Emory Law Professor Andrew Jennings has a keen eye for sensitive issues in corporate crime – issues that everyone in the field has thought about, but few address head on.
Let’s take the question of so-called innocent shareholders.
In a recent article titled Criminal Investors, Jennings assesses the culpability of those who invest in criminal corporations.
“Prosecutors currently treat investors as victims of corporate wrongdoing rather than as actors who might bear responsibility for it,” he writes. “One explanation for this tendency is that corporate law’s doctrine of limited liability creates such a strong presumption of investor blamelessness that it permeates other spheres, including criminal law.”
Another is that investors are too remote from the firms they invest in to be blamed for corporate wrongdoing.
Jennings argues that investment can facilitate, and even cause, illicit corporate activity.
“When investors intentionally contribute to those effects, substantive criminal law imposes liability on them just the same as it does on accomplices, conspirators, or principals in other contexts. Despite this formal parity, however, investor criminal liability is more a theoretical proposition than a practical reality.”
In Criminal Investors, Jennings challenges that status quo by asking whether and when culpable investors should be held criminally accountable for corporate wrongdoing.
The answer, he says, should follow careful balancing between the public’s interests in law compliance and capital formation.
He argues that individual investors in private law-breaking firms, who have at least knowing intent, are plausible enforcement targets.
For other investors, the status quo of not pursuing legal action against them should remain.
“I found in the past that when I talked about innocent shareholders, I would get pushback from academics who would ask – shareholders aren’t so innocent, are they?” Jennings told Corporate Crime Reporter in an interview last week. “To that criticism, I said – I’m with you there. But the “innocent shareholder” is a consideration that prosecutors as a practical matter invoke. It’s one that tends to act as a shield for the firm itself. Prosecutors don’t want to hurt the shareholders so the firm gets better settlement terms than it would otherwise get”
“My agreement with that line of pushback got me to start thinking about this. As a financial matter, it’s true that shareholders should not be protected from the consequences of corporate wrongdoing.”
“Their job is to bear risk, the ultimate financial risks for the firm. But under what conditions would an investor potentially be not just economically responsible for corporate wrongdoing, but also personally responsible for corporate wrongdoing? We could imagine any number of criminal activities that might require some outside financing – a drug deal for example.”
“I don’t think we would bat an eye at the idea that somebody who finances some street crime and does so knowingly is also criminally responsible for the activity. The motivation for the article was to consider – under what circumstances might an investor be directly culpable for corporate crime? And more perhaps more importantly – under what circumstances should those investors face enforcement?”
“If I’m an investor in a public company, or I bought shares in a mutual fund which in turn buys shares in a public company, I’m not able to form the requisite mens rea, the criminal intent necessary to be culpable for that criminal activity. I don’t know and can’t know and reasonably couldn’t be expected to know what the firm will do or what its agents are doing.”
“In that case, the basic doctrine of criminal law would be fairly insulating to the shareholders. We could perhaps have more of a conversation around firms that are recidivist or known to be at high risk of violating the law.”
“We could imagine somebody who buys shares in a cannabis company, which you can do now despite those companies being federally illegal. They might actually bear some culpability compared to the average shareholder who can’t and shouldn’t be expected to know what exactly the firm is up to and what it is using that person’s money for.”
Did you come across any instances of criminal prosecution of investors for corporate criminal activity?
“I expected that when I started this process I would find a small number,” Jennings said. “I didn’t find any of mere investors being prosecuted. There is an Eleventh Circuit case where the defendants alleges that he was a mere investor. The court said that he did have some participation in the criminal activity. But the court also said, even if he was just a mere investor, knowing what he knew wouldn’t have prevented him from being liable.”
“So as far as mere investors being prosecuted, I haven’t been able to find cases along those lines. That doesn’t mean they don’t exist. But I’m fairly confident saying that right now prosecutors are not looking at investors.”
“We talked earlier about public companies. That’s an area where we probably want to keep the status quo. But there’s a bigger question when it comes to private companies. You might have investors who are much closer to the action even if they are not actively participating. They might have greater knowledge about what exactly it is that they are investing in. And perhaps they have greater leverage to influence the firm to comply with the law versus violating the law.”
“So the conversation around private company investors might be a little bit different than the paper’s conclusion when it comes to public company investors.”
If you were a prosecutor and you wanted to bring a breakthrough case against a large investor in a public company, what kind of case would you be looking at?
“Let’s imagine that you had a really big investor in a public firm. Let’s say it was a private investor in a public equity deal in a pharmaceutical company – a narcotics manufacturer. And we learned through the due diligence process that the company is engaged in various violations of the food and drug laws.”
“And the company needs the investment to keep going to market these narcotics. If I know about those things and the company goes ahead, takes my investment, uses my investment to violate the law, particularly in ways that harm the public, that might be a breakthrough case in a public company setting.”
“You wouldn’t be looking at the rank and file shareholders of the firm. That would be a difficult case to bring. But if I had the evidence that the private investor knew what it was getting into and what it was funding, then that might be a breakthrough case.”
You wrote an article last year titled Criminal Subsidiaries.
You use an acronym – SOC, which stands for subsidiary only conviction. Did you create that term?
“I think that is original to the article. I needed a term to describe this phenomenon and ideally a term that would be simple and short. So that is the acronym I came up with. SOC.”
How did this article come about?
“I had read many deferred and non prosecution agreements and press releases from the Department of Justice and other enforcement agencies. I noticed over time that I would see an announcement that a parent corporation had entered into a deferred prosecution agreement. And oh, by the way, its subsidiary pled guilty to the same offense.”
“I thought – that’s kind of strange. Why might you not convict the parents, but the subsidiary is going to plead guilty? I had some notions about why that might be, but that prompted me to do a more comprehensive search for every instance I could find of this practice.”
Why is the federal government cutting these SOC deals?
“Anecdotally, I’ve heard from lawyers that this is being done because of a preference by firms to avoid a parent level conviction because of the collateral consequences that could attend that. And yet the activity was severe enough that prosecutors still feel as if some kind of conviction is justified.”
“The best explanation is a balance between trying to avoid collateral consequences due to a parent level conviction – isolate those consequences to the subsidiary level – and the need to obtain some kind of entity level conviction and not allow the case to be resolved simply through a non prosecution or a deferred prosecution agreement. It’s a compromise.”
Don’t you sense that all of these alternative settlements – deferred and non prosecution agreements, SOCs, declinations – are a part of the politics of corporate crime prosecution? There are powerful corporate entities who will no longer accept guilty pleas.
“SOCs probably represent a move in the direction of more enforcement. Certainly the Department of Justice and the SEC have been criticized for modest settlements, settlements that don’t require an admission of facts. There has been a rise in SOCs and parent level guilty pleas in recent years and those represent a more aggressive stance.”
“To what degree that’s the result of a political push and pull between powerful corporate interests and the prosecutors, prosecutors who might have their own incentives in terms of future private sector employment – that’s all possible.”
“But your question is hitting at real possibilities that this whole distinct world of corporate criminal settlements might have a real political economic story behind how it has emerged and why it is so different from the system we have for individuals.”
[For the complete q/a format Interview with Andrew Jennings, see 39 Corporate Crime Reporter 2(12), January 13, 2025, print edition only.]