Linkage and the deterrence of corporate fraud

Virginia Law Review

Volumn 94, Issue 6, 2008, Pages 1295-1366

  Baer, Miriam H ^a  

^a BROOKLYN LAW SCHOOL   (United States)

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EID: 56449108573     PISSN: 00426601     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (338)

1. "Fraud is bad. Pretty much everyone, communitarians and contractarians, liberals and conservatives, can agree with this broad conclusion (though perhaps not its policy implications)." Robert A. Prentice, The Inevitability of a Strong SEC, 91 Cornell L. Rev. 775, 824 (2006).
2. Compare Larry E. Ribstein, Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002, 28 J. Corp. L. 1, 3 (2002) ("[W]ith all their imperfections, contract and market-based approaches are more likely than regulation to reach efficient results"), with Prentice, supra note 1, at 828-30 (arguing that a strong SEC presence is necessary to combat corporate fraud).
3. See, e.g., Samuel W. Buell, Novel Criminal Fraud, 81 N.Y.U. L. Rev. 1971 (2006) (suggesting a framework for explaining why certain frauds are treated criminally or civilly).
4. Compare Ellen S. Podgor, Throwing Away the Key, 116 Yale L.J. Pocket Part 279 (2007), http://thepocketpart.org/2007/02/21/podgor.html (arguing that many federal white collar prison sentences are unnecessary and inordinately severe), with Andrew Weissmann & Joshua A. Block, White-Collar Defendants and White-Collar Crimes, 116 Yale L.J. Pocket Part 286 (2007), http://thepocketpart. org/2007/02/21/weissmann_block.html (contending that, with the exception of certain severe sentences, most white collar sentences are appropriate).
5. I use the term "corporate fraud" to refer to those fraud-based crimes (mail, wire, and securities fraud and various other financial crimes based on deceit) that occur in corporate or business settings.
6. This Article focuses exclusively on attempts to curb fraud through the criminal law. The analysis below, however, should also apply in various civil and regulatory settings.
7. E.g., President George W. Bush, President Announces Tough New Enforcement Initiatives for Reform (July 9, 2002), available at http://www.whitehouse.gov/ news/releases/2002/07/20020709-4.html ("When abuses . . . begin to surface in the corporate world, it is time to reaffirm the basic principles and rules that make capitalism work: truthful books and honest people, and well-enforced laws against fraud and corruption.").
8. See generally David A. Skeel, Jr., Icarus and American Corporate Regulation, 61 Bus. Law. 155 (2005).
9. See, e.g., John R. Emshwiller & Alexei Barrionuevo, U.S. Prosecutors File Indictment Against Skilling, Wall St. J., Feb. 20, 2004, at Al;
10. Martin Zimmerman & Lianne Hart, Former Enron CEO Gets 24-Year Sentence, L.A. Times, Oct. 24, 2006, at A1, A15 ("The government said Monday that it was filing a court action to seize Lay's condominium in Houston, property associated with a Lay family investment partnership and a bank account with more than $22,000....");
11. Carrie Johnson, Prosecutors Oppose Delay of Ebbers's Term, Wash. Post, Aug. 4, 2005, at D3;
12. Erin McClam, Martha Stewart Loses Bid to End House Arrest Early, St. Louis Post-Dispatch, Apr. 12, 2005, at C3 ("In court papers that mocked the request for a shorter sentence, prosecutors had urged the judge to uphold the original sentence.");
13. Rorie Sherman, It's Scandal Time, Tr. & Est., July 2002, at 55 ("[L. Dennis Kozlowski's] accuser, Manhattan District Attorney Robert M. Morgenthau, held a press conference almost gleefully announcing the 'first step in a long investigation' into the world of wealthy art collectors and unscrupulous dealers who may be evading millions in sales taxes.").
14. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (codified in scattered sections of, for example, 15, 18, and 28 U.S.C.).
15. See Robert C. Brighton, Jr., Sarbanes-Oxley: A Primer for Public Companies, and Their Officers and Directors, and Audit Firms, 28 Nova L. Rev. 605, 606 (2004).
16. See Geraldine Szott Moohr, Prosecutorial Power in an Adversarial System: Lessons from Current White Collar Cases and the Inquisitorial Model, 8 Buff. Crim. L. Rev. 165, 166-67 (2004);
17. Michael Schroeder, SEC Gets a Raise, but Will It Be Enough?, Wall St. J., Aug. 12, 2002, at Cl.
18. For an argument that much of the criminal sanction aspects of Sarbox were unnecessary, see Frank O. Bowman III, Pour Encourager Les Autres? The Curious History and Distressing Implications of the Criminal Provisions of the Sarbanes-Oxley Act and the Sentencing Guidelines Amendments That Followed, 1 Ohio St. J. Crim. L. 373 (2004).
19. Podgor, supra note 4, at 279.
20. In its sentencing memorandum supporting a substantial prison sentence for former Worldcom CEO Bernard Ebbers, prosecutors for the United States Attorneys Office for the Southern District of New York reasoned: Corporate executives across the country, and the American public as a whole, will be measuring the seriousness of Ebbers' conduct in part by the seriousness of his sentence. More importantly, corporate executives will, in the future, consider the sentence imposed on Ebbers whenever those executives are tempted to mislead shareholders or manipulate the financial statements of their companies. General deterrence serves an important function and works, perhaps even more effectively than in the context of other types of criminal conduct, to prevent financial crimes of the sort committed by Ebbers. Government's Memorandum of Law in Opposition to Defendant's Sentencing Motions at 66-67, United States v. Ebbers, S4 02 Cr. 1144 (BSJ) (S.D.N.Y. June 24, 2005), available at http://lawprofessors.typepad.com/ whitecollarcrime_blog/files/ebbers_sentencing_usao.pdf. Whether such penalties actually deter criminals is difficult to determine.
21. See Christine Hurt, The Undercivilization of Corporate Law, 33 J. Corp. L. 361, 366 (2008) ("[W]hether criminal penalties or civil penalties provide greater deterrence is empirically unknown and perhaps undeterminable . . . . ").
22. For discussions of bounded rationality and its interference with attempts to deter corporate crime, see James D. Cox, Private Litigation and the Deterrence of Corporate Misconduct, Law and Contemp. Probs., Autumn 1997, at 1, 5-8 (prospect theory);
23. Donald C. Langevoort, Resetting the Corporate Thermostat: Lessons from the Recent Financial Scandals About Self-Deception, Deceiving Others and the Design of Internal Controls, 93 Geo. L.J. 285, 308 (2004) (loss aversion);
24. Geraldine Szott Moohr, An Enron Lesson: The Modest Role of Criminal Law in Preventing Corporate Crime, 55 Fla. L. Rev. 937, 958-59 (2003) (optimism bias).
25. See generally Chris William Sanchirico, Detection Avoidance, 81 N.Y.U. L. Rev. 1331 (2006).
26. For a description of how undercover operations such as wiretapping and electronic surveillance were used (legally) to combat organized crime, see James B. Jacobs, Coleen Friel & Robert Radick, Gotham Unbound: How New York City Was Liberated from the Grip of Organized Crime 131, 133 (1999) (describing the use of electronic surveillance as the "chief investigative tool"). Jacobs et al. also discuss in detail how the government used stings to detect and punish organized crime.
27. See id. at 175 (discussing an FBI sting operation resulting in arrests of eighty-three people accused of stealing and fencing goods at JFK airport), 196 (examining how the Manhattan District Attorney's use of undercover police officers allowed the government to collect evidence of organized crime's control of the waste-hauling industry on Manhattan). Gotham Unbound discusses these stings and surveillance operations in a positive light. For a less positive discussion of undercover operations in narcotics and street crime cases, see Alexandra Natapoff, Snitching: The Institutional and Communal Consequences, 73 U. Cin. L. Rev. 645 (2004).
28. See discussion infra Section III.E.
29. See John T. Scholz, Enforcement Policy and Corporate Misconduct: The Changing Perspective of Deterrence Theory, Law & Contemp. Probs., Summer 1997, at 253 (describing the evolution of deterrence theory to "incorporat[e] broader institutional and motivational analyses in order to understand the increasingly complex institutional structures and policy objectives involved in mitigating a growing range of social harms").
30. See Gary S. Becker, Crime and Punishment: An Economic Approach, 76 J. Pol. Econ. 169 (1968). Becker, in turn, drew on Cesare Beccaria and Jeremy Bentham.
31. See Cesare Beccaria, On Crimes and Punishments, in On Crimes and Punishments and Other Writings 1 (Richard Bellamy ed., Richard Davies et al. trans., Cambridge Univ. Press 1995) (1764);
32. Jeremy Bentham, The Theory of Legislation (Etienne Dumont ed., Richard Hildreth trans., Tripathi Private Ltd. 1975) (1802).
33. Becker, supra note 20, at 207-08 ("Fines have several advantages over other punishments ....").
34. See, e.g., Richard A. Posner, An Economic Theory of the Criminal Law, 85 Colum. L. Rev. 1193, 1208 (1985) (explaining that solvency limitations for many criminals necessitate non-pecuniary sanctions such as imprisonment).
35. For a discussion of the expressive theory of criminal law, see Johannes Andenaes, Punishment and Deterrence 110-12 (1974) (observing that "punishment is not only the artificial creation of a risk of unpleasant consequences but also a means of expressing societal disapproval").
36. For more modern discussions, see Kenneth G. DauSchmidt, An Economic Analysis of the Criminal Law as a Preference-Shaping Policy, 1990 Duke L.J. 1;
37. Dan M. Kahan, The Secret Ambition of Deterrence, 113 Harv. L. Rev. 413 (1999);
38. Dan M. Kahan & Martha C. Nussbaum, Two Conceptions of Emotion in Criminal Law, 96 Colum. L. Rev. 269, 356 (1996).
39. Becker, supra note 20, at 207 ("The public's decision variables are its expenditures on police, courts, etc., which help determine the probability ... that an offense is discovered ... the size of the punishment for those convicted ..., and the form of the punishment....").
40. Steven Shavell, Criminal Law and the Use of Nonmonetary Sanctions as a Deterrent, 85 Colum. L. Rev. 1232, 1245 (1985) ("[R]aising the sanction with the expected harmfulness of acts gives parties who are not [initially] deterred incentives to do less harm.").
41. See Tracey L. Meares, Neal Katyal & Dan M. Kahan, Updating the Study of Punishment, 56 Stan. L. Rev. 1171, 1173-74 (2004) ("The marginal deterrence argument, therefore, is one about creating incentives for individuals to refrain from committing the same crime on a greater scale.").
42. By contrast, those who adhere to a retributivist or "just deserts" theory of criminal law argue that commonly held notions of justice demand a connection between the severity of the crime and the corresponding sanction.
43. See Paul H. Robinson & John M. Darley, The Utility of Desert, 91 Nw. U. L. Rev. 453 (1997);
44. Paul H. Robinson & Robert Kurzban, Concordance and Conflict in Intuitions of Justice, 91 Minn. L. Rev. 1829, 1893 (2007) ("[A] criminal justice system that regularly fails to do justice or that regularly does injustice, as judged by the community's shared intuitions of justice, will inevitably be widely seen as failing in a mission that the community thinks important....").
45. For an economic analysis of how one's aversion or preference for risk affects the disutility of criminal punishment, see A. Mitchell Polinsky & Steven Shavell, On the Disutility and Discounting of Imprisonment and the Theory of Deterrence, 28 J. Legal Stud. 1, 4-7 (1999). For a discussion of how law can shape our "tastes" or preferences for crime, see Dau-Schmidt, supra note 23.
46. See Mark A. Cohen, The Economics of Crime and Punishment: Implications for Sentencing of Economic Crimes and New Technology Offenses, 9 Geo. Mason L. Rev. 503, 508 (2000) ("How else do you explain most computer viruses and hackers? Although some of this activity is motivated by money, such as extortion, it seems that some computer crime may be perpetrated for the psychic rewards that the offender receives from crashing other computers.").
47. Donald C. Langevoort has hypothesized that the manner by which corporations choose and promote managers favors risk-preferring executives over their risk-averse counterparts. Langevoort, supra note 15, at 299-300.
48. See also Skeel, supra note 7, at 157 (noting that executives who "rise to the top" of corporate hierarchies "tend to be self confident and willing to take risks") (citing Robert Jackall, Moral Mazes: The World of Corporate Managers (1988)).
49. For a discussion of discounting and its impact on deterrence, see Polinsky & Shavell, supra note 28, at 2.
50. Two different biases cause the discounts. Risk aversion causes the CFO to prefer the definite dollar today (and similar benefits) to the uncertain dollar tomorrow. Loss aversion, on the other hand, causes the CFO to prefer the future prison sentence (and similar losses) to the more certain one imposed today. "[R]esearch participants in a wide variety of settings tend to be risk averse with respect to gains and risk seeking with respect to losses." Tom Baker, Alon Harel and Tamar Kugler, The Virtues of Uncertainty in Law: An Experimental Approach, 89 Iowa L. Rev. 443, 453 (2004).
51. Arguably, the declining disutility of prison already reflects the perpetrator's "discount." Professors Polinsky and Shavell, however, treat the discount as distinct from the decline in disutility. Polinsky & Shavell, supra note 28, at 4 (positing that "[d]iscounting can occur regardless of whether the immediate disutility experienced each period rises, falls, or remains constant").
52. See Yair Listokin, Crime and (with a Lag) Punishment: The Implications of Discounting for Equitable Sentencing, 44 Am. Crim. L. Rev. 115, 115-16 (2007).
53. Enron Declares Bankruptcy, Houston Chron., Dec. 6, 2001, at Yo! 2.
54. Mary Flood, Ex-Enron Bosses Closer to Prison, Houston Chron., May 26, 2006, at Al.
55. Kristen Hays, No Fanfare as Skilling Steps into Prison Life, Houston Chron., Dec. 14, 2006, at Al.
56. Cohen, supra note 29, at 514-15 (citing empirical evidence that prisoners respond more readily to more certain punishments than to more severe ones);
57. Polinsky & Shavell, supra note 28, at 6 ("For risk-preferring individuals, the severity of imprisonment sanctions has a lesser effect on deterrence than the probability of sanctions ....") (emphasis omitted);
58. Scholz, supra note 19, at 255 (observing that workplace safety improved after OSHA imposed penalties for violations, but that the size of the penalty was irrelevant to the level of deterrence).
59. "While there presumably is a positive relationship between actual and perceived levels of enforcement, it is implausible that individuals' probability estimates are generally accurate, particularly when the probability is extremely low." Lucian Arye Bebchuk & Louis Kaplow, Optimal Sanctions When Individuals Are Imperfectly Informed About the Probability of Apprehension, 21 J. Leg. Stud. 365, 366-67 (1992). Bebchuk and Kaplow contend that low probabilities of enforcement paired with maximum sanctions will produce greater mistakes because the criminal's error in estimating enforcement probability will result in larger errors when multiplied against a higher sanction. Id.
60. See Richard Craswell, Deterrence and Damages: The Multiplier Principle and its Alternatives, 97 Mich. L. Rev. 2185, 2211 (1999);
61. see also Oren Bar-Gill & Alon Harel, Crime Rates and Expected Sanctions: The Economics of Deterrence Revisited, 30 J. Legal Stud. 485 (2001).
62. "Since all four events must occur before the defendant will be punished, the expected penalty depends on the combined probability of... the probability of detection times the probability of prosecution times the probability of a finding of liability times the expected fine or damage award." Craswell, supra note 40, at 2211.
63. David Adam Friedman, Reinventing Consumer Protection, 57 DePaul L. Rev. 45, 65 n.112 (2007) ("Detection is a staged proposition [that] can happen at different stages in the scheme-ranging from conception, to completion, to the edge of the legal statute of limitations and beyond."). As I explain infra, because of the manner in which federal criminal law defines and punishes most fraud, early detection is not likely to result in a diminished sanction.
64. See Dau-Schmidt, supra note 23, at 14.
65. One might see this as a debiasing problem. See discussion infra Subsection IV.B.2;
66. Christine Jolls & Cass R. Sunstein, Debiasing Through Law, 35 J. Legal Stud. 199 (2006);
67. Scholz, supra note 19, at 255 ("[A] modest extension of deterrence theory incorporates the assumption that the function of the legal system is to keep the risk of social harms arising from inevitable corporate mistakes within tolerable limits.").
68. Multiple investigations and prosecutions also permit law enforcement agents to learn from and correct their mistakes. "The agency accumulates data and information (on criminals, on opportunities of crime), enhancing the ability of future apprehension at a lower marginal cost." Nuno Garoupa & Mohamed Jellal, Dynamic Law Enforcement with Learning, 20 J.L. Econ. & Org. 192, 192 (2004). Of course, if law enforcement agents can learn from increased enforcement, so too can criminals. However, if the law enforcement agency's enforcement is spread over a broad enough pool (and if agencies are permitted to keep certain details secret), the agency's collective rate of learning should exceed the rates of the individual criminals within its purview, particularly where the criminal population is disorganized.
69. See Neal Kumar Katyal, Deterrence's Difficulty, 95 Mich. L. Rev. 2385, 2391-2402 (1997).
70. See Doron Teichman, The Market for Criminal Justice: Federalism, Crime Control, and Jurisdictional Competition, 103 Mich. L. Rev. 1831, 1839-40 (2005) (discussing displacement);
71. Katyal, supra note 46, at 2402-08 (suggesting that mandatory minimum sentences for crack cocaine distribution may have led drug dealers to substitute heroin for crack).
72. See generally Sanchirico, supra note 16 (explaining detection avoidance).
73. Christine Jolls, Cass R. Sunstein & Richard H. Thaler, A Behavioral Approach to Law and Economics, in Behavioral Law and Economics 13, 14-15 (Cass R. Sunstein ed., 2000).
74. Id. at 45-47;
75. see also Alon Harel & Uzi Segal, Criminal Law and Behavioral Law and Economics: Observations on the Neglected Role of Uncertainty in Deterring Crime, 1 Am. L. & Econ Rev. 276 (1999).
76. Jolis, Sunstein & Thaler, supra note 48, at 47.
77. Id. at 46.
78. Whereas "ordinary" people might exponentially discount future benefits or costs according to a static discount figure, criminals (in the bounded rationality model) hyperbolically discount future benefits or costs because they are too "present-oriented." See Yair Listokin, Efficient Time Bars: A New Rationale for the Existence of Statutes of Limitations in Criminal Law, 31 J. Leg. Stud. 99, 103 (2002) (citing James Q. Wilson & Allan Abrahamse, Does Crime Pay?, 9 Just. Q. 359 (1992)).
79. See Samuel Kramer, Comment, An Economic Analysis of Criminal Attempt: Marginal Deterrence and the Optimal Structure of Sanctions, 81 J. Crim. L. & Criminology 398, 405 & n.32 (1990) (suggesting that deterrence theory does not apply to crimes of passion).
80. See Cohen, supra note 29, at 503 ("[T]here should be little controversy" that perpetrators of economic crimes act "in what they perceive to be their own best interest.").
81. The few empirical studies of corporate fraud do suggest that where moral inhibitions are low, the threat of formal and informal sanctions can serve as a deterrent. See Raymond Paternoster & Sally Simpson, Sanction Threats and Appeals to Morality: Testing a Rational Choice Model of Corporate Crime, 30 Law & Soc'y Rev. 549 (1996) (demonstrating empirically the deterrent effect of sanctions when moral norms are lacking);
82. Daniel S. Nagin, Criminal Deterrence Research at the Outset of the Twenty-First Century, 23 Crime & Just. 1, 20-21 (1998) (discussing the importance of formal and informal sanctions in tax compliance). Others have questioned, however, whether corporate fraud is in fact the result of deliberate choice by individuals.
83. See, e.g., Sung Hui Kim, The Banality of Fraud: Re-situating the Inside Counsel as Gatekeeper, 74 Fordham L. Rev. 983, 997 (2005) (arguing that fraud is the result of situational factors);
84. Milton C. Regan, Jr., Moral Intuitions and Organizational Culture, 51 St. Louis U. L.J. 941 (2007) (examining the importance of organizational culture). Although organizational factors may affect one's decision to commence criminal conduct, for reasons set forth in Part III infra, they may well recede for MFPs who are deciding whether to end such conduct.
85. In a July 2007 speech, Attorney General Alberto Gonzalez praised members of the Corporate Fraud Task Force for obtaining 1200 convictions of corporate wrongdoing over a five-year period: "[P]erhaps the most important accomplishment [of the Task Force] is the criminal conduct that never occurred because of the wide-spread deterrent effect triggered by the tireless and thorough efforts of the Task Force and everyone in this room." Prepared Remarks of Attorney General Alberto R. Gonzalez at the Corporate Fraud Task Force 5th Anniversary Event (July 17, 2007), available at http://www.usdoj.gov/ archive/ag/speeches/2007/ag_speech_070717.html.
86. This presumption has been attacked in numerous instances. See, e.g., Paul H. Robinson & John M. Darley, Does Criminal Law Deter? A Behavioural Science Investigation, 24 Oxford J. Leg. Stud. 173, 174 (2004) ("Potential offenders commonly do not know the legal rules, either directly or indirectly, even those rules that have been explicitly formulated to produce a behavioural effect.").
87. Even as the criminal law expands to cover broader categories of commercially questionable conduct (thereby allowing a jury to convict virtually anyone who is charged), criminals still may be uncertain of the outcome of an arrest insofar as prosecutors retain charging discretion. For a discussion of overcriminalization, see Erik Luna, The Overcriminalization Phenomenon, 54 Am. U. L. Rev. 703 (2005).
88. See, e.g., Buell, supra note 3, at 1972.
89. See Assaf Hamdani, Mens Rea and the Cost of Ignorance, 93 Va. L. Rev. 415, 444-45 (2007) (discussing the effect of uncertainty regarding the mens rea required for conviction for environmental crimes).
90. See 18 U.S.C. § 1346 (2000). For an argument that the statutes that outlaw corporate fraud are too broad, see Geraldine Szott Moohr, On the Prospects of Deterring Corporate Crime, 2 J. Bus. & Tech. L. 25, 28-30 (2007) ("In prohibiting everything, vague and broad criminal laws prohibit nothing.").
91. Buell, supra note 3, at 2015. Buell continues: "The presence of consciousness of wrongdoing, as evidenced by steps taken to disguise the actor's conduct... establishes that the actor feared and sought to evade the adverse judgments of her market peers, including refusal to transact." Id.
92. Moohr hypothesizes that the firm's institutional setting and the uncertainty inherent in the law permit otherwise law-abiding executives who view themselves as inherently "ethical" to delude themselves into thinking that their conduct is not in fact illegal. Moohr, supra note 62, at 31-32.
93. See Regan, supra note 56, at 949-50 (explaining that individuals rely on cognitive frames to explain behavior "by recourse to what they regard as socially acceptable reasons").
94. For a discussion of the numerous collateral consequences that attach to investigations of corporate wrongdoing, see Jonathan M. Karpoff, D. Scott Lee & Gerald S. Martin, The Consequences to Managers for Financial Misrepresentation, 88 J. Fin. Econ. 193 (2008), available at http://www.sciencedirect.com/science/journal/0304405X (follow link to PDF).
95. See, e.g., Darryl K. Brown, Cost-Benefit Analysis in Criminal Law, 92 Cal. L. Rev. 323, 345-47 (2004) (discussing collateral consequences of conviction on offenders, their communities, and their families).
96. Karpoff, Lee & Martin, supra note 66, at 3.
97. See Paternoster & Simpson, supra note 56, at 554.
98. See Dan M. Kahan, Response: Between Economics and Sociology: The New Path of Deterrence, 95 Mich. L. Rev. 2477, 2478-79 (1997).
99. See Richard A. Bierschbach & Alex Stein, Overenforcement, 93 Geo. L.J. 1743, 1750 (2005).
100. See generally Andenaes, supra note 23.
101. Concededly, some frauds may arise because of an impulse to lie. Cf. Kim, supra note 56, at 1026-34.
102. See generally Robinson & Darley, supra note 58.
103. See Buell, supra note 3, at 2015.
104. For more cynical accounts of lawmakers' use of deterrence as a basis for increased penalties and the enactment of overlapping and additional crimes, see Luna, supra note 59, at 719;
105. William J. Stuntz, The Pathological Politics of Criminal Law, 100 Mich. L. Rev. 505, 506-09 (2001).
106. Neither the major federal statutes that define criminal fraud, 18 U.S.C. §§1341-1342, 1344 (2000), 18 U.S.C.A. §1348 (West Supp. 2007), nor the Sentencing Guidelines' fraud provision, U.S. Sentencing Guidelines Manual §2B1.1 (2007), take into account the length of time necessary to complete the fraud, other than the Sentencing Guidelines' departure for defendants who demonstrate that their crime was an "aberrant act." See U.S. Sentencing Guidelines Manual § 5K2.20, which permits a downward departure from the proscribed guidelines sentence when the crime: "(1) was committed without significant planning; (2) was of limited duration; and (3) represents a marked deviation by the defendant from an otherwise law-abiding life." Except where other circumstances exist to demonstrate that the fraud was particularly sophisticated or widespread, courts are not likely to sentence defendants on the basis of the fraud's duration alone.
107. See, e.g., United States v. Alpert, 28 F.3d 1104, 1108-09 (11th Cir. 1994) (reversing the district court's upward departure on the basis of the duration of defendant's fraud scheme). Compare Alpert, with United States v. Benskin, 926 F.2d 562, 563, 566-67 (6th Cir. 1991) (permitting upward departure where defendant defrauded over 600 victims during a five-year period).
108. See, e.g., Moohr, supra note 15, at 939 ("Empathy with employees, investors, and creditors readily explains the public's demand for punishment."). For a contrary view that the law governing corporate crime focuses primarily on deterrence, whereas the law governing street crime addresses retributivist notions
109. see Darryl K. Brown, Street Crime, Corporate Crime, and the Contingency of Criminal Liability, 149 U. Pa. L. Rev. 1295, 1313-15 (2001).
110. See generally Paul R. Hoeber, The Abandonment Defense to Criminal Attempt and Other Problems of Temporal Individuation, 74 Cal. L. Rev. 377 (1986).
111. For simplification, I assume throughout much of this Article that benefits and harm are equivalent. In reality, for many defendants, the loss amount in a corporate fraud case will far outstrip the perpetrator's monetary benefit.
112. See generally Toussie v. United States, 397 U.S. 112, 115 (1970).
113. United States v. Rivera-Ventura, 72 F.3d 277, 281 (2d Cir. 1995).
114. Id.
115. Christian Davis & Eric Waters, Federal Criminal Cospiracy, 44 Am. Crim. L. Rev. 523, 536 & n.82 (2007) (citing Fiswick v. United States, 329 U.S. 211, 216 (1946)).
116. See Wayne R. LaFave, Jerold H. Israel & Nancy J. King, Criminal Procedure § 18.5(a) (4th ed. 2004).
117. Compare United States v. Vaughn, 797 F.2d 1485, 1493 (9th Cir. 1986) (holding that each mailing constitutes a separate violation of the mail fraud statute), and United States v. Garlick, 240 F.3d 789, 792 (9th Cir. 2001) (reaching the same result for wire fraud), with United States v. Bruce, 89 F.3d 886, 889 (D.C. Cir. 1996) ("It is settled law that acts in furtherance of the [bank fraud] scheme cannot be charged as separate counts unless they constitute separate executions of the scheme ..., and that acts which do constitute individual executions may be charged separately ...." (citations omitted)).
118. Although an act that is a separate execution of a bank fraud scheme may be charged separately, it may also be charged in a single count if the count provides the defendant sufficient notice of the government's case and the "executions" can be viewed "as parts of a single course of conduct." Bruce, 89 F.3d at 890;
119. see also United States v. King, 200 F.3d 1207, 1213 (9th Cir. 1999) (holding that "each execution of a scheme to defraud need not give rise" to a separate charge).
120. See, e.g., Schmuck v. United States, 489 U.S. 705, 711 (1989) (describing a used car dealer's odometer fraud that spanned fifteen years as "an ongoing fraudulent venture").
121. Badders v. United States, 240 U.S. 391, 394 (1916).
122. See U.S. Sentencing Guidelines Manual § 2B1.1 (2007).
123. See Garoupa & Jellal, supra note 45, at 192-93 (noting the path dependent nature of criminal conduct);
124. Ronald J. Gilson, Corporate Governance and Economic Efficiency: When Do Institutions Matter?, 74 Wash U. L.Q. 327, 329-30 (1996) (discussing path dependence in a more general sense).
125. See, e.g., Gilson, supra note 90.
126. Of course, the length of the crime also may affect its path dependence, but I treat "duration" as a separate factor affecting deterrence.
127. Samuel W. Buell, Criminal Procedure Within the Firm, 59 Stan. L. Rev. 1613, 1624 (2007).
128. Although there has been discussion of how group dynamics increase the likelihood and extent of harm, see Neal Kumar Katyal, Conspiracy Theory, 112 Yale L.J. 1307 (2003), the literature has not yet discussed the extent to which a perpetrator's interaction with victims might increase the severity of harm because the victims' presence reduces the possibility for costless exit.
129. I purposely refer to the first characteristic as the time necessary to obtain the object of the offense and not the time it takes to complete the offense because, doctrinally, many crimes (including fraud) are considered "complete" long before the defendant has obtained his expected object. The problems with this disconnect are discussed supra, at notes 80-89 and accompanying text.
130. See Stephen J. Schulhofer, Solving the Drug Enforcement Dilemma: Lessons from Economics, 1994 U. Chi. Legal F. 207, 220 (discussing the organizational dynamics of drug dealing and ways in which "more intensive enforcement exacerbates" drug-related crime).
131. This may be due in part to the very nature of the corporation. As decisionmaking becomes more decentralized and compartmentalized, the perpetrator may need more time to perfect his plan and achieve his objective.
132. I refer primarily to 18 U.S.C. § 1341 (2000) (mail fraud), 18 U.S.C. § 1343 (2000) (wire fraud), 18 U.S.C. § 1344 (2000) (bank fraud), 18 U.S.C. § 1347 (2000) (health care fraud), 18 U.S.C.A. § 1348 (West Supp. 2007) (securities fraud), 18 U.S.C.A. § 1349 (West Supp. 2007) (attempt and conspiracy), 18 U.S.C. § 371 (2000) (conspiracy);
133. and to Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j (2000) and 17 C.F.R. 240.10b-5 (2000), promulgated under that Act. In the federal system, a single scheme might support indictment under several or all of the above statutes.
134. See, e.g., United States v. Vought, No. 3:05cr268, 2006 WL 1662882 (D. Conn. June 15, 2006) (describing multiple fraud-related counts in indictment).
135. The elements of mail fraud and wire fraud are: (i) a scheme to defraud that includes a material deception; (ii) with the intent to defraud; (iii) while using the mails, private commercial carriers, and/or wires in furtherance of that scheme; (iv) that did result or would have resulted in the loss of money or property, or the deprivation of honest services. Skye Lynn Perryman, Mail and Wire Fraud, 43 Am. Crim. L. Rev. 715, 718 (2006) (citing 18 U.S.C. § 1341). Wire fraud also requires an interstate communication as an element. Id. (citing 18 U.S.C. § 1343). To be found guilty of mail fraud, the defendant need not even personally use the mails; it is sufficient to show that it was foreseeable that the mails would be used in furtherance of the execution of the fraud.
136. See Pereira v. United States, 347 U.S. 1, 8-9 (1954);
137. United States v. Crossley, 224 F.3d 847, 857 (6th Cir. 2000).
138. See Perryman, supra note 99, at 729;
139. see also, e.g., United States v. Kennedy, 64 F.3d 1465, 1478 (10th Cir. 1995) (stating that the crime of wire or mail fraud is complete "when any wiring or mailing is used in execution of a scheme; there is no requirement that the scheme actually defraud a victim into investing money for the crime to be complete");
140. United States v. Hickey, 16 F. Supp. 2d 223, 234 (E.D.N.Y. 1998)
141. For scholarly commentary on both the breadth of the mail and wire fraud statutes and the relative ease with which federal prosecutors can prove a violation of such statutes, see Moohr, supra note 15, at 944 & n.41 (citing various accounts for the view that mail fraud is a prosecutor's primary and best weapon against wrongdoers);
142. see also John Hasnas, Trapped: When Acting Ethically Is Against the Law 31-32 (2006).
143. As Christine Hurt has observed, the burden on civil plaintiffs seeking to prove corporate fraud is much greater than the burden placed on prosecutors. Whereas prosecutors may rely on aiding and abetting and conspiracy theories of liability, civil plaintiffs are barred from using aiding and abetting theories and are likely to find conspiracy difficult to prove, under the Private Securities Litigation Reform Act. See Hurt, supra note 14, at 403-05.
144. See So. Dev. Co. v. Silva, 125 U.S. 247, 250 (1888), in which the Court split the first and second elements into four and stated the complete test as follows: That the defendant has made a representation in regard to a material fact ... [t]hat such representation is false;... [t]hat such representation was not actually believed by the defendant, on reasonable grounds, to be true;... [t]hat it was made with intent that it should be acted on[;]... [t]hat it was acted on by [the plaintiff] to his damage; and,... [t]hat in so acting on it the [plaintiff] was ignorant of its falsity, and reasonably believed it to be true. Later courts have appended the requirement that the false statement "caused" the plaintiff's detriment. For a discussion of this final element and the general requirements of a common law fraud claim
145. see John C.P. Goldberg, Anthony J. Sebok & Benjamin C. Zipursky, The Place of Reliance in Fraud, 48 Ariz. L. Rev. 1001, 1001-02 (2006). For a comparison of the differences in prosecuting similar conduct under civil and criminal fraud doctrines
146. see Hasnas, supra note 101, at 31-32;
147. Hurt, supra note 14.
148. "A person can be guilty of wire or securities fraud without causing any loss at all, for the essence of both crimes lies in the defendant's conduct, not in his or her success in harming the intended victim." United States v. Emmenegger, 329 F. Supp. 2d 416, 425 (S.D.N.Y. 2004) (Lynch, J.).
149. Palsgraf v. Long Island R.R. Co., 162 N.E. 99, 99 (N.Y. 1928) (Cardozo, C.J.).
150. See John C. Coffee, Jr., The Metastasis of Mail Fraud: The Continuing Story of the "Evolution" of a White-Collar Crime, 21 Am. Crim. L. Rev. 1, 10-11 (1983) (criticizing the breadth of mail fraud statute as inconsistent with inchoate crimes). "The [wire fraud] statute punishes the scheme (more precisely, the use of the telephone or cognate means of communication to conduct the scheme) rather than the completed fraud.... It punishes, in short, the attempt to defraud." United States v. Coffman, 94 F.3d 330, 333 (7th Cir. 1996) (Posner, J.) (citations omitted).
151. See 18 U.S.C.A. § 1349 (West Supp. 2007) (attempt and conspiracy);
152. U.S. Sentencing Guidelines Manual § 2X1.1 (b)(1) (2007) (decreasing the offense level for attempts by three levels, "unless the defendant completed all of the acts the defendant believed necessary for successful completion of the substantive offense or the circumstances demonstrate that the defendant was about to complete all such acts but for apprehension or interruption of some similar event beyond the defendant's control.");
153. see also, e.g., United States v. DeFelippis, 950 F.2d 444, 446 (7th Cir. 1991) (concluding that a defendant was not entitled to a reduction in sentence under §2X1.1 because he had completed all steps necessary to obtain a $250,000 loan through fraudulent means). Section 1349 was added pursuant to the Sarbanes-Oxley Act of 2002. It is unclear, however, why it was necessary. Conspiracy was already an offense under 18 U.S.C. § 371, and most fraudulent conduct already triggered the substantive fraud statutes.
154. See Richard A. Posner, An Economic Theory of the Criminal Law, 85 Colum. L. Rev. 1193, 1217 (1985) (concluding that an attempted robber should receive a lesser sentence than an actual robber, "to give offenders an incentive to change their minds at the last moment");
155. see also Shavell, supra note 25, at 1241-43.
156. For an argument that lawmakers should sometimes grade more developed attempts less harshly than less-formed attempts, see Kramer, supra note 54, at 410-12 (arguing that reduction in sentence for "last-step" of attempt will encourage defendants to desist from completing the attempt).
157. The Sentencing Guidelines further reduce this incentive by basing the perpetrator's sentence on the perpetrator's intended loss and not his victim's actual loss. See, e.g., United States v. Wallace, 458 F.3d 606, 612 (7th Cir. 2006) (stating that a stock-broker employee's liability for criminal fraud is properly based on the intended loss of $400,000 and not the actual loss of $30,000).
158. The caveat is that the defendant may qualify for a reduction under U.S. Sentencing Guidelines Manual § 2X1.1. See discussion supra note 107.
159. For an argument that conspiracy ought to remain a separate crime because perpetrators draw economic and psychological strength from groups (and thereby pose a greater threat to society), see Katyal, supra note 94, at 1370-71.
160. 18 U.S.C. § 371 (2000).
161. Under the Sentencing Guidelines, a defendant who "accepts responsibility" by pleading guilty to an offense in advance of trial receives a slight reduction in his sentence. U.S. Sentencing Guidelines Manual § 3El.1 (2007). This reduction, however, is available to most defendants post-detection, up through and including a few weeks or even days prior to trial. A separate departure exists for a defendant, where "motivated by remorse, discloses an offense that otherwise would have remained undiscovered." The disclosure cannot be prompted by the defendant's fear of detection. U.S. Sentencing Guidelines Manual § 5K2.16 (2007).
162. A scheme to defraud terminates when it is "fully consummated." United States v. Evans, 473 F.3d 1115, 1119 (11th Cir. 2006) (citing Henderson v. United States, 425 F.2d 134, 141 (5th Cir. 1970)).
163. See United States v. Emmenegger, 329 F.Supp.2d 416, 427 (S.D.N.Y. 2004) (criticizing the Sentencing Guidelines' approach to loss amount in fraud cases where the loss amount appeared to be a function of the employer's failure to catch the employee and not the employee's interest in defrauding employer of a specific amount).
164. See United States v. Morelli, 169 F.3d 798, 807-08 (3d Cir. 1999) ("Each wiring concealed and promoted each and every fraudulent series of transactions by making the entire scheme less detectable.");
165. United States v. Ashman, 979 F.2d 469, 483 (7th Cir. 1992) ("[C]oncealment - in this case, the appearance of legitimate trading-formed a vital part of the instant defendants' ongoing scheme [to collude fraudulently on setting the price of soybean futures]. The mailing and wiring aided that concealment. They led customers to believe that the broker had attempted to obtain the best price available in the market; they prevented customers from complaining that they were not getting appropriate execution of their orders, and, perhaps most importantly, they maintained the defendants' positions of trust as brokers and traders on the [Chicago Board of Trade].").
166. See United States v. Barbera, No. 02 CR. 1268(RWS), 2005 WL 2709112, at *5 (S.D.N.Y. Oct. 21, 2005) (citing fraud cases in which defendants remitted "payments" that were "necessary ... for the scheme to continue");
167. see also H. Lowell Brown, Extraterritorial Jurisdiction Under the 1998 Amendments to the Foreign Corrupt Practices Act: Does the Government's Reach Now Exceed Its Grasp?, 26 N.C. J. Int'l L. & Com. Reg. 239, 307-10 nn.244-45 (2001) (discussing cases).
168. For an argument that the courts' willingness to accept lulling statements sent via the mails or wires has unduly weakened the mail and wire fraud statutes' jurisdictional requirements,
169. see Geraldine Szott Moohr, The Federal Interest in Criminal Law, 47 Syracuse L. Rev. 1127, 1157-60 (1997).
170. The Supreme Court observed this phenomenon in United States v. Lane, 474 U.S. 438 (1986): Mailings occurring after receipt of the goods obtained by fraud are within the statute [18 U.S.C. § 1341] if they "were designed to lull the victims into a false sense of security, postpone their ultimate complaint to the authorities, and therefore make the apprehension of the defendants less likely than if no mailings had taken place."
171. Id. at 451-52
172. (quoting United States v. Maze, 414 U.S. 395, 403 (1974) (rejecting subsequent mailing as basis of mail fraud prosecution because it was irrelevant to the defendant's execution of the scheme));
173. see also United States v. Sampson, 371 U.S. 75, 80 (1962) ("[Subsequent mailings can in some circumstances provide the basis for an indictment under the mail fraud statutes.") .
174. I am indebted to Professor Dan Richman for this observation.
175. See Stuart P. Green, Uncovering the Cover-Up Crimes, 42 Am. Crim. L. Rev. 9, 36-37 (2005) (describing the benefits of prosecuting cover-ups);
176. Daniel C. Richman & William J. Stuntz, Al Capone's Revenge: An Essay on the Political Economy of Pretextual Prosecution, 105 Colum. L. Rev. 583, 590 (2005) (explaining why prosecutors find it easier to prosecute defendants for cover-up crimes such as obstruction and perjury, as opposed to more complex crimes such a fraud and insider trading).
177. "Mailings sent after the defendant has obtained the victim's money are considered 'in furtherance of the scheme' for purposes of 18 U.S.C. § 1341 if they facilitate concealment of the scheme.... These mailings are commonly referred to as 'lulling letters.'" United States v. Trammell, 133 F.3d 1343, 1352 (10th Cir. 1998) (citation omitted).
178. "[T]he scheme is not fully consummated, and does not reach fruition, until the lulling portion of the scheme concludes." United States v. Evans, 473 F.3d 1115, 1120 (11th Cir. 2006) (citing Sampson, 371 U.S. at 80-81).
179. 18 U.S.C. § 3282 (2000).
180. See Brown, supra note 118 (discussing numerous instances of lulling statements or statements that otherwise delayed detection of the fraudulent scheme). It should be noted that a mail or wire fraud prosecution is within the statute of limitations if at least one mailing or use of the wires occurred within five years of indictment, regardless of whether part or all of the scheme was devised prior to the five-year period.
181. See United States v. Howard, 350 F.3d 125,127 (D.C. Cir. 2003).
182. See Ianthe Jeanne Dugan, Hedge-Fund Fugitive Caught in Crete, Wall St. J., Aug. 21, 2007, at C3 (describing apprehension of perpetrator who fled the country one day prior to his sentencing for defrauding investors through hedge fund Ponzi scheme).
183. See Schmuck v. United States, 489 U.S. 705, 714 (1989) (finding mailings essential to a scheme involving sale of cars whose odometers had been fraudulently set back, because they supported the defendant's "relationship of trust and goodwill with the retail dealers upon whose unwitting cooperation his scheme depended").
184. Despite his insistence that he did so for personal reasons, Jeffrey Skilling's resignation as CEO of Enron in August 2001, just a few months after he had attained the position, alerted Wall Street of possible issues with the company.
185. See Laura Goldberg, Enron's New CEO Resigns Suddenly, Houston Chron., Aug. 15, 2001, at Al.
186. The commitment to lying may further hurt the company in other markets as well.
187. See Gil Sadka, The Economic Consequences of Accounting Fraud in ProductMarkets: Theory and a Case from the U.S. Telecommunications Industry (WorldCom), 8 Am. L. & Econ. Rev. 439,440-41 (2006) (explaining how WorldCom's misrepresentations in securities filings also caused it to make inefficient pricing decisions in product markets in order to match the company's misrepresentations).
188. This analysis assumes that both current and future perpetrators are aware that the fraud in question violates well-defined legal norms, and does not address the problems associated with changes in the content of criminal law.
189. See generally Jolis, Sunstein & Thaler, supra note 48.
190. For purposes of this Article, I have defined the sanction in units equivalent to the expected benefit. In real life, the perpetrator must convert the disutility of imprisonment and the perceived benefit of his conduct into an equivalent currency, which itself increases the risk of error.
191. Admittedly, this simplistic model does not consider the bounce-back effect of the prevalence of white collar crime on the success of sanctions or probability of detection. For such an analysis and discussion,
192. see Bar-Gill & Harel, supra note 40, at 495-97.
193. For the sake of simplicity, I treat the fraudster's harm and benefit as equivalents.
194. This is obviously an oversimplified example of the CEO's expected punishment. The release of false Quarter 2 earnings may cause greater shareholder loss (and therefore a larger penalty) than the release of truthful Quarter 2 earnings paired with a denial that Quarter 1 earnings were fraudulent. For simplicity's sake, I assume that the sanctions are already so substantial that the extra penalty for additional lying has been severely discounted.
195. In 2005, the Supreme Court struck down the Guidelines in their mandatory form as an unconstitutional encroachment on the defendant's jury trial right. United States v. Booker, 543 U.S. 220, 226-27 (2005).
196. Nevertheless, federal trial courts must sentence defendants according to the general considerations laid out in 18 U.S.C. § 3553(a) (2000), including the seriousness of the offense and the need for deterrence. To carry out this responsibility, courts must calculate the defendant's Guideline sentence range as a starting point.
197. See Gall v. United States, 128 S. Ct. 586, 596 (2007) (citing Rita v. United States, 127 S. Ct. 2456, 2465 (2007)).
198. See U.S. Sentencing Guidelines Manual § 2B1.1 comment (n.3) (2007). If the actual or intended loss amount is indeterminate, courts may use the defendant's gain as a measure for sentencing.
199. See United States v. Mooney, 425 F.3d 1093, 1099-1100 (8th Cir. 2005). Similarly, when deciding whether to proceed with the crime, the offender also should take into account the likelihood that the government will detect prior misconduct (and prior losses) along with the current one.
200. See Bar-Gill & Harel, supra note 40, at 490.
201. Other than Chris William Sanchirico
202. (see supra note 16, at 1375-76), few scholars have considered the effect on MFPs of increasing sanctions. An exception is Professor Ribstein's discussion of the Sarbanes-Oxley Act of 2002. Larry E. Ribstein, Sarbox: The Road to Nirvana, 2004 Mich. St. L. Rev. 279, 285 ("[Executives' incentives may change after they take the first step to fraud. At this point they are motivated to engage in cover-up. In other words, the law itself may discourage law compliance by blocking the exit route. This suggests that rigid penalties for fraud may, to some extent, be counterproductive unless they take account of the cover-up incentive." (citation omitted)).
203. The linkage implications and economics of continued lying will differ depending on the type of fraud. For example, Internet and computer-driven frauds occur intermittently and between strangers. Linkage may not be a concern for the perpetrators of these scams. On the other hand, Ponzi schemes (whereby a perpetrator uses funds illegally obtained from one victim to pay off another) are quite likely to implicatelinkage, but the course of lying (whereby the perpetrator must increasingly manufacture new stories for an ever widening group of people) may cumulatively increase the perpetrator's likelihood of detection. Accordingly, the creator of a Ponzi scheme will engage in slightly different analysis from the typical corporate fraudster, who periodically lies to the same people (the shareholding public) again and again.
204. If (L)(S) >(p)(S)(X), then the MFP will continue to commit the crime.
205. For the purposes of my analysis above, I have assumed that benefit and loss are equivalent. In reality, when the fraud pertains to a publicly owned company, the loss amount is likely to dwarf the defendant's benefit. Cf. United States v. Adelson, 441 F. Supp. 2d 506, 509 (S.D.N.Y. 2006) (commenting on the stratospheric level of loss when fraud concerns the value of shares of a publicly owned company).
206. See supra note 136 and accompanying text.
207. I assume that our MFP perceives a 100% likelihood of obtaining the remaining benefit, based on her earlier fraudulent conduct. I also assume that the MFP's attempt to recoup the remaining benefit has no effect on her probability of getting caught.
208. For example, the Sentencing Guidelines set offense levels that correspond to certain ranges of losses.
209. See U.S. Sentencing Guidelines Manual § 2B1.1(b) (2007);
210. see also Katyal, supra note 46, at 2389 ("[E]xacting equal penalties for crimes of lesser and greater magnitude leads to crimes of greater magnitude."). Accordingly, if an offense level corresponds to any loss between $2.5 and $7 million, a defendant who has taken $2.5 million has little reason to refrain from taking more money from his victim, up to an amount that triggers the next offense level.
211. Of course, loss aversion, sunk cost fallacies, and the MFP's belief that he can obtain additional benefits may undermine the corrected regime's deterrent effect, but those are different problems.
212. "No Bill of Attainder or ex post facto Law shall be passed [by Congress]." U.S. Const, art. I, § 9, cl. 3;
213. see also Calder v. Bull, 3 U.S. (3 Dall.) 386, 390 (1798).
214. See, e.g., Paul H. Robinson, Fair Notice and Fair Adjudication: Two Kinds of Legality, 154 U. Pa. L. Rev. 335, 351-53 (2005); Peter Westen, Two Rules of Legality in Criminal Law, 26 Law & Phil. 229, 235 (2007).
215. The reason why these laws are so universally condemned is, that they overlook the great object of all criminal law, which is, to hold up the fear and certainty of punishment as a counteracting motive, to the minds of persons tempted to crime, to prevent them from committing it. But a punishment prescribed after an act is done, cannot, of course, present any such motive. Warren v. U.S. Parole Comm'n, 659 F.2d 183, 188 (D.C. Cir. 1981) (citing Jacquins v. Commonwealth, 63 Mass. (9 Cush.) 279, 281 (1852)).
216. If the MFP was party to a fraud conspiracy, she theoretically could terminate liability under the new statute by withdrawing from the conspiracy prior to the enactment of the new penalty. Withdrawal, however, is both legally and practically difficult. The defendant must either notify authorities of the conspiracy's aims or communicate her withdrawal to all of her co-conspirators.
217. See, e.g., United States v. Greenfield, 44 F.3d 1141, 1149-50 (2d Cir. 1995).
218. She also might quit her job. A replacement employee, however, would likely find the fraud that our MFP perpetrated.
219. See Sanchirico, supra note 16, at 1338 ( "[H]iking up sanctions on securities fraud encourages violators to exert more effort avoiding detection of their securities fraud ....").
220. Meares, Katyal & Kahan, supra note 26, at 1185;
221. see also Edward K. Cheng, Structural Laws and the Puzzle of Regulating Behavior, 100 Nw. U. L. Rev. 655, 660 (2006) (observing that draconian sentences for relatively minor offenses may trigger inverse enforcement effects because they "insult[] common intuitions of desert").
222. For a recent example of a court's unsuccessful attempt to significantly reduce the sentences of two individuals convicted of a $100 million fraud,
223. see Mark Hamblett, Sentences Reversed for Parties in $100 Million Fraud Scheme, N.Y. LJ., Mar. 18, 2008, at 1 (describing the Second Circuit's overruling of a district court's drastic reduction of Guidelines sentences for a former Days Inn general counsel and CFO who were convicted of a multi-million dollar fraud scheme). Theoretically, lawmakers and prosecutors might overcome inverse sentencing effects by educating the public on the linkage problem and the need for draconian sanctions sufficient to overcome linkage effects. Of course, the public might reject this justification.
224. Loss aversion is discussed at length in Baker, Harel & Kugler, supra note 32, at 453-55.
225. As he increases the amount he steals, the MFP also increases the base amount for his sanction. This increase, however, may be quite small if the probability of enforcement is low. Moreover, if the MFP is engaged in a corporate fraud worth millions of dollars, the base amount is already so high that the marginal increase in his sanction is quite negligible.
226. See U.S. Sentencing Guidelines Manual § 2B1.1(b)(1) (2007) (providing the sentencing table for measuring offense level for economic crimes).
227. 155I have discussed this elsewhere with regard to corporate compliance programs.
228. See Miriam H. Baer, Insuring Corporate Crime, 83 Ind. L.J. 1035, 1059(2008).
229. Sanchirico, supra note 16, at 1337 (citing, e.g., Arun S. Malik, Avoidance, Screening and Optimum Enforcement, 21 RAND J. Econ. 341, 341-42 (1990));
230. see also Jacob Nussim & Avraham D. Tabbach, Controlling Avoidance: Ex Ante Regulation Versus Ex Post Punishment, 4 Rev. L. & Econ. 1, 46 (2008).
231. Sanchirico, supra note 16, at 1363-64.
232. Admittedly, the additional detection avoidance techniques (like the additional lies) may cumulatively increase the MFP's likelihood of punishment. Nussim & Tabbach, supra note 156, at 51. I am assuming that this increase, however, pales in comparison to the increase in probability that occurs when the offender terminates his conduct.
233. See, e.g., 18 U.S.C. §§ 1501-1518 (2000) (criminalizing obstruction-related offenses such as witness intimidation and destruction of records);
234. U.S. Sentencing Guidelines Manual § 3C1.1 (2007).
235. Sanchirico, supra note 16, at 1339.
236. Id. at 1387.
237. Id. at 1395.
238. See Part III.D, Strategy 4 and 5, infra.
239. See Linda S. Beres & Thomas D. Griffith, Habitual Offender Statutes and Criminal Deterrence, 34 Conn. L. Rev. 55, 59 n.27 (2001) (citing studies).
240. Of course, the calculation is not so simple. Even if the legislature raises the penalty by 100% and strips courts of their discretion to mete out any lesser sentence, the legislature is nevertheless dependent on prosecutors to institute charges.
241. See Meares, Katyal & Kahan, supra note 26, at 1185.
242. Arguably, similar problems could pervade the strategy of increasing sanctions, particularly if criminals are initially unaware that sanctions have in fact increased.
243. See Beres & Griffith, supra note 164, at 60. However, given the media attention surrounding increases in economic crime penalties, as well as the fact that corporate executives receive regular briefings from in-house and external attorneys, corporate awareness of new sanctions seems likely to be quite prompt.
244. The obligation to disclose penalties publicly is often discussed as part of the "legality principle" under which "criminal liability and punishment can be based only upon a prior legislative enactment of a prohibition that is expressed with adequate precision and clarity." Paul H. Robinson, Criminal Law: Case Studies and Controversies 47 (2005).
245. "Ordinarily, enforcement strategies are closely guarded secrets, since disclosure undermines their efficacy and deterrence value." Cheng, supra note 151, at 686 (observing that the 1RS does not publish the formulas on which it relies to audit taxpayers).
246. For more detailed discussions of SCP,
247. see Brown, supra note 67, at 349-50;
248. Cheng, supra note 151, at 662-64.
249. For a discussion of how the crime rate links to fears of retaliation by victims and witnesses,
250. see Bar-Gill & Harel, supra note 40, at 489. Gerard Lynch has written persuasively about the more general effect of visible law enforcement on cultural norms: "The public punishment of those who violate [societal] norms enables the law-abiding to define themselves as such in contrast to those who are not, and, not incidentally, reinforces the view that those who comply with the law are not saps or dupes, but the righteous and respected majority." Gerard E. Lynch, The Role of Criminal Law in Policing Corporate Misconduct, Law and Contemp. Probs., Summer 1997, at 23, 46-47 (explaining that public enforcement of criminal law is necessary to remind "good citizens" that "society at large continues to abide by [the basic norms of the culture]").
251. Bruce D. Pringle, Comment, Present and Suggested Limitations on the Use of Secret Agents and Informers in Law Enforcement, 41 U. Colo. L. Rev. 261, 261 (1969) ("[T]he methods used by secret agents and informers are inconsistent with a truly free society.").
252. Nagin, supra note 56, at 34.
253. "Given scarce resources and the need to prioritize workloads, one factor that inevitably affects investigators and prosecutors is the ultimate punishment the alleged criminal offender can expect to receive." Cohen, supra note 29, at 511;
254. see also Craswell, supra note 40, at 2187 ("In most contexts in which enforcement is imperfect ... the probability of punishment any particular defendant faces depends in part on the nature of his or her violation. That is, in most legal regimes, defendants who commit only marginal offenses are less likely to be punished than those who commit more serious or egregious ones.").
255. Craswell contends that "multiplier mechanisms," designed to account for less-than-perfect enforcement are optimal only if calculated on a case-by-case basis to reflect differing likelihoods of detection across a defendant population.
256. Id. at 2187-88.
257. For the establishment of the Corporate Fraud Task Force,
258. see Exec. Order No. 13,271, 67 Fed. Reg. 46,091 (July 9, 2002). For a discussion of the increase in the SECs budget,
259. see Elizabeth F. Brown, E Pluribus Unum-Out of Many, One: Why the United States Needs a Single Financial Services Agency, 14 U. Miami Bus. L. Rev. 1,51-52 (2005) ("In response to the public outcry over the Enron and WorldCom scandals, Congress ... increased the SECs budget almost 33 percent to $716 million in 2003, from the $540 million that it received in 2002.") (citing Stephan Taub, SEC Boosting Big-Company Caseload, CFO.com, Mar. 9,2004, http://www.cfo.com/article.cfm/3012481).
260. When a linkage factor of Y exists, lawmakers should attempt to set the probability of the foregone sanction equal or less than the increased sanctions and enforcement. If X is the factor by which sanctions and probability of enforcement are multiplied, then (Y)(S) = (M) (p) (S). M therefore must be at least as large as Y divided by p. For example, if linkage is very high (100%) and the initial probability of enforcement is very low (1%), the government must increase overall enforcement (probability and sanctions) by a factor of 100. It can split that multiple among sanctions (increasing them by 10 times as much) and enforcement probability (also increasing the probability by a factor of 10) or it could load the entire multiple onto one variable (for example, by imposing a new sanction that is 100 times as large as the original sanction).
261. An undercover investigation may include instances in which government agents simply observe criminal conduct, or it may include a "sting" whereby government agents (or cooperating defendants acting under the government's direction) orchestrate and participate in the conduct that they are observing.
262. See Bruce Hay, Sting Operations, Undercover Agents, and Entrapment, 70 Mo. L. Rev. 387, 396 (2005) (describing the difference between stings and "pure surveillance"). For a discussion of "undercover work" and its common justifications,
263. see Christopher Slobogin, Deceit, Pretext, and Trickery: Investigative Lies by Police, 76 Or. L. Rev. 775, 778-79 (1997).
264. See Cheng, supra note 151, at 686 & nn.177-78 (observing that police officers "routinely discuss speeding enforcement policies and release the dates and locations subject to heightened attention") (citing sources).
265. See Natapoff, supra note 17, at 646 (describing the negative effects of using cooperating defendants to further undercover investigations of street crimes). "Because [secret agents and informers] take advantage of a suspect's trust and confidence, they create an atmosphere of distrust and suspicion which adversely affects freedom of speech and association." Pringle, supra note 171, at 261.
266. See also Hay, supra note 176, at 397 (analyzing undercover stings' potential for entrapment of otherwise lawabiding individuals).
267. Although undercover enforcement is often disdained, it has been repeatedly accepted as an integral method of combating wrongdoing.
268. See, e.g., Pringle, supra note 171, at 261 ("[A]fter denouncing [deceitful] police practices, most authors ultimately conclude that informers and secret agents are a necessary component of law enforcement."). "The use of undercover techniques... is essential to the detection, prevention, and prosecution of white collar crimes, public corruption, terrorism, organized crime, offenses involving controlled substances, and other priority areas of investigation." The Attorney General's Guidelines on Federal Bureau of Investigation Undercover Operations 1 (May 30, 2002), available at http://www.justice.gov/olp/fbiundercover.pdf. "This technique is a critically effective means of investigating organized, clandestine, sophisticated criminal activity which is not readily susceptible to detection by traditional investigative techniques." Jay B. Stephens, Setting the Sting, Minimizing the Risk: The Government's Case for an Effective Undercover Investigative Technique, Crim. Just., Summer 1986, at 14.
269. Note, however, that employees and managers may become less informative or explicit with each other if they perceive the possibility that they are being "watched" or "reported" by someone else. Cf. Steven D. Clymer, Undercover Operatives and Recorded Conversations: A Response to Professors Shuy and Lininger, 92 Cornell L. Rev. 847, 852 (2007) (noting that "it is common for criminals to discuss their trade ambiguously or in code" in order to avoid revealing information to undercover policemen).
270. This was the government's strategy in its investigation of Archer Daniels Midland for its participation in an international price-fixing conspiracy.
271. See Kurt Eichenwald, The Informant (2000).
272. Whether he can devise such a strategy, or whether he irrationally decides to stay at the company indefinitely, is another matter.
273. Hay, supra note 176, at 388 (observing that stings "eliminate] many of the evidentiary difficulties of ordinary law enforcement").
274. Bar-Gill & Harel, supra note 40, at 490 ("When criminality is organized in groups, police surveillance or interrogation of one criminal may lead to the apprehension of other members of the same criminal group.").
275. "A natural effect of permitting covert police activity-and publicizing the fact-is to make individuals fear that they may be under surveillance without knowing it." Hay, supra note 176, at 411.
276. Id. at 416.
277. Id. ("When the objective is to identify crooks, to catch them in the act, the police want to keep the existence of undercover agents as hushed up as possible.... Deterrent stings have the opposite property. If the objective is to deter criminals, the authorities want to create the impression that there are traps everywhere.").
278. Jacqueline E. Ross, Valuing Inside Knowledge: Police Infiltration as a Problem for the Law of Evidence, 79 Chi.-Kent L. Rev. 1111, 1115 (2004) ("[T]he ability of undercover agents to set up easy-to-prove contrived offenses presents a temptation to overworked law enforcement personnel....").
279. See also Natapoff, supra note 17, at 689 (suggesting that police "tolerate, even foster" criminal conduct in informants in exchange for information).
280. For an explanation of how social norms may restrain wrongdoing,
281. see Dan M. Kahan, Reciprocity, Collective Action, and Community Policing, 90 Cal. L. Rev. 1513, 1522-23 (2002);
282. see also Miriam Hechler Baer, Corporate Policing and Corporate Governance, in Symposium: The Dysfunctional Boards: Causes and Cures, U.
283. For economic discussions of self-reporting,
284. see, e.g., Robert Innes, Self-Reporting in Optimal Law Enforcement When Violators Have Heterogeneous Probabilities of Apprehension, 29 J. Legal Stud. 287 (2000);
285. Louis Kaplow & Steven Shavell, Optimal Law Enforcement with Self-Reporting of Behavior, 102 J. Pol. Econ. 583 (1994).
286. For discussions of tax amnesty programs, compare Craig M. Boise, Breaking Open Offshore Piggybanks: Deferral and the Utility of Amnesty, 14 Geo. Mason L. Rev. 667, 670 (2007)
287. (devising an "optimal tax amnesty theory"), with Leo P. Martinez, Federal Tax Amnesty: Crime and Punishment Revisited, 10 Va. Tax Rev. 535 (1991) (criticizing tax amnesties as generally ineffective).
288. For a general discussion of the Department of Justice's "Corporate Leniency Policy" and its effect on enforcement of antitrust violations,
289. see Bruce H. Kobayashi, Antitrust, Agency, and Amnesty: An Economic Analysis of the Criminal Enforcement of the Antitrust Laws Against Corporations, 69 Geo. Wash. L. Rev. 715, 716 (2001) (arguing that the Corporate Leniency Policy may produce overdeterrence).
290. See also Scott D. Hammond, Dir. of Crim. Enforcement, Antitrust Div., U.S. Dep't of Just., Cornerstones of an Effective Leniency Program (Nov. 22-23, 2004), http://www.usdoj.gov/atr/public/speeches/206611.pdf.
291. The amnesty strategy therefore differs from the government's courting of whistleblower employees, who are themselves innocent of wrongdoing.
292. See Natapoff, supra note 17, at 651-52. It also differs from the government's treatment of defendants who are offering information and cooperation after the government has already initiated prosecution. Compared to the MFP, the defendant who has already been identified and prosecuted is far less likely to be in a position to continue his fraudulent activities.
293. Cf. Roger Bowles, Michael Faure & Nuno Garoupa, Forfeiture of Illegal Gain: An Economic Perspective, 25 Oxford J. Legal Stud. 275, 276 (2005) (observing that forfeiture statutes have become popular in the contexts of environmental and white collar crime).
294. Id. at 285 (highlighting that "removal of illegal gain" alone will not provide optimal deterrence).
295. Cf. Boise, supra note 191, at 700 (observing that amnesty may "ease the transition to a new legal regime or signal an impending change in enforcement activities").
296. Conversely, amnesty reduces the value of detection avoidance. There is less reason to go to the trouble of hiding information when there are few costs associated with its disclosure. For an example of a proposal keyed to the idea of encouraging the dissemination of information by reducing the costs of its disclosure,
297. see Paul Schwartz & Edward Janger, Notification of Data Security Breaches, 105 Mich. L. Rev. 913, 936-37 (2007) (describing regime for data security leaks in which consumers would receive information about the leak but not the identity of the entity responsible for the leak).
298. Schwartz and Janger suggest that the appropriate legal rule will turn on whether the community seeks to impose sanctions or mitigate the underlying problem. Where mitigation is the primary goal, "very little may be lost by [identifying the particular source of a security breach], and much may be gained in terms of a firm's willingness to disclose." Schwartz & Janger, supra note 196, at 937.
299. Grading can also serve the function of distinguishing between different levels of moral culpability. For a discussion of how the Model Penal Code and New York Penal Code have used grading to sort, respectively, levels of culpability and extent of harm,
300. see Gerard E. Lynch, Towards a Model Penal Code, Second (Federal?): The Challenge of the Special Part, 2 Buff. Crim. L. Rev. 297 (1998);
301. see also Michael Cahill, Offense Grading and Multiple Liability: New Challenges for a Model Penal Code Second, 1 Ohio St. J. Crim. L. 599, 601 (2004) (arguing that grading schemes are used to distinguish the " seriousness" of given offenses).
302. For an example of how one might "grade" a particular crime,
303. see Kramer, supra note 54, at 410-11 (describing phases of planning and execution of burglary and arguing that attempt sanctions ought to track the criminal's cost-benefit calculation).
304. Louis Kaplow has discussed at length legal transitions and the government's response to issues raised by changes in legal policy.
305. See Louis Kaplow, An Economic Analysis of Legal Transitions, 99 Harv. L. Rev. 509 (1986). Although much of his analysis is applicable to criminal law, his analysis is restricted technically to civil law.
306. See id. at 512 & n.1.
307. "[T]he recognition that the legal system is dynamic does not give one clairvoyance concerning the precise changes that will occur."
308. Id. at 525.
309. Id. at 527-28 (noting that insurance and diversification through financial markets are primary mechanisms for spreading transition risks). Although perpetrators may be able to use market diversification indirectly to smooth transition risks associated with criminal frauds, their access to these markets is clearly more limited and therefore less efficient in spreading risk.
310. See Boise, supra note 191, at 700-01.
311. A different technique would be to debias the shareholders who are the victims of corporate fraud.
312. See, e.g., Amitai Aviram, Counter Cyclical Enforcement of Corporate Law, 111. Pub. L. & Legal Theory Res. Papers Series (Feb. 28, 2007), http://ssrn.com/abstract=968757 (arguing for countercyclical law enforcement strategies in order to correct shareholders' incorrect perceptions of low incidences of fraud in good economies and high incidences of fraud in bad ones). The problem with this strategy is that shareholders are ordinarily unable to monitor adequately the corporate executives who run firms.
313. Jolis & Sunstein, supra note 44, at 201.
314. Id. at 226.
315. Id. at 202-03.
316. See id. at 230-31.
317. See also Douglas Glen Whitman & Mario J. Rizzo, Paternalist Slopes, 2 N.Y.U. J. L. & Liberty 411, 413 (2007).
318. Jolks & Sunstein, supra note 44, at 226.
319. For example, Jolis and Sunstein suggest that policymakers might use the availability heuristic (the tendency to overestimate the likelihood of an event based on the availability of information about that event) to counteract smokers' overoptimism about the risks that cigarettes pose to their future health. "Concrete information appears to render the incident in question available in a way that can successfully counteract optimism bias." Jolis & Sunstein, supra note 44, at 210.
320. See also Katyal, supra note 46, at 2402-03 (discussing substitution effects from crack cocaine to heroin as a result of dramatic increase in penalties for dealing crack).
321. 544 U.S. 336 (2005).
322. Id. at 342.
323. See id. at 347 (criticizing the complaint's failure to allege "that Dura's share price fell significantly after the truth became known").
324. See James C. Spindler, Why Shareholders Want Their CEOs to Lie More After Dura Pharmaceuticals, 95 Geo. L.J. 653, 657 (2007).
325. See, e.g., United States v. Rutkoske, 506 F.3d 170,178-79 (2d Cir. 2007) (praising Dura's "useful guidance" for sentencing in securities fraud cases);
326. United States v. Olis, 429 F.3d 540, 546 (5th Cir. 2005) (advising that "[t]he civil damage measure should be the backdrop for criminal responsibility" in sentencing).
327. But see United States v. Mooney, 425 F.3d 1093,1100 (8th Cir. 2005) (electing to set defendant's sentence for securities fraud by reference to his gain rather than to victims' losses, because losses were too difficult to quantify and civil cases were inapposite).
328. See United States v. Booker, 543 U.S. 220, 245 (2005).
329. U.S. Sentencing Guidelines Manual § 2B1.1 comment, n.3 (2007);
330. Mooney, 425 F.3d at 1100 (advocating measurement of sentence by defendant's gain).
331. U.S. Sentencing Guidelines Manual § 5K2.20 (2007) (defining an aberrant act as a "single criminal occurrence or single criminal transaction" that required little planning, "was of limited duration," and "represents a marked deviation by the defendant from an otherwise law-abiding life"). Theoretically, courts are no longer bound by the departure's narrow definition.
332. See, e.g., Gall v. United States, 128 S. Ct. 586, 595 (2007) (finding that lower court's departure from Guidelines sentence for defendant did not require extraordinary circumstances). To the extent that the Guidelines remain a primary source and starting point for judges, however, it is unlikely that the duration of crimes such as fraud will figure highly in their calculations.
333. See supra note 135 and accompanying text.
334. This is not to say that corporate executives at public companies do not worry about the next quarter's results. To the contrary, executives are "fixat[ed]" on the earnings reports they must make to shareholders on a quarterly basis. Henry T.C. Hu, Risk, Time, and Fiduciary Principles in Corporate Investment, 38 UCLA L. Rev. 277, 303 (1990). The mismatch between the fixation on the timing of earnings and the contrasting lack of regard for the duration of fraud, however, encourages executives to discount further the penalties likely to accrue from their criminal conduct.
335. See Paul H. Robinson & John M. Darley, The Role of Deterrence in the Formulation of Criminal Law Rules: At Its Worst when Doing Its Best, 91 Geo. LJ. 949, 953-56 (2003).
336. Paul H. Robinson & John M. Darley, Intuitions of Justice: Implications for Criminal Law and Justice Policy, 81 S. Cal. L. Rev. 1 (2007).
337. See also Katyal, supra note 94, at 1311 ("[T]he dominant motif in criminal law scholarship has veered too far toward retributivist analysis.").
338. Cf. Steven Shavell, An Economic Analysis of Threats and Their Illegality, 141 U. Pa. L. Rev. 1877, 1903 (1993). ("[E]conomic analysis has its two usual virtues. First, it helps to describe behavior, which sometimes has complex and interesting aspects.... Second, it aids in making recommendations.").