America’s Corporate Crime Dilemma

Corporate crime has never been a more pressing, vexing, and at times infuriating topic for Americans than at present.  The subject’s many difficulties both are fascinating and, at every turn, defy easy answer.  The ambition of my new book, Capital Offenses: Business Crime and Punishment in America’s Corporate Age (W.W. Norton & Co.), is to illustrate and explain, in plain language accessible to all readers, the dilemma of corporate crime—as a means to point Americans beyond criminal law and into a deeper examination of our relationship with the large modern corporation.

Consider the case of Candice Anderson of Van Zandt County, Texas.  She was convicted of manslaughter and branded a felon for the 2004 death of her own fiancée, after her car went off the road into a tree and police detected a medication in her blood that she had taken the night before.  Ten years of grieving later, Anderson was exonerated when the truth emerged that General Motors, not Anderson, had killed her intended spouse—by manufacturing a cheap, faulty starter switch in her car that rotated out of position, shutting off the power steering and brakes, as well as the airbag.  At least 100 people have died due to the same defective part, one created by an engineer who was responding to cost-cutting pressures at GM.

Criminal responsibility for such a death—a straightforward matter if the issue is simply vehicular manslaughter—becomes exceedingly complicated when a corporation is to blame.  GM doesn’t think, it can’t drive a car, and it can’t even really be seen.  It’s an amalgam of people, factories, vehicles, images, and offices spread across the globe.  The company is an idea as much as it is a thing.

Everyone in a position of senior management responsibility at GM appears to have been ignorant of the engineering decisions involved in that starter switch—much less of any connection between those decisions and the many road deaths.  Even lower-level employees handling lawsuits against the company for some of the related crashes failed, for nearly nine years, to connect the accidents to the starter switch and raise the alarm with supervisors about a systemic problem.

Maybe the engineer should be charged with killing Anderson’s fiancée.  But, as that man toiled within the bowels of GM, did he realize his neglect might endanger lives?  Suppose he did.  Would a prosecution of this midlevel salaried worker, even for homicide, really be a way of saying GM was a killer and punishing the company for that?  It seems like GM’s managers, with their cost-cutting strategies and their failure to make sure the left hand in the company knew what the right was doing, are most responsible.

Could the government round up those managers and imprison them for their serious business failures?  Not in the American legal system, which strictly prohibits prosecuting a person without a clear law on the books at the time of his offensive conduct.  There is no crime of “bad management of a big company” and no good argument for legislating such a sweeping and amorphous power to revoke liberty.  The only conceivable criminal case against managers would be a prosecution for negligent homicide based on the long and attenuated chain running from their unawareness at GM’s headquarters all the way down to the road outside Dallas where Anderson’s fiancée died.

Even if the problem of the crime could be worked out—who committed it and what law he or she violated—what about punishment?  GM can’t be put in a prison, so it’s not clear what a prosecution of GM could add to the civil lawsuits for each of the driver deaths that the company will have to settle with the survivors, no doubt at steep cost.

Criminal fines could increase GM’s total bill for its transgressions.  But how big a fine would it take to get the GMs of the world not to make these kinds of mistakes again?  Would such a penalty be so large that it could put GM in dire straits, eliminating those manufacturing jobs that the government tried so hard to save when it rescued the huge auto company from the financial crisis of 2008 to 2009?  (In the end, the government prosecuted GM on a theory of fraud in the sale of the faulty cars but agreed to defer the case in exchange for a $900 million penalty that the company has absorbed.)

To take another example, consider the elephant in the room of corporate crime these days:  the enormously complex matter of criminal liability for mortgage-backed securities (MBS) trading at the world’s largest banks leading up to the market collapse of 2008—that is, the “why no bankers in jail” question.

Fraud requires deception.  And the kind of fraud that makes one eligible for prison requires the intent to deceive.  Deception is necessarily a contextual concept, based on the expectations that buyers and sellers bring with them when they enter a particular market.  The candor expected, and the trust given, are not the same on the used car lot as in the doctor or lawyer’s office.

When, late in the MBS game, sharp trader A sold lots of long positions to slightly less sharp trader B, both of whom were operating in a baroque market for custom-built derivatives products, a theory of fraud by nondisclosure of facts—for example, that A’s bank thought it a bad idea to keep going long and was itself loading up on short positions—is very hard to construct.

If trader A lied to trader B, that would be another story.  But such cases have been rare and hard to prove.  A’s silence in the midst of a bad deal for B is just arm’s length securities trading which, by definition, doesn’t happen unless there is disagreement about risk and there will be a winner and a loser.

When all these MBS deals, with all the doubled-down side bets in the form of CDOs and CDSs, added up, we had a systemic disaster on our hands in which most of the rest of us were victims.  But to be the victim of a disaster is not to be the victim of a criminal fraud.  Capital markets need rules of the road.  The law of fraud is one such rule.  Flexible as that body of law is, “we don’t like what happened” is no rule at all, and certainly not the law of fraud.  And without a basic theory of fraud there can be no legal charge to pursue against the managers of the MBS-trading banks, even before grappling with problems of managers’ lack of knowledge and direct involvement in trades.

Our relationship to corporations and capitalism guarantees the repetition of these dilemmas in one corporate scandal after another.  We celebrate economic innovation and risk-taking for the wealth they have given us.  We invented the limited liability corporation to fuel growth by guaranteeing reduced legal responsibility and limited economic exposure.  But when the project of American capitalism goes awry, we regret the results without having any idea how to live without those foundational choices in our legal and economic order.

It might seem easiest to dismiss corporate crime’s puzzles with a simplistic comeback:  Stories like Candice Anderson’s are typical in American criminal justice.  Working people suffer injustice while corporations and their executives get away with everything up to and including homicide.  The only reason any of these questions are difficult is because the law is not what it should be.  It’s the job of legislators and lawyers to fix that.

There is another comeback, less often heard but equally simplistic:  Criminal law has little or no place meddling in the ordinary and vital machinery of economic growth and competition.  That process necessarily involves risks that sometimes produce costs and harms.  But it benefits us all immeasurably and therefore, even when it sometimes goes awry, it does not deserve the special moral condemnation and often devastating consequences of criminal sanctions.

Capital Offenses shows how both of these facile responses to the puzzles of crime in corporate America are wrong.  The parade of corporate malfeasance, and the recent emergence of an entire legal industry around corporate crime, point to the need for a more fundamental conversation about Americans’ relationship to the large corporation.

It’s time to reexamine first principles:  the ground rules for limited liability corporations and their management and governance; where the authority rests for setting those rules within our federal system; what basic regulatory frameworks are essential to making large economic enterprises safe and manageable; and whether we must push the scale of the modern mega-firm down to a size at which it is realistic to think that human beings can control it.  Fixation with criminal punishment distracts us from that work.

This post comes to us from Samuel W. Buell, the Bernard M. Fishman Professor of Law at Duke University. It is based on his new book, Capital Offenses: Business Crime and Punishment in America’s Corporate Age.