Global Capitalism, Trust and Accountability Conference: Corporate Misconduct and the Law

Corporate Misconduct and the Law: A Summary

Key Concepts:

• Corporate Misconduct: Illegal or unethical behavior by corporations.
• Corporate Law: State laws governing the formation, operation, and governance of corporations.
• Securities Law: Federal laws regulating the issuance and trading of securities, aimed at investor protection.
• Fiduciary Duty: Legal obligation of directors and officers to act in the best interests of the corporation and its shareholders.
• Duty of Care: Fiduciary duty requiring directors to exercise reasonable care and diligence in their decision-making.
• Duty of Loyalty: Fiduciary duty requiring directors to act in good faith and with the best interests of the corporation, avoiding conflicts of interest.
• Carmack Claim: A claim under Delaware law for breach of fiduciary duty based on a failure of oversight by directors.
• Regulatory Enforcement: Government actions to ensure compliance with laws and regulations.
• Non-Prosecution Agreement (NPA): Agreement where prosecutors agree not to prosecute a corporation if it meets certain conditions.
• Deferred Prosecution Agreement (DPA): Agreement where prosecution of a corporation is deferred if it meets certain conditions.
• Responsible Corporate Officer Doctrine: Legal principle holding corporate officers liable for violations of public safety laws if they had the authority to prevent the violation.

1. Introduction: The Need for Law and Enforcement

• The session focuses on corporate misconduct, the law (written rules), and enforcement mechanisms.
• The discussion acknowledges that corporations, while not human, are powerful entities that significantly impact lives.
• The central question is: What does it mean for a corporation to commit misconduct, and what should the law do about it?
• Corporations act through people, raising the issue of individual accountability when corporate misconduct occurs.
• Corporate law provides the initial framework for corporations to exist and operate, but they must also obey other laws.

2. Corporate Law in the US: Elizabeth Foreman's Perspective

• Corporate law is an imperfect tool for corporate accountability.
• While corporate law requires legal obedience, enforcing it through corporate law is difficult.
• Regulation and enforcement outside of corporate law are often more effective.
• Renewed regulatory competition among states for corporate charters underscores the limitations of using corporate law for legal obedience.

2.1. Securities Law

• Federal securities law mandates disclosure for public companies, focusing on information material to investors.
• There is no continuous disclosure requirement for all material information.
• Private companies have different rules regarding information disclosure.
• Current debates focus on the rise of private markets and the implications for information availability.
• Securities fraud enforcement is primarily through public enforcement (DOJ, SEC) or private enforcement (securities class actions).
• Securities class actions can provide some deterrence from fraud, but most cases result in settlements paid by companies and their insurers.

2.2. Corporate Law

• Corporate law in the US is primarily state law, governed by the internal affairs doctrine.
• Corporate law is generally enabling, allowing corporations to choose their state of incorporation and the applicable law.
• The focus of corporate law is primarily on shareholders, directors, and officers.
• Corporations can have broad purposes, but they must engage in lawful business.
• Fiduciary duties (care and loyalty) are used to hold directors and officers accountable to shareholders.
• External law is used for other matters (environmental, labor, etc.).
• The duty of care allows companies to exculpate directors and officers from monetary damages for breach of duty of care.
• The duty of loyalty includes a duty of good faith, requiring directors to act lawfully.
• A director's intent to violate positive law is a breach of fiduciary duty.
• Directors have an obligation to oversee the company's affairs and ensure information and monitoring systems are in place for legal risk and compliance (Carmack claim).
• There has been an uptick in Carmack claims, but they are not easy to prove.
• Delaware is tightening up doctrines related to fiduciary duty of loyalty and interested transactions.

3. Corporate Criminal Accountability: Ellen Podgore's Perspective

• The legal framework for corporate criminal accountability is failing.
• Statutory deficiencies exist due to Congress's poor drafting of statutes.
• The Supreme Court has limited the scope of statutes related to honest services fraud (McNal, Skilling).
• The Arthur Anderson case demonstrates the chilling effect of criminal prosecution on corporations.
• Advocacy failures include overreaching by the government (Yates case), use of shortcut offenses, and pitting corporations against their constituents.
• The government often prosecutes individuals for obstruction of justice or perjury instead of the underlying fraud.
• Non-prosecution agreements (NPAs) and deferred prosecution agreements (DPAs) often result in corporations paying fines and implementing compliance programs.
• New declinations of prosecution, where corporations provide information and are not prosecuted, may incentivize corporations to avoid trial.
• Decreased regulatory enforcement leads to delays in trials, increased damage to victims, and higher fraud losses.
• Higher fraud losses result in greater sentences for individuals who are caught.

4. Transnational Corporate Misconduct: Fabio de Pasqual's Perspective

• The case study focuses on the OPL245 case in Nigeria, involving alleged bribery by Shell and Eni.
• The case highlights the illusion of a global operational network of anti-corruption law.
• The prosecutor's methodology included directing the police, interviewing witnesses and suspects, seeking international cooperation, and going up the chain of command.
• Gaps and limits in the judiciary include intimidation, bribery, and influence from other colleagues or high-ranking judges.
• The media's interest in investigations wanes over time, making it difficult to maintain public attention.
• Working with victim states is messy due to conflicting interests and lack of commitment to pursuing high-level corruption.
• The OPL245 case involved Shell and Eni paying $1.1 billion to a former Nigerian minister with a conflict of interest.
• Monies were intended to pay the minister and his political godfathers, with some funds channeled back to the companies.
• The court acquitted all defendants due to a lack of detailed proof of specific meetings and agreements.
• The court did not consider large, opaque payments to intermediaries as evidence of foreign bribery.
• After the acquittals, the prosecutor and his colleague were investigated for concealing exculpatory evidence and were later convicted.
• The case highlights the risks of pursuing high-level corruption and the challenges of overcoming political influence.

5. A Sociological Perspective on Corporate Misconduct: Jennifer Taub's Perspective

• The focus on corporate misconduct is driven by a desire to prevent it, not just respond to it.
• Civil law systems are inadequate for dealing with activities beyond decision-making among directors, management, and shareholders.
• Criminal accountability is used after the fact to respond to major cases of corporate misconduct.
• The question is how to best use or reform the existing legal system to prevent corporate misconduct.
• A sociological perspective is needed to understand the audience being targeted by legal regimes.
• Corporations can be categorized into three types:
  • Criminal to the core: Organizations that are essentially criminal from day one (e.g., Madoff, Enron).
  • Opportunistic offenders: Average business organizations that engage in cost-benefit analysis and respond to industry peers (e.g., banks during the financial crisis, Wells Fargo).
  • One-off offenders: Organizations that get into a scrape due to a bad apple or desperate circumstances (e.g., Abacus Bank).
• The system perversely favors criminal-to-the-core models, as they are difficult to identify and prosecute early.
• One-off offenders are easy targets but cause less harm.
• Most businesses fall into the opportunistic offender category, requiring a different approach.
• Congress or the SEC should hold hearings ahead of time to shine sunlight on problematic industry practices.
• Norms should be enforced, similar to the "comply or explain" approach in British corporate governance.
• The approach should be tailored to the specific type of business and the nature of the misconduct.
• Settlements should not be the primary goal; the focus should be on changing behavior.
• Boards of directors should be replaced in companies with persistent problems.
• The existing legal tools are insufficient, even with zealous prosecutors.
• Prevention is crucial to avoid the cycle of corporate crime waves and crackdowns.

6. Examples and Discussion

• Purdue Pharma and Boeing are examples of egregious corporate misconduct where regulation and punishment failed.
• Purdue Pharma misled the FDA about the addictiveness of OxyContin, and the DOJ failed to hold executives accountable.
• Boeing defrauded the FAA, leading to safety problems and a deferred prosecution agreement that was later undone.
• Compliance programs are meant to check boxes and provide discounts from the Department of Justice.
• Compliance programs can be automated and are desired by general counsels.
• The Boeing case highlights the awkwardness of using corporate law to address issues of corporate trauma.
• The Duke Energy case demonstrates the difficulty of proving oversight liability when regulators are captured.
• The BP oil spill case resulted in a plea agreement with a fine and a monitor, similar to a deferred prosecution agreement.
• In Italy, compliance is not totally exculpatory.
• Compliance programs can be obvious, useless, designed to blackmail internally, or designed to hide or claim good faith.
• Executives rarely face personal financial ruin for corporate misconduct.
• The bar for responsible officers should be lowered, and willful blindness should be criminalized.
• The responsible corporate officer doctrine should be expanded to other areas of law.

7. Conclusion

The panel discussion highlights the complexities of addressing corporate misconduct through law and enforcement. The speakers emphasize the limitations of existing legal frameworks, the challenges of prosecuting high-level executives, and the need for a more proactive approach to prevention. They call for greater individual accountability, stronger regulatory oversight, and a shift in focus from settlements to changing corporate behavior. The discussion also underscores the importance of international cooperation and the need to address political influence in corruption cases.