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Entries in Respondeat Superior (56)

Tuesday
Jun102008

Justice For Corporate Defendants?

Nothing has increased the impact of the Foreign Corrupt Practices Act on corporations more than respondeat superior. That's the legal doctrine by which companies are vicariously liable for crimes committed by employees acting within the scope of their employment--that is, within their actual or apparent authority and on behalf of the corporation. It has left companies completely defenseless in the face of criminal charges under the FCPA. Once an employee admits to an FCPA violation or is found guilty, the company is automatically guilty too. Case closed.

If respondeat superior sounds oppressive and unbalanced, that's because it is. It becomes irrelevant to a corporation's defense that the wrongdoer isn't a high managerial official, that the corporation specifically instructed the employee not to engage in the proscribed conduct, or that the statute in question (such as the FCPA) requires willful or knowing violations. The idea, the courts say, is that criminal statutes impose a duty upon the corporation to prevent its employees from committing the statutory violations. So forget intent, mens rea, good faith and so on; think instead of strict liability for the employee's criminal conduct.

Are we exaggerating? Not at all. Here's how the United States Sentencing Commission's May 2004 release describes respondeat superior as applied by the courts:

Criminal liability can attach to an organization whenever an employee of the organization commits an act within the apparent scope of his or her employment, even if the employee acted directly contrary to company policy and instructions. An entire organization, despite its best efforts to prevent wrongdoing in its ranks, can still be held criminally liable for any of its employees’ illegal actions.
As long as respondeat superior is the law of the land, corporations won't be mounting any defense to potential criminal charges under the FCPA. They can't win in court so of course they don't go to court. Naturally enough, that puts the prosecutors in full control. They know an FCPA criminal indictment waved in front of a defenseless corporation inevitably leads to a plea deal -- usually a deferred or non-prosecution agreement with terms dictated by the DOJ.

Now, though, there's a serious challenge to respondeat superior in a Second Circuit case called United States v. Ionia Management, S.A. It's the topic of a post on the White Collar Crime Prof Blog here. As Prof Podgor says, "This case forcefully takes on corporate criminal liability both from a policy perspective and in its application. This is clearly a case that needs to be watched."

The facts are these: A ship management company headquartered in Piraeus, Greece was convicted in a criminal jury trial under the Act to Prevent Pollution from Ships and obstruction of justice. It was fined $4.9 million and sentenced to probation and other assessments on the basis of the application of respondeat superior, which the defendant now challenges.

The amicus brief in support of the defendant / appellant is particularly powerful. The brief calls on the court to "adopt a standard for vicarious corporate criminal liability . . . that limits the application of respondeat superior." At the bottom of this post we've included a sample of the arguments.

Bloodless corporations are usually cast in the role of villain and seldom garner much sympathy. But we're in full agreement with the amicus brief and Prof Podgor, who says the doctrine of respondeat superior "needs to be examined in the real world of today, a world with international dimensions resulting from corporations that have employees on more than one continent, where statutes omit mens rea terms, and where the trial penalties can destroy a company."

What's the fix? Prof Podgor thinks the best option is a "good faith defense" for corporations charged for acts of rogue employees. That, she says, would be similar to the application of the analogous civil-law defense. It makes sense. Let corporations defend themselves based on their own good-faith compliance efforts. That would allow them a measure of justice and give them the strongest possible incentive to maintain an effective compliance program. Wouldn't everyone win?

_______________

Here are excerpts from the amicus brief in support of the defendant / appellant in United States v. Ionia Management, S.A. The brief comes from the Association of Corporate Counsel, the Chamber of Commerce, the National Association of Criminal Defense Lawyers, the National Association of Manufacturers, the New York Association of Criminal Defense Lawyers, and the Washington Legal Foundation. We've left in some of the citations but omitted the mountainous footnotes.

[T]he district court’s view of vicarious liability in the criminal context is inconsistent with the criminal law’s goals of deterrence and punishment. In cases where corporations have done everything reasonable to prevent criminal conduct on the part of their employees, the corporation itself is not morally culpable yet is disincentivized from taking steps to expose the wrongdoing because of the risk that expansive respondeat superior principles will lead to its own criminal liability. These are exactly the incentives that led the Supreme Court to adopt a more limited approach to vicarious liability in Faragher, Ellerth, and Kolstad. An alternative approach to corporate criminal liability is called for not only by Faragher, Ellerth, and Kolstad, but by numerous commentators who have criticized the respondeat superior approach.

The criticism of the prevailing scope of corporate vicarious criminal liability is widespread and growing, particularly given the rise of corporate investigations and prosecutions by the federal and state governments. While the availability of corporate criminal liability is congressionally mandated, the means by which such liability is established are critical.

A criminal indictment can be a life-or-death matter for a company. Yet, the vast sweep of the district court’s standard for the imposition of vicarious criminal liability makes corporations accountable for almost all criminal acts of any low level employees—even those acting against explicit instructions and in the face of the most robust corporate compliance program. This has caused a tremendous imbalance between the power of a prosecutor and a corporate defendant. Given the hair-trigger for corporate liability even for the most responsible corporate citizen, many corporations forego any defenses in order to resolve threatened prosecution. District Judge Gerald E. Lynch phrased the problem with precision:

If a corporation is criminally liable for the unauthorized acts of mid-level managers, the corporation will often not have a viable defense, despite legitimate questions about the justice of punishing it. . . . Such 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.

Gerald E. Lynch, The Role of Criminal Law in Policing Corporate Misconduct, 60 Law & Contemp. Probs. 23, 59 (1997).

This imbalance and the problems it engenders are not theoretical. For example, one judge found that prosecutors violated the Constitution by causing KPMG to cut off attorneys’ fees to employees in the hope of obtaining a deferred prosecution agreement. United States v. Stein, 435 F. Supp. 2d 330 (S.D.N.Y. 2006), appeal docketed, No. 07-3042-cr (2d Cir. 2007). In another instance, as part of a deferred prosecution agreement, Bristol-Myers Squibb agreed to endow a professorship at Seton Hall University, the prosecutor’s alma mater. Interview of Mary Jo White, Corp. Crime Rep., Dec. 12, 2005, at 14-15; see also Andrew Weissmann with David Newman, Rethinking Criminal Corporate Liability, 82 Ind. L.J. 411, 415 n.5 (2007. The potential for abuse is manifested as well in the then‑common requirement that corporations agree to broad waivers of attorney-client privilege as a factor to be considered for a deferred prosecution agreement.

The potential for inappropriate prosecutorial pressure is particularly heightened in the area of corporate criminal investigations that end in Draconian non-prosecution and deferred prosecution agreements, where no court has oversight authority. There, the prosecutor effectively serves as both judge and jury. Because of the disastrous consequences of a corporate indictment and the ease with which corporations may be liable under the doctrine of respondeat superior, corporations are under immense pressure to agree to almost any terms. The vast majority of these negotiations go on behind closed doors, with little public scrutiny and no judicial review.

Special thanks to Luke McLoughlin at Jenner & Block's New York office for providing the link to the final version of the brief. The firm acted as counsel for the amici curiae.

Thursday
May222008

The Highest Roller In Town

Does it ever pay to stonewall the Department of Justice in an FCPA investigation? We're asking because of an item that ran in the May 21st edition of the U.K. Times Online (available here). It described the DOJ's detention of BAE's ceo and a director as they travelled separately through the Houston and Newark airports last week. The DOJ, investigating alleged corrupt payments to Saudi officials, reportedly searched and copied information from their laptops, phones and briefcases, then let the men continue traveling. In the Times piece, Joshua Hochberg, the former head of the DOJ's group responsible for Foreign Corrupt Practices Act prosecutions, explained "that the recent heavy-handed behaviour of investigators indicated 'a severe lack of cooperation by BAE'."

Is a "severe lack of cooperation" a viable legal strategy -- for BAE and its personnel, or for any company facing an FCPA investigation? Does being non-cooperative and recalcitrant ever serve the best interests of a corporation? When dealing with the FCPA, does ordering company employees and agents to keep quiet and stay away from the DOJ ever enhance a company's defensive position?

The questions aren't merely academic. In most criminal investigations, corporate targets have some options to consider. They can decide to force the government to do the hard work of uncovering evidence. That's their right. Defendant's don't have to testify against themselves, and the government's burden to prove guilt beyond a reasonable doubt is a safeguard for corporations too. At its criminal trial, an accused company can sit mute and force the government to make its case.

But the FCPA doesn't work like a typical criminal statute. Companies facing FCPA charges don't go to trial. They can't withstand the withering publicity -- the front page stories around the world of their alleged international public bribery. They usually can't risk being banned from U.S. government contracts, or losing their export licenses -- which can happen based on mere allegations of FCPA offenses. And anyway, their chances at trial are exremely bleak. With the application of respondeat superior, once a company employee admits to violating the FCPA, the company is guilty as a matter of law. That's the rule in most U.S. circuits that have considered the question. It doesn't matter if the guilty employee held a low rank or was violating company policy. The employee's guilt is still imputed to the company. So one bad apple really does spoil the barrel.

Companies are sitting ducks in FCPA cases, and their people are vulnerable too. Let's face it, what director, officer or executive responsible for compliance wants to risk his or her hide because an assistant sales manager in Mongolia decided sui generis to grease some government palms? In other words, it's all downside risk to fight the DOJ in an FCPA case. So instead, companies cooperate, knowing a "good" outcome -- usually involving a deferred prosecution agreement -- is only possible when the DOJ is on their side.

If fighting isn't an option, if cooperating is the only way to salvation, then the DOJ ends up holding all the cards. Its decision to investigate and charge a corporation becomes paramount. There won't be a trial where lawyers can argue, raise defenses, challenge the witnesses' credibility, and implore the jury to dish out justice. Instead the process will start and end with the DOJ itself. Yes, there are grounds to criticize the prosecutors' omnipotence in FCPA cases. But for now that omnipotence is a fact of life that has to be faced. Why, then, would a corporation under investigation for alleged FCPA offenses thumb its nose at the prosecutors? What's to be gained?

Instead of fighting, the path forward has been for accused companies to work with the DOJ, to investigate the facts cooperatively, to self-disclose the results, to take remedial action, and to hope the DOJ will be willing to defer the prosecution if the company keeps its nose clean. But that's not what BAE is doing. Why not?

Well, in the U.K., BAE has been protected. The Serious Fraud Office -- responsible for investigating and prosecuting high-level overseas public corruption -- opened a file on the company but closed it in 2006 under irresistible pressure from the Blair government. The High Court in March this year ruled that the SRO couldn't legally drop the investigation, but the government is now appealing that decision to the House of Lords. In the U.K., BAE may yet keep its secrets. So is the company also betting that its U.K. protectors will prevail against U.S. prosecutors as well? That the Western Alliance will be unwilling to press the case and embarrass Saudi Arabia -- a key security ally and OPEC's largest exporter?

We don't know what's going on inside BAE. It has denied doing anything illegal. So all we really know is that the company isn't playing by the usual rules. Instead of making peace with the DOJ, it's flipping the feds an awfully rude gesture. Does that mean BAE has a legal strategy that relies on an ultimate savior, such as the man in the White House? If that's true, what happens if the strategy doesn't work? What happens if BAE ends up in the hands of the Department of Justice like every other company facing FCPA allegations? In that case, BAE and its leaders will have lost an enormous bet, and life will never be the same.

View prior posts about BAE here.

Tuesday
May132008

From The Mailbag

The question our readers most want answered -- after we tell them bloggers have no way to predict Powerball winners -- is, Who's covered by the Foreign Corrupt Practices Act? It's always the jurisdiction thing -- and for good reason. How, for gosh sakes, does the FCPA reach from Washington to the four corners of the earth and back again? It's unnatural -- until you know how it works. Then it's just plain terrifying.

So to keep the FCPA's jurisdiction straight, we take inspiration from the Justice Department. That means we think about it by categories. Here's how:

Category One: Issuers. An "issuer" is a corporation that has issued securities that have been registered in the United States or who is required to file periodic reports with the SEC. See 15 U.S.C. §§ 78c(a)(8), 78dd-1(a). All issuers are covered by the FCPA, wherever they are.

Category Two: Domestic concerns. A "domestic concern" is any individual who is a citizen, national, or resident of the United States, or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship which has its principal place of business in the United States, or which is organized under the laws of a State of the United States, or a territory, possession, or commonwealth of the United States. See § 78dd-2(h)(1). All domestic concerns are covered by the FCPA, wherever they are. Helpful hint: If your lawyer calls you a domestic concern, it's more likely to be a warning than an insult.

Category Three: Parent companies. U.S. parent corporations (issuers or domestic concerns) may be held liable for the acts of their foreign subsidiaries if they (the U.S. parent) authorized, directed, or controlled the activity in question, as can U.S. citizens or residents, themselves domestic concerns, who were employed by or acting on behalf of such foreign-incorporated subsidiaries.

Category Four: Foreign companies and individuals. A foreign company or person is subject to the FCPA if it, he or she takes any act in furtherance of a corrupt payment while within the territory of the United States. See § 78dd-3(a), (f)(1). When a foreign company or person acts on U.S. soil, the FCPA applies. Note, however, that the Justice Department interprets Category Four much more expansively. The government's position --untested in court -- is that there's FCPA jurisdiction whenever a foreign company or national (wherever they are) causes an act to be done within the territory of the United States by any person acting as that company's or national's agent.

Those are the categories. As we said, they're inspired by the Justice Department -- specifically the United States Attorneys' Manual, Title 9, Criminal Resource Manual §1018 “Prohibited Foreign Corrupt Practices” (November 2000).

And now, back to our Powerball picks.

View CRM §1018 here.

Wednesday
Apr022008

Ten Fast Facts About The FCPA

It's easy enough to scoff at the slogans, proverbs and aphorisms that line the halls of the great corporations. Who hasn't emerged from a conference-room donnybrook wondering who the Teamwork posters are supposed to be talking about? And yet, THINK helped create an industry and a company to lead it, and Safety First really can save lives.

How about compliance? Can we ever be reminded too many times to play by the rules, obey the law, keep our noses clean? Just as the best safety programs prevent accidents before they happen, so the best compliance programs should likewise head off illegal schemes before they hatch. So, could it be that the best -- which means the most memorable -- lessons about the FCPA might just be the shortest?

With that in mind, here are ten fast facts about the FCPA. Some aren't all that "fast" and none will fit on a bumper sticker. But we'll keep trying -- and we'll welcome your help.

1. Companies and individuals subject to the FCPA's antibribery provisions cannot give or promise to give anything of value to foreign officials directly or indirectly in order to obtain or retain business.

2.Those subject to the FCPA's accounting standards must make and keep books and records that accurately and fairly reflect the transactions and dispositions of the assets of the corporation, and have internal accounting controls adequate to provide reasonable assurance of the integrity of the company's financial systems and its disclosures.

3. An FCPA antibribery offense is punishable by up to five years in jail; intentionally violating the accounting standards can result in 20 years in prison.

4. The antibribery provisions generally apply to all organizations based or operating in the United States, and the accounting standards apply to companies with securities trading on a U.S. exchange and filing periodic reports with the SEC. Directors, officers, employees and agents of the foregoing are covered by the FCPA, as is anyone who does anything to cause an FCPA offense while they're on U.S soil.

5. Even if a foreign subsidiary isn't covered by the FCPA, its acts might cause its U.S. parent to be in violation.

6. Indirect payments or promises to pay foreign officials through partners, agents or other intermediaries can violate the law.

7. Corrupt payments to a foreign political party, party official or candidate for foreign political office intended to obtain or retain business are prohibited.

8. Anyone acting on behalf of a "public international organization" such as the International Olympic Committee, the United Nations, the World Bank and the International Red Cross is a “foreign official” for the FCPA.

9. Members of a royal family are “foreign officials” for the FCPA.

10. The best protection against an FCPA violation is an "effective compliance program." It can result in penalty reductions for companies by up to 95%, according to the U.S. Federal Sentencing Guidelines.

10-A. The board of directors is always responsible for the oversight and management of the company’s FCPA compliance program.

Wednesday
Mar262008

At Alcoa, Who Knew What?

If, as Alba alleges, Alcoa overcharged it for supply contracts by $2 billion, and some or all of the money went into offshore accounts controlled by Alcoa's agent and was used to bribe Alba's personnel and other Bahraini government officials, then the focus of the U.S. government's criminal investigation will be on whether anyone from Alcoa knew what was happening, or if the agent acted alone and without Alcoa's knowledge.

The Justice Department last week intervened in Alba's federal civil suit against Alcoa, asking the court to stay the case while the government investigates possible criminal violations of the Foreign Corrupt Practices Act and other laws by Alcoa and its executives and agent. Alcoa has said it's innocent. "We will cooperate fully with the DOJ and believe this will help bring this matter to a speedy conclusion," Alcoa communications director Kevin Lowery said.

For U.S. prosecutors to obtain a criminal conviction of an individual under the FCPA, they must prove, among other things, that the defendant acted with "knowledge." The most recent discussion of the knowledge element in an FCPA prosecution is U.S. v. Kay (No. 05-20604, 5th. Cir., 2008). In that case, the United States Court of Appeals for the Fifth Circuit said the government didn't need to prove the defendants had specific knowledge about the FCPA. Instead, the court said, the government could satisfy the knowledge element by proving merely that the defendants understood that their actions were illegal.

Sitting en banc, the U.S. v. Kay appellate court -- which was reviewing the trial court's jury instructions on "knowledge" -- said: To be clear, we return to first principles. That is, this case was tried on the basis that the Government had to prove that the Defendants knew that their actions violated the law, although they did not need to prove that they were aware of the specific provisions of the FCPA. . . . The Government, while responding that they need not prove the specifics of the FCPA, made clear that it had to prove that Defendants knew that their conduct was illegal."

U.S. v. Kay involved bribery offenses under the FCPA, which carry a potential prison term of five years. What about criminal violations of the accounting standards, for which individuals can face up to 20 years? Those prosecutions must include proof that the accused acted willfully. The FCPA says a willful violation is the intentional circumvention of or failure to implement a system of internal accounting controls, or willful falsification of an issuer's books, records, or accounts.

What about Alcoa's corporate exposure for criminal charges? If any employee was involved with the agent and knowingly participated in bribing foreign officials in Bahrain, or intentionally cooked Alcoa's books with respect to the overcharges and bribery, then Alcoa itself might be held criminally responsible under the doctrine of respondeat superior. That could happen even if Alcoa's employees acted secretly, completely outside their authority, and against Alcoa's policies.

“An Overview of the Organizational Guidelines” from the United States Sentencing Commission's May 2004 release says this:

Criminal liability can attach to an organization whenever an employee of the organization commits an act within the apparent scope of his or her employment, even if the employee acted directly contrary to company policy and instructions. An entire organization, despite its best efforts to prevent wrongdoing in its ranks, can still be held criminally liable for any of its employees’ illegal actions.

The statement reflects the majority view of the federal appellate courts that have considered whether corporations are criminally liable for the crimes employees commit while acting within the scope of their employment. Courts have said it may be irrelevant that the employee is not a high managerial official, that the corporation may have specifically instructed the employee not to engage in the proscribed conduct, or that the statute is one that requires willful or knowing violations, rather than one that imposes strict liability.

The rationale for applying respondeat superior to corporations is that criminal statutes such as the FCPA impose a duty upon the corporation to prevent its employees from committing the statutory violations. If it fails in its duty to prevent the criminal behavior, then the corporation itself should be made to answer for the same criminal acts.

Despite the doctrine of respondeat superior, the DOJ is now understandably reluctant to charge corporations with criminal offenses. The Arthur Andersen prosecution demonstrated the catastrophic consequences that can result from a corporate felony charge, which for Andersen was a death sentence, even though the firm was later exonerated. The DOJ has since adopted the practice for FCPA and other white collar offenses of offering companies deferred prosecution agreements as an alternative to criminal prosecutions.

In cases involving the FCPA, corporations have additional (albeit largely theoretical) protection from the harshness of the respondeat superior doctrine. The "Overview of the Organizational Guidelines" says this:

The [federal sentencing guidelines mitigate] the potential fine range - in some cases up to 95 percent - if an organization can demonstrate that it had put in place an effective compliance program. This mitigating credit under the guidelines is contingent upon prompt reporting to the authorities and the non-involvement of high level personnel in the actual offense conduct.

If, as Alba alleges, people from Alcoa were involved in activity that may violate the FCPA, then the company's task, among others, will be to show that it has an effective compliance program, that top executives were unaware of any illegal conduct, and that it never concealed the conduct from the DOJ or SEC. If Alcoa can demonstrate these things, it will be eligible for mitigation of the potential criminal penalties. It is certainly true, however, that mitigation is less relevant when deferred prosecution agreements are offered. But the arguments for mitigation should still influence the DOJ's determination of the terms of any eventual deferred prosecution agreement.

Would the presence of actual FCPA violations ruin Alcoa's ability to establish that it has an effective compliance program? No. The Sentencing Guidelines stipulate that the failure to prevent or detect an FCPA offense "does not necessarily mean that the program is not generally effective in preventing and detecting criminal conduct."

* * *

Alba's allegations raise a multitude of FCPA issues for Alcoa, its employees and agent. We've mentioned just a few here, and we'll come back to the case from time to time. As one pundit said to us, this will be a zoo.

Please click on the labels below for prior posts on the topics discussed above and for access to the sources and authorities referred to in the post. You can also contact us for the annotations.

Wednesday
Sep262007

A.T. Kearney's Former India President Violated The FCPA

The U.S. Securities and Exchange Commission announced on September 25, 2007 two settled enforcement actions based on violations of the books and records provisions of the Foreign Corrupt Practices Act. The actions involved the founder and former president of A.T. Kearney Ltd's India business, Chandramowli Srinivasan, and Kearney's former parent company, Electronic Data Systems Corp.

Between 2001 and 2003, Srinivasan made corrupt payments of over $720,000 in the form of cash transfers, gifts and services to employees of two private energy companies partly owned by the Indian government in order to retain their buisness. To fund the bribes, Srinivasan and a Kearney-India contract accountant fabricated invoices that Srinivasan subsequently signed to authorize payment. This caused EDS to record the payments incorrectly in its accounting books and records. EDS recognized over $7.5 million in revenues from the Indian companies' contracts after Kearney-India began paying the bribes.

For violating Sections 13(b)(5) and 30A of the Securities Exchange Act of 1934, Srinivasan paid a civil penalty of $70,000. EDS paid $358,800 in disgorgement and $132,102 in prejudgment interest for violating Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-20 and 13a-13, and Regulation FD in connection with a separate offense.

Kearney, which EDS owned from 1995 to 2006, is now "an independent, privately owned management consultancy, with 100 percent of the equity owned by officers in the firm." Srinivasan, whom EDS terminated in 2004, resides in Delhi, India. Kearney's change in ownership, Srinivasan's departure from Kearney / EDS and his foreign residency are all reasons why the Department of Justice may decide not to bring criminal prosecutions for the FCPA violations.

Electronic Data Systems Corp. trades on the New York Stock Exchange under the symbol EDS.

View the SEC's September 25, 2007 Litigation Release No. 20296 and Accounting and Auditing Enforcement Release No. 2726 Here.

View the SEC's Complaint Against Srinivasan Here.

View the SEC's Administrative Proceeding Order Against EDS Here.

Sunday
Sep022007

Enron's Culture Of Non-Compliance

One consistent measure of a compliance culture is executive responsibility. In the case of Enron's CEO, Jeffrey Skilling, there was little evidence of that. True, he was obligated to comply with the Foreign Corrupt Practices Act. But remarkably, his January 1, 1996 Employment Agreement might have allowed him to be convicted under the FCPA and still keep his job. How? By his own declaration that he had no personal knowledge of or involvement in the crime -- the same defense he later bet on and lost at his federal trial for conspiracy, securities fraud, wire fraud and insider trading.

Fellow executives Rebecca Mark, Kenneth Rice and Joseph Sutton lacked Mr. Skilling's sui generis right to declare themselves innocent. Upon an FCPA offense, however, their employment agreements, like his, allowed the board to decide that if they'd acted in good faith after all, they could remain employed by Enron (never mind the mens rea element of a federal criminal conviction under the FCPA).

Mr. Skilling's Employment Agreement said in part:

Employee shall at all times comply with United States laws applicable to Employee's actions on behalf of Employer, including specifically, without limitation, the United States Foreign Corrupt Practices Act, generally codified in 15 USC 78 (FCPA), as the FCPA may hereafter be amended, and/or its successor statutes. If Employee pleads guilty to or nolo contendere or admits civil or criminal liability under the FCPA, or if a court finds that Employee has personal civil or criminal liability under the FCPA, or if a court finds that Employee personally committed an action resulting in any Enron entity having civil or criminal liability or responsibility under the FCPA with knowledge of the activities giving rise to such liability or knowledge of facts from which Employee should have reasonably inferred the activities giving rise to liability had occurred or were likely to occur, such action or finding shall constitute "cause" for termination under this Agreement unless (i) such action or finding was based on the activities of others and Employee had no personal involvement or knowledge of such activities, or (ii) Employer's Board of Directors or Enron's management committee (or, if there is no Enron management committee, the highest applicable level of Enron management) determines that the actions found to be in violation of the FCPA were taken in good faith and in compliance with all applicable policies of Employer and Enron.
(emphasis added)

View Jeffrey Skilling's Employment Agreement Here.

Sunday
Aug192007

An Effective FCPA Compliance Program Might Save the Company (A Great Defense Team Might Not)

“An Overview of the Organizational Guidelines” from the United States Sentencing Commission's May 2004 release includes the following jaw-dropping statement:

Criminal liability can attach to an organization whenever an employee of the organization commits an act within the apparent scope of his or her employment, even if the employee acted directly contrary to company policy and instructions. An entire organization, despite its best efforts to prevent wrongdoing in its ranks, can still be held criminally liable for any of its employees’ illegal actions.

(emphasis added)

This is meant to encourage adoption of effective compliance programs in order “to alleviate the harshest aspects of this institutional vulnerability . . . .”

It is also fair warning.

The majority view of the federal courts of appeals which have considered the question have held that a corporation is vicariously criminally liable for the crimes employees commit while acting within the scope of their employment--that is, within their actual or apparent authority and on behalf of the corporation. See Standard Oil Co. v. United States, 307 F.2d 120 (5th Cir. 1962); Developments in the Law--Corporate Crime: Regulating Corporate Behavior Through Criminal Sanctions, 92 Harv.L.Rev. 1227, 1247-5 1 (1979).

Under this view, which constitutes an application of respondeat superior principles to criminal statutes, it may be irrelevant that the employee is not a high managerial official, that the corporation may have specifically instructed the employee not to engage in the proscribed conduct, or that the statute is one that requires willful or knowing violations, rather than one that imposes strict liability. See, e. g., United States v. Hilton Hotels Corp., 467 F.2d 1000 (9th Cir. 1972), cert. denied, 409 U.S. 1125 (1973); Continental Baking Co. v. United States, 281 F.2d 137 (6th Cir. 1960); United States v. Armour & Co., 168 F.2d 342 (3d Cir. 1948); but see Holland Furnace Co. v. United States, 158 F.2d 2 (6th Cir. 1946). The stated rationale is that the criminal statutes impose a duty upon the corporation to prevent its employees from committing the statutory violations.

See Committee Comment to Instruction 5.3, Pattern Criminal Federal Jury Instructions (7th Cir. 1998).

What, then, should corporations do? The "Overview of the Organizational Guidelines" says this:

The [federal sentencing guidelines mitigate] the potential fine range - in some cases up to 95 percent - if an organization can demonstrate that it had put in place an effective compliance program. This mitigating credit under the guidelines is contingent upon prompt reporting to the authorities and the non-involvement of high level personnel in the actual offense conduct.

(emphasis added)

View "An Overview of the Organizational Guidelines" Here.

View the Seventh Circuit’s Pattern Criminal Federal Jury Instructions Here.

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