The Criminalization of American Business
What do Bank of America, Citigroup, JPMorgan Chase, and Goldman Sachs have in common? All paid hefty fines for purportedly misleading investors about mortgage-backed securities. In fact, these companies paid the government a total of $50 billion in fines. The payments were made in lieu of criminal prosecutions.Today, several hundred thousand federal rules that apply to businesses carry some form of criminal penalty. That is in addition to more than four thousand federal laws, many of which carry criminal sanctions for their violation. From 2000 to the beginning of 2017, about 2,200 corporations either were convicted or pleaded guilty to violating federal statutes or rules.
Criminal Convictions
The first successful criminal conviction in a federal court against a company—the New York Central and Hudson River Railroad—was upheld by the Supreme Court in 1909 (the violation: cutting prices) Many other successful convictions followed.One landmark case developed the aggregation test, now called the Doctrine of Collective Knowledge.b This
test aggregates the omissions and acts of two or more persons in a corporation, thereby constructing an actusreus and areus and are us men srea out of the conduct and knowledge mens rea out of the conduct and knowledge mens rea
of several individuals.Not all government attempts at applying criminal law to corporations survive. In 2013, for example, Sentinel Offender Services, LLC, prevailed on appeal. There was no actual evidence to show that the company had acted with specific intent to commit theft by deception.c In 2014, FedEx Corporation was indicted for purportedly illegally shipping prescription drugs ordered through Web sites. FedEx has chosen to proceed to trial in the U.S. District Court for the Northern District of California in San Francisco.d Many companies, however, choose to reach settlement agreements with the government rather than fight criminal indictments.
Many Pay Substantial Fines in Lieu of Prosecution
More than three hundred corporations reached so-called non-prosecution agreements with the government from 2000 to the beginning of 2017. These agreements typically involve multimillion- or multibillion-dollar fines. This number does not include fines paid to the Environmental Protection Agency or to the Fish and Wildlife Service.According to law professors Margaret Lemos and Max Minzner, “Public enforcers often seek large monetary awards for self-interested reasons divorced from the public interest and deterrents. The incentives are strongest when enforcement agencies are permitted to retain all or some of the proceeds of enforcement.”
Business Questions
1. Why might a corporation’s managers agree to pay a large fine rather than to be indicted and proceed to trial?
2. How does a manager determine the optimal amount of legal research to undertake to prevent her or his company from violating the many thousands of federal regulations?
