The balance among corporate criminal liability, private civil suits, and regulatory enforcement

American Criminal Law Review

Volumn 46, Issue 4, 2009, Pages 1459-1479

  Moohr, Geraldine Szott ^a  

^a UNIVERSITY OF HOUSTON   (United States)

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EID: 76749147001     PISSN: 01640364     EISSN: None     Source Type: Journal    
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References (238)

1. N. Y. Cent. & Hudson River R. R. Co. v. United States, 212 U. S. 481, 494-95 (1909) (internal citations omitted).
2. Mary Jo White, former U. S. Attorney, quoted in David Ziemer, Seventh Circuit Bar Association Meets in Milwaukee, WIS. L. J., May 14, 2003.
3. Deterrence is probably the strongest justification for corporate criminal liability.
4. See Vikramaditya S. Khanna, Corporate Criminal Liability: What Purpose Does It Serve?, 109 HARV. L. REV. 1477, 1494 (1996) (treating deterrence, rather than retribution, as the aim of corporate criminal liability) ;
5. Julie R. O'Sullivan, Professional Discipline for Law Firms? A Response to Professor Schneyer 's Proposal, 16 GEO. J. LEGAL ETHICS 1, 40 (2002) (noting that proponents of corporate criminal liability draw support from deterrence literature) ;
6. Harvey L. Pitt & Karl A. Groskaufmanis, Minimizing Corporate Civil and Criminal Liability: A Second Look at Corporate Codes of Conduct, 78 GEO. L. J. 1559, 1573 (1990) (citing the need to deter misconduct as the most commonly accepted basis for corporate criminal liability).
7. But retributivist principles are also at work. See e.g., Samuel W. Buell, The Blaming Function of Entity Criminal Liability, 81 IND. L. J. 473, 526 (2006) (stating that the respondeat superior doctrine should more fully exploit criminal law's expressive capital by selecting cases based on entity blameworthiness) ;
8. Lawrence Friedman, In Defense of Corporate Criminal Liability, 23 HARV. J. L. & PUB. POL'Y 833, 841-44 (2000) (concluding that the expressive function of retribution justifies corporate criminal liability) ;
9. Alan C. Michaels, Fastow and Arthur Andersen: Some Reflections on Corporate Criminality, Victim Status, and Retribution, 1 OHIO ST. J. CRIM. L. 551, 569 (2004) (concluding that retributive justifications for punishment have normative force in prosecutions of corporations) ;
10. Developments in the Law - Corporate Crime: Regulating Corporate Behavior Through Criminal Sanctions, 92 HARV. L. REV. 1231, 1241 (1979) ("[W]hile the primary aim of corporate criminal sanctions is deterrence, there may be some retributive limitations on the pursuit of this goal....").
11. Although these two further conditions could limit corporate criminal liability, in practice they do not restrict use of vicarious liability against corporations.
12. See, e.g., United States v. Sun-Diamond Growers of Cal., 138 F.3d 961, 973-74 (D. C. Cir. 1998), aff' d on other grounds, 526 U. S. 398 (1999) ;
13. United States v. Hilton Hotels Corp., 467 F.2d 1000, 1004 (9th Cir. 1972). Nineteen states use a different standard for imposing criminal liability on corporations that requires the participation of or ratification by a high managerial agent of the firm.
14. See Christopher Green, Punishing Corporations: The Food-Chain Schizophrenia in Punitive Damage Laws and Criminal Law, 87 NEB. L. REV. 197, 205-206 (2008) ;
15. MODEL PENAL CODE § 207 (Proposed Official Draft 1962) (outlining statutes on corporate criminal liability in twenty-four jurisdictions).
16. See Gerard E. Lynch, The Role of Criminal Law in Policing Corporate Misconduct, 60 LAW & CONTEMP. PROBS. 23, 59 (1997) (stating that corporate defendants are "increasingly relegated to making their most significant moral and factual arguments to prosecutors, as a matter of 'policy' or 'prosecutorial discretion' rather than making them to judges, as a matter of law, or to juries, as a matter of factual guilt or innocence").
17. See generally Leonard Orland, The Transformation of Corporate Criminal Law, 1 BROOK. J. CORP. FIN. & COM. L. 45 (2006).
18. For a review of the deferred prosecution agreement controversy up to the present, see Dane C. Ball & Daniel E. Bolia, Ending a Decade of Federal Prosecutorial Abuse in the Corporate Criminal Charging Decision, 9 WYO. L. REV. 229 (2009).
19. See generally JOHN HASNAS, TRAPPED: WHEN ACTING ETHICALLY IS AGAINST THE LAW (2006).
20. See John Hasnas, Rethinking Vicarious Criminal Liability: Corporate Culpability for White-Collar Crime, 1195 Web Memo, Heritage Foundation (Aug. 15, 2006). http://www.heritage.org/research/legalissues/wmll95. cfm (arguing that requiring wrongful corporate action for corporate conviction would make for more appropriate balance of power in adversarial system).
21. See Elizabeth K. Ainslie, Indicting Corporations Revisited: Lessons of the Arthur Andersen Prosecution, 43 AM. CRIM. L. REV. 107, 119 (2006) (suggesting the Advisory Committee on Criminal Rules should consider adopting a jury instruction based on the MPC).
22. See Ellen S. Podgor, A New Corporate World Mandates a "Good Faith" Affirmative Defense, 44 AM. CRIM. L. REV. 1537, 1543 (2007) (favoring the "good faith" affirmative defense as a means of protecting law-abiding employees, shareholders and the corporate entity).
23. See Andrew Weissman & David Newman, Rethinking Criminal Corporate Liability, 82 IND. L. J. 411, 449 (2007) (arguing the government should assume the burden of establishing a corporation failed to create reasonable policies and procedures to prevent employee misconduct) ;
24. Andrew Weissman, A New Approach to Corporate Criminal Liability, 44 AM. CRIM. L. REV. 1319, 1322 (2007) (proposing that corporate criminal liability be limited to those companies that failed to take "reasonable steps" to detect and deter the crimes of its agents).
25. Larry Thompson, Remarks on "The Blameless Corporation", 46 AM. CRIM. L. REV. 1323 (2009).
26. See Geraldine Szott Moohr, Of Bad Apples and Bad Trees: Considering Fault-Based Liability for the Complicit Corporation, 44 AM. CRIM. L. REV. 1343, 1364 (2007).
27. Miriam Hechler Baer, Insuring Corporate Crime, 83 IND. L. J. 1035, 1077 (2008).
28. Julie R. O' Sullivan, The Federal Criminal "Code" Is a Disgrace: Obstruction Statutes as Case Study, 96 J. CRIM. L. & CRIMINOLOGY 643, 643 (2006).
29. Two recently published books discuss the trend to rely on criminal law and analyze its effects.
30. See generally JONATHAN SIMON, GOVERNING THROUGH CRIME: HOW THE WAR ON CRIME TRANSFORMED AMERICAN DEMOCRACY AND CREATED A CULTURE OF FEAR (2007) ;
31. DOUGLAS HUSAK, OVERCRIMINALIZATION: THE LIMITS OF THE CRIMINAL LAW (2008). A symposium held in 2005 considered the topic from several perspectives.
32. See generally Ellen S. Podgor, Overcriminalization: The Politics of Crime, 54 AM. U. L. REV. 541 (2005) ;
33. Over-Criminalization of Conduct/Over-Federalization of Criminal Law, H. Comm. on the Judiciary, Subcommittee on Crime, Terrorism, and Homeland Security (July 22, 2009) (written statement of John Wesley Hall, National Association of Criminal Defense Lawyers).
34. See JAMES WHITMAN, HARSH JUSTICE: CRIMINAL PUNISHMENT AND THE WIDENING DIVIDE BETWEEN AMERICA AND EUROPE 47 (2003). Whitman suggests that the tendency to punish white-collar offenders harshly is a method of lowering their status.
35. Id. at 43-49.
36. See also DAVID GARLAND, THE CULTURE OF CONTROL: CRIME AND SOCIAL ORDER IN CONTEMPORARY SOCIETY (2001) (arguing that changes in modern social organization and the rise of neoconservative politics have accelerated concern for crime control) ;
37. Darryl K. Brown, The Problematic and Faintly Promising Dynamics of Corporate Crime Enforcement, 1 OHIO ST. J. CRIM. L. 521, 544 (2004) (suggesting the punitive approach to wrongdoing is linked to populist sentiments that are conveyed to elected officials).
38. See Diana B. Henriques, Madoff, Apologizing, is Given 150 Years, N. Y. TIMES, June 30, 2009, at A1. Bernie Ebbers of WorldCom was sentenced to 25 years, Jeffrey Skilling of Enron, to 24 years.
39. See generally Peter Henning, White Collar Crime Sentences After Booker: Was the Sentencing of Bernie Ebbers Too Harsh?, 37 MCGEORGE L. REV. 757, 758 (2006) (arguing that when considered within the context of the Sentencing Guidelines, the Ebbers sentence was not too harsh).
40. See Carrie Johnson & Brooke A. Masters, Cook the Books, Get Life in Prison: Is Justice Served?, WASH. POST, Sept. 25, 2006, at A1 (noting also that shareholders felt cheated because Lay "escaped" punishment) ;
41. Henry Allen, Ken Lay's Last Evasion; To Some, CEO Is Cheating Them One More Time, WASH. POST, July 6, 2006, at C1.
42. Compare 18 U. S. C. §§ 1341, 1343, 1346 (2006) with the same provisions in the 2000 version of the code., 18 U. S. C. §§ 1341, 1343, 1346 (2000).
43. Compare 18 U. S. C. § 1348 (2002) (setting maximum time of imprisonment for securities fraud at 25 years) with 15 U. S. C. § 77ff (a) (1998) (authorizing up to ten years imprisonment).
44. Even before this burst of lawmaking, by one count there were over 4, 000 separate federal crimes on the books.
45. See John S. Baker, Jr., Jurisdictional and Separation of Powers Strategies to Limit the Expansion of Federal Crimes, 54 AM. U. L. REV. 545, 546 (2005).
46. See 18 U. S. C. § 1350 (a) (2006) (penalizing failure of corporate officers to certify financial reports).
47. Id. § 1513 (e).
48. As of 2007, more than 50 defendants have been charged under section 1348.
49. See Department of Justice, Office of the Deputy Attorney General, Fact Sheet: President's Corporate Fraud Task Force Marks Five years of Ensuring Corporate Integrity, July 17, 2007, 2007 WL 2041136 (D. O. J.) A new obstruction provision makes it a crime to corruptly tamper with a document with intent to impair its use in an official proceeding.
50. See 18 U. S. C. § 1512 (c) (1) (2006). Two other obstruction provisions were also passed.
51. See 18 U. S. C. §§ 1519 (criminalizing destruction, alteration, or falsification of records in Federal Investigations and bankruptcy), § 1520 (2006) (criminalizing destruction of corporate audit records).
52. See Fraud Enforcement Recovery Act of 2009, Pub. L. No. 111-21, 123 Stat. 1617 (codified in scattered sections of 18 U. S. C).
53. For instance, Congress passed the Economic Espionage Act (EEA), making it a federal crime to misappropriate trade secrets, even though there is no federal civil counterpart.
54. See United States v. Hsu, 155 F.3d 189, 194-96 (3d Cir. 1998) (tracing passage of the EEA).
55. See Joshua Dressier, The Wisdom and Morality of Present-Day Criminal Sentencing, 38 AKRON L. REV. 853, 855 (2005) (stating that lawmakers employ the principle of "What do I need to get re-elected?") ;
56. Paul Rosenzweig, Overcriminalization: An Agenda for Change, 54 AM. U. L. REV. 809, 810 (2005) (stating that the origin of criminalization can be answered in a single word: "Politics").
57. See generally Daniel C. Richman, Federal Criminal Law, Congressional Delegation, and Enforcement Discretion, 46 U. C. L. A. L. REV. 757 (1999) (analyzing institutional forces that lead Congress to enact broadly written statutes) ;
58. William J. Stuntz, The Pathological Politics of Criminal Law, 100 MICH. L. REV. 505 (2001).
59. See Geraldine Szott Moohr, Defining Overcriminalization Through Cost-Benefit Analysis: The Example of Criminal Copyright Laws, 54 AM. U. L. REV. 783, 785 (2005) (defining " overcriminalization" as occuring "when the costs of treating conduct as a crime exceed the benefits of the new criminal law."). Overenforcement, defined much the same way, is a related concept.
60. See Richard A. Bierschbach & Alex Stein, Overenforcement, 93 GEO. L. J. 1743, 1745 (2005) (identifying overenforcement when violators suffer excessive harm from actual implementation of a legal rule, or more harm than is necessary for optimal deterrence). Costs include unchecked enforcement discretion with its attendant potential for misuse, abuse by enforcement authorities, erosion of significant values, evasion of procedural protections, and misdirection of scarce resources.
61. See Sara Sun Beale, The Many Faces of Overcriminalization: From Morals and Mattress Tags to Overfederalization, 54 AM. U. L. REV. 747, 749 (2005). Overcriminalization on the federal level has resulted in federal crimes that duplicate state offenses, diminishing the traditional role of state government.
62. See id.; JAMESA. STRAZZELLA, AM. BAR ASS'N, THE FEDERALIZATION OF CRIMINAL LAW (1998).
63. See Paul H. Robinson & John M. Darley, The Utility of Desert, 91 NW. U. L. REV. 453, 481 (1997) (noting that the deterrent effect of punishment may be undermined when the community views it as unjust).
64. The opposite effect can also occur. See Lawrence M. Solan, Statutory Inflation and Institutional Choice, 44 WM. & MARY L. REV. 2209, 2238-46 (2003) (suggesting that civil courts and the SEC construe securities law broadly, developing a loose standard that applies to criminal cases).
65. Jed S. Rakoff, The Federal Mail Fraud Statute (Part I), 18 DUQ. L. REV. 771, 771 (1980).
66. Sorich v. United States, 129 S. Ct. 1308, 1309 (2009) (Scalia, J., dissenting).
67. See 18 U. S. C. § 1341 (2006) (mail fraud) ;
68. 18 U. S. C. § 1343 (2006) (wire fraud) ;
69. 18 U. S. C. § 1346 (2006) (honest services amendment that applies to mail and wire fraud). Mail and wire fraud have different jurisdictional triggers, but their substantive elements are identical, and cases interpreting them apply to both statutes.
70. See Carpenter v. United States, 484 U. S. 19, 24 (1987) (applying same analysis to mail and wire fraud). For the sake of convenience, the term "mail fraud" in this essay refers to both mail and wire fraud.
71. Dick Thornburgh, The Dangers of Over-Criminalization and the Need for Real Reform: The Dilemma of Artificial Entities and Artificial Crimes, 44 AM. CRIM. L. REV. 1279, 1279 (2007).
72. Donald V. Morano, The Mail-Fraud Statute: A Procrustean Bed, 14 J. MARSHALL L. REV. 45, 47 n. 3 (1980) (describing the mythological Procrustean bed).
73. See generally id.;
74. John C. Coffee, The Metastasis of Mail Fraud: The Continuing Story of the "Evolutio". of a White-Collar Crime, 21 AM. CRIM. L. REV. 1 (1983) (tracing evolution of mail fraud laws).
75. See United States v. Siegel, 717 F.2d 9, 23-25 (2d Cir. 1983) (Winter, J., dissenting in part and concurring in part) (objecting to the creation of a federal law of fiduciary obligation in private sector case) ;
76. United States v. deVegter, 198 F.3d 1324, 1328-30 (11th Cir. 1999) (distinguishing between public and private sector frauds).
77. For particularly trenchant recent critiques, see Albert W. Alschuler, The Mail Fraud & RICO Racket, 9 Green Bag 2d 113, 114-19 (2006) and O'Sullivan, supra note 15, at 661-65.
78. See also Michael K. Avery, Whose Rights ? Why States Should Set the Parameters for Federal Honest Services Mail and Wire Fraud Prosecutions, 49 B. C. L. REV. 1431 (2008) (arguing honest services violations should be determined by reference to state law) ;
79. Matthew N. Brown, Prosecutorial Discretion and Federal Mail Fraud Prosecutions for Honest Services Fraud, 21 GEO. J. LEGAL ETHICS 667 (2008) (arguing "honest services" is too broad to know what conduct it reaches, allowing prosecutors to impose their own interpretations) ;
80. Lisa L. Casey, Class Action Criminality, 34 J. CORP. L. 153 (2008) (analyzing a prosecution in which honest services law was too broadly applied) ;
81. Wendy Gerwick Couture, White Collar Crime's Gray Area: The Anomaly of Criminalizing Conduct Not Civilly Actionable, 72 ALB. L. REV. 1 (2009) (arguing against extending criminal liability beyond scope of civil liability).
82. O'Sullivan, supra note 15, at 666 (emphasis removed).
83. Sorich v. United States, 129 S. Ct. 1308, 1310 (2009) (Scalia, J., dissenting).
84. See, e.g., United States v. Thompson, 484 F.3d 877, 882 (7th Cir. 2007) ("[N]o one really thinks that § 1346 treats all legal errors by public employees as criminal....") (emphasis in original) ;
85. United States v. Welch, 327 F.3d 1081, 1107 (10th Cir. 2003) ;
86. United States v. Sun-Diamond Growers, 138 F.3d 961, 973 (D. C. Cir. 1998) ;
87. United States v. Carpenter, 791 F.2d 1024, 1035 (2d Cir. 1986), aff' d 484 U. S. 19 (1987).
88. Four circuits adopted a materiality test, under which prosecutors must prove that the omission, a failure to disclose a breach of a heightened duty, "naturally tend[s] to lead... a reasonable employer to change its conduct."
89. See United States v. Rybicki, 354 F.3d 124, 145 (2d Cir. 2003) ;
90. United States v. Cochran, 109 F.3d 660, 667 (10th Cir. 1997) ;
91. United States v. Gray, 96 F.3d 769, 774-75 (5th Cir. 1996) ;
92. United States v. Jain, 93 F.3d 436, 442 (8th Cir. 1996). Five circuits use a slightly more rigorous standard: that the defendant "foresaw or reasonably should have foreseen that his employer might suffer an economic harm as a result of the breach."
93. See United States v. Frost, 125 F.3d 346, 368 (6th Cir. 1997) ;
94. United States v. Vinyard, 266 F.3d 320, 328-29 (4th Cir. 2001) ;
95. United States v. Martin, 228 F.3d 1, 17 (1st Cir. 2000) ;
96. deVegeter, 198 F.3d at 1329-30;
97. Sun-Diamond Growers, 138 F.3d at 973. The Seventh Circuit requires a "[m]isuse of office (more broadly, misuse of position) for private gain. "
98. See United States v. Bloom, 149 F.3d 649, 655 (7th Cir. 1998).
99. See Black v. United States, 530 F.3d 596 (7th Cir. 2008), cert, granted, 129 S. Ct. 1279 (2009). Conrad Black was convicted of three counts of mail fraud for a scheme that diverted income from the sale of company property to himself and other defendants. He was also convicted of one count of obstruction and is presently serving a six and a half year prison term. Richard Siklos, Conrad Black, Ex-Press Baron, Guilty of Fraud, N. Y. TIMES, July 14, 2007. Jeffrey Stalling, ex-CFO of Enron, filed petition for certiorari on much the same grounds, and the Court's decision in Black will have ramifications for his appeal.
100. See United States v. Skilling, 554 F.3d 529 (5th Cir. 2009), cert, petition filed, 77 USLW 3645 (May 11, 2009).
101. See McNally v. United States, 483 U. S. 350, 377 n. 10 (1987) (Stevens, J., dissenting) (suggesting bringing honest service cases as property offenses to circumvent the majority's restrictive decision) ;
102. Black, 530 F.3d at 600 (stating that the evidence established a conventional fraud, a theft of money or other property) ;
103. id. at 604 ("Notice, too, how honest services fraud bleeds into money or property fraud.") ;
104. Brown, 459 F.3d at 523 (indicating the government could bring charges based on the same conduct under a property theory).
105. See McNally, 483 U. S. at 359-60 (limiting the scope of mail fraud by relying in part on a Nineteenth Century view of property as it existed when statue was enacted).
106. See Carpenter, 484 U. S. at 25 (stating victim had a property right in the exclusive use of confidential business information). The idea that information is property subject to misappropriation was crucial in creating the misappropriation theory of securities fraud.
107. See United States v. O'Hagan, 521 U. S. 642 (1997) ;
108. see also United States v. D'Amato, 39 F.3d 1249 (2d Cir. 1994).
109. See United States v. Martin, 228 F.3d 1, 16 (1st Cir. 2000) (affirming conviction when confidential information of employer was disclosed in pen-pal relationship) ;
110. United States v. Hedaithy, 392 F.3d 580, 596-97 (3d Cir. 2004) (holding, in test cheating scheme, that testing company had property right in score reports).
111. See D'Amato, 39 F.3d at 1257 (stating the government must show that the defendant contemplated actual harm). Evidence of a property (or honest services) loss is relevant to establishing the scheme to defraud and culpability.
112. See United States v. Regent Office Supply Co., 421 F.2d 1174, 1180-81 (2d Cir. 1970) (defining specific intent as intent to injure and distinguishing between intent to deceive and to defraud) ;
113. see also United States v. Frost, 125 F.3d 356, 368 (6th Cir. 1997) (adopting reasonable forseeability of economic harm standard) ;
114. United States v. Jain, 93 F.3d 436, 441 (8th Cir. 1996) (requiring actual harm or injury be contemplated).
115. See United States v. Black, 530 F.3d 596, 604-05 (7th Cir. 2008) (finding no error in ostrich instruction) ;
116. Brief of Defendant-Appellant Jeffery K. Skilling at 81-94, United States v. Skilling, 554 F.3d 529 (5th Cir. 2009) (No. 06-20885), 2007 WL 2804318 (appealing jury instruction of deliberate ignorance as authorizing guilty verdict on negligence). The Fifth Circuit opinion upholding Skilling's conviction dismisses this argument as harmless error.
117. See United States v. Skilling, 554 F.3d 529, 548-51 (5th Cir. 2009), cert. petition filed, 71 USLW 3645 (May 11, 2009).
118. See, e.g., United States v. O'Hagan, 521 U. S. 642, 678 n. 25 (1997) (stating that failing to adopt the misappropriation theory could result in more criminal mail fraud cases).
119. Under the Blockburger test, charges of both mail fraud and securities fraud do not offend the Double Jeopardy Clause.
120. See U. S. CONST, amend. V; Blockburger v. United States, 284 U. S. 299 (1932) (finding no double jeopardy where provisions of a criminal statute requires proof of a fact that another other statute does not).
121. See Couture, supra note 40, at 9 (interpreting data provided by U. S. DEP'T OF JUSTICE, CORPORATE FRAUD TASK FORCE, SIGNIFICANT CRIMINAL CASES AND CHARGING DOCUMENTS, http://www.usdoj.gov/dag/cftf/cases. htm).
122. See United States v. Brown, 459 F.3d 509, 534-35 (5th Cir. 2006) (DeMoss, J., concurring in part and dissenting in part) (registering concern about coupling conspiracy and honest services fraud). Aiding and abetting charges can also be brought under 18 U. S. C. § 2 (2006).
123. See United States v. Rybicki, 354 F.3d 124, 127 (2d Cir. 2003) (holding that law firm's payments through third parties to insurance adjusters caused the adjusters to deprive the insurance company of their honest services).
124. 18 U. S. C. §§ 1961-1968 (2006).
125. See 18 U. S. C. § 1962 (c) (2006). A RICO conspiracy provision reaches offenders who conspired to commit a RICO violation. 18 U. S. C. § 1962 (d) (2006).
126. See Alschuler, supra note 40, at 117-18 (discussing effects of charging a RICO conspiracy).
127. For purposes of RICO, a corporation can be either an enterprise (the putative victim of predicate criminal acts) or a defendant. See United States v. Goldin Indus., Inc., 219 F.3d 1271, 1275 (Uth Cir. 2000).
128. See e.g., Michael L. Seigel & Christopher Slobogin, Prosecuting Martha: Federal Prosecutorial Power and the Need for a Law of Counts, 109 PENN. ST. L. REV. 1107, 1113-30 (2005) (discussing problematic nature of redundant charges filed against Martha Stewart) ;
129. Daniel C. Richman & William J. Stuntz, Al Capone's Revenge: An Essay on the Political Economy of Pretextual Prosecution, 105 COLUM. L. REV. 583, 608-18 (2005) (discussing the tendency for federal prosecutors to bring all conceivable charges against a target).
130. 18 U. S. C. §§ 1503, 1505, 1512 (2006).
131. Id. at §1001.
132. Id. at §§ 1955, 1956.
133. Statistics indicate that 95 per cent of defendants in federal cases plead guilty. See Stephanos Bibas, Plea Bargaining Outside the Shadow of Trial, 117 HARV. L. REV. 2463, 2497 (2004) (citing 2002 DOJ analysis that shows 94.95% of federal criminal defendants plead guilty.).
134. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U. S. 308, 313 (2007) (citations omitted) (Ginsburg, J., writing).
135. See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U. S. 71, 79 (2006) (providing development of the implied right of action under the Exchange Act). Rule 10b-5, 17 C. F. R. § 240.10b-5 (2009) was promulgated in 1942 pursuant to section 10 (b) of the Securities Exchange Act of 1934.
136. See J. I. Case Co. v. Borak, 377 U. S. 426, 432 (1964) (stating that private enforcement of the securities laws "provides a necessary supplement to Commission action"). In 1971, the Supreme Court recognized an implied right of action for private investors.
137. See Superintendent of Ins. of N. Y. v. Bankers Life & Casualty Co., 404 U. S. 6, 13 n. 9 (1971) ("It is now established that a private right of action is implied under § 10 (b).").
138. For comprehensive treatment of this movement and its effects, see Christine Hurt, The Undercivilization of Corporate Law, 33 J. CORP. L. 361 (2008).
139. Indeed, some laws specify civil awards of three times the damage in order to encourage private suits. See e.g., 15 U. S. C. § 15 (a) (authorizing civil antitrust suits) ; 18 U. S. C. § 1964 (2006) (authorizing civil RICO actions). Qui tarn actions, in which private realtors can reap large rewards for exposing fraudulent claims against the government, are another example.
140. See Civil False Claims Act, 31 U. S. C. §§ 3729-3733 (2006).
141. The private attorney general theory presupposes a public forum. Arbitration agreements between investors and brokerage firms remove many claims of securities fraud from the public eye.
142. See Shearson/American Express, Inc. v. McMahon, 482 U. S. 220, 238 (1987) (upholding arbitration agreement over arguments that they offended public policy of securities law) ;
143. Quijas v. Shearson/American Express, Inc., 490 U. S. 477, 480 (1989) (upholding arbitration agreements related to the purchase of securities).
144. See John C. Coffee Jr., Reforming the Securities Class Action: An Essay on Deterrence and Its Implementation, 106 COLUM. L. REV. 1534, 1542-43 tbls. 2 & 3 (showing that much larger monetary sanctions are obtained through private suits than through than public enforcement and that damages obtained through civil suits are greater than those obtained by the SEC).
145. See Brown, supra note 17, at 538 (citing empirical studies that suggest private civil litigation is a more effective regulatory mechanism for financial markets than agency enforcement).
146. See William M. Landes & Richard A. Posner, Adjudication as a Private Good, 8 J. LEGAL STUD. 235, 236 (1979) (noting that trial outcomes produce a public good) ;
147. see generally GUIDO CALABRESI, A COMMON LAW FOR THE AGE OF STATUTES (1982) (outlining a role for the judiciary in interpreting statutory law).
148. See Brown, supra note 17, at 541-44 (summarizing academic literature on the appropriate mix of enforcement options and noting that their "common theme... is to accord a large role to non-criminal sanctions and remedies").
149. See Basic, Inc. v. Levinson, 485 U. S. 224, 248 (1988) (holding that the "fraud-on-the-market" theory provides adequate support for a presumption that shareholders rely on public material misstatements that affect a company's stock price).
150. See Daniel R. Fischel, Efficient Capital Markets, the Crash, and the Fraud on the Market Theory, 74 CORNELL L. REV. 907, 908-12 (1989) (explaining the fraud on the market theory and its relationship to efficient capital markets). The theory that false information is immediately reflected in the market price for stock is also triggered by accounting fraud and misstatements in SEC filings.
151. See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U. S. 71, 81-82 (2006).
152. See John C. Coffee, Jr., Reforming the Securities Class Action: An Essay on Deterrence and its Implementation, 106 COLUM. L. REV. 1534, 1535-36 (2006) (summarizing critiques). The main critique of suits brought by secondary market investors is that they do not adequately compensate victims, but instead result in transfers of wealth among classes of investors. Some investors may be on both sides of the transfer.
153. See id. at 1556-62 (providing detailed analysis of the circular problem of wealth transfers among shareholders).
154. See Casey, supra note 40, at 166 (providing history of the PSLRA and noting that a broad coalition of business firms launched an intense lobbying effort for such legislation in 1992).
155. Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 737 (codified as amended in scattered sections of 15 and 18 U. S. C.). For contrasting views on the PSLRA, see Lynn A. Stout, Type I Error, Type II Error, and the Private Securities Litigation Reform Act, 38 ARIZ. L. REV. 711 (1996) and Coffee, supra note 79.
156. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U. S. 308, 322 (2007).
157. See Merrill, 547 U. S. at 81-82.
158. See 18 U. S. C. § 1964 (c) (2006).
159. See Securities Litigation Uniform Standards Act of 1998, Pub. L. No. 105-353, 112 Stat. 3227 (1998) (codified as amended at 15 U. S. C. §§ 77p, 78bb (f)).
160. The SLUSA requires that claims "in connection with the purchase or sale" of securities be filed federal courts and applies when damages are sought for more than fifty people. 15 U. S. C. § 78bb (f) (2006).
161. See Cent. Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A., 511 U. S. 164, 191 (1994). The SEC, however, may bring aiding and abetting charges against third parties.
162. See 15 U. S. C. § 78t (2006). The DOJ may bring aiding and abetting charges in criminal cases.
163. See 18 U. S. C. § 2 (2006).
164. See Reves v. Ernst & Young, 507 U. S. 170, 185 (1993) (requiring plaintiffs establish that defendants participated in a pattern of racketeering activity through operating or managing the enterprise, a test that eliminated third parties who provided advice). Jack Coffee notes that litigation against auditors and other secondary participants dropped off abruptly in the 1990s after passage of the PSLRA and Supreme Court decisions.
165. See JOHN C. COFFEE, JR., GATEKEEPERS: THE PROFESSIONS AND CORPORATE GOVERNANCE 154-56 (2006) (stating also that when faced with less litigation, accounting firms had less reason to invest in internal controls).
166. During this same general period, the Court rendered similar decisions in private antitrust litigation. See Carl W. Hittinger & Jarod M. Bona, The Diminishing Role of the Private Attorney General in Antitrust and Securities Class Action Cases Aided by the Supreme Court, 4 J. BUS. & TECH. L. 167, 179-80 & 182-83 (2009) (discussing four antitrust cases in which the Court restricted private causes of action).
167. 547 U. S. 71 (2006).
168. Id. at 87.
169. 544 U. S. 336 (2005).
170. Id. at 346.
171. See id. at 347 (holding plaintiff must plead economic loss as a result of the alleged conduct with facts that support allegations that company misstatements caused a disparity between the market price and the value of the stock at the time of purchase).
172. See also Miriam H. Baer, Linkage and the Deterrence of Corporate Fraud, 94 VA. L. REV. 1295, 1363-64 (2008) (noting that the decision in Dura creates a perverse incentive for executives to continue to mislead investors).
173. 551 U. S. 308 (2007).
174. Id. at 322-24.
175. See id. at 324, 328 (2007).
176. 128 S. Ct. 761, 766 (2008).
177. Id. at 766 (2008).
178. See id. at 766. The Court stated that the defendants' conduct was too remote to satisfy the requirements of reliance.
179. Id. at 770.
180. See generally Albert J. Matricciani, Jr., Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc: Substitution of Congressional Intent with Caveat Emptor, 4 J. BUS. & TECH. L. 187, 187 (2009) ("Stoneridge... has reached the presumptive peak of a succession of rulings that have dissolved the implied private cause of action against secondary actors" who violate securities law) ;
181. Norman S. Poser, Why the SEC Failed: Regulators Against Regulation, 3 BROOK. J. CORP. FIN. & COM. L. 289, 307 (2009) (stating that of recent Supreme Court decisions, Stoneridge "probably most restricted the ability of investors to recover damages from securities fraud").
182. But see Richard A. Booth, The Future of Securities Litigation, 4 J. BUS & TECH. L. 129, 129 (2009) (stating that Stoneridge is little more than a reiteration of the settled point that there is no private right of action based on aiding and abetting securities fraud).
183. See Tellabs, 551 U. S. at 336 (Stevens, J., dissenting).
184. See Couture, supra note 40, at 4, 15, 21 & 28-30 (noting that materiality, dismissal rates, and use of state criminal laws make criminal suits easier to bring than civil suits).
185. Michael Lewis & David Einhorn, The End of the Financial World As We Know It, N. Y. TIMES, Jan. 4, 2009, at WK 9.
186. 212 U. S. 481, 495-96 (1909).
187. Id. at 495-96 (noting that in the absence of corporate criminal liability, "many offenses might go unpunished and acts be committed in violation of law").
188. See Pamela Bucy, Corporate Ethos: A Standard for Imposing Corporate Criminal Liability, 75 MINN. L. REV. 1095, 1117-19 (1991) (suggesting that civil remedies against a corporation are effective and corporate criminal liability on broad respondeat superior principles is not justified).
189. See ROGER SHERMAN, MARKET REGULATION 824-37 (2008) (explaining that harm to third parties because of market or managerial failure justifies regulation).
190. See CASS R. SUNSTEIN, AFTER THE RIGHTS REVOLUTION: RECONCEIVING THE REGULATORY STATE 25 tbl.1 (1990) (providing partial list of federal agencies). New Deal initiatives focused on financial and employment initiatives and those created in the 1960s and 1970s focused on a broader array
191. Id;
192. see also STEPHEN BREYER, REGULATION AND ITS REFORM 372-74 (1982) (providing timelines for the creation of federal agencies that control prices and services, and federal agencies concerned with health, safety, and quality of environment).
193. For a general perspective on how regulation functions in a market economy, see SHERMAN, supra note 109.
194. See Kenneth Mann, Punitive Civil Sanctions: The Middleground Between Criminal and Civil Law, 101 YALE L. J. 1795, 1801 (1992).
195. This aspect of administrative actions raises problems of due process. See id. at 1816-19.
196. In securities law, criminal punishment is authorized when the defendant acted willfully. See 15 U. S. C. § 78ff (a) (2006) (providing maximum of 20 years in prison and $5 million fine for individuals and $25 million for corporations when conduct was willful) ;
197. see, e.g., 16 U. S. C. § 1174 (2006) ;
198. 15 U. S. C. § 1 (2006) ;
199. 29 U. S. C. § 463 (2006) ;
200. 21 U. S. C. § 461 (2006) (authorizing criminal action for violating regulatory provisions).
201. See Emil J. Bove III, Institutional Factors Bearing on Criminal Charging Decisions in Complex Regulatory Environments, 45 AM. CRIM. L. REV. 1347, 1387 (2008) (concluding that in a complex regulatory environment like securities law, the costs of investigation, the effort required to educate juries on complicated subjects, and the risks associated with a securities fraud doctrine defined by courts on an ex-post basis will often weigh against bringing criminal charges).
202. Stewart was prosecuted and found guilty on cover-up charges and served six months in prison. United States v. Stewart, 433 F.3d 273, 279 (2d Cir. 2006). The SEC also brought an enforcement action for insider trading, which was settled when Stewart accepted limitations on serving as an officer or director of any public company and paid a fine. See Landon Thomas, Jr., Stewart Deal Resolves Stock Case, N. Y. TIMES, Aug. 8, 2006, at C1.
203. See United States v. O'Hagan, 521 U. S. 642, 678 n. 25 (1997) (noting that failure to adopt the misappropriation theory of insider trading could result in more mail and wire fraud prosecutions for securities suits, skewing enforcement responsibility for insider trading away from the SEC).
204. Credit Suisse Sec. (USA) LLC v. Billing, 551 U. S. 264, 279, 281 (2007).
205. See IAN AYRES & JOHN BRAITHWAITE, RESPONSIVE REGULATION: TRANSCENDING THE DEREGULATION DEBATE 35-36 (1992).
206. See SHERMAN, supra note 109, at 30, 346 (listing barriers to effective regulation) ;
207. Jonathan R. Macey, Administrative Agency Obsolescence and Interest Group Formation: A Case Study of the SEC at Sixty, 15 CARDOZO L. REV. 909, 913-14 (1994) (suggesting that the narrow focus of specialized agencies make them more susceptible to interest group capture by narrowing the scope and range of the agency's interests, and causing the preferences of its regulatory clientele to become more homogeneous).
208. See Jonathan R. Macey, Wall Street in Turmoil: State-Federal Relations Post-Eliot Spitzer, 70 BROOK. L. REV. 117, 123 tbl.1 (2004) (providing turnover rates of federal agency personnel).
209. See Poser, supra note 102, at 309 n. 128-29 (noting present employment of former SEC officials with firms related to the securities industry) ;
210. Cyrus Sanati, Inspector Faults S. E. C. on Oversight of Rating Agencies, N. Y. TIMES, Aug. 29, 2009, at B2 (stating that report on oversight of rating agencies called for review of the effect of the revolving door syndrome, in which analysts leave to work for an issuer whose debt they were rating).
211. For a current application of these tendencies to the SEC, see generally Macey, supra note 119, at 921-48.
212. Public choice theory explains that a single-minded pursuit of an initiative, even one that does not conform to the public interest, can succeed. See generally JAMES M. BUCHANAN & GORDON TULLOCK, THE CALCULUS OF CONSENT (1965) ;
213. George J. Stigler, The Theory of Economic Regulation, 2 BELL J. ECON. 3 (1971).
214. According to a former SEC official, the combination of ideology and politics caused the SEC to minimize the goal of investor protection that is embodied in securities laws.
215. See Poser, supra note 102 at 317-19 ("The fundamental reason for [SEC] failures, however, is the anti-regulatory climate, supported by academically generated anti-regulatory theory, that has pervaded government... in the past two or three decades."). The SEC, now under a new administration and new leadership is pressing for more emphasis on investor protection at the agency.
216. See Kara Scannell, 'Urgency' Drives SEC Crackdown: New Leadership Accelerates Investigations and Levies Millions in Penalties, WALL ST. J., Aug. 11, 2009, at C1;
217. Kara Scannell, U. S. Issues New Rules on Short-Selling, WALL ST. J., July 28, 2009 at C1;
218. Marisa McQuilken, SEC Goes After Countrywide CEO and Other Top Execs, NAT'L L. J., June 5, 2009 (noting Mary Schapiro has made enforcement the agency's top priority), available at http://www.law.com/ jsp/nlj/PubArticleNLJ.jsp?id=1202431235840&slreturn=1&hbxlogin=1.
219. See Robert W. Hamilton, The Crisis in Corporate Governance: 2002 Style, 40 HOUS. L. REV. 1, 6-7 n. 16 (2003) (noting decline of SEC enforcement actions in the years preceding Enron).
220. See Poser, supra note 102, at321 (noting that salary inflation cannot account for the lack of staff increases and noting also that the SEC's budget increased from $377 million to $906 million between 2000 and 2008). But the number of enforcement employees actually decreased between 2002 and 2007, and the number of examiners has not increased since 2002.
221. See Joanna Chung & Greg Farrell, SEC Under Pressure Over Crisis Detection, FIN. TIMES, Dec. 17, 2008.
222. See Troy A. Paredes, Blinded by the Light: Information Overload and Its Consequences for Securities Regulation, 81 WASH. U. L. Q. 417, 419 (2003) (noting that broad disclosure requirements can generate unmanageable amounts of data).
223. See Macey, supra note 115, at 126-28;
224. Dale A. Oesterle, Early Observations on the Prosecutions of the Business Scandals of 2002-03: On Sideshow Prosecutions, Spitzer's Clash With Donaldson Over Turf, the Choice of Civil or Criminal Actions, and the Tough Tactic of Coerced Cooperation, 1 OHIO ST. J. CRIM. L. 443, 467-71 (2004) ;
225. see also John Cassidy, The Investigation: How Eliot Spitzer Humbled Wall Street, THE NEW YORKER, Apr. 7, 2003, at 54.
226. Plaintiffs' claims have also been viewed as threats to agency authority. See Steven A. Ramirez, When Does the Securities Litigation Uniform Standards Act of 1998 Preempt State Law Claims?, 4 PREVIEW OF U. S. SUP. CT. CAS 215, 218 (2006) (noting the SEC's concern that the plaintiff's position in Merrill Lynch threatened its enforcement authority).
227. See Macey, supra note 119, at 124. Preemption has largely been accomplished for private civil suits based on state law.
228. See supra, text accompanying notes 87.
229. Cf., Darren Bush & Carrie Mayne, In (Reluctant) Defense of Enron: Why Bad Regulation Is to Blame for California's Power Woes (or Why Antitrust Law Fails to Protect Against Market Power When the Market Rules Encourage Its Use), 83 OR. L. REV. 207, 283 (2004) (concluding that in deregulated industries recourse to antitrust law is not sufficient to protect competitive processes and regulatory oversight is essential).
230. Richard A. Booth, What Is a Business Crime?, 3 J. BUS & TECH. L. 127, 144 (2008).
231. See generally The Need for Increased Fraud Enforcement in the Wake of the Economic Downturn Before the S. Comm. of the Judiciary, 111th Cong. 1 (2009) (statement of Rita Glavin, Criminal Division, Department of Justice, supporting passage of the Fraud Enforcement and Recovery Act of 2009 (S. 386)) ;
232. David Segal, Financial Fraud Rises as Target for Prosecutors, N. Y. TIMES, March 12, 2009, at A1. The Supreme Court seems to have envisaged this choice, at least in part.
233. See Stoneridge Inv. Partners, LLC v. Scientific-Atlanta Inc., 128 S. Ct. 761, 773 (2008) (noting plaintiffs are not without remedies because secondary actors are subject to criminal penalties and SEC enforcement) ;
234. id. at 774 (Stevens, J., dissenting) (noting that majority assumes conduct could merit criminal and regulatory actions but not a private action brought by those injured).
235. See William W. Bratton, Enron and the Dark Side of Shareholder Value, 76 TUL. L. REV. 1275, 1282-83 (2002) (noting that Enron's "principals emerge[d] as rogues, to be roughly expelled by the respectable business community").
236. See Moohr, supra note 13, at 1363.
237. See Booth, supra note 130, at 136 n. 61 (noting possibility that "characterizing Enron as a criminal conspiracy may have been a strategy to divert public attention from the dangers of derivatives in order to avoid overreaction and overregulation of new ways of doing business") ;
238. Stephen Labaton, Seemingly Close to Nominee, S. E. C. Search Is Back to Start, N. Y. TIMES, Nov. 15, 2002, at A1 (reporting that the Bush administration's use of criminal prosecution was a tool to blunt calls for tougher regulation).