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One of the most basic notions in our legal system is that
liability attaches only to those who act with intent or knowledge. But as
detailed in a front-page September 27, 2011 Wall Street Journal article
Congress has in recent decades enacted numerous provisions imposing criminal
liability regardless of intent. Among the many troubling aspects of this trend
are the implications for corporate directors and officers, who often are the
target of these strict liability provisions and who increasingly have liability
imposed on them for matters in which they were not involved and of which they
were not even aware.
As the Journal article explains, a "bedrock
principle" of our legal system is that criminal liability cannot be imposed
without "mens rea," or a
guilty mind. But as the article details, Congress has "repeatedly crafted laws
that weaken or disregard the notion of criminal intent." As a result, things
that "once might have been considered simply a mistake" are "now sometimes
punishable by jail time."
The article cites a number of recently enacted criminal
provisions, particularly certain enactments regarding wildlife issues and
firearms violations. One example cited refers to the imposition of a 15-year
criminal sentence for possession of a single bullet (in violation of firearms
restrictions for convicted felons).
Among the areas the article references that have seen the
enactment of these types of provisions is white collar crime. The article
specifically cites the provisions of the Sarbanes Oxley Act that make it "easier
for prosecutors to bring obstruction of justice cases related to the
destruction of evidence." The article explains how these provisions passed as
part of the larger bill without full or appropriate consideration of the
The Sarbanes Oxley Act provision cited is far from the
only recent statutory enactment or judicial development that potentially
imposes liability on corporate officials without culpability. Indeed, just a
few days ago, on September 13, 2011, another Wall Street Journal article
entitled "U.S. Targets Drug Executives" (here)
described how federal regulators have increasingly been using the judicially
developed "responsible corporate officer doctrine" to pursue criminal
prosecutions against corporate executives for federal food and drug law
As I discussed in my own earlier look at the "responsible
corporate officer doctrine" (here),
courts have the doctrine to impose criminal liability on corporate officials
who were not involved in or even aware of the violations. (The word
"responsible" in the name of the doctrine references responsibility for the corporation
not for the conduct.) As the September 13 Journal article
details, the use of this doctrine can not only result in the imposition of criminal
fines and penalties, but the convictions obtained in reliance on the doctrine
can then be used to exclude convicted executives from Medicare and Medicaid, in
effect turning their conviction into "career-ending punishment."
As discussed here,
the doctrine's application has not been limited just to food and drug
violations but has also been extended to violations of environmental law as
well, and also has been used as the basis for the imposition of civil liability
as well as criminal liability.
Nor do these instances represent the only examples of
imposition of liability without culpability - to the contrary, they are
consistent with a growing willingness of government regulators and prosecutors
to try to impose liability without regard to involvement in or awareness of the
alleged wrongdoing. For example, there have been multiple instances recently where
the SEC has pursued enforcement actions against corporate officials without
regard to their lack of knowledge of the alleged wrongdoing.
First, as described here,
the SEC has now on several occasions used its authority under Section 304 of
the Sarbanes-Oxley Act to "clawback" compensation corporate executives earned a
time when their companies were committing accounting fraud. For example, most
recently former Beazer Homes CFO James O'Leary was compelled to return $1.4
million in bonus compensation even though he was himself not charged with any
wrongdoing in connection with the company's accounting fraud. As I noted in my
prior post, though the SEC's implementation of the compensation clawback is
statutorily authorized, the imposition of a forfeiture without culpability or
fault raises troubling questions, including basic questions of fairness.
In a separate development discussed here,
the SEC recently filed an enforcement action seeking to impose control person
liability on two officers of Nature's Sunshine Products for the company's
Foreign Corrupt Practices Act violations - even though the two officials were
not alleged to have any involvement in or awareness of the wrongful conduct.
Unfortunately, this trend toward the expansion of
liability without culpability seems to be growing. Indeed, the Dodd-Frank Act
greatly expands the compensation clawback , by requiring the major
exchanges to adopt requirements for all listed companies to adopt provisions
for the recovery in the event of a restatement of bonus compensation from any
current or former executive officer who earned bonus compensation during the
three years preceding the restatement.
The September 27 Journal article suggests that Congress
is creating these types of exposures simply because it is neglecting to
consider traditional intent requirements. I am not so sure, particularly when
it comes to liability for corporate officials, as there seems to be this pervasive
notion that corporate officials deserve liability and are getting off "scot
free" and this in turn is leading to an increasing willingness to impose
liability because of the position rather than because of their
In recent months, I have taken on several commentators
who have tried to argue that corporate officials need to be held liable more
or that there is something wrong with our legal system when corporate officials
cannot be held liable more frequently (here).
I am concerned that general presumption that corporate executives are somehow
blameworthy and deserving of liability are behind this trend toward imposing
liability on corporate executives without actual culpability.
There is an unfortunate trend in our society to assume
that when something has gone wrong that somebody has to be punished. This
general proclivity to look for someone to blame is exacerbated by a general
willingness to demonize corporate "fat cats," which in turn leads some to
conclude that corporate executives deserve liability because of their position,
without regard of whether they actually did anything culpable.
I appreciate that many believe corporate executives need
to be held accountable. Nevertheless, I am concerned that as a result of the
increased tendency to impost liability on corporate executives without
culpability, there is a contrary danger that corporate executives could be held
liable too frequently, or at least in instances when they have done nothing
themselves to deserve it. Scapegoating any individual - even a corporate
executive - for circumstances in which they were not involved and of which they
were not even aware is inconsistent with some of the most basic assumptions of
a well-ordered society governed by law.
Along with all the other concerns, these types of
proceedings may also raise D&O insurance coverage issues. Corporate
officials in most instances would not have insurance coverage for the various
fines and penalties imposed in these actions or for disgorged compensation. But
the executives might well seek insurance coverage of their legal fees incurred
in defending themselves in these actions. One question that might be asked in
many of these types of cases is whether or not the proceedings involve an
alleged "Wrongful Act" as is required to trigger coverage. Should these
questions arise, these executives will want to be able to argue that the
applicable D&O policy in any event covers them for allegations against them
in their capacities as directors and officers "and in their status as such."
Bank Director and Officer Defenses: As
I have noted in prior posts (most recently here),
there are now a growing number of actions against the directors and officers of
failed banks brought by the FDIC as the failed bank's receiver. The defenses
available for these individuals and related considerations (including
indemnification and insurance) are discussed in a brief, useful (date) memo
from the Dechert law firm, entitled "Bank D&O Defense Manual" (here).
The memo provides background on the FDIC's approach to director and officer
liability, the well as on the legal theories on which the FDIC will proceed and
the defenses available to the directors and officers.
Speakers' Corner: On
October 5 and 6, 2011, I will be in Cologne, Germany participating in C5's
Sixth European Forum on D&O Liability Insurance. I will be participating in
a panel on the first day discussing the evolution of class actions in the U.S.
and Europe. Joining me on the panel will be Rick Bortnick of the Cozen O'Connor
law firm; Guillaume Deschamps of Marsh, S.A. (France) and Prof. Dr. Roderich
Thümmel of the Thümmel Schültze law firm. Background regarding the event,
including the complete agenda and registration information, can be found here.
If you will be attending the conference, I hope you will
take time to greet me, particularly if we have not previously met.
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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