Board of Directors

Over-Criminalization and its Effects on Corporate America, Part II

Richard Levick is Chairman and CEO of LEVICK, which provides strategic communications counsel on high-profile, public affairs and business matters globally. This is the second of a four-part series originally published on (Read Part I, Part III and Part IV.)

When a company is guilty of willful negligence or gross misconduct, it deserves to be punished to the full extent of the law. Indeed, the ability of regulators and law enforcement officials to pursue criminal charges undergirds U.S. corporate law.

But when corporate executives are wrongly accused of committing criminal acts in the routine administration of their duties, the consequences can be devastating; they face the possibility of losing their livelihoods and reputations. Look no further than the unjustified prosecution of Todd Newman, a hedge fund manager at Diamondback Capital Management, whose conviction for insider trading based on dubious evidence was eventually overturned – but not before he suffered nightmarish losses.

Companies, moreover, confront the specter of extreme financial penalties and serious – if not irrevocable – danger to their brands. JPMorgan Chase & Co. and Perella Weinberg Partners both absorbed hits when executive Sean Stewart, who’d worked at both firms, was found guilty in a high-profile insider trading trial. His conviction was later dismissed over legal missteps.

What makes recent trends doubly frustrating is that they offer corporate CEOs, general counsels, and board members relatively few guideposts. Legal precedents on corporate criminalization tend not to get established because most cases, Newman’s and Stewart’s notwithstanding, get settled out of court. For many corporations, reaching a settlement is preferable to risking the public spectacle and potentially nasty recriminations of a trial.

The legal landscape is crowded: more than 300,000 regulatory statutes in this country carry potential criminal penalties, a figure that dwarfs any comparable metric in other industrialized countries. Compliance with still (relatively) new Dodd-Frank financial disclosure reforms alone requires thousands of pages of new rules.

“It’s becoming increasingly difficult for company executives, board members, and their counsel to keep track of all their areas of potential legal liability,” observes litigation specialist Scott D. Marrs, the regional managing partner of Akerman's Texas offices.

“The old ‘scorecards’ don’t work anymore,” Marrs says. “The scope of regulatory and prosecutorial actions leveled against companies – and the fines and penalties they incur – continues to grow at an unsettling rate.”

No area is immune: the government has pursued criminal actions against companies across a wide spectrum, from antitrust, trade sanctions, and consumer lending requirements to bribery, environmental compliance, and the enforcement of food and drug safety laws.

Just as vexing, Marrs points out, are the nature of the monetary rewards that follow corporate criminalization settlements. Too many regulators and prosecutors have come to regard enforcement activities as something of a cash cow.

The office of Rhode Island’s attorney general funded a physical expansion of its workplace thanks to largesse received from a settlement with Google. New York State insinuated itself into snagging a tenth of BNP Paribas’ then-record $9 billion settlement with the federal government over the French company’s violations of U.S. sanctions against Iran and the Sudan. It’s not readily apparent why a state government – any state government – is entitled to a percentage of a federal fine imposed on a foreign company for violating U.S. trade provisions.

Economists worry that the trend toward criminalizing “normal” business conduct throws off corporate planning, retards growth, and discourages foreign entities from investing in the U.S., all of which undermine America’s global competitiveness.

Moreover, the federal Department of Justice (DOJ) and other enforcers have become ultra-aggressive in expanding their definitions of criminal liability, diminishing the role of intent in white collar prosecutions while dismissing the utility of voluntary corporate compliance programs.

“Left unchecked, this trend is bad for the rule of law and unhealthy for a business community that strains to compete in international markets,” says Marrs. “Board members in charge of mitigating risk increasingly find themselves at wit’s end.”

The consequences of unwarranted criminalization are profound: they run far deeper than just one prosecution. It’s tough enough for American corporations to compete with foreign companies that are often heavily subsidized by their national and local governments.

When U.S. companies start getting prosecuted for the conduct of regular business, it puts everyone at risk: executives, board members, workers, and shareholders.

Read part III here and part IV here.

Published .