This practice note provides an overview of the law and legal standards governing the imposition of criminal liability on officers, directors, and corporations for the acts of employees. The practice note discusses the federal government's policies and procedures in corporate criminal investigations and prosecutions, and the most common areas of corporate civil liability under the federal securities laws.
This practice note specifically addresses the following key issues in civil and criminal corporate liability:
- Vicarious Criminal Liability for Corporations and Executives
- Assessing Potential Criminal Liability under Department of Justice (DOJ) Guidelines
- Criminal Liability under Federal Employment Laws
- Corporate Sentencing and Establishing Effective Compliance Programs
- Civil Liability in SEC Enforcement Actions
- Civil Liability in Shareholder Direct and Derivative Actions
Although this practice note covers federal law, many of the topics addressed below also may implicate state laws, depending on the circumstances.
Be mindful that what begins as a commercial or civil matter may ultimately have consequences under criminal statutes as well. Similarly, regulatory investigations into potentially criminal conduct often result in civil litigation brought by contractual counterparties or shareholders. Thus, it is important to involve counsel with both criminal and civil expertise at the onset of a dispute or investigation. Finally, we emphasize the importance for corporations to develop and nurture a culture of rigorous compliance with the laws and regulations applicable in their respective industries. A substantive compliance program is both a significant mitigating factor considered by prosecutors in assessing penalties and a bedrock best corporate practice in a post-Enron, post-credit crisis environment.
VICARIOUS CRIMINAL LIABILITY FOR CORPORATIONS AND EXECUTIVES
Corporations can be charged with committing crimes. Federal criminal statutes apply to "whoever" or to any "person" who violates their prohibitions, terms which include not only individuals, but also corporations, companies, associations, firms, and partnerships. See, e.g., 18 U.S.C. §§ 371, 1956; 1 U.S.C. § 1.
As a legal entity that exists only in documents, a corporation is incapable of independently forming the mens rea necessary to commit a criminal act. Instead, the corporation acts through its employees and agents. Some U.S. states hold corporations criminally liable only for the acts of directors or senior managers. See, e.g., Model Penal Code § 2.07; Ariz. Rev. Stat. Ann. § 13-305. By contrast, federal law generally ignores an employee or agent's level of responsibility. See, e.g., United States v. Singh, 518 F.3d 236, 249–50 (4th Cir. 2008).
The most prominent theory of corporate criminal liability is respondeat superior. Originally developed in tort law, respondeat superior holds corporations both civilly and criminally liable for the acts of their employees and agents, so long as the acts were carried out within the scope of their authority and, at least in part, for the benefit of the corporation. New York Cent. & Hudson R.R. Co. v. United States, 212 U.S. 481, 494–95 (1909).
The general proposition that a parent corporation is not liable for the criminal acts of a subsidiary does not apply in all circumstances. A parent's liability for a subsidiary's bad acts can arise under one of two variations on respondeat superior:
- First, the subsidiary may be the agent of the parent, and the employees of the subsidiary may be the sub- agents of the parent.
- Second, the two corporations may be so intertwined that the two companies are treated as a single enterprise, such that the employees of the subsidiary are effectively the employees or agents of the parent.
See, e.g., United States v. Johns-Manville Corp., 231 F. Supp. 690, 698 (E.D. Pa. 1963).
Liability for the Conduct of Employees and Agents
Under respondeat superior, two elements must be present for a corporation to be liable for the criminal acts of an employee or agent:
- First, the employee or agent must have committed a criminal act within the scope of his or her authority with the corporation.
- Second, the employee or agent must have acted with the intent, at least in part, to benefit the corporation.
New York Cent. & Hudson R.R. Co. v. United States, 212 U.S. 481, 494–95 (1909); United States v. Demauro, 581 F.2d 50, 53 (2d Cir. 1978).
Scope of Authority and Scope of Employment
The scope of authority requirement generally is met when the employee or agent had actual or apparent authority to engage in the type of act that gave rise to liability. Actual authority, also called express authority, arises when a corporation, through its words or actions, objectively leads its employee or agent to reasonably believe that he or she may act on behalf of the corporation. Restatement (Third) of Agency § 2.01. Apparent authority is the authority that outsiders would normally assume the agent to have, judging from his or her position within the corporation and the circumstances surrounding his or her past conduct. See, e.g., United States v. Bi-Co Pavers, Inc., 741 F.2d 730, 737 (5th Cir. 1984).
Similarly, the term "scope of employment" has been defined to include acts committed on the corporation's behalf "in performance of the agent's general line of work." See United States v. Hilton Hotels Corp., 767 F.2d 1000, 1004 (9th Cir. 1972); Hamm v. United States, 483 F.3d 135, 138 (2d Cir. 2007). Courts generally have found that an employee or agent acts within the scope of authority or the scope of employment for attributing individual conduct to a corporate entity so long as he or she is performing a job-related duty, or an act of the kind he or she is authorized to perform, even if the specific act is contrary to express instructions or to company policy. See, e.g., United States v. Agosto-Vega, 617 F.3d 541, 552–53 (1st Cir. 2010); United States v. Hilton Hotels Corp., 467 F.2d 1000, 1004 (9th Cir. 1972); United States v. Twentieth Century Fox Film Corp., 882 F.2d 656, 660 (2d Cir. 1989).
Intent to Benefit the Corporation
For the corporate benefit element to be met, an employee must be motivated at least in part by a desire to serve the corporation. See, e.g., United States v. Demauro, 581 F.2d 50, 54 & n. 3 (2d Cir. 1978). The key question is what the employee intended. The employee's act need not actually confer a benefit upon the corporation, and may instead result in harm to the corporation. See, e.g., United States v. Ionia Management S.A., 526, F. Supp. 2d 319, 323 (D. Conn. 2007), aff'd, 555 F.3d 303 (2d Cir. 2008). So long as at least one of the employee's intentions was to benefit the corporation, the corporate benefit element is met. See, e.g., Standard Oil Co. of Texas v. United States, 307 F.2d 120, 128–29 (5th Cir. 1962). Courts may then impute the employee's conduct to the corporation. Notably, a corporation can be held criminally liable for "willful blindness" to illegal activity by its personnel. See, e.g., Acclaim Sys., Inc. v. Infosys, Ltd., 679 Fed. App'x 207, 212 (3d Cir. 2017). Corporations also may be found criminally liable based on the collective knowledge of its employees of the wrongdoing at issue. See, e.g., United States v. Pac. Gas & Elec. Co., 2015 U.S. Dist. LEXIS 171577, at *8 (N.D. Cal. Dec. 23, 2015).
Liability for the Conduct of Corporate Subsidiaries
A parent corporation may be held liable for the criminal acts of a subsidiary. This may be true even when a parent corporation acquires a subsidiary through a merger or acquisition that takes place after the criminal act occurs. See, e.g., United States v. Wilshire Oil Co. of Tex., 427 F.2d 969, 973–74 (10th Cir. 1970); United States v. Countrywide Fin. Corp., 961 F. Supp. 2d 598 (S.D.N.Y. 2013). Courts have reasoned that to do otherwise would permit companies to avoid liability by reorganizing themselves. See, e.g., United States v. Alamo Bank of Tex., 880 F.2d 828, 830 (5th Cir. 1989).
A parent corporation's liability for the acts of a subsidiary generally arises under one of two legal theories:
- First, under the agency theory, liability may attach to a parent corporation where its subsidiary or the subsidiary's employees are agents or sub-agents of the parent.
- Second, under the mere instrumentality or veil piercing theory, a parent may be liable for its subsidiary's actions when the parent does not treat the subsidiary as a separate entity and uses the subsidiary to commit a crime.
The agency theory of criminal liability applies in the parent-subsidiary context. The fact that a subsidiary is wholly owned by its parent, or even shares an identical board of directors with its parent, is normally insufficient for a court to find that the subsidiary is the parent's agent. See, e.g., Schmidt v. Burlington N. & Santa Fe Ry. Co., 605 F.3d 686, 689 (9th Cir. 2010) (citing Kelley v. S. Pac. Co., 419 U.S. 318 (1974)). However, if the subsidiary acts on the parent's behalf, and under the parent's control, the subsidiary may be the agent of the parent, and the employees of the subsidiary may be the sub-agents of the parent. In such circumstances, the acts of the agents or sub-agents may impute criminal liability to the parent. See, e.g., United States v. Johns-Manville Corp., 231 F. Supp. 690, 698 (E.D. Pa. 1963); United States v. Watchmakers of Switzerland Info. Ctr., 134 F. Supp. 710, 711 (S.D.N.Y. 1955).
Mere Instrumentality or Veil Piercing
The general principal that a parent corporation is not liable for the acts of its subsidiaries is inapplicable when a parent treats its subsidiary as a mere instrumentality and uses the subsidiary for a wrongful purpose. In such a situation, courts may pierce the corporate veil and hold the parent accountable for its subsidiary's acts.
Determining whether to pierce the veil is a question of fact. One hundred percent ownership and common directors and officers, even together, are, by themselves, an insufficient basis for piercing the veil. See, e.g., United States v. Bestfoods, 524 U.S. 51 (1998).
Courts consider numerous other issues in the veil-piercing analysis, including the following factors:
- The subsidiary is grossly undercapitalized.
- The subsidiary does business solely with the parent.
- The parent provides financing to the subsidiary.
- The parent and subsidiary consolidate their financial statements.
- The parent uses the subsidiary's assets as its own assets.
- The parent and subsidiary operate physically as a single enterprise.
- The parent and subsidiary fail to observe corporate formalities, including holding required shareholder meetings.
See, e.g., United States v. Jon-T Chemicals, Inc., 768 F.2d 686 (5th Cir. 1985).
Veil piercing for criminal acts remains relatively rare. However, even when a parent and subsidiary are insufficiently intertwined for a court to pierce the veil, subsidiaries or their employees may nonetheless be agents or sub-agents of the parent, resulting in the parent's liability for the criminal acts of its subsidiary's employees.
For guidance on steps that employers can take to help deter criminal activity by its employees and therefore lower the risk of vicarious criminal liability, see Corporate Sentencing and Establishing Effective Compliance Programs below.
The Responsible Corporate Officer Doctrine
Under the Supreme Court-created Responsible Corporate Officer (RCO) doctrine, a corporate officer may be found criminally liable for regulatory offenses even when he or she is unaware of and not involved in the wrongdoing if he or she is in a position of authority regarding the activities giving rise to the illegal conduct and failed to prevent or correct the conduct. United States v. Park, 421 U.S. 658, 672–74 (1975); United States v. Dotterweich, 320 U.S. 277, 284–85 (1943). Penalties under the RCO doctrine can include fines and imprisonment. Meyer v. Holley, 537 U.S. 280, 287 (2003).
When defending against an RCO charge, consider the following two key defenses:
- The executive could not have prevented or corrected the violation at issue.
- The executive used extraordinary care and was not able to prevent the violation.
See, e.g., United States v. Wiesenfeld Warehouse Co., 376 U.S. 86, 91 (1964).
Originally published by LexisNexis.
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