Criminal Law and Business

1. Criminal Law and Business Chapter 5

2. Crime • Crime: Positive or negative action that violates a penal law • Not civil law • Act against a state or federal government • Congress and state legislatures decide the criminality of actions and determine penalties • Seen more and more in the business context • Computer and technology have created new versions of old criminal laws • e.g. Unauthorized entry into computer systems is the new version of the old breaking and entering laws

3. Crime Categories • Felonies more serious than misdemeanors • Classifications (Class A, Class B) and degrees (1st, 2nd, 3rd degree) denote seriousness of criminal charge • Violent crimes – murder, armed robbery, assault • Non-violent victim crimes – vehicle theft, burglaries • Victimless crimes – possession of illegal drugs • White collar crimes – embezzlement, bribery, fraud • Punishment depends on the category under which a person is convicted (plea bargains)

4. Crimes & Elements of Crimes • Government agencies decide who will be charged with a crime. • Prosecutors receive reports of alleged crime, & results of investigation. • Prosecutors then decide whether or not to bring charges. • Not all claims of criminal activity are investigated. • Politics & personal preference may come into play in decisions by prosecutors. • Process is not perfect. • Requirements for prosecution: • Actus reus – the guilty act • Mens rea – criminal intent

5. Commonwealth v. Angelo Todesca Corp. • Gauthier drove truck full of asphalt for Angelo Todesca Corp. • To a highway construction site near a busy intersection. • Police officer directing traffic killed as Gauthier backed up to deliver asphalt. • Back-up horn on the truck was not working. • Gauthier and Todesca knew horn wasn’t working – Violation of company safety procedures. • Gauthier was charged with driving offices: fined and driving limited • Massachusetts charged Todesca w/vehicular homicide. • Jury convicted company and fined $2,500. • Appeals court reversed the conviction. Commonwealth appealed. (continued)

6. Commonwealth v. Angelo Todesca Corporation, cont. • Must prove that Gauthier had power, duty, responsibility & authority to act on behalf of corporation for business he was doing. • And that he committed a criminal act while acting for corporation. • To prove corporation is guilty of criminal offense, must prove: • #1) individual committed a criminal offense; • #2) at the time of committing offense, person “was engaged in some particular corporate business”; AND • #3) individual had authority to act for corporation on its behalf to carry out particular business when offences occurred • Todesca claimed corporation can’t be involved in motor vehicle homicide since “corporation” cannot “operate” a vehicle. • HELD: Judgment of trial court affirmed. Because corporation is not a living person, can only act through its agents. To hold otherwise would mean corporations would never be liable for any crime. • Corporations can be held criminally liable for acts performed by employees “within the scope of their employment” and “on behalf of the corporation.

7. Defenses • Statute of Limitations runs (time varies by crime) • Statute of limitations can “toll” to stop the running of time (e.g. if criminal flees country to avoid prosecution) • Affirmative Defenses: Even if prosecution’s claims are true, other facts prevent the claims from constituting the crime. • Improper procedure in the criminal prosecution • Action was justifiable, i.e. self defense with reasonable force • Self-defense in violent crimes cases (use of force justifiable to protect oneself against another) • Entrapment (Law enforcement sets a trap to lure someone into committing a crime he/she had no intention of committing – this can be a little tricky as a defense).

8. Evidence • Strict standards for gathering and presentation at trial • Evidence was handled properly • Called “chain of custody” • If improperly obtained or presented, evidence is excluded (under procedural due process) • Called the exclusionary rule • 4th Amendment protection • May be referred to as “fruit of the poisonous tree” • Authorities may • Search property • Seize documents and other physical items • Warrantsusually needed for search of property, persons, or seizure of property. (“Hot pursuit” exception.) • Warrant issued by a judge or magistrate • Law enforcement officials must show probable causeto a judge to obtain a warrant. • See United States v. Young

9. United States v. Young • Under IRS regulations fuel may be sold tax free if for marina use. • Marinas sell tax-free by obtaining a “647 certificate” from the IRS. Young obtained a certificate for his marina. • IRS believed he sold fuel in cash deals to truck stops and service stations that should have paid taxes on fuel. • IRS believed Young shipped money he made by FedEx. • FedEx let the IRS x-ray packages shipped by Young. Cash seen. IRS then obtained a warrant to seize and open Young’s packages – there was the suspected cash • Young moved to suppress evidence because IRS did not obtain a warrant to x-ray FedEx packages. • Trial court rejected Young’s motion; he was convicted. He appealed. • (Continued)

10. United States v. Young • HELD: Judgment affirmed. • No reasonable person expects to retain privacy after signing an air bill warning of carrier’s authorization to inspect packages. • FedEx told customers (1) do not ship cash, and (2) we may open and inspect your packages at our option. • Young had no expectation of privacy of packages being x-rayed by IRS agents with FedEx permission. • Young assumed the risk that FedEx might consent to a search. • No offense to Young’s 4th Amendment rights.

11. Prosecution Process • Occurs when prosecuting attorney has enough evidence to make criminal charges • Will be either a misdemeanor or felony • In some cases, a grand jury will review a potential felony case. • If grand jury determines probable cause, usually it will issue an indictment against the accused.

12. Arraignment • Accused placed under arrest based on a warrant. • In non-violent matters, accused may turn herself in, rather than be taken into custody by the police. • Suspect is “booked” at police station, photographed, finger printed and searched. • Chance given to the accused to contact an attorney. • Arraignment: court appearance before judge or magistrate. • Accused may plead guilty, nolo contendere (no contest), or innocent. • Judge may release accused or require bail and will set a courtdate. • Violent criminals, or those who court fears might flee before trial are held without bail, or bail is set very high. • Often defendants plea bargain – pleads guilty to charges or lesser charge or pleads no contest in exchange for agreed punishment.

13. Discovery • Civil Litigation: Reduce surprises • Both sides must turn over anything requested by other side • Criminal Law Cases: Parties do own investigations & disclose only subset of what is found to the other side prior to trial • Law enforcement may be conducting investigation that defendant knows nothing about. • Prosecution must disclose any exculpatory evidence • Evidence which might show defendant is not guilty • The choice to disclose left up to prosecutions lawyers • Defendant in criminal case has no obligation to disclose to prosecution evidence showing guilt • 5th Amendment protects defendants • Right before trial, sides exchange witness & exhibits lists. • Prosecutors often “play chess and the defense plays street hockey.”

14. TRIAL • TRIAL: If matter goes to trial, government attorney (often district attorney) presents prosecution’s case. • Defendant must be found guilty “beyond a reasonable doubt”. • If jury finds defendant innocent – end of matter. • Double jeopardy prevents a defendant from being tried a 2nd time for same criminal charges. • If jury can’t agree on verdict, there is a mistrial, and prosecutor will decide whether to proceed again. • If guilty, there may be • Prison time • Jail time • Probation • Fines • Restitution to victim

15. White Collar Crime • 1939 origin of term: “Crime committed by a person of respectability and high social status in the course of his occupation.” • Criminal activity for financial advantage occurring in business. • FBI estimates such crimes create $1/3 trillion in losses each year. • Most cases are against individuals; corporations may also be prosecuted. • Antitrust: Violation under the Sherman Act and Clayton Act. • Prison terms involved in price fixing and anti-competitive practices • Bankruptcy Fraud: Person or corporation hides or lies about assets in bankruptcy proceeding (also applies to creditors giving false information or illegal pressure to bankruptcy petitioners). • Bribery: Offer or taking of money, goods, services, etc. to influence official actions or decisions. • Counterfeiting: Copying of genuine items without authorization – money, designer clothing, other products. • Credit Card Fraud: Unauthorized use of a credit card.

16. White Collar Crime • Computer and Internet Fraud: • Credit card fraud involving a computer/internet • Unauthorized access to financial accounts • Unauthorized use of computers and computer files • Sabotage of computers • Economic Espionage: Theft or misappropriation of valuable business information, such as a trade secret. • Embezzlement: Person in position of trust takes money or property for his/her own use. • Environmental Law Violations: Federal (EPA) and state laws • Data fraud cases, e.g. private laboratories submit false environmental data • Hazardous waste dumping • Ocean dumping by cruise ships • Oil spills • International smuggling of CFC’s • Illegal handling of hazardous substances (asbestos, etc.) • EPA averages 300 criminal prosecutions per year--150-200 years of prison and jail time.

17. White Collar Crime • Financial Fraud: Regulation of banks and financial institutions • Firms and employees subject to criminal liability • Fraud in loans, financial documents, mortgages, etc. • Government Fraud: Governs contracts with public agencies • Billing for goods not delivered • Double billing • Inferior goods • Government payment programs • Farm subsidies • Public housing • Educational programs • Hurricane Katrina disaster in New Orleans – convictions of fraud in collecting benefits intended for victims • Healthcare Fraud: Over-billing and scams by hospitals, doctors ambulance services, laboratories, pharmacies, extended care facilities • Insider Trading: Person trades a security while in possession of material, non-public information.

18. White Collar Crime • Insurance Fraud: Insurance companies commit fraud, charging higher rates than allowed by state regulators. • Policy holders lie about property to get lower rates. • Policy holders pad their claims to get more money. • Mail Fraud: Sending of fraudulent materials through U.S. Postal Service or using the U.S. Postal Service to communicate fraudulent activities. • Money Laundering: Hiding the truth about the origins of money, especially illegal activities. Obligation to report income even from illegal income for tax purposes.

19. White Collar Crime • Racketeer Influenced and Corrupt Organizations (RICO) Act • Originally an extra weapon against organized crime, esp. Mafia. • Racketeering originally meant activities, such as bribery or extortion. • Modern meaning: broadened the term to include activities such as mail fraud, etc. • Successful RICO claim receives triple actual damages + attorneys’ fees through civil claims • Now include mail and wire fraud as crimes under RICO • Government can seek injunction seizing defendant’s assets, preventing their transfer or require defendant to post a performance bond. • Government may press for imprisonment for criminal violations. • Complicated and unpredictable area of the law • Is now used in suits against persons, businesses, political protest groups and terrorist organizations

20. Bridge v. Phoenix Bond & Indemnity Co. • Cook County, Illinois holds public auctions for tax liens on tax delinquent properties. Bridge and Phoenix compete to buy liens. • County requires buyers to submit bids in their own names. Cannot use “agents, employees or other related entities” to submit bids for property by disguising the real bidder. • Phoenix sued Bridge for getting tax liens by filing false documents through others. Phoenix lost possible tax lien purchases to Bridge. • Claimed Bridge and other bidders violated RICO through racketeering involving mail fraud by sending false documents for tax lien purchases. • District court dismissed RICO claims. Plaintiffs were not protected by mail fraud statute since scam was not directed at them. • If there was a scam, it was directed at Cook County & property owners (not plaintiffs) and they could have a cause of action. • Appeals court reversed in favor of plaintiffs. • Defendants appealed to Supreme Court.

21. Bridge v. Phoenix Bond & Indemnity Co., cont. • HELD: Judgment of Court of Appeals affirmed in plaintiff’s favor. • Plaintiff asserting RICO claim based on mail fraud need not show that it relied on defendants alleged misrepresentations. • The basis of mail fraud is a mailing that furthers a scheme to defraud – even if the mailing does not contain false information. • Here, mail was used to submit false attestations of compliance with the Bidder Rule to the County. • RICO is strictly construed. • Congress can change the statute, but Court will not make interpretations to the statute and change RICO’s strict outcome. • Plaintiff may assert RICO claims.

22. White Collar Crime • Securities Fraud: Different kinds • Insider trading gets a lot of press • Market rigging • Theft from accounts of clients of securities firms • See chapter on Securities Regulation • Tax Evasion: • Failure to file tax returns • Failure to report income • Overstatement of expenses • Not reporting illegal income • Investigations carried out by 20,000 + IRS agents • ~ 2000 cases persons imprisoned for tax fraud • Once indicted – 90% likelihood of conviction See Issue Spotter: “Internal Fraud”

23. White Collar Crime • Wire Fraud: Any electronic communication involved in illegal activities (much like mail fraud & telephone/internet fraud) • Traditionally would have been subject only to state prosecution • Now basis for federal prosecution • A sweeping nature to the statutes seen in cases • Includes “a scheme or artifice to deprive another of the right to honest services” • Refers to bribery or kickbacks, not rather vague failure to provide “honest services.” • Pasquantino v. U.S.: American bought liquor in U.S. and smuggled it into Canada for resale, avoiding high Canadian taxes. • Since electronic communications were used that originated in the U.S., two people sent to prison for 5 years each in the U.S.

24. Business Implications From Money Laundering • Example of obligations created in normal business operations • $1 to $2 trillion laundered worldwide each year • Money laundering is taking proceeds of criminal activities (i.e. drug smuggling) & transforming cash in the appearance of legitimate business. • Doesn’t attract law enforcement attention • Tony Soprano Example • Tony Soprano earns $1 million from loan sharking and drug dealing • He creates Soprano Coin Laundry, Inc. • Deposits cash into corporate bank account as income from laundry • Pays himself a salary • Looks like legitimate income

25. Regulations Aimed to Discover Money Laundering Anti-money Laundering Measures (“AML Measures”) Consequences for Non-Compliance Failure to File suspicious activity report Civil/criminal penalties, or both Civil penalties – willful violation of reporting requirements Civil penalties can be up to the greater of the amount involved in a transaction Willful violations may lead to criminal penalties Fines up to $250,000 or 5 years in prison • Regulations making money laundering more difficult • Soprano’s banks must comply with federal regulations, reporting, etc. • Require financial organizations to use Know Your Customer (KYC) or Customer Due Diligence (CDD) Programs • Track It Down: Tracing asset flows – large cash transactions are suspect • Who Is Up to What?: Reporting suspicious transactions – cash deposited over certain amounts ($10,000)

26. Sentencing Guidelines and Compliance • Controversial aspect of federal criminal law • Congress mandated that courts follow rules about imposing sentences for criminal law violations. • Sentencing Commission created a list of factors to consider for each conviction. • Punishment reduced under the Sentencing Guidelines when a firm has a program in place to ensure problems won’t happen again. • DOJ has Guidelines for effective compliance programs. • Some companies have traditional accounting and financial reporting to audit committees. • Other companies hire an outsider to be on the compliance committee. • Companies have whistleblower hotlines to encourage tips. • Some European countries, such as France, prohibit hotlines. Person accused of crime has right to know who complained. • Supreme Court held: Guidelines are advisory, not mandatory, for judges to use, but judges must follow them closely.

27. United States v. Young • Young, cattle rancher, and McDonnell, an accountant, involved in cattle business for over 10 years • Solicited funds to invest in their cattle operations. Represented to clients and banks they had 343,000 head of cattle; but had only 17,000 • Price of cattle fell; scheme collapsed; Young and McConnell closed the business; filed bankruptcy • Investors lost $147 million; banks lost $36 million; only $16 million was recovered • Indicted, but cooperated with investigators; entered plea agreements – admitted to mail fraud, making false statements and other violations • Sentencing Guidelines were applied: Young sentenced to 108 months and McConnell to 87 months • They appealed; Guidelines had been applied too harshly and their sentences should be reduced. Sentences had been “enhanced” because they endangered the solvency of financial institutions • Defendants said they had no knowledge of this possibility. (Continued)

28. United States v. Young, cont. • HELD: Affirmed. Sentencing properly applied. • Defendants’ sentences were well below the applicable statutory maximum – not even 1/3 of maximum • Because of the millions invested, it was foreseeable to defendants that their investors would borrow money from banks, using the cattle that they supposedly bought as collateral. • Banks performed inspections in an effort to ensure the security of collateral backing, and were defrauded. • Defendants knew that consequences of their fraud would extend beyond their own banks and individual investors to the investors’ banks as well.