 2010).

2. 6-14   Kyle Kimoto was president of Assail, Inc. Assail was a telemarketing firm responsible for marketing a financial package developed by another company that included a pay-as-you-go debit card. Assail employees would use call lists to choose individuals who had recently applied for a credit card and been rejected. The telemarketer would tell these individuals that they were now eligible for a Visa or Mastercard. If the individuals said they were interested, the telemarketer would place the call on hold to obtain “authorization.” After letting a few minutes pass, the telemarketer would get back on the line to tell the individual that he or she had been approved. The telemarketer would tell the individuals that they would be charged a one-time processing fee of $159.95. The call was then transferred to another department to verify payment of the processing fee.

While the call was being transferred, the individual listened to a recording that informed him that the card was a pay-as-you-go MasterCard and there would be no credit on the card until a payment was made. However, any questions from the individual were answered in such a way as to support the assumption that this card would function as a typical credit card.

Defendant was indicted on one count of conspiracy, one count of mail fraud, and 12 counts of wire fraud. On appeal, Kimoto contends that as president he was in the business of selling pay-as-you-go credit cards and that the scripts used were not deceptive. Kimoto did not endorse employee statements indicating that the cards were credit cards. How do you think the court of appeals should rule? List the reasons you would use to support your position. United States v. Kimoto, 588 F.3d 464 (7th Cir. 2009).

3. 6-15   Scott Bauknecht previously worked for Pontiac National Bank (“PNB”). In 2002, Bauknecht signed a confidentiality agreement with PNB where he agreed “not to disclose confidential customer information for a period of two years.” PNB eventually changed its name to Freestar, and merged with First Financial Bank in 2011. In 2011, Bauknecht became a loan officer, as well as president of the bank. When PNB became Freestar, the bank had a policy forbidding release of confidential information any time during or after employment, as well as measures to require encryption of electronic devices.

In December of 2011, Bauknecht allegedly communicated with a competitor of Freestar, Ronald Minnaert, who was the president of Graymont Bank. Bauknecht spoke to Minnaert about the possibility of working for Graymont. Bauknecht then quit Freestar Bank and began working for Graymont Bank. Bauknecht continued to retain his previous customers after transitioning to employment at Graymont. Freestar Bank brought suit against Bauknecht, including breach of contract, breach of fiduciary duty, and misappropriation of trade secrets. The plaintiff also alleges that Bauknecht obtained customer information from a “Master Database.” It was undisputed that both Bauknecht and Graymont Bank possessed a number of plaintiff’s financial documents, including loan agreements. The plaintiff additionally sought summary judgment on a claim under the Computer Fraud and Abuse Act (CFAA) due to the defendant’s accessing information from the “Master Database.” How do you think the court ruled? What evidence would the plaintiff need to provide to satisfy a CFAA claim? First Fin. Bank, N.A. v. Bauknecht, 2014 U.S. Dist. LEXIS 151244 (C.D. Ill. 2014).

4. 6-16   Van Chester Thompkins was arrested approximately a year after a Southfield, Michigan, shooting occurred in which one person was killed and another wounded. When he was taken into custody, a police officer gave him a written copy of the five Miranda warnings. To verify that the suspect understood the warnings, the officer asked him to read the fifth warning aloud, which he did. The suspect, upon request, then signed a form stating that he understood his rights. Officers then began questioning him, and at no point did he say he wanted to remain silent, although he was mostly silent throughout the almost three-hour interrogation, giving a few grunts, and brief responses such as “yes,” “no,” or “I don’t know.”

Almost three hours into the interrogation, the officer asked the suspect whether he believed in God, and the suspect said he did. And according to the police officer, his eyes started to tear. The officer then asked, “Do you pray to God?” and when the suspect said he did, the officer then asked, “Do you pray to God to forgive you for shooting that boy down?” The suspect again responded, “Yes,” and looked away. He refused to make a written statement, and the interrogation ended about 15 minutes later.

At trial for the murder, the suspect sought to suppress the evidence of his statements on grounds that he had invoked his Fifth Amendment right to remain silent and his statements were involuntary. The trial court denied his motion and he was convicted of murder. After a number of appeals, the case ultimately was before the U.S. Supreme Court. How do you think the high court decided this case and why? Berghuis v. Thompkins, 130 S. Ct. 2250 (U.S. Ct. 2010).

5. 6-17   Autohut was a used car business located in Englewood, Colorado. The business sold cars on a consignment basis and was not formed as a separate legal entity. Instead, Padilla, Mr. Lowell Andrews, and the Debtor in this case formed a partnership to run Autohut. This partnership agreement was not written. Autohut operated by “contacting individuals who were selling their cars on Craigslist” and offering “to sell their vehicles on consignment basis from Autohut’s lot.” The plaintiff, Chenaille, was a customer of Autohut who attempted to purchase a truck in 2011 from the business. The plaintiff customer paid the negotiated price to the business but never received the title to the truck. When the plaintiff returned to Autohut to discuss his receiving of the title for the truck, the business had shut down and the lot was empty. Plaintiff customer contacted the police and learned that many previous customers of Autohut had a similar experience.

The Colorado Motor Vehicle Dealer Board shut down Autohut’s business and revoked its business license, but no charges were brought against Autohut or its owners. In the meantime, the original owner of the truck, a Mr. Jarred Johnson, had reported the vehicle as stolen, as he still retained the original title to the truck before he agreed to let Autohut sell the truck for him on the business’s lot. When Mr. Johnson learned of the plaintiff’s possession of the truck, he sued the plaintiff for return of the vehicle. The state court awarded ownership of the truck to Mr. Johnson, and the plaintiff was never refunded the money he paid Autohut for the truck. The plaintiff eventually filed suit for the debt owed to him from purchasing the truck. The plaintiff alleged that the debt owed to him met the requirements of embezzlement. How do you think the court ruled? Why? Chenaille v. Palilla (In re Palilla), 493 B.R. 248 (Bankr. D. Colo. 2013).

6. 6-18   Betty Werner, the widow of a World War II veteran, had been receiving Veterans Administration (VA) Dependency and Indemnity Compensation (DIC) since the death of her husband in 1976. In 1995, Werner’s son, Joel Ruben, had Werner admitted to an institution that would provide her primary care for severe mental problems. Ruben obtained a durable power of attorney, putting himself in charge of his mother’s finances in order to provide for her care. Ruben redirected the VA’s DIC payments made to his mother into his own personal accounts, and never actually used the money to pay for the care of his mother. When the VA began investigating the whereabouts of the payments made to Werner, Ruben admitted that he had used the money to pay off his own financial obligations and to care for his ill son. Of what crime is Ruben guilty? What evidence is necessary to prove these allegations? United States v. Ruben, 2006 U.S. App. LEXIS 12528 (2006).

7. 6-19   Nayak paid doctors a kickback in order to get them to send their business to his surgery center. After learning of the kickback scheme, the government indicted Nayak. It later filed superseding information charging him with honest-services mail fraud. Although both the indictment and the superseding information alleged that Nayak intended “to defraud and to deprive patients of their right to honest services of their physicians” through his scheme, neither alleged that Nayak caused or intended to cause any sort of tangible harm to the patients in the form of higher costs or inferior care. In fact, the government later represented to the district court that the scheme did not cause patients any physical or monetary harm. Nayak filed a motion to dismiss the mail fraud count, contending that the government needed to allege some form of actual or intended physical harm to the referring physicians’ patients as an element of the crime. Why do you think Nayak lost his appeal? Nayak v. United States, 769 F.3d 968 (2014).

8. 6-20   In 2004, James Clayton Terry was elected to serve as a member of the Lowndes County, Mississippi, Board of Supervisors, as the supervisor for District Four. As a member of the board, Terry was given a county vehicle and a Fuelman card, to be used for business purposes only. The county later began to receive complaints that Terry was making inappropriate purchases of gasoline and using the vehicle to take personal trips to casinos. Following an investigation, Terry was indicted for embezzlement.

The trial court found Terry guilty. On appeal, Terry argued that the conviction should be overturned because the state had failed to specify the dates during which the embezzlement supposedly occurred. The state argued that because the embezzlement was continuous, specific dates were not necessary. What exactly was embezzled, and should it matter whether the state alleged specific dates on which the embezzlement occurred? Terry v. State, 26 So.3d 378 (Miss. Appellate Court 2009).

9. 6-21   Plaintiff Lisa Huff was injured by a falling tree near utility lines that were owned and operated by the defendant, Ohio Edison. The plaintiff alleges that the tree was located on property that was covered by an easement owned by Ohio Edison. When the plaintiff filed suit against the defendant, as well as First Energy Corporation and Asplundh Tree Expert Company, the state trial court granted summary judgment to the defendants, finding that there was no duty owed to the plaintiff. The court of appeals reversed this decision, finding that “there was a question of fact as to whether Huff had enforceable rights under the contract between Ohio Edison and Asplundh as a third-party beneficiary.” The Ohio Supreme Court first denied discretionary review, and then granted jurisdiction and reversed the court of appeals decision, finding in favor of the defendant, Ohio Edison. On October 16, 2012, the plaintiffs filed suit alleging a conspiracy between judicial defendants and First Energy defendants to influence litigation, under the federal Racketeer Influenced and Corrupt Organizations Act (RICO). Did the court rule in favor of the plaintiff? Why or why not? Do you agree with the court’s decision? Huff v. First Energy Corp., 972 F. Supp. 2d 1018 (N.D. Ohio 2013).

Thinking Critically About Relevant Legal Issues

Allocating Blame for White-Collar Crime

Despite the prevalence of white-collar crime in the business world, it is wrong to try to pin the blame for a white-collar crime on just anyone. Our seeking someone to blame is exactly the motivation underlying the practice of pinning liability on managers for the wrongdoing of those employees below the managers. Just because a manager might be easier to identify and blame does not make it right to attach legal liability to the manager by virtue of his or her role as “manager.”

The vast majority of crimes require a wrongful act, as well as a guilty mind, or mens rea. The problem with finding managers liable for the actions of those below them is that neither the element of wrongful act nor that of mens rea is met with respect to the manager. That is, just because a low-level employee commits a white-collar crime does not mean the manager participated or even intended for a crime to be committed. Liability imposed on managers for the wrongful acts of others overstretches the bounds of proper criminal liability. After all, is it right to legally hold parents responsible for the actions of their kids? What about holding teachers liable for an illegal act by one of their students? To hold a manager (or parent or teacher) accountable for the wrongful acts of another is absurd.

Another problem with imposing liability upon a manager for the actions of a lower-level employee is that the imposition of liability ignores the manager’s other responsibilities. Managers are in charge of numerous people, as well as having their own work they need to complete. Accordingly, managers cannot be expected to keep an eye on every little action of all of the employees below them at all times. Even the most vigilant of managers has the potential to miss one act of wrongdoing by a lower-level employee. It seems wrong to hold this diligent manager legally liable because one employee was able to fool the manager and hide his wrongdoing from the manager.

Finally, businesses in general are harmed by the practice of holding managers liable for the actions of other employees. Businesses need qualified managers to ensure that everything runs smoothly. Holding managers liable for the actions of others, however, creates a disincentive for becoming a manager. If the practice of holding a manager liable for the white-collar crimes of lower-level employees continues, the number of competent, caring people who want to become managers will greatly decrease. This decrease could cost businesses by preventing the best people from rising to the top to be managers, because these people could fear the wrongful attribution of liability for the acts of another.

1. How would you frame the issue and conclusion of this essay?

2. Is there relevant missing information in the argument?

Clue: What would you like to know before deciding whether the author is correct?

3. What ethical norm does the author appear to rely upon most heavily in making the argument?

4. Write an essay that someone who holds an opinion opposite to that of the essay author might write.

Clue: What other ethical norms could influence an opinion on this issue?

Assignment On The Internet

You have now learned several approaches to deter white-collar crime in this chapter, including federal laws such as RICO and the False Claims Act, individual state laws, and the proposed GPD. There are, however, many other independent steps a business can take to ensure that employees do not engage in illegal behavior. Use the Internet to find out what other businesses are doing to prevent white-collar crime. You can begin by visiting  www.expertlaw .com  and typing “corporate crime” in the search bar.

As a business manager, what additional deterrents to white-collar crime would you create or adopt? How does United States v. Park, discussed earlier in this chapter, affect your attitude toward the responsibility of a manager to prevent white-collar crime?

 On The Internet

www.nw3c.org  This site is the location of the National White Collar Crime Center, which provides investigative support services to fight against white-collar crimes.

www.usdoj.gov  This is the website of the Department of Justice division that prosecutes fraud and white-collar crime. Click on the “Agencies” heading, then click on “Criminal Division” in the third row. Click on “About the Division,” then “Organizations.” Go to “List View,” then click on “Fraud Section.” Under the heading “Fraud Section,” which should be about halfway down the page, click on “Website.”

www.ic3.gov  The Internet Crime Complaint Center is a joint endeavor by the FBI and the National White Collar Crime Center to create an easy-to-use forum for reporting Internet-based crimes.