• Criminal Law: White Collar Defense
  • Criminal Liability of a Corporation
  • Criminal Liability of a Corporate Officer or Agent
  • White Collar Crime
    • Antitrust
    • Bribery & Extortion
    • Computer Crime
    • Conspiracy
    • Embezzlement
    • Fraud
    • Obstruction of Justice
    • Perjury
    • Racketeer Influenced and Corrupt Organizations Act
    • Securities Fraud & Insider Trading
  • Avoiding White Collar Criminal Liability
  • Resources

Business owners increasingly need to be aware of how they might run afoul of criminal laws in the operation of their businesses. Newspapers today are so full of reports of corporate criminal investigations and prosecutions that most business owners do not even realize that once business entities were thought to be incapable of committing crimes. Under the common law, corporations were considered artificial constructs without minds of their own, incapable of forming the intent necessary to be guilty of crimes. All this has changed. During the last two decades, the federal and state governments have increased the number of criminal investigations of businesses and the people who run them, partly in an effort to apply criminal laws evenhandedly. Commission and prosecution of white collar crimes are on the rise. High profile prosecutions of large corporations have caught the attention of the press and the public.

Today, business owners and corporate executives should have a basic understanding of how criminal laws can impact their businesses. A myriad of regulatory laws can trip up even a conscientious business owner or manager. This chapter is designed to acquaint the reader with criminal statutes that most affect businesses and the steps businesses can take to avoid criminal liability. Antitrust violations are discussed more fully in the Antitrust Law Chapter, and civil lawsuits are covered in the Commercial Litigation Chapter.

As mentioned earlier, corporations once were thought to be incapable of forming the intent necessary to commit crimes. This attitude now has changed and corporations even have been found guilty of crimes requiring specific intent. According to California law, a corporation may be prosecuted for any crime other than a crime that only may be committed by a natural person, such as bigamy or rape. California law recognizes that corporations may be reckless, and that corporations may have the specific intent to commit crimes. For a corporation to be responsible, the action must be committed by an agent--a director, employee, or officer authorized to act on behalf of the corporation--acting in the scope of employment. The corporation may be held responsible, as well, for its part in a conspiracy. Some statutory provisions specifically name corporations as possible offenders, such as laws prohibiting unfair trade practices or acting as a salesperson without a license.

In addition to the corporation's liability, corporate officers and agents may be judged personally liable for their criminal conduct. Some businesspersons mistakenly believe that criminal liability is an "either-or" proposition. That is, they think that if their actions subject the business to criminal liability, they will be free of personal liability. This belief is incorrect, because many criminal statutes allow prosecutors to prosecute both the business and the individuals who run it. Individual and corporate liability are cumulative, not exclusive.

Participation in business criminal activity does not, by itself, make a person criminally liable. Usually the prosecution must show that the participating officer or agent consciously promoted or at least knew about the illicit act. Ordering a subordinate to commit a crime or silently acquiescing to another's commission of a crime will make most officers or agents personally liable for the crime. Some officers within a corporation even have been held responsible for criminal activity of which they were unaware because they had an obligation to ensure compliance with the law or to detect and prevent violations of criminal regulations. The law does not look kindly on corporate officers who claim to have been asleep at the helm while their subordinates were engaging in criminal activity. Especially in the context of environmental regulations, with their substantial penalties, the defenses "I did not know" and "I was not aware" are insufficient if the court or jury believes the officer should have known or had an obligation to be aware of what was happening in the company.

White collar crime is the most common type of business crime. The term "white collar crime" generally is used to describe crimes that have cheating or dishonesty as their common basis. These crimes typically are committed by professionals or entrepreneurs under cover of legitimate business activity. Such crimes may be difficult to prosecute because of their complexity. Often they carry lesser penalties than other crimes because they are not associated with violence. However, defendants convicted of white collar crimes may incur enormous fines, be ordered to pay restitution, or spend time in jail.

As a practical matter, it is impossible to describe every activity that fits within the definition of white collar crime, because white collar crime takes many forms. Some criminal actions are prohibited by specific laws narrowly drawn to outlaw particular activities. Other actions are not covered by specific laws but instead are prosecuted under one or more "catch-all" laws criminalizing dishonest behavior generally.

Antitrust

Businesspersons with experience in antitrust law have learned that these laws are complicated, covering mergers and acquisitions, pricing policy, terms of trade, customer and territory selection, bundling of services, and even advertising and sales technology. An experienced antitrust attorney who stays abreast of current developments in this area can advise businesses how to avoid antitrust problems.

Persons found in violation of certain aspects of the Sherman Antitrust Act--the primary federal antitrust law--may be fined or jailed. Violations of this Act include making contracts that unreasonably restrain trade, and attempting to form and maintain a monopoly in an industry. In practice, however, these violations generally are handled by civil, rather than criminal, lawsuits. The Antitrust Law Chapter goes into more detail about what actions violate antitrust laws.

Bribery & Extortion

A number of federal statutes prohibit bribery and extortion. A common goal of most bribery statutes is to prevent people from seeking preferential treatment from public officials and to prevent public officers from using their offices for personal gain. Under a statute prohibiting bribery of federal government officials, both the official and the person offering the bribe are subject to prosecution if the official is offered or seeks anything of value for himself or herself in exchange for:

• Being influenced to perform any official act

• Committing, aiding, conspiring, or allowing a fraud to be committed upon the United States

• Being induced to do or omitting to do anything in violation of his or her official duty

Promises and offers are equally prohibited, so there is no requirement that the bribe actually occur. A separate federal statute, known as the Foreign Corrupt Practices Act, prohibits bribery of foreign officials.

Computer Crime

Computer crime is an area of the law in which the government appears to be playing catch-up with the growth in new technologies. Some variations of computer crime are so new that there are no specific laws to address them, and general laws in existence do not seem adequate to proscribe the particular illicit activities.

Today, six types of conduct are specifically outlawed by federal statute:

• Knowingly accessing a computer without authorization or exceeding authorization, and thereby obtaining confidential national security information

• Intentionally accessing a computer without authorization or exceeding authorization, and thereby obtaining the financial information of a financial institution or of a credit card issuer

• Intentionally accessing without authorization a computer of a federal department or agency used exclusively by that department or agency or affecting the government's use thereof

• Knowingly, and with intent to defraud, accessing a federal interest computer without authorization or exceeding authorization to further a fraud or obtain anything of value

• Intentionally accessing a federal interest computer without authorization to alter, damage, or destroy information and thereby causing a loss of $1000 or, if medical information is affected, any amount

• Knowingly, and with intent to defraud, trafficking in any password or similar information through which a computer is accessed without authorization if such computer affects interstate or foreign commerce or is used by or for the government

California's penal code also includes provisions covering computer crime. It is illegal to knowingly introduces a contaminant into a computer, computer system, or computer network. In addition, it is against state law to do any of the following knowingly and without permission:

• Access and alter, damage, delete, destroy, or otherwise use any data, computer, computer system or computer network as part of a scheme to defraud or to wrongfully control or obtain money, property, or data

• Access and take, copy, or use any data from a computer, computer system, or computer network, or take or copy any supporting documentation

• Use computer services

• Access and add, alter, damage, delete, or destroy any data, computer software, or computer program

• Disrupt computer services or deny computer services to an authorized user of a computer, computer system, or computer network

• Provide a means of accessing a computer, computer system, or computer network for an unlawful purpose

• Access any computer, computer system, or computer network

A violation of this law subjects the offender to a range of sanctions depending on the specific violation, the value of computer services used, the amount of the injury, and whether it is the defendant's first violation of the statute. The maximum punishment is a fine not exceeding $10,000, imprisonment in the state prison for three years, or both.

Conspiracy

Conspiracy is the term for a broad category of crimes involving multiple actors coming together to engage in concerted criminal activity. A person or business generally is guilty of conspiracy to commit a crime if that person or business does one of the following: (1) with the purpose of facilitating or promoting its commission, agrees with another person or business to engage in conduct that constitutes a crime or an attempt or solicitation of a crime; or (2) agrees to aid another person or business in planning, committing, or attempting to solicit a crime.

Specific federal anti-conspiracy statutes are found throughout the United States Code. California statutes also contain anti-conspiracy laws. In recent years, a growing number of white collar criminal prosecutions have included allegations of conspiracy.

Bringing a conspiracy charge offers the prosecution several distinct advantages. Prosecutors usually learn of a conspiracy while it is in an early stage; thus, they may prosecute before the underlying crime takes place. In addition, prosecutors may be able to charge defendants simultaneously and present evidence against the group. When several defendants stand trial together, juries often perceive individual defendants to be guilty by virtue of their association with the others. A key element in prosecuting a defendant for conspiracy is proving the agreement. The agreement that forms the basis for conspiracy need not be written, oral, or even explicit, but is often inferred from the facts of the specific case. If the parties meet and reach an understanding to work for a common purpose, there is an agreement. For example, if the producers of a particular product meet to exchange information on prices, and later set identical prices, a prosecutor may be able to prove they conspired to set prices even though there was never an explicit agreement to do so. Most criminal conspiracy statutes also require that at least one of the parties has committed an overt act in furtherance of the conspiracy.

A procedural issue of great importance to parties accused of conspiracy is whether government prosecutors try to frame the conspiracy as a "hub-and-spoke conspiracy" or a "chain conspiracy." In a hub-and-spoke conspiracy, many parties (the spokes), conspire with one person (the hub), but not with other defendants. It is advantageous for a defendant to have its actions characterized as part of a hub-and-spoke conspiracy, because that means that the conspiracies are separate and disconnected.

In contrast to a hub-and-spoke conspiracy, a chain conspiracy involves several parties as links in one long criminal chain. Defendants in chain conspiracies are responsible for the actions of all participants in the chain, even if they never met some of the other participants in the chain.

Embezzlement

To embezzle means to take another's money and property through abuse of an official job or position of trust. Embezzlement can take many forms. An accountant might use sophisticated methods to falsify records and skim profits, while a bank teller might walk home with an extra 20 dollars from his or her drawer.

Fraud

Fraud is intentionally lying in order to induce someone to rely on the lie and part with something of value. Like embezzlement, fraud can be either complex or simple. The federal government has three general anti-fraud statutes for mail fraud, bank fraud, and wire fraud.

Mail fraud is a broad crime punished under the United States Code. Mail fraud has two elements: 1) a scheme devised or intending to defraud or for obtaining property or money by fraudulent means, and 2) using the mails in furtherance of that fraudulent scheme. The "scheme to defraud" element of mail fraud is deliberately broad. It encompasses a wide variety of criminal activity, including credit card fraud, securities fraud, medical drug fraud, and frauds based on political malfeasance. Because the statute uses such broad language and because mail fraud is relatively easy to prove, it is one of the most common charges brought by federal prosecutors. Charges of mail fraud frequently are made even in cases in which more specific crimes have been charged.

The federal wire fraud statute is similar to the mail fraud statute, but requires an interstate or foreign transmittal of a communication by wire, radio, or television. This interstate requirement sets wire fraud apart from mail fraud. An intrastate mailing is sufficient to trigger liability for mail fraud, while an intrastate wire, radio, or television communication is insufficient for wire fraud liability.

The federal bank fraud statute criminalizes the conduct of any party who "knowingly executes, or attempts to execute, a scheme or artifice to defraud a financial institution, by means of false or fraudulent pretenses, representations, or promises." The federal bank fraud statute is newer than the mail fraud and wire fraud statutes, so it has not received a great deal of interpretation in the courts. Because its language is so similar to that of the mail and wire fraud statutes, however, it is expected to be broadly applied and interpreted.

Obstruction of Justice

Obstruction of justice is a category of offenses consisting of interfering with one of the three branches of government. Obstruction of justice can take many forms, including assaulting a process server, improperly influencing a juror, stealing or altering a record of process, and obstructing a criminal investigation by officers of a financial institution. Picketing, parading, or using sound amplification devices in front of a courthouse, a building or residence occupied by a judge, juror, witness, or court officer may be prosecuted as obstruction of justice.

Perjury

Federal perjury laws penalize anyone who willfully or knowingly makes false statements under oath. The sworn statements may be written or oral and need not be made in court; a person may perjure himself or herself in deposition or written testimony. A related law against subornation of perjury makes it illegal for anyone to procure another person to commit perjury.

Racketeer Influenced and Corrupt Organizations Act

The Racketeer Influenced and Corrupt Organizations Act (RICO) was established to fight the influence of organized crime on legitimate businesses. Under federal criminal law, defendants may be found guilty of violating RICO if they engage in "racketeering activity" under the auspices of an enterprise that affects interstate commerce, or if they are involved in the collection of an unlawful debt. There are nine state and 35 federal offenses specifically listed as racketeering activity. The nine listed state offenses are murder, kidnapping, gambling, robbery, arson, bribery, dealing in obscene materials, and dealing in narcotics or other dangerous drugs. While drug smuggling, murder, bribery, and extortion of "protection money" are examples of the activities to which RICO was originally applied, more recently it has been used to prosecute an increasing variety of criminal actions.

In the first years after it was passed, RICO rarely was used. Today, RICO charges are quite common, largely because its provisions have been interpreted expansively to cover many situations in which there is no allegation that the defendant has any connection to organized crime.

In addition to its criminal provisions, RICO gives private parties and the federal government civil causes of action against violators. Because RICO prosecutions have grown so unpredictably in recent years, some people have called for redrafting the law more narrowly, particularly its civil provisions.

Securities Fraud & Insider Trading

A broad range of illegal behavior is prosecuted under securities fraud statutes. Criminal prosecutions require the prosecutor to show that the accused acted willfully; if the accused is found in violation, he or she is subject to criminal penalties, civil penalties, or both. The securities fraud statutes recognize that deception may take many forms and thus are worded broadly to prohibit "any device, scheme or artifice to defraud" in securities sales.

There are two general categories of securities fraud. The first involves the sale of securities to investors for far more than their actual value. The second involves the sale of legitimate securities for illegal purposes. An example of the first type of fraud is selling shares in dry oil wells. An example of the second type of fraud is sale of legitimate stock by a broker who conceals information about his or her own involvement with the brokerage company. These acts are prohibited by rules established by the Federal Securities and Exchange Commission.

Insider trading prosecutions have been some of the most publicized white collar prosecutions of the 1980s and 1990s. Surprisingly, "insider trading" is not defined in any specific statute; it is a term used to describe insiders (such as officers of a corporation) taking unfair advantage of information to make money or avoid losing money in securities. Generally, insider trading means that an insider with material, non-public information engages in trading without disclosing that information to the public first. These crimes typically are prosecuted under the Securities and Exchange Act of 1934. Further information about this Act may be found in the Securities & Venture Finance Law Chapter.

Prosecutors are not confined to using specific securities fraud statutes to prosecute securities fraud. General anti-fraud statutes may be used instead of, or in addition to, specific securities fraud laws. For example, parties engaged in securities fraud may be charged with violating mail and wire fraud statutes, discussed above.

It is challenging for a company to ensure that none of its employees will violate the law in any way. Some laws are so complex that even knowing one's legal responsibilities can be difficult. However, there are ways in which business owners and executives can avoid white collar criminal liability.

In the area of white collar crime, an ounce of prevention is worth a pound of cure. Businesses should establish internal procedures to prevent wrongdoing by employees, or to ensure that managers become aware of problems at an early stage. An attorney experienced in the regulatory area can be an excellent source of information for helping managers understand their responsibilities for overseeing corporate employees' actions and reporting accidents or wrongdoing.

Internal investigations are an integral part of the defense in many corporate criminal proceedings. When a company learns that it may be the subject of a criminal prosecution, it is important to notify management quickly and to act to resolve the situation. Sometimes a business avoids criminal liability altogether if it shows that it took proper action to correct a situation as soon as managers were made aware of a problem. The internal investigation carries risks of its own, however. It may be wisest to have the investigation conducted by outside legal counsel. Attorney-client privilege and the work product doctrine may prevent the corporation's officers from being required to reveal to prosecutors the contents of a final report, and may prevent the report from being used at trial as evidence against the company.

No business should ever obstruct a government investigation into its affairs; such action could be perceived as a cover-up or obstruction of justice. Being honest with all employees, if secrecy is necessary, and fully explaining the employees' responsibilities can be excellent preventive medicine against criminal liability. Any employee asked to keep anything secret for reasons he or she does not understand may assume his or her employer is involved in illegal activity and testify later to that effect.

Books providing additional information on the criminal liability of businesses include:

Stanley S. Arkin, et al. Business Crime: Criminal Liability of the Business Community (Matthew Bender, New York, NY 1994).

Eliot G. Disner, Antitrust for Business: Questions & Answers (Federal Legal Publications, Inc., New York, NY 1989).

Internal Corporate Investigations: Conducting Them, Protecting Them (Brad D. Brian & Barry F. McNeil, eds., American Bar Association, Chicago, IL 1992).

William E. Knepper & Dan A. Bailey, Liability of Corporate Officers and Directors (Michie, Charlottesville, VA 5th ed. 1993).

For the free pamphlet, What Should I Know If I Am Arrested?, contact the State Bar of California, 555 Franklin Street, San Francisco, CA 94102-4493, (415) 561-8200.