General Outline of Corporate and White Collar Crime Topics

Fall 2005

Chapter 1: Corporate Criminal Liability

Corps have the capacity to commit criminal acts.
New York Central & Hudson River RR (p.1) – RR and two employees were each held liable for bribing sugar refiners, an anti-competitive practice in violation of the Elkins Act. RR held liable b/c the crime was committed for the sake of the RR’s economic gain, the bribes were paid for with the RR’s funds, and the RR benefited by gaining a temporary competitive edge.
RULE: Corporation can be held liable for acts of its agents. Agents acts (knowledge and purposes) may be attributed to the corporation.
Corporate Crime Under Attack (excerpt)
corporations held liable b/c structure is so complex, it is hard to pinpoint individuals responsible for specific decisions
corporate liability provides incentive for top officers to supervise lower/middle mgmt. more closely.
As long as punishment>benefits, firm will better deter misconduct than law enforcement
competition will cause firm to absorb costs; shareholders can file derivative suit if value goes down.
Federal Prosecution of Corporations (excerpt)
benefits of indicting a corporation:
corps. Likely to take immediate remedial steps, enable deterrence
charge of corporation does not mean no charge against individual officers. – also a strong deterrent
prosecutor has wide latitude in making charge
need to consider purposes of law: deterrence, punishment, protection
corporations should generally not agree to accept corporate guilty plea in exchange for non-prosecution
to facilitate information flow in plea agreements, corporation may waive atty client and work product privileges; make employees available for briefing, and do whatever else is necessary to ensure full scope of wrongdoing is disclosed.
United States v. C.R. Bard, Inc. (1994) p. 10

A corp was held liable for its violations of FDA regulations, which led to serious injuries and deaths in use of its catheters. Misconduct pervasive and motivated by greed; the executives approved it.
Ct. held that the plea agreement at issue was reasonable b/c it had certain features: allowed criminal prosecution of individual employees; imposed severe fines; imposed compliance program involving more intense FDA oversight.
Notes:[LW1] - consider motive: greed. This is important under federal prosecution guidelines.
In evaluating the plea agmnt: - look at effect on corporation

Fines (financial impact on corporation) did not just take away profit made from criminal behavior, but punished them further by taking all revenue
Individuals – court felt that it was significant that the individual execs would also be prosecuted[L.R.2].
Change to corporate culture (problem was well known, but no whistle blowers)
Respondeat Superior Rule
imposes corporate criminal liability for acts performed by officers or agents in course of their employment, w/o regard to their status
limitation: agent must be acting w/in scope of his/her authority and on behalf of corporation
Commonwealth v. Beneficial Finance Co. (p18)
Facts: mid-level mgrs in corporate financial institutions bribing officials to keep interest rates at highest poss. level for small loans. Court Instructions to Jury: under respondeat superior theory, acts of agents can be imputed to the corporation, if agents were acting w/in the scope of their employment.
Holding: even though these officials were not authorized to do the specific crime, since it was w/in the scope of their employment b/c they have the authority to deal w/ rate-setting agencies, the corporation was liable
Defendant’s Argument: (MPC theory) These actions would need to be authorized/ratified by a high level official in order to be shown to embody the ‘act’ of the corporation
Court’s Argument: MPC standard (∆’s arg.) has evidentiary problems[L.R.3]. How would there be a paper trail proving that high level officials actually approved those types of activities?
“expenditure of corporate funds is uniquely a corporate act.”
People v. Lessoff & Berger (1994) p 24.
law partnership was held liable for fraud, even though only one partner was involved in commission of crime. “Harsh, but rational.” Other partners who were clueless about misconduct suffered.
Rule: The other partners also stood to gain from the fraud, and they should have had incentives to do a better job of policing.
U.S. v. Hilton Hotels Corp (1973) p. 26
Facts: purchasing agent for Hilton went against company policy by participating in boycott, requiring company’s suppliers to pay 1% fee for consortium. He admitted that he had actual knowledge of the corporate policy, but he violated it b/c he was mad at the supplier.
Corp held liable for the acts of its rogue employee, even though corp had explicit policy that it wouldn’t engage in illegal boycotts and the employee acknowledged receiving specific instructions to that effect.
Notes:- though the employee disobeyed its employer, there was still a benefit achieved by employer by the employee’s actions (increase in convention business brought by consortium) Actual benefit rcd even though motivation for crime was personal.
b/c agent was given sole authority to make these contracts and supplier decisions, and b/c his threat was so closely related to his responsibility as the purchasing agent, it could be seen as ‘acting w/in the scope of his employment.’
Regularity of conduct may suggest agent has ‘apparent authority’
corporation has tools for educating supply base on policies, and for trying to increase employee compliance w/ its policies.
U.S. v. Bank of New England, N.A. (1987) p. 31 (collective knowledge used to satisfy mens rea requirement; flagrant indifference = willfulness)
Bank held liable for violating the Currency Transaction Reporting Act; customer withdrew more than $10K in cash by presenting multiple checks simultaneously to single bank teller. Other employees gossiped about it, yet no one reported or even inquired about reporting. Bank didn’t even make effort to report after it rc’d a federal grand jury subpoena (the transactions were still reportable).
Ct. held that the Bank’s flagrant indifference to its reporting obligations could serve as a proxy for willfulness. AND compartmentalizing of knowledge no defense. Corporation has collective knowledge of employees.
Note: could also prove willfulness and knowledge of one or more employees acted with those components

Chapter 2: Personal Liability in an Organizational Setting
Direct Participants
United States v. Wise (1962) p. 50
Corporate officer is still individually subject to prosecution when he knowingly perpetrates crime on behalf of a corporation, or within his corporate capacity. Both corp. and individual can be prosecuted.
Handout #1 Problem 2-1 Accomplice Liability
Treasurers commit act, but lack mental state (no intent)
is there an opportunity to charge willful blindness? If they were aware that there was a high probability of this criminal activity, and that possibly they consciously avoided it.
And Negligence? This would be failure to perceive that which they ought to have seen. But this does not translate into knowingly submitting false statements. Therefore, treasurers did not violate 18 U.S.C. § 1001.
Cole does not engage in the act, but has the fraudulent intent.
Who is liable?
Cole is liable, under 18 U.S.C. §2 (b), b/c he willfullycauses the treasurers to engage in an act that, if he did it personally, would have constituted a crime.
His intent (he’d be an aider and abettor)+ his causing act to be committed (by innocent agent[L.R.4]) = violation of statute. (he willfully caused an innocent agent to engage in wrongdoing.)
What MentalState is required in 18 U.S.C. §2 (a)?
- (b) requires ‘willful’ causation of a violation against U.S. (in this case, 18 U.S.C. §1001).
Dotterweich (p.61) – President/general manager (Dotterweich) of Buffalo Pharmacal was held personally liable for FDA violations for shipping adulterated and misbranded drugs in interstate commerce. If someone must be responsible for the purity of drugs and the accuracy of representations, then, between public (consumers) and the mfr and the shipper, last two are in the best position to minimize the risk of harm. Dotterweich held responsible b/c he was supervisor, even though he didn’t know about or personally participate in the wrongdoing. Note that these violations were only misdemeanors.
Park(1975) p. 65
Facts: CEO had been advised by FDA of unsanitary conditions. Made some improvements, but subsequent inspections found further rodent infestations. Park said he had delegated that responsibility and relied upon subordinates. Said he shouldn’t be held responsible.
Theory of liability in case:
He had knowledge of what was going on
Had clear responsibility in bylaws (duties included sanitation)
Rules of case:
Even if initially you are entitled to rely on a system of delegation, once you are aware of urgent need to repair problems, can’t sit back and wait for system to correct itself.
Source of Park’s duty was partly his position of responsibility in corporation. Food and Drug act imposes a legal duty – can’t put contaminated food in stream of commerce
Is the duty /theory of liability an act or omission? Omission. He had a legal duty to prevent or seek out and correct violations of the act, and he failed to do so.- his omission (failure) CAUSED the violation.
Did he have the culpable mental state here?

- no, but blameworthiness comes from the causal connection.

- court doesn’t really use negligence. Looks like a strict liability statute.

5. Problems 2-1 - 2-3

6. United States v. Jorgensen (handout)

Facts: family ran meat packing company who advertised and initially produced hormone-free, “heart-healthy” beef (specific claims made re: feeding, cholesterol monitoring, fat content, etc). Then they started buying meat that didn’t meet those standards, but mixed it in w/o changing advertising/packaging.
Court Rule: that instruction isn’t even needed. As corporate officers, they are in a ‘responsible relationship’ to activity w/in company that violates the laws, and therefore can be held ‘criminally responsible, even though the officer did not personally engage in that activity.’ (p. 5)
Compare this case to Park: - Park’s liability was based on an omission; here, each person had active role in committing act. They were aiders or abetters by telling people what to do. Responsible Corporate Officer Doctrine really isn’t needed in this case, to establish their liability.
Comparing FDA statute (Park) and FDA label statute (Jorg): Park: more strict liability. Jorg: intent to defraud. Higher level of culpability (evidence – hiding beef that they didn’t produce during tours; employees told not to tell anyone about blending of meat)

MAIL AND WIRE FRAUD ---- these statutes are applied in many cases, b/c concept of fraud is elastic. “fraud” is never defined.
Intent to Defraud
U.S. v. Hawkey p126
Facts: Sheriff contracted w/ promotion company to advertise and sell tickets for charitable concerts. Sheriff then used funds for personal and business needs, replacing depleted funds from personal and business funds later.
∆’s claim: not fraud b/c people who bought tickets got a good concert. They got value for their cash expenditures. Never represented that “all” of the funds would go to charity. Some funds DID go to charity.
Problem: his intent was to mislead the public
(intent to defraud, in this context, would mean to act knowingly, w/ intent to deceive someone w/ purpose of causing financial loss or obtain personal, undeserved gain…)
breach of fiduciary duty can constitute fraud (if you do some of what they want, and then some of what you want – you’re still breaching fiduciary duty)
look at hypo on p 129 and prob. 4.1
Lustiger v. United States (1968) p. 131 (literally true statements as fraud)
Facts: misrepresented distance to lake, availability of water, etc in brochures for land in AZ. Statements were not literally false. Some were actually literally true.
Notes: important that statements and pictures taken into consideration in aggregate.
Rules:
- “if scheme is devised with the intent to defraud, and the mails are used in executing the scheme, the fact that there is no misrepresentation of a single existing fact is immaterial. It is only necessary to prove that it is a scheme reasonably calculated to deceive…” p134
- purpose of making the statements in the manner in which they were made, and the purpose in displaying the pictures they way they were displayed – was to deceive.
Note: - Hawkey case: half truths[L.R.5] Were statements literally false? He said money was for charitable purpose, and a little did go that way, but a lot went to his own pocket. Half truths: went to heart of bargain; were meant to deceive.
Problem 4.2: - ∆ arg. that municipalities got what they bargained for doesn’t hold water. Municipalities bargained for dumping at a certain distance. They were operating under a half-truth. Fraudulent intent proven by their billing practices: if they really didn’t think their practice mattered, why would they falsify their billing records.
United States v. George p135
Facts: Greensphan (accurate cabinet supplier) paid kickbacks to George, who then laundered some back to Yonan (at zenith) George kept cut of cash. George got paid off of invoices that were completely bogus. No competition for the contract Greensphan had won from Zenith. There was no competitive bidding. The price was under the 10% profit max. cap allowed by Zenith. Yonan’s boss knew of price – was satisfied. Also satisfied w/ quality.
Yonan deprived Zenith of (1) his honest and loyal services, (2) a $300,000 discount, and (3) the opportunity to bargain with a fact most relevant before it. Intangible rights theory: intangible rights that you’re entitled to – (1) and (3) – are protected interests under the mail fraud statute.
Carpenter v. United States (1987) p. 147
Facts: journal article author leaked information to brokerage before publishing.
Court found fraud by focusing on deprivation of WSJ’s intangible property right. Deprived of confidentiality and exclusive use of the information.- b/c of McNally decision, court could not rely solely on deprivation of employee’s honest services.
other property argument is that the employee’s actions harmed its reputation, undermining confidence in integrity of the reporting. From here, have to point to effects – harm sales
Cleveland v. United States p 151
Issue: unissued licenses in hands of state regulators property under fraud statute?
Court’s holding: nope. Licensing is regulatory – power to control; not revenue-raising in nature. Further, here, the state actually did receive its revenues.
Rationale: statute not revenue producing in nature – even revenue produced secondarily; court didn’t want to expand fed jurisdiction (federalism); Rule of Levity: if ambiguity in a criminal statute, should be resolved through a narrower rather than broader reading.
Pasquantino v. U.S. (handout p 7)
Facts: Facts: dudes smuggled alcohol into Canada, not declaring it or paying taxes at border
Holding: depriving Canadian government of duties owed on alcohol constituted wire fraud (if scheme was developed and communicated on U.S. phone)?
Notes: how does that compare to Cleveland? Here, whole point of scheme was to deprive Canada of its economic interest. In Cleveland, scheme did not deprive LA of economic interest.
Attempt:
- no general attempt provision in fed. criminal law
- Sarbannes Oxley added attempt statute to mail and wire fraud statute. Scheme to defraud, even if unsuccessful, can be prosecuted.
- but even w/o SOX, can prosecute scheme w/o success
18 U.S.C. § 1346 – Definition of Scheme or Artifice to Defraud – includes a scheme to deprive another of intangible right to honest services.
U. S. v. Czubinski (1997) p 160
An IRS employee who exceeded his authority and conducted unauthorized searches in taxpayer info database was not held liable for wire fraud b/c no proof that he intended to deprive the IRS of its property, or the IRS and the public of their intangible right to his honest services.
Regarding the honest services charge, he didn’t derive any tangible benefit, and he didn’t seriously breach any fiduciary duty.
U.S. v. Devegter (2000) p. 169 (honest services fraud in private sector extends to violation of fiduciary duty and reasonably foreseeable economic harm)
Facts: – Two employees of investment banks deprived FultonCounty of honest commercial services by providing corrupted financial advice regarding underwriting proposals, causing potential economic harm to the County.
Holding: fraud found b/c They both had fiduciary relationships w/ the County b/c the County relinquished de facto control of the underwriter selection decision to one of them, and other was vested w/ a position of authority, trust, and de facto control in recommending underwriter
Schmuck v. U.S. (1989) p. 175
Facts: Schmuck was convicted of mail fraud for selling used-cars with rolled-back odometers to dealers, who in turn resold them to retail purchasers. The dealers mailed title-registration applications to the state, and the state mailed them back to the customers.
Note: mailing element is essential for jurisdiction, but not for proving (or being part of) scheme. Nothing fraudulent need be contained in the actual mail
Note use of mails in various cases in 091205 notes
U.S. v. Sampson – p 181.
Facts: ∆s represented to loan applicants that they would help businesses get loans or be sold – got advance fee on services w/ application. Later mailed acceptance/confirmation.
Holding: Acceptance letters mailed after ∆s had already obtained money from victims held to be “for purpose of executing” ∆s scheme b/c lulled them into believing loans would be performed at some point (bought time)
Note on Proof of Mailing
Govt can use circumstantial evidence to prove that mails were used to further fraud scheme:
Routine office procedures (std to mail letter)
conduct consistent w/ response to material allegedly mailed
b/c gist of mail fraud offense is use of mails in furtherance of a fraudulent scheme, rather than commission of the fraud itself, each mailing in furtherance of the scheme constitutes a separate offense.”
Wire fraud: has to be interstate use. Don’t have to have knowledge, but have to show that communication was somehow wired out of state at some point. Mail fraud: does not have to be interstate. Just use federal mails for fraudulent purposes.
Mail and Wire Fraud Affecting a Financial Institution
U.S. v. Bouyea (1998) p. 184
∆ was convicted of bank fraud and wire fraud for causing a subsidiary of a bank to lend him money on the basis of forged and falsified documents. The subsidiary wasn’t a financial institution, but the bank was. Ct. looked at the relationship bet. bank and subsidiary and held the bank was affected b/c it had to loan the $150K to the subsidiary so that the subsidiary, in turn, could make the loan to ∆.
Note: if mail/wire fraud affects financial institution, max penalty = 30 years; fine up to $1M
Statutes Prohibiting Specific Frauds
BANK FRAUD
18 U.S.C. §1344 – patterned after mail/wire fraud statutes
∆ must knowingly execute or attempt to execute scheme to defraud a financial institution and
knowingly executing or attempting scheme to obtain $, assets, or other property owned by financial institution through false or fraudulent pretenses

United States v. Doke (1999)