Not one Wall Street executive has been criminally prosecuted in the wake of the 2008 financial crisis. Why not?
The Justice Department says — well, it’s not easy to prove intent.
Peter Henning asks — if that’s the case, why don’t we have a recklessness standard for corporate executive wrongdoing?
He raises the question in an upcoming article in the Mississippi Law Journal titled — A New Crime for Corporate Misconduct?
Henning is a professor at Wayne State University Law School in Detroit, Michigan.
Henning believes that if we had a recklessness standard for corporate wrongdoing in the United States post 2008 financial crisis, there would have been criminal prosecutions of Wall Street executives by now.
“You would have had a broader investigation,” Henning told Corporate Crime Reporter in an interview last week. “You would have looked at not just what actually happened, the day to day decision making, but you would have been able to step back and look more broadly at how the company was operated and its decision making process to see if there was recklessness. It lets the Justice Department paint with a broader brush and look at higher level decision making. When you talk about a fraud, that’s a misstatement or omission of a material fact. Who said what? Under this proposal, you are asking what decisions were made that led to misconduct. It takes you a step higher and a step back from the nitty gritty of everyday decision making. That might have allowed the Justice Department to pursue more cases.”
“If a primary reason for the lack of prosecutions of executives is the high threshold for proving intent, then one response – which has not been expressed by the Department of Justice to this point – can be to reduce this element needed to establish a violation so that it is easier to pursue a case when there are substantial losses from corporate decisions,”
Henning writes in the article. “Reducing the threshold for liability to proof of recklessness – or even negligence – would facilitate the government’s use of the criminal law to police corporate management. A new crime that requires a lower level of intent can lead to more prosecutions of corporate management for decisions that can have a wide economic impact, while also serving as a deterrent to executives considering a course of action involving outsized risks that might be pursued when there is no realistic threat of criminal liability.”
Henning says his recklessness proposal grew out of a trip he took to Zagreb, Croatia last year.
“I received a Fulbright to teach in Zagreb last year,” Henning said. “For four and a half months, I taught there. And it exposed me to, most importantly, the German legal system. It’s probably the main competitor to the U.S. legal system, although the two are converging. I became much more familiar, through my German students and German colleagues, who came through Zagreb, with the German Breach of Trust statute. That’s a way to hold executives responsible for what in effect would be a breach of fiduciary duty.”
“That law got me to thinking about the persistence complaints about the lack of prosecutions of corporate executives and the Justice Department’s statements that we weren’t able to find enough evidence of intent. I asked — should there be a new crime that perhaps reflects the German approach?”
“England had a similar financial crisis. And the English started to look at holding executives accountable.”
“The German Abuse of Trust law holds the executive responsible for decisions that harm the organization. It’s about decisions in which the executive breached a fiduciary duty — acted in a way that was not in the best interests of the organization. It holds the executive responsible for decisions that end up costing shareholders or even more broadly the economy.”
“The British statute targets only bankers. It was put in as part of their banking reform law. Their approach is that the standard for intent is recklessness. If reckless decisions are made that cause a bank to go out of business or need a government bailout, then the executive can be held responsible. What was intriguing about that statute was the reckless standard. One of the rationales that the Justice Department offered for not pursuing individuals was that it is too hard to prove intent. Well, if the intent level is too high, is there a lower level of intent that can be the basis for a criminal prosecution? You can look to the British statute for that model and the German Abuse of Trust law for holding executives responsible for decisions that harm the organization.”
Henning also looked at the responsible corporate officer doctrine in the United States.
“The responsible corporate officer doctrine developed out of the food and drug laws as a way to hold managers responsible for insuring that the company followed the proper procedures to protect public health,” Henning said. “It very much comes out of the notion that the public needs protection from dangerous food and drugs. That doctrine was then adapted into the environmental laws. In fact, it is explicit in some of the environmental laws. If you are a supervisor and there is a breach on your watch, you can be held criminally liable. It’s a way to hold an officer responsible. But it is very broad liability because there is no intent element with regard to the underlying violation. You don’t even have to know directly about the violation.”
It’s like strict corporate criminal liability?
“It’s strict corporate criminal liability imposed on the individual. It’s individual liability that is essentially strict liability. It’s not pure strict liability. You have to know of the procedures that should be put in place. But there is no involvement of the official in the underlying violation. That can be very appealing. But it is also very broad liability.”
“If you were to apply to financial decisions, would the courts allow strict liability for what is essentially what we see now as civil harm, that is normally addressed in a securities class action or in a shareholders derivative lawsuit? The whole idea behind our business structure is that we want executives to take risks. Risk means that sometimes you are going to make a decision that goes wrong. Apple has not always been a success. They had some projects in the 1980s and 1990s that did not do well. But then that allowed them to develop, for example, the Mac. You want failures in business as long as the businesses learns from it. But if I’m an executive, and I can be held liable for any failure, the best way to avoid liability is to take no risks.”
Why did Henning choose the recklessness model over the German abuse of trust model or the U.S. responsible corporate officer doctrine?
“The responsible corporate officer doctrine standard is too low,” Henning said. “Strict liability or something that is almost equated to strict liability would have too great an effect on business decision making.”
“But the idea of holding corporate officers liable for decisions is a good one. Although the German law requires proof of specific intent. The good faith defense would still be a viable one.”
“The British recklessness standard struck me as Goldilocks — not too hot, not too cold but somewhere in between, a workable standard. And recklessness is an understood standard in the criminal law.
Would Henning get rid of responsible corporate officer doctrine for health and safety violations?
“No,” Henning says. “I would not get rid of it there. It works well there. Those violations are obvious wrongs. When you have oil flowing down a river or waste being dumped into a bay, that’s wrong. Whereas, business decisions often take months and years to play out and it’s not immediately apparent. While it works in one sector, I don’t think it can be easily adapted to the financial or corporate sector. In that regard, the standard is too low. There would be no hurdle. It would be too easy.”
[For the complete transcript of the Interview with Peter Henning, see 27 Corporate Crime Reporter 12(13), March 24, 2014, print edition only.]