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Inducing Corporate Compliance: A Compound Corporate Liability Regime
Abstract
Corporate liability regimes have two major social goals: inducing corporations to internalize all social ramifications of their activity; and inducing corporations to prevent, deter, and report their employee misconduct. The scholarly polemic has shown that none of the liability regimes recognized thus far in the literature efficiently satisfies both social goals. Following a Law and Economics approach, this paper develops an innovative regime that may comprise an optimal corporate liability framework in most settings. The Compound Corporate Liability Regime developed in this paper is a two-layer strict liability regime. Under this regime, corporations that self-report their employee misconduct incur a sanction that is reduced by the variable enforcement costs saved due to their self-reporting. Such a liability framework aligns social and corporations’ interests, and thereby satisfies both social goals of corporate liability regimes.
Starting point of the paper is the description of the phenomenon of labour exploitation, which is intertwined with the global process of liberalization of the global labour market. In this context, a protection of workers can be traced back to legal instruments in combating human trafficking where the victim is a vulnerable person. To this end, I argue that domestic and international rules against labour exploitation define a sort of minimum statute of the worker, the violation of which may result in criminal law protection that otherwise cannot be guaranteed by other measures of an extra-criminal nature. The Italian legal system punishes not only the employer who exploits workers but also the ‘caporale’ (or gangmaster) who recruits labour for the purpose of allocating them to work for third parties under exploitative conditions, taking advantage of the workers’ state of need. The paper then offers a comparative analysis with German criminal law, where unlawful intermediation of labour only plays a marginal role. Finally, I argue that the crime of labour exploitation intends to protect the entire labour market, defining the boundaries of the phenomenon within the so-called corporate crime. Evidence is, on the one hand, in Italy, the increasingly widespread application of the judicial administration and liability of entities under legislative decree 231/2001 and, on the other hand, in Germany, the tension towards labour market protection in the form of wage dumping.
Our study deals with the control of Hungarian state-owned business associations in order to find out whether there is any correlation between corporate sustainability and compliance. According to our hypothesis, the state has a greater responsibility for the sustainable operation of state-owned enterprises-one of the tools of which can be the efficient construction of so-called compliance controls. A state-owned enterprise can be sustained in its operation and function by doing what it has been assigned to it as a task. The sustainable operation can be achieved through the use of circular feedback and continuous control. Corporate sustainability can be influenced by a number of factors that are crucial to the integrity and adequacy of companies. In our study, these are the Initial Hazard Factors (IHFs), Hazardous Increasing Factors (HIFs), and Control Enhancement Factors (CEFs), which were used in indexed form for testing. For the specific analysis, we used the Analytical Hierarchy Process (AHP) method to rank and evaluate risk avoidance options. We analyzed the practice of the State Audit Office of Hungary and its results and found that in the case of state-owned enterprises, the current Hungarian legal system does not contain uniform normative regulations that would regulate the control of conformity in a broader sense. As a result, corporate integrity and corporate compliance are also subject to a fragmented set of rules in different jurisdictions. This has a negative impact on the development of the company's long-term, sustainable operating principles. Based on our research, a number of factors have been identified (including enterprise size and intensive use of EU funding resources) that may result in a loss of corporate sustainability but can be mitigated or even eliminated by creating an effective internal control environment. Based on literature analysis, most of the Hungarian phenomena are typical of the former socialist countries of Central Europe. The interpretation of sustainability-in transition management countries-for first-generation enterprises which were developed in a socialist market economy is quite different from the most developed countries of the European Union. The main reason for this is that generational rules do not yet exist.
Global Securities Litigation and Enforcement - edited by Pierre-Henri Conac January 2019
O artigo examina o programa de leniência na Lei Anticorrupção brasileira, sob uma perspectiva comparativa e empírica. Programas de leniência assim entendidos como conjunto de normas que permitem que infratores evitem ou reduzam as punições que receberiam em troca de confissão e colaboração no processo de apuração conduzido pelas autoridades competentes, são adotadas em ordenamentos estrangeiros desde 1978. O recém adotado programa de leniência na lei anticorrupção brasileira (Lei nº 12.846/2013) apresenta distinções significativas do programa de leniência antitruste (Lei nº 12.529/11). O programa funda-se na Teoria da Dissuasão. O programa de leniência anticorrupção brasileiro apresenta como principais características: admitir apenas a leniência parcial; aparentemente limitam o acesso à leniência aos aplicantes que primeiro se apresentarem às autoridades (não obstante a realidade observada no caso da Operação Lava-Jato); seu pedido pode ser formulado ex post; inexistindo restrições à aplicação ao líder da conduta ilícita. Não obstante seja um importante avanço, já é possível apontar questões que devem ser mais bem tratadas de forma a possibilitar o efetivo combate à corrupção.
Palavras-chave: Leniência, Anticorrupção, Controle, Administração
The paper examines the leniency program in the Brazilian Anti-Corruption Law, from a comparative and empirical perspective. Leniency programs, understood as a set of standards that allow offenders to avoid or reduce the punishments they would receive in exchange for confession and collaboration during the assessment process conducted by the competent authorities, are adopted in foreign legal systems since 1978. The recently adopted leniency program in Brazilian anti-corruption law (Law No. 12,846 / 2013) shows significant distinctions of antitrust leniency program (Law No. 12.529 / 11). The program is founded on the Theory of Deterrence. The Brazilian anticorruption leniency program has the following main characteristics: admit only partial leniency; apparently limits access to the applicants who first present themselves to the authorities (despite the reality observed in the case of Operação Lava-Jato); can be requested ex post; there are no restrictions on application to the leader of the illicit conduct. Although being an important advance, it is possible to identify issues that should be better handled in order to enable the effective fight against corruption.
Keywords: Leniency, Anti-corruption, Control, Administration
We study the design of self-reporting schemes for corporate crimes. We model a welfare-maximizing authority and a continuum of firms, where each firm has one employer and one employee. Employees decide whether to take an action beneficial to themselves but harmful to their employer and society. Employers design contracts that either prevent the harmful act or tolerate it. We investigate the optimal corporate and individual sanctions to impose on firms whose employees confess to having committed the harmful act. In an extension, we let employers monitor their employees, and investigate the optimal sanctions when employers report their own employees.
In 2014 the United Nations launched a debate on corporate criminal liability as a mechanism for States to prosecute gross human rights abuses by multinational corporations. This paper understands these efforts as part of the creation and implementation of the Corporate Responsibility to Respect Human Rights in the context of a transnational governance system to regulate companies. It contributes to this development by examining the potential of four stylised liability models – vicarious liability, identification doctrine, aggregation liability, and organisational liability – to prosecute and prevent such gross human rights abuses. The analysis is based on a theoretical framework which complements the law and economics approach regularly employed in studies on corporate criminal liability with the idea of the socially embedded multinational corporation, and the concept of moral imagination as an effective instrument to prevent human rights abuses. The analysis ascertains that among the derivative liability models, vicarious liability offers the greatest potential to further the corporate responsibility to respect human rights while aggregation liability bears particular potential for negligence cases. In contrast, identification liability is not suitable for holding multinational corporations liable. Due to its inherent focus on corporate culture, organisational liability provides for the best environment for effective preventive measures.
This publication provides an overview of arguments explaining the risk of corruption. Corrupt acts are subject to decision making authority and assets available for grabbing. These assets can be stolen, created by artificial shortage, or become available as the result of a market failure. Assets that are especially exposed to corruption include profits from the private sector, revenues from the export of natural resources, aid and loans, and the proceeds of crime. Whether or not opportunities for corruption are exploited depends on the individuals involved, the institution or society they are part of, and the law enforcement circumstances. Corruption usually persists in situations in which players are aware of the facts but nonetheless condone the practice. Absence of reaction can result from information asymmetries (in which the people who are supposed to act are not aware of the need to act), coordination failure, patronage-determined loyalty, and incentive problems at the political level. This review of results and insights from different parts of the scholarly literature on corruption focuses on areas where research can guide anticorruption policy. The publication also describes a number of corruption-related challenges in need of more attention from researchers.
The past decades witnessed the massive growth of literature on corporate governance. Various perspectives of corporate governance mechanisms were widely documented. However, studies on corporate governance from the regulatory perspective receive relatively little attention. Majority review papers focus largely on internal and external corporate governance mechanism literatures. This paper intends to give an overview on the literatures on the second generation of corporate governance research as suggested by Denis and McConnell. Literatures on legal and regulatory mechanism are reviewed. In addition, this paper highlighted the roles and importance of regulatory investor protection, regulatory enforcement and compliance behavior. The consequences of corporate misconduct and stock market reactions followed by identification of research gap and suggestions for future research are discussed.
This article explores how issuer liability reallocates fraud risk and how risk allocation may reduce the incidence of fraud. In the US, the apparent absence of individual liability of officeholders and insufficient monitoring by insurers undermines the potential deterrent effect of securities litigation. The underlying reasons why both mechanisms remain ineffective are collective action problems under the prevailing dispersed ownership structure, which eliminates the incentives to monitor set by issuer liability. This article suggests that issuer liability could potentially have a stronger deterrent effect when it shifts risk to individuals or entities holding a larger financial stake. Thus, it would enlist large shareholders in monitoring in much of Europe. The same risk-shifting effect also has implications for the debate about the relationship between securities litigation and creditor interests. Creditors’ claims should not be given precedence over claims of defrauded investors (e.g. because of the capital maintenance principle), since bearing some of the fraud risk will more strongly incentivize large creditors, such as banks to monitor the firm in jurisdictions where corporate debt is relatively concentrated.
Essentially, what is wrong with the Guidelines is that they are rules "without"-without rationality, without authority, without constitutionality. What went wrong is an old pattern of deficiency in government that seems to recur in endless variation: power without adequate discipline becomes tyranny. The possible solutions are equally simple: reinforce the discipline, or withdraw the power. The former tends to be a risky strategy for a free people, for most disciplinary procedures can be circumvented. Therefore, perhaps it is time to reexamine whether the power should be granted at all, that is, whether the Sentencing Commission should be put out of the business of corporate sentencing.
The modern American environmental regulatory system is founded on the assumption that business firms are rational polluters: that the rational pursuit of their self interest guides both their compliance decisions and their participation in the political process. This traditional view of firms implies that environmental regulators must deter pollution through the imposition of fines and penalties, and must deter capture and subversion of the regulatory process through the use of prescriptive and proscriptive rules. Critics of this traditional view claim that the regulatory system is unnecessarily complex, making compliance difficult, and unnecessarily punitive, since most firms try to comply and most noncompliance is unintentional. This article examines this debate between proponents of the traditional view and proponents of the complexity critique, a debate that lies at the root of ongoing controversies over civil enforcement, citizen suit standing, mens pea standards in environmental criminal prosecutions, environmental auditing policy, and EPA's experiments with collaborative regulation. While there is evidence to support both, it seems clear from a review of the evidence that, for heavily regulated firms, the complexity critique is right much of the tune. That is, the compliance task is often unreasonably difficult, and much noncompliance results from misunderstanding of or ambiguity surrounding environmental rules. The latter part of this article reviews the implications of that finding for the ongoing policy and doctrinal disputes listed above and discusses host, failure to recognize those implications could threaten the long-term legitimacy and effectiveness of the regulatory system as a whole.
The paper investigates the role of the government and self-regulatory reputation
mechanisms to internalise externalities of market operation. If it pays off for
companies to invest in a good reputation by an active policy of corporate social
responsibility (CSR), external effects of the market will be (partly) internalised by the
market itself. The strength of the reputation mechanism depends on the functioning of
non governmental organisations (NGOs), the transparency of the company, the time
horizon of the company, and on the behaviour of employees, consumers and
investors. On the basis of an extensive study of the empirical literature on these
topics, we conclude that in general the working of the reputation mechanism is rather
weak. Especially the transparency of companies is a bottleneck. If the government
would force companies to be more transparent, it could initiate a self-enforcing spiral
that would improve the working of the reputation mechanism. We also argue that the
working of the reputation mechanism will be weaker for smaller companies and for
both highly competitive and monopolistic markets. We therefore conclude that
government regulation is still necessary, especially for small companies.
Across a range of legal regimes - including environmental, tort, employment discrimination, corporate, securities, and health care law - United States law reduces or eliminates enterprise liability for those organizations that can demonstrate the existence of "effective" internal compliance structures. Presumably, this legal standard rests on an assumption that internal compliance structures reduce the incidence of prohibited conduct within organizations. This Article demonstrates, however, that little evidence exists to support that assumption. In fact, a growing body of evidence indicates that internal compliance structures do not deter prohibited conduct within firms and may largely serve a window-dressing function that provides both market legitimacy and reduced legal liability. This leads to two potential problems: (1) an under-deterrence of corporate misconduct, and (2) a proliferation of costly - but arguably ineffective - internal compliance structures. The United States legal regime's enthusiastic embrace of internal compliance structures as a liability determinant is consistent with the increasing influence of what are referred to in this Article as "negotiated governance" models that seek to improve government regulation and/or the litigation process through more cooperative governance methods that provide a governance role to the regulated group and other interested parties. Drawing on the incomplete contracts literature, this Article argues that, although the negotiated governance model provides valuable descriptive insights into the mechanisms by which legal rules develop, the model's proponents minimize the dangers of opportunistic behavior during the renegotiation phases of governance (that is, the implementation and enforcement phases) by those with the greatest stake in the meaning of incomplete law - in this case, business organizations and legal compliance professionals, including lawyers.
This article demonstrates that, at least since the adoption of the Organizational Sentencing Guidelines in 1991, the United States legal regime has been moving away from a system of strict vicarious liability toward a system of duty-based organizational liability. Under this system, organizational liability for agent misconduct is dependant on whether or not the organization has exercised due care to avoid the harm in question, rather than under traditional agency principles of respondeat superior. Courts and agencies typically evaluate the level of care exercised by the organization by inquiring whether the organization had in place internal compliance structures ostensibly designed to detect and discourage such conduct. I argue, however, that any internal compliance-based organizational liability regime is likely to fail because courts and agencies lack sufficient information about the effectiveness of such structures. As a result, an internal compliance-based liability system encourages the implementation of largely cosmetic internal compliance structures that reduce legal liability without reducing the incidence of organizational misconduct. Furthermore, a review of the empirical literature on the effectiveness of internal compliance structures suggests that many organizations have adopted precisely this cosmetic approach to internal compliance. This leads to two potential problems: first, an underdeterrence of organizational misconduct and, second, a proliferation of costly but ineffective internal compliance structures.
How should the law structure the responsibility of corporations for the crimes and intentional torts of their managers and other employees? This question has received too little attention despite its intrinsic importance. Under both criminal and civil law, a firm is directly and vicariously liable for wrongs committed by its agents (managers and other employees) within the scope of their employment. A firm's liability under this principle is very far reaching. For example, it extends to crimes committed by the firm's subordinate agents (including salesmen, clerical workers and truck drivers), even when these agents violate corporate policy or express instructions. Moreover, although culpable agents must generally intend to benefit the firm before it is liable, this requirement is easily met if there is any possibility that wrongdoing might increase corporate profits -- even if its net effect is to injure the firm, once expected corporate sanctions are considered.
This paper examines the sizes of the fines, damage awards, remediation costs, and market value losses imposed on companies that violate environmental regulations. Firms that violate environmental laws suffer statistically significant losses in the market value of firm equity. The losses, however, are of similar magnitudes to the legal penalties imposed, and in the cross section, the market value loss is related to the size of the legal penalty. Thus, environmental violations are disciplined largely through legal and regulatory penalties, not through reputational penalties.
Section 307 of the Sarbanes-Oxley Act authorizes the SEC to prescribe "minimum standards of professional conduct" for attorneys "appearing or practicing" before it. Although the initial debate has focused on issues of confidentiality, this terse statutory provision frames and seemingly federalizes a much larger question: What is the role of the corporate attorney in public securities transactions? Is the attorney's role that of (a) an advocate, (b) a transaction cost engineer, or, more broadly, (c) a gatekeeper-that is, a reputational intermediary with some responsibility to monitor the accuracy of corporate disclosures? Skeptics of any gatekeeper role for attorneys have long argued that (a) such a role conflicts with the traditional obligations of loyalty that attorneys owe their clients, and (b) imposing gatekeeping obligations on attorneys will chill attorney-client communications and thereby reduce law compliance. This Essay examines these arguments that attorneys make inferior gatekeepers and replies that securities attorneys can and do perform a limited "gatekeeping" function and that imposing such obligations on attorneys should neither chill socially desirable client communications nor reduce the attorney's influence over the client (and probably will increase that leverage). Finally, this Essay proposes specific standards and obligations that the SEC might adopt to enhance the securities attorney's role as a gatekeeper. Going beyond the current "noisy withdrawal" issue, it proposes both limited certification and independence standards.
We examine the penalties imposed on the 585 firms targeted by SEC enforcement actions for financial misrepresentation from 1978-2002, which we track through November 15, 2005. The penalties imposed on firms through the legal system average only 3.08. Of this additional loss, 2.71 is due to lost reputation. In firms that survive the enforcement process, lost reputation is even greater at $3.83. In the cross section, the reputation loss is positively related to measures of the firm's reliance on implicit contracts. This evidence belies a widespread belief that financial misrepresentation is disciplined lightly. To the contrary, reputation losses impose substantial penalties for cooking the books. Copyright 2008, Michael G. Foster School of Business, University of Washington, Seattle, WA 98195.
show that such conflict arises in the case of accidents, in which (1) the needs of victims are immediate and concrete and the potential corporate liability is great and (2) management can plausibly claim there are mitigating circumstances and factors beyond its control. In the case of accidents, if managers are accommodating to victims, shareholders are likely to suffer. The conflict does not arise in the case of scandals, for neither of those conditions holds. Shareholders benefit when managers are accommodating. This article discusses the theoretical and managerial implications of these findings. In this research, we empirically analyzed the impact on the stock market of the announcements that corporate managements make during three types of crisis: accidents, scandals, and product safety incidents. Such crises affect all a corporation's stakeholders (Freeman, 1984), including shareholders, customers, employees, and suppliers. They also create a new category of stakeholders-the victims. As Shrivastava wrote, in a crisis "the most profoundly affected stakeholders, and ironically sometimes the most easily forgotten because of their powerlessness, are the victims" (1987: 23). Although the announcements managers make during a crisis can have profound impacts on both shareholders and victims, researchers have not carefully studied this phenomenon or constructed a theory of how such announcements Many people helped bring this project to fruition. We would like to acknowledge the assistance of Patrick Hess, Gordon Alexander, and George Benson, who helped with the financial models; Grant Yonehiro, who provided technical assistance; Hyoung Koo Moon and Mark Weber, who helped analyze the data; and Ray Willis and Cheenu Balakrishnan, who helped us solve some statistical and methodological problems. Larry Cummings, Norman Bowie, Peter Ring, and Elizabeth Maines read and commented on early drafts and Judith Thompson made very useful suggestions when we presented this research at an annual Academy of Management
This Article traces the Sentencing Commission's path in completing that task32 and considers what work lies ahead. The Article addresses four specific questions: (1) Given that the Commission's primary mandate is to facilitate greater certainty, uniformity, effectiveness and rationality in the sentencing of individuals, why did the Commission tackle the area of corporate sentencing at all? (2) How did the Commission arrive at the philosophical bases that underlie the fine provisions of the corporate sentencing guidelines? (3) How did the principles of deterrence and just punishment for the offense shape the Commission's decisionmaking with respect to the key structural issues involved in creating the corporate fine guidelines, and what other factors played a role in the construction of these guidelines? and (4) Are the corporate Sentencing Guidelines cast in stone, or can organizations and attorneys expect changes in the future?
The pervasive influence enjoyed by large, publicly held corporations has inspired a body of scholarship that considers at length the need for effective mechanisms to regulate institutional behavior. Enforcement of penal statutes applicable to corporations is, of course, included among existing options, and renewed interest in criminally prosecuting corporations during the last decade has brought to the fore the true breadth of corporate exposure to criminal liability. While it has long been settled that corporations constitutionally may be held accountable for criminal misdeeds of their agents, one detects a current sense of uneasiness regarding the appropriate role and scope of corporate criminal liability. Have we, for instance, strayed too far from the mens rea model of criminality when dealing with institutional misbehavior? A vast array of penal statutes applicable to the corporate entity dispenses with any requirement of moral blameworthiness. Is it time, perhaps, to re-examine such offenses in light of traditional notions of culpability so that we may arrive at a "consensus" about what constitutes "truly culpable" corporate wrongdoing and eliminate criminal penalties for "trivial conduct?”
Vicarious liability is the strict liability of a principal for the misconduct of her agent. This chapter reviews six areas of commentary on vicarious and corporate civil liability. It begins by formulating the standard case for vicarious liability based on the likely insolvency of the firm's culpable agents in the face of massive liability for business torts. Next, it addresses cost considerations that militate against imposing vicarious liability on the corporation in some circumstances, and the relationship between corporate liability the structure of liability imposed on corporate agents. Two additional sections of the article review alternatives to traditional vicarious liability regimes, including alternative liability rules for corporate principals (notably a negligence rule) and alternative targets for liability besides the firm (notably top corporate managers). Finally, the chapter reviews recent literature on the distinction between corporate civil and criminal liability. It concludes that the case made out thus for distinguishing between these too forms of corporate liability is weak.
... In recent years, federal and state laws have sought to promote good corporate citizenship by encouraging business entities to establish internal compliance programs designed to avoid--or at least detect--illicit conduct. ... Upjohn Co. v. United States, the Supreme Court's seminal decision interpreting the attorney-client privilege in a corporate context, provides a preliminary framework for analyzing when compliance materials may be protected from disclosure. ... Under the subject matter test, five elements must be present for the attorney-client privilege to apply: (1) the communication must be made for the purpose of securing legal advice; (2) the employee making the communication must do so at the direction of a supervisor; (3) the direction must be given by the supervisor to obtain legal advice for the corporation; (4) the subject matter of the communication must be within the scope of the employee's corporate duties; and (5) the communication may not be disseminated beyond those persons who need to know the information. ... Because of these limitations, however, fewer corporations are likely to assume the disclosure risk inherent to a compliance audit. ... Compliance program materials include the following: compliance audit results, field notes and records of observations, raining materials, opinions, suggestions, conclusions, drafts, memoranda, drawings, photographs, computer-generated or electronically recorded information, maps, charts, graphs, and surveys. ...
Firms frequently admit mistakes voluntarily. For instance, they recall defective products and restate financial statements. These "confessions," which lead to immediate reputation losses, may be aimed at avoiding likely litigation costs. In this paper, however, we argue that long-term reputational concerns alone can provide firms with strong enough incentives to confess their mistakes, even in the absence of other disciplinary mechanisms. Analyzing a two-period interaction between an inspector and a firm, we show that in equilibrium a confession places the firm under higher future scrutiny, which is more costly for lower quality firms, and thus provides a means for higher quality firms to reveal their quality and build their long-term reputation.
Under current federal law, a corporation, no matter how large or small, is criminally liable if a member of the organization commits a crime within the scope of employment and at least in part with the intent to benefit the company. This Article challenges that doctrine and contends that where it seeks to charge a corporation criminally, the government should bear the burden of establishing as an additional criminal element that the corporation failed to have reasonable policies and procedures to prevent the employee's conduct. Narrowing the scope of criminal corporate liability is supported by the reasoning of a series of Supreme Court decisions that curtailed the application of civil corporate vicarious liability in the context of punitive damages and certain claims under Title VII. This Article applies the logic behind those cases to the criminal context and argues that a similar rethinking of criminal corporate liability is long overdue. Far from giving corporations a shield to commit fraud, a system that ties criminal liability to the lack of an effective compliance program will do what the practical limitations on a prosecutor's time and resources could never permit - incentivize boardrooms around the country to devise, implement, and monitor compliance measures. Where a corporation has such policies and procedures to deter and detect criminal actions by its employees, none of the legitimate concerns animating criminal corporate liability is implicated.
Following the recent spate of corporate scandals, government enforcement authorities have increasingly relied upon corporate monitors to help ensure law compliance and reduce the number of future violations. These monitors also permit enforcement authorities, such as the Securities & Exchange Commission and others, to leverage their enforcement resources in overseeing corporate behavior. However, there are few descriptive or normative analyses of the role and scope of corporate monitors. This paper provides such an analysis. After sketching out the historical development of corporate monitors, the paper examines the most common features of the current set of monitor appointments supplemented by interviews with monitors. This is followed by a normative analysis that examines when it is desirable to appoint monitors and what powers and obligations they should have. Based on this analysis, we provide a number of recommendations for enhancing the potential of corporate monitors to serve a useful deterrent and law enforcement function without being unduly burdensome on corporations. This involves, among other things, discussion of the kinds of powers monitors should have and the fiduciary duties monitors should owe to the shareholders whose businesses they are monitoring.
Section 307 of the Sarbanes-Oxley Act authorizes the SEC to prescribe "minimum standards of professional conduct" for attorneys "appearing or practicing" before it. Although the initial debate has focused on issues of confidentiality, this terse statutory provision frames and seemingly federalizes a much larger question: What is the role of the corporate attorney in public securities transactions? Is the attorney's role that of (a) an advocate, (b) a transaction cost engineer, or, more broadly, (c) a gatekeeper--that is, a reputational intermediary with some responsibility to monitor the accuracy of corporate disclosures? Skeptics of any gatekeeper role for attorneys have long argued that (a) such a role conflicts with the traditional obligations of loyalty that attorneys owe their clients, and (b) imposing gatekeeping obligations on attorneys will chill attorney-client communications and thereby reduce law compliance. This Essay examines these arguments that attorneys make inferior gatekeepers and replies that securities attorneys can and do perform a limited "gatekeeping" function and that imposing such obligations on attorneys should neither chill socially desirable client communications nor reduce the attorney's influence over the client (and probably will increase that leverage). Finally, this Essay proposes specific standards and obligations that the SEC might adopt to enhance the securities attorney's role as a gatekeeper. Going beyond the current "noisy withdrawal" issue, it proposes both limited certification and independence standards.
Both criminal law and the law of punitive damages feature a division of authority over when a corporation may be punished. In both fields, some states allow punishment when any employee misbehaves in the scope of employment, but other states allow corporations to avoid punishment by claiming that a misbehaving employee's mental states should not be imputed to the corporation because he was not sufficiently important in the corporate hierarchy. However, these divisions of authority do not match: there is no correlation between the rules individual states follow for criminal law and the rules they follow for punitive damages. This article argues that this mismatch is unjustified; the same rules should govern the food-chain question for punitive damages and for criminal law.
In Organizational Misconduct: Beyond the Principal-Agent Model, Professor Krawiec argues that organizations have perverse incentives to implement ineffective compliance programs, and supports this argument with a survey of empirical research. Based on her argument she urges that organizations be held strictly liable to corporate crimes (in terms of both guilt and punishment), regardless of the implementation of a compliance program by the accused organization. Assuming arguendo that criminal law's current treatment of compliance programs gives organizations an incentive to design inefficient programs, this Article posits that corporate crime may be better deterred if criminal law embraces, rather than remains agnostic to, compliance programs. First, Krawiec's policy suggestion overstates the impact of the legal sanction on corporate behavior. The legal sanction is only one of several sanctions imposed for organizational misconduct. The public relations effect of misconduct may harm organizations more than any legal sanction, giving them an incentive to implement compliance programs that assure the public of the organization's compliance with the law. Second, Krawiec does not consider utility that is derived from reducing the public's subjective perception of the likelihood of misconduct. This placebo effect that exists whether a compliance program is objectively effective or not, may increase utility by offsetting behavioral biases that cause the public to overestimate the probability of organizational misconduct.
We examine the penalties imposed on all 585 firms that were targeted by SEC enforcement actions for financial misrepresentation from 1978 - 2002, which we track through November 15, 2005. The penalties imposed on firms through the legal system average only 3.08. Of this additional loss, 2.71 is due to lost reputation. In firms that survive the enforcement process, lost reputation is even greater at $3.83. In the cross-section, the reputational penalty is positively related to measures of the firm's reliance on implicit contracts. This evidence belies a widespread belief that financial misrepresentation is disciplined lightly. To the contrary, reputation losses impose substantial penalties for cooking the books.
We examine the market reaction to a sample of 403 restatements announced from 1995 to 1999. We document an average abnormal return of about −9 percent over a 2-day announcement window. We find that more negative returns are associated with restatements involving fraud, affecting more accounts, decreasing reported income and attributed to auditors or management (but not the Securities and Exchange Commission). There appears to be an additional penalty for announcements that do not quantify the restatement. Finally, we provide evidence on the relation between restatement announcements and analyst earnings forecast dispersion, bid–ask spreads and subsequent revisions in analyst earnings forecasts.
People's causal attributions for events in their lives have been shown to relate to individual and interpersonal outcomes. Groups and organizations also make causal attributions, and this article examines whether their publicly communicated attributions predict organizational-level outcomes. By content analyzing attributions contained in corporate annual reports from 14 companies during a 21-year period, the authors found that organizations that made "self disserving" attributions- internal and controllable attributions for negative events-had higher stock prices 1 year later. The authors argue that claiming personal responsibility for negative events made the organizations appear more in control, leading to more positive impressions.
We live in an era defined by corporate greed and malfeasanceâone in which unprecedented accounting frauds and failures of compliance run rampant. In order to calm investor fears, revive perceptions of legitimacy in markets, and demonstrate the resolve of state and federal regulators, a host of reforms, high-profile investigations, and symbolic prosecutions have been conducted in response. But are they enough? In this timely work, William S. Laufer argues that even with recent legal reforms, corporate criminal law continues to be ineffective. As evidence, Laufer considers the failure of courts and legislatures to fashion liability rules that fairly attribute blame for organizations. He analyzes the games that corporations play to deflect criminal responsibility. And he also demonstrates how the exchange of cooperation for prosecutorial leniency and amnesty belies true law enforcement. But none of these factors, according to Laufer, trumps the fact that there is no single constituency or interest group that strongly and consistently advocates the importance and priority of corporate criminal liability. In the absence of a new standard of corporate liability, the power of regulators to keep corporate abuses in check will remain insufficient. A necessary corrective to our current climate of graft and greed, Corporate Bodies and Guilty Minds will be essential to policymakers and legal minds alike. â[This] timely work offers a dispassionate analysis of problems relating to corporate crime.ââHarvard Law Review
[extract] The objectives of this article are to review the dominance in the common law world of derivative models of corporate criminal liability, to examine the deficiencies that have led to the current spate of reform proposals, to describe some of these proposals, and to address certain key questions about how to construct an organizational model of corporate criminal liability. The argument to be developed is broadly supportive of the proposals in the Model Criminal Code prepared by the Criminal Law Officers Committee of the Standing Committee of Attorneys-General of Australia. In particular, the idea that the fault elements for certain offenses may be found in criminogenic corporate cultures is endorsed. There are, however, some divergences of approach. It is argued here that an organizational model of liability can and should dispense with any requirement for conduct elements of offenses to be attributed from representatives who are acting within the scope of their employment or authority. In this respect, the Model Criminal Code may be too conservative. On the other hand, the proposals of the code may make too sharp a break from the traditional conceptual framework of the common law; in particular, the traditional distinctions between forms and levels of subjective fault. Clearly, concepts such as intention, knowledge, and recklessness need to be adapted for use with reference to organizations. Such terms, however, have collective meanings in ordinary language and, with appropriate refinements, can be given collective meanings in criminal law.
I. Introduction Since the turn of the century, legislation in Western countries has expanded rapidly to reverse the brief dominance of laissez faire during the nineteenth century. The state no longer merely protects against violations of person and property through murder, rape, or burglary but also restricts "dis crimination" against certain minorities, collusive business arrangements, "jaywalking," travel, the materials used in construction, and thousands of other activities. The activities restricted not only are numerous but also range widely, affecting persons in very different pursuits and of diverse social backgrounds, education levels, ages, races, etc. Moreover, the likeli hood that an offender will be discovered and convicted and the nature and extent of punishments differ greatly from person to person and activity to activity. Yet, in spite of such diversity, some common properties are shared by practically all legislation, and these properties form the subject matter of this essay. In the first place, obedience to law is not taken for granted, and public and private resources are generally spent in order both to prevent offenses and to apprehend offenders. In the second place, conviction is not generally considered sufficient punishment in itself; additional and sometimes severe punishments are meted out to those convicted. What determines the amount and type of resources and punishments used to enforce a piece of legislation? In particular, why does enforcement differ so greatly among different kinds of legislation?
This paper considers a model of probabilistic law enforcement in which a violator can undertake remediation that reduces the harm caused. In an optimal regime, violators are prompted to voluntarily remediate-or self-police-by the promise of a reduced sanction when they do so. Self-policing increases efficiency in two ways: (1) efficient remediation is achieved early and with certainty, rather than only when a violator is apprehended; and (2) the enforcement effort needed to deter violations is often reduced. Switching to a self-policing enforcement regime leads optimally to less government enforcement activity and less deterrence.
Self-reporting--the reporting by parties of their own behavior to an enforcement authority--is a commonly observed aspect of law enforcement, such as in the context of environmental and safety regulation. The authors add self-reporting to the model of the control of harmful externalities through probabilistic law enforcement and they characterize the optimal scheme. Self-reporting offers two advantages over schemes without self-reporting: enforcement resources are saved because individuals who report their harmful acts need not be detected and risk is reduced because individuals who report their behavior bear certain rather than uncertain sanctions. Copyright 1994 by University of Chicago Press.
Some of the costs of enforcing laws are fixed" - - in the sense that they do not depend on the number of individuals who commit harmful acts- -while other costs are "variable"- - they rise with the number of such individuals. This article analyzes the effects of fixed and variable enforcement costs on the optimal fine and the optimal probability of detection. It is shown that the optimal fine rises to reflect variable enforcement costs; that the optimal fine is not directly affected by fixed enforcement costs; and that the optimal probability depends on both types of enforcement costs.
If an earnings restatement is simply an accounting adjustment to old information that is no longer being used for valuation purposes, it will not necessarily cause a change in a firm's value. However, the restatement may contain information that is used to reassess the future cash flows and credibility of the firm. It is found that the earnings restatements elicit a strong negative market response. Moreover, the market response is conditioned on the content of the earnings restatements. The market-imposed penalty is more severe when the restatement is attributed to an adjustment in revenue, when it is forced by the auditor or the SEC, and when the revised earnings level is lower than two proxies used to measure expected earnings.