The Threat of Triple Liability
In the wake of scandals such as WorldCom and Enron, government agencies such as the Securities and Exchange Commission have started cracking down on corporate giants in an effort to end white collar crime. Although such busts appear to be larger than life, the laws used by the government to impose criminal liability can hit home, especially for closely-held corporations where officers and directors have a tendency to be the same or closely-related persons.
The purpose of forming a corporation is to ultimately protect individuals, but the protections people sought in forming corporate entities may end up backfiring in light of criminal violations, which recent case law suggests may create an easy-to-charge triple criminal liability. Such triple liability results from a single charge against the corporation as a principal, with officers, directors, and other employees charged as both principal and as aiders and abettors. The concerning part is that any criminal activity within the corporation appears to somewhat automatically bloom into this triple threat, and that prevention appears to be the only true solution.
The first tier of corporate liability – the criminal corporation – arises naturally from the corporate structure. The purpose of forming a corporation is to insulate individuals from liability, so that any problems are problems of the corporation as opposed to violations attributable to individual actors. But in reality, corporations cannot act criminally; any criminal liability arises via the actions of officers, directors, and employees. It has long been established that “[a] corporation may be held criminally responsible for acts committed by its agents, provided such acts were committed within the scope of the agents’ authority or course of their employment.” Basically, so long as the criminal actions of an officer, director, or employee were motivated, at least in part, by an effort to benefit the corporation, such action can arise in corporate liability. This is true even where such action ends up ultimately harming the corporation, which often occurs when corporate criminality becomes fodder for the media.
Imputing such criminal actions to the corporation, however, will not absolve the individuals who ultimately committed the violations. The second tier of liability – individual liability – remains with the person that committed the act, as courts refuse to allow corporate officers, directors, and employees to escape punishment when their actions are imputed to the corporation. This tier of liability is especially dangerous for officers and directors, who “may be held criminally liable for the acts of subordinates done in the normal course of business, regardless of whether or not these directing heads personally supervised the particular acts done.” Furthermore, such officers and directors may run the risk of self-incrimination solely by their positions within the corporation; by acting as dutiful agents of the corporation, they may cooperate in criminal investigations by providing corporate documents, and in some events may be required by shareholders to provide documents that incriminate them individually.
The third and final tier of liability – aiding and abetting – has reared its ugly head more recently, as was seen in the Waste Management, Inc. scandal. While most of Waste Management’s officers sought to settle the charges filed against them by the SEC, James Koenig, Waste Management’s CFO, battled for over five years, only to lose the fight to the forces of the triple threat. The court in Koenig’s case found that 1) Koenig was personally liable for his criminal violations of SEC regulations, 2) that since Koenig was an officer of the corporation, that his actions could be imputed to the corporation and result in corporate liability, and 3) that Koenig was guilty of aiding and abetting the corporation in its criminal acts. Koenig argued that it was double dipping to charge him as a principal, which resulted in the corporation’s criminal liability, and as an aider and abettor, assisting the corporation in creating that same criminal liability. The court, however, ultimately disagreed, holding that
“to hold that Koenig cannot have acted to aid and abet Waste Management’s violations as well as being primary [sic] liable for Waste Management’s violations is contrary to the intent of the securities laws and to our reasoning.”
Other courts have held similarly, finding that so long as a corporation is a separate entity that it is capable of being aided and abetted, even by the officer that caused the initial corporate liability.
From the standpoint of shareholders, it may appear that the triple threat is not really a threat at all, since their concern is primarily with corporate liability, and not with liability arising from the individual or aiding and abetting. Such lack of concern, however, may be inappropriate, as many corporations often fund the litigation of its top officers for actions associated with the corporation. Furthermore, publication of any type of corporate liability, whether related to the organization itself or to an individual within the organization, can adversely affect stock prices and investor confidence, resulting in the loss of business and profitability as a whole.
In order to prevent the triple threat, which appears to somehow automatically arise as the individual violation converts to a corporate violation and the combination of the two create aiding and abetting, corporations must become proactive in their attempt to stop criminal violations before they ever begin. Corporations need to have checks and balances throughout the upper levels of the organization, and better supervision of activities throughout the lower levels. Organizations, especially those that are closely-held, should make sure that the actions of directors and officers are constantly checked to assure legality. Furthermore, officers and directors need to be aware of the actions of their employees and subordinates, as they may be held personally liable even if they fail to directly oversee criminal activity. Third party firms that perform audits and check for corporate compliance can be used, as well as outside consultants. The goal is to make sure that criminal activity, even unintentional activity, never pervades the organization, preventing the government from having the ability to bring the triple threat at all.
Our thanks to this article’s author, Leanne Siegfried of Cobb & Cole, P.A. This Corporate Governance Article is published with permission. Cobb & Cole, P.A. is a prestigious regional law firm practicing in Central Florida since 1925. Cobb & Cole, P.A.
DISCLAIMER: This Corporate Governance article is provided as an informational resource and does not constitute legal advice. The information provided in this article is based on the laws in effect at the time the article was published. Laws related to this article’s topics may change over the course of time. Visitors to this website should not rely upon or act upon this information without seeking professional legal counsel.
1 Old Monastery Co. v. U.S., 147 F.2d 905, 908 (4th Cir.) cert. denied 326 U.S. 734 (1945).
2 U.S. v. Automated Medical Laboratories, Inc., 770 F. 2d 399, 407 (4th Cir. 1985).
3 Carolene Products Co. v. U.S., 140 F. 2d 61, 66 (4th Cir. 1944).
4 Id. citing cases.
5 See http://www.sec.gov/news/headlines/wastemgmt6.htm for full details
6 SEC v. Koenig, 2007 WL 1074901 (N.D. Ill.)
7 Id. at *7
9 See U.S. SEC v. Cohen, Slip copy 2006 WL 2225410 and U.S. v. Sain, 141 F. 3d 463, 475 (Pa. 1998) (holding “[t]herefore, an individual who causes a corporation to commit a crime is criminally liable for the corporation’s criminal conduct as an aider and abettor even if the corporation does not act with a knowing mental state. United States v. Dotterweich, 320 U.S. 277, 284, (1943).)