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White Collar Crime Outline

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USSG SS 2B1.1 Determine Relevant Conduct: by a preponderance Determine Offense Level (Chapter 2) Make any Chapter 3 adjustments: Role; obstruction; acceptance Determine criminal history: Chapter 4 Determine Sentence: Chapter 5 28% tax rate: individual 34% tax rate: corporation

I. Why Impose Criminal Sanctions?
A. Deterrence, incapacity, rehabilitation, protect rights of innocent, retributivist II. Defining Criminal Conduct: A. 1) intentional or purposeful conduct; 2) that is morally wrong; 3) that causes harm; 4) for which the person deserves punishment III. Why should government prosecute corps?
A. Pros: Collateral estoppel; stigma; coordinated effort to go after corp and responsible individuals; deep pockets B. Cons: 1) challenge deterrent effect of sanctions cause corps don't commit crimes, people do; 2) retributive function because corporate criminal sanctions punish innocent shareholders; 3) contest efficiency of organizational liability arguing that economic analysis shows that civil liability deters better than criminal IV. DOJ Guidance on Prosecution of Corps (Pg 12-16) A. Corporations "should not be treated leniently because of their artificial nature nor should they be subject to harsher treatment." B. The nature and seriousness of the offense C. The pervasiveness of wrongdoing within the corporation, including the complicity in, or the condoning of, the wrongdoing by corporate management D. The corporation's history of similar misconduct E. The corporation's timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents F. The existence and effectiveness of the corporation's pre-existing compliance program G. The corporation's remedial actions, including any efforts to implement an effective corporate compliance program or to improve an existing one, to replace responsible management, to discipline or terminate wrongdoers H. collateral consequences, including whether there is disproportionate harm to shareholders, pension holders, employees, and others I. the adequacy of the prosecution of individuals responsible for the corporation's malfeasance; and J. the adequacy of remedies such as civil or regulatory enforcement actions K. Antitrust Division almost always goes after corporations rather than individuals L. Tax Division has a strong preference for prosecuting responsible individuals, rather than entities, for corp tax offenses M. V. Corporate Criminal Liability A. Corps have the capacity to commit criminal acts. B. Intent: The Act is done for benefit of the principal while the agent is acting within scope of employment

1. New York Central & Hudson River RR - RR and two employees were each held liable for bribing sugar refiners, an anti-competitive practice in violation of the Elkins Act. RR held 1

liable b/c the crime was committed for the sake of the RR's economic gain, the bribes were paid for with the RR's funds, and the RR benefited by gaining a temporary competitive edge. S. Ct. Justice Day asked rhetorically, how else are we supposed to correct these kinds of abuses if not through criminal sanctions?
i. Anything done by a corp subject to act, which done by any ii. Note that there are pros & cons of imposing criminal liability on corps: potential to change the corp's culture and set new industry-wide standards (pros); potential unfairness to shareholders, innocent employees, and consumers (cons).

2. C.R. Bard, Inc.- A corp was held liable for its violations of FDA regulations, which led to serious injuries and deaths. Misconduct pervasive and motivated by greed; the executives approved it. Ct. held that the plea agreement at issue was reasonable b/c it had certain features: it allowed for criminal prosecution of individual employees; it imposed fines; and it imposed a compliance program involving more intense FDA oversight. C. Usual way of meeting an actus reus requirement: the respondeat superior doctrine: A corp can be held liable under this theory if (1) a corp agent (even the most menial employee) acted (2) within the scope of his or her employment authority (i.e., the acts were directly related to the performance of the type of duties the employee had a general duty to perform, actually or apparently) and (3) on behalf of the corp (4) w/ the intent to benefit the corp. This is defn. of the federal rule, and it's the rule most prevalent in state courts.

1. Beneficial Finance Co.- A group of small loan companies bribed public officials so that they could keep interest rates high (which benefited them). If an employee was a position such that he or she had enough power, duty, responsibility, and authority to act for and on behalf of the corp, then the employee's acts which were committed within that scope may be imputed to the corp. Title/position does not conclusively determine authority.

2. Lessoff & Berger- A law partnership was held liable for fraud, even though only one of the partners was involved in the commission of the crime. "Harsh, but rational." Harsh: Other partners who were clueless about the misconduct suffered. Rational: The other partners also stood to gain from the fraud, and they should have had incentives to do a better job of policing.

3. Hilton Hotels - Corp held liable for the acts of its rogue employee, even though corp had explicit policy that it wouldn't engage in illegal boycotts and the employee acknowledged receiving specific instructions to the same effect. The employee just went off the deep end b/c of "anger and personal pique." If a corp entrusts an employee with enough responsibility so that it's possible for the employee to get into significant trouble with the law while acting within the scope of his employment, then the corp should take the precaution of policing the employee to the extent that that risk exists. Note that mgmt's diligence is no defense: If the agent acts willfully, then we can impute the agent's act to the principal. D. Alternative way of meeting an actus reus requirement: proving that there was a corporate policy. If the misconduct was performed, authorized, ratified, adopted, or tolerated (even recklessly tolerated) by the corp's directors, officers, or other "high managerial agents" who are sufficiently high in the hierarchy to warrant the assumption that their acts in some substantial sense reflect corporate policy, then the corp can be held criminally liable. This is MPC standard. Proof problems: higher-ups usually cover their tracks. E. Mens rea requirements: knowledge and willfulness. Two ways of proving knowledge: (1) one or more agents had actual knowledge; (2) collective knowledge doctrine (i.e., if one employee knows one piece of info, and another knows another piece, then the employer can be charged with the aggregate knowledge). Two ways of proving willfulness: (1) one or more agents acted willfully; (2) there was flagrant organizational indifference (serves as a proxy for proof of willfulness on the part of a single agent). 2

1. Bank of New England (p.31) - Bank held liable for violating the Currency Transaction Reporting Act; customer withdrew more than $10K in cash by presenting multiple checks simultaneously to a single bank teller. Other employees gossiped about how unusual and suspicious this was, and yet no one reported or even inquired whether the transactions should be reported. The Bank didn't even make any effort to report after it received a federal grand jury subpoena (the transactions at that point were still reportable). Ct. held that the Bank's flagrant indifference to its reporting obligations could serve as a proxy for willfulness. VI. Personal Liability in an Organizational Setting A. Direct participants: Federal law doesn't recognize any distinction bet. principals and accessories.

1. Wise (p.50) - A corporate officer may be held personally liable if he knowingly participates in illegal conduct - whether he authorizes, orders, or helps perpetrate the crime - even if he's acting in a representative capacity. Both the corp and the officer can be prosecuted. We punish the corp to encourage supervision and the implementation of compliance programs; we punish the officer b/c that has a particularly powerful deterrent effect. i. Legislative Intent: Well settled that absent clear legislative intent to exclude corporate agents from personal responsibility for crimes they commit, they cannot use the corporate entity as a shield against liability for their own misdeeds. B. Imposing liability on corporate officers via the responsible share theory: A corporate officer may be found to have had a responsible share in a transaction which led to a violation if (1) she was in a position of power and authority over the transaction/operation out of which the violation arose and (2) she had a legal duty to prevent or correct such violations.

1. Dotterweich (p.61) - President/general manager (Dotterweich) of Buffalo Pharmacal was held personally liable for FDA violations for shipping adulterated and misbranded drugs in interstate commerce. If someone must be responsible for the purity of the drugs and the accuracy of the representations, then, bet. the public (consumers) and the manufacturer and the shipper, the last two are in the best position to minimize the risk of harm. i. Held: Manager could be held criminally responsible for violations even though there was no evidence that he knew the drugs were misbranded and adulterated or that he personally participated in shipping them

2. Park (p.65) - CEO of huge corp w/ multiple operations and locations (in contrast to the pharmaceutical corp in Dotterweich) was held personally liable for FDA violatons (rodents in food warehouses). He had lots of notice of the problem (series of letters from the FDA); he delegated authority to fix the problem to subordinates whom he trusted; he thought everything was taken care of; and in the end he was still held liable under the responsible share theory. Authority can be inferred from position/title, or ostensible or effective authority and responsibility. Park failed to fulfill the two duties he had under the Act: a positive duty to seek out and remedy violations when they occur and also a duty to implement measures to ensure that violations won't occur. He knew that his system of delegation had broken down, so he shouldn't have continued to rely on it. The only available defense under the Act (which he didn't have): objective powerlessness to prevent the violations (e.g., sabotage under weird circumstances). i. "The individual is or could be liable under the statute, even if he did not consciously do wrong. However, the fact that the Defendant is president and CEO of Acme Markets does not require a finding of guilt. Though he need not have personally participated in the situation, he must have had a responsible relationship to the issue. The issue is, in this case, whether the defendant by virtue of his position in the company had a position of authority and responsibility in the situation of which these charges arose." VII. 18 U.S.C. SS 2: Aiding and Abetting (pg 41) 3

A. Aiders and Abettors who assist in the planning of a crime or who induce or encourage others to commit crime are punishable as principals VIII. Sherman act: 15 U.S.C. SS 1 A. Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $100,000,000 if a corporation, or, if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments, in the discretion of the court. IX. Currency Transaction Reports: 31 U.S.C. SS 5313 A. (a) When a domestic financial institution is involved in a transaction for the payment, receipt, or transfer of United States coins or currency (or other monetary instruments the Secretary of the Treasury prescribes), in an amount, denomination, or amount and denomination, or under circumstances the Secretary prescribes by regulation, the institution and any other participant in the transaction the Secretary may prescribe shall file a report on the transaction at the time and in the way the Secretary prescribes. X. Rule of Lenity: ambiguity in criminal statutes resolved in favor of lenity XI. Vagueness Doctrine A. A criminal statute must clearly define the conduct it proscribes. B. A statute that is unconstitutionally vague cannot be saved by a more precise indictment, nor by judicial construction that writes in specific criteria that its text does not contain. C. Vague statutes are those that fail "to provide a person of ordinary intelligence fair notice of what is prohibited, or as being so standardless that they authorize or encourage seriously discriminatory enforcement." D. US v. Reese: "The question, then, to be determined, is, whether we can introduce words of limitation into a penal statute so as to make it specific, when, as expressed, it is general only.

1. "It would certainly be dangerous if the legislature could set a net large enough to catch all possible offenders, and leave it to the courts to step inside and say who could be rightfully detained, and who should be set at large. This would, to some extent, substitute the judicial for the legislative department of the government. . . .

2. "To limit this statute in the manner now asked for would be to make a new law, not to enforce an old one. This is no part of our duty." XII. Mail Fraud A. The mail fraud statute, 18 U.S.C. SS 1341: The gist of the offense is the use of the mails to further fraudulent activity. Elements: (1) D must have engaged in a scheme to defraud someone of a protected interest; (2) D must have had fraudulent intent; (3) the purpose of D's scheme must have been private gain; (4) the scheme must have involved the use of interstate mails/wires; and (5) the fraud or deception must have been material.

1. Note that the fraud itself doesn't have to be criminal, which makes the mail fraud statute a useful device for prosecutors. Also: The fraud doesn't have to entail something that the fed. govt. can regulate independently, which allows the fed. govt. to expand its jurisdictional hook beyond the usual commerce clause limits. B. The wire fraud statute, 18 U.S.C. SS 1343: Analogous to the mail fraud statute; the two statutes are to be construed in the same way (the statutes are in pari materia). C. What is a Scheme to Defraud?

1. "Any conduct which fails to match the reflection of moral uprightness, of fundamental honesty, fair play and right dealing in the general and business life of members of society." Blachly v. U.S., 380 F.2d 665 (5th Cir. 1967)

2. "An effort to gain an undue advantage or to bring about some harm though misrepresentation or breach of duty." ~ Brickey, pp. 88-89. 4

D. Distinction between fraud and acting under false pretenses: Someone acts under false pretenses when she, intending to defraud, knowingly makes a false representation of a past or a present fact to induce another to part with money or property. Promises and representations as to the future don't qualify under most false pretenses statutes. E. What is Fraud? Fraud, a more fluid concept, involves an effort to gain an undue advantage or to bring about harm through some material misrepresentation or breach of duty. (There is no brightline defn. of fraud - depends on the context.) F. Intent to defraud, or intent to engage in a scheme to defraud. What distinguishes intent to defraud from incompetence/inefficiency/negligence? Lack of honesty, misrepresentation. What distinguishes intent to defraud from intent to deceive? Materiality, i.e., does it go to the heart of the bargain. (No real bright-line distinction.)

1. Hawkey (p.126) - A sheriff was held liable under mail fraud statute for self-dealing in a charity concert venture. D intentionally engaged in a scheme to defraud: concerts were designed to raise money for charitable purposes; D knowingly diverted these funds for his personal benefit; and D failed to inform the concert promoter, his accountant, the contributors, and the benefactors.

2. Lustiger (p.131) - D held liable under mail fraud statute for mailing out colorful brochures with literally true but misleading pictures concerning parcels of property for sale. If a scheme is reasonably calculated to deceive and defraud, and it involves use of the mails, then it's fraud; the fact that there's no actual misrepresentation of a single existing fact doesn't matter. Also, the deception needn't be premised on verbalized words alone. The arrangement of the words or the circumstances in which they're used may be deceptive enough.

3. Note: You just have to prove intent to engage in a scheme to defraud; you don't have to prove that the victim of the scheme was actually defrauded or suffered a loss. G. Materiality: Cts. have traditionally assumed that false or fraudulent representations must be material. A statement is material if: (a) a reas. person would attach importance to its existence or nonexistence in determining his choice of action in the transaction in question; or (b) the maker of the representation has reason to know that its recipient is likely to regard the matter as important in determining his choice of action, even if a reas. person would not so regard it. (Rest. 2d of Torts.)

1. Note: Not every lie is fraudulent. Example: A salesperson telling a purchasing agent that he just played golf with the agent's boss may be lying, but that lie wouldn't be considered fraudulent. Just salesmanship. H. Protected interests: money, property, and the intangible right of honest services.

1. George (p.135) - Ds were charged w/ defrauding Zenith Radio Corp. under mail fraud statute. A cabinet supplier paid Zenith's purchasing agent (Yonan) kickbacks, through a third party, to ensure that Zenith would continue to purchase the suppliers cabinets. Yonan deprived Zenith of (1) his honest and loyal services, (2) a $300,000 discount, and (3) the opportunity to bargain with a fact most relevant before it. Intangible rights theory: intangible rights that you're entitled to - (1) and (3) - are protected interests under the mail fraud statute.

2. McNally (p.140) - S. Ct. nullifies intangible rights theory, holding that the intangible right of the citizenry to good government is not a "property" interest within the meaning of the mail fraud statute. Ct. was concerned about federalism and didn't want to set far-reaching standard for good government for the states (i.e., no conflicts of interest). Money and property are the only protected interests.

3. Skilling i. In view of this history, there is no doubt that Congress intended SS 1346 to reach at least bribes and kickbacks. Reading the statute to proscribe a wider range of offensive conduct, we acknowledge, would raise the due process concerns underlying the vagueness doctrine. To preserve the statute without transgressing constitutional 5

limitations, we now hold that SS 1346 criminalizes only the bribe-and-kickback core of the pre- McNally case law. ii. Gov never alleged Skilling solicited or accepted side payments from a third party in exchange for making these misrepresentations. Skilling didn't commit honest services fraud. iii. ?Among all the pre- McNally smorgasbord-offerings of varieties of honest-services fraud, not one is limited to bribery and kickbacks. That is a dish the Court has cooked up all on its own.

4. Carpenter (p.100) - WSJ columnist gave confidential business info belonging to the WSJ to Wall Street traders prepublication who used the info to out-trade the WSJ's readership. S. Ct. held that Ds deprived WSJ of its exclusive right to decide how to use the information in the "Heard" column before disclosing it to the public, and that this was a protected property interest. The info was generated in the course of the columnist's employment for the WSJ. Impact: harm to WSJ's reputation and effect on readers who used info in the column to make investment decisions. i. Confidential information is property. Sufficient for the WSJ to be deprived of its right to exclusive use of confidential information

5. Cleveland (pg. 101): 1341 does not reach fraud in obtaining state or municipal licenses for such a license is not property I. The use of the mails. The mailing just has to be incident to an essential part of the scheme.

1. Schmuck (p.130) - Schmuck was convicted of mail fraud for selling used-cars with rolledback odometers to dealers, who in turn resold them to retail purchasers. The dealers mailed title-registration applications to the state, and the state mailed them back to the customers. S. Ct. held that the mailing of the applications was part of the execution of the fraudulent scheme b/c D intended the retail purchasers to bear the ultimate loss (as opposed to the dealers) and b/c this was an ongoing scheme involving 150 cars over a period of years. i. Held: it is sufficient for the mailing to be incident to an essential part of the scheme or step in the plot. Scheme didn't reach fruition until title was transferred. Court has found elements of mail fraud even where the mailings are routine. J. Proof of use of the mails/wires: OK to use circumstantial evidence. Not a major issue. Note that each separate use (mailing, phone call, etc.) in furtherance of the scheme constitutes a separate offense. K. Mail Fraud as Specified Unlawful Activity

1. D Money Laundering:Government must prove that the defendant conducted a financial transaction that involved property that were the proceeds of a "Specified Unlawful Activity"

2. RICO: Pattern of "racketeering activity"; "racketeering activity" includes mail/wire fraud; Money Laundering and RICO allow for increased sentencing; Asset forfeiture I. False Statements A. False statements generally, 18 U.S.C. SS 1001: Whoever (1) knowingly and willfully (2) makes false or fraudulent statements (3) that are material (4) in any matter within the jurisdiction of a federal department or agency, except in judicial proceedings, is guilty of violating the statute. B. Jurisdiction: means covers all matters confided to the authority of an agency or department: Rogers

1. United States v. Rodgers D was held liable under SS 1001 for making false reports to the FBI and to the Secret Service in order to locate his wife. Court read the term "jurisdiction" more broadly than did the lower ct., finding that "the phrase 'within the jurisdiction' merely differentiates the official, authorized functions of an agency or department from matters peripheral to the business of that body." The statute applies only to those who lie "knowingly and willfully" to the govt., so it shouldn't deter citizens who in good faith want to report suspected crimes. 6





2. United States v. Wright- D was held liable under SS 1001 for filing falsified reports with the County Health Dept. regarding the water treatment plant where he worked. He argued that there was no direct relationship between the reports he submitted and a function of the EPA b/c the EPA had surrendered primary authority for enforcement of Safe Drinking Water Act standards to Oklahoma and b/c he filed the report w/ the state, not the EPA. The ct. rejected his argument, reasoning that all that matters is whether the EPA has the authority to review the reports to enforce the Safe Drinking Water Act - not whether the EPA actually exercises that authority.

3. Steiner Plastics- The D corp produced plexiglass cockpit canopies for Grumman Aircraft, which was producing jet planes for the Navy. It engaged in a fraudulent scheme in which it switched inspection approval stamps so that defective canopies would pass inspection. The ct. found that the scheme was designed to deceive both Grumman and the Navy, and therefore was "within the jurisdiction" of the Navy. Also, the ct. found that it didn't matter whether or not the canopies in question were actually defective b/c such evidence wouldn't have negated the false statements in the inspection approval stamps, which deprived the Navy of the right to make the approval decisions on its own. Department or Agency:

1. US v. McNeil pg. 207: 1001(b) sets forth exception: "does not apply to a party to a judicial proceeding, or that party's counsel, for statements, representations, writings, or documents submitted by such party of counsel to a judge or magistrate in that proceeding." Once D was indicted, the judicial proceeding had begun and his statement to magistrate was part of that proceeding. Material false statements: A statement is material if it relates to the function of an agency - if it has the "capacity or natural tendency" to influence the course of an agency project or investigation, whether or not it's likely to influence. Not a stringent standard. (The higher materiality standard in the securities fraud context - reasonably would influence an investor's decision - is the exception rather than the rule.)

1. Shah (p.213) - D certified in a govt. contract, "I will not disclose price info before the contract award," after he had invited a competitor to share bids with him. Ct. held that a promise may amount to a "false, fictitious, or fraudulent" statement, within the meaning of SS 1001, if it's made without any present intention of performance and under circumstances s.t. it plainly, even if implicitly, represents the present existence of an intent to perform. It's not that he broke a promise; it's that he made a promise while not intending to keep it. What about insincere predictions? Not unlike false promises. Have to determine whether the prediction is material, whether it induced the other party to enter into the contract. Exculpatory no's. No such thing.

1. Brogan (p.313) - S. Ct. held that there is no exception to liability under SS 1001 for a false statement that consists of the mere denial of wrongdoing, the so-called "exculpatory no." Ginsburg wrote a concurring opinion warning of "the extraordinary authority Congress, perhaps unwittingly, has conferred on prosecutors to manufacture crimes." Culpable mental state w.r.t. jurisdictional facts: None required. But cts. have found that SS 1001 isn't a trap for the innocent b/c there's still a knowingly-and-willfully requirement w.r.t the false statement or fraud. If the amt. of the fraud is truly minor, try to argue that the govt. should exercise prosecutorial discretion.

1. Yermian (p.223) - D had already lied on his employment application, and he didn't want to get caught, so he lied again in connection with a security questionnaire. Charged under SS 1001, he claimed that, although he knew that he lied, he didn't realize that he was lying to the Dept. of Defense. He requested a jury instruction requiring govt. to prove that he had actual knowledge that his statements were made in a matter within the jurisdiction of a federal agency. S. Ct. 7

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