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Can Companies be Criminally Charged for Securities Fraud?


Can Companies be Criminally Charged for Securities Fraud?

Securities fraud is no joke. It can lead to huge financial losses for investors and seriously damage confidence in capital markets. But can companies themselves actually be charged criminally for securities frauds committed by employees? Well, it’s complicated.

The short answer is yes, companies can be charged with criminal offenses related to securities fraud. But there’s a lot more nuance to it than that.

A Little Background

First, some quick background. Securities fraud involves deliberately providing false or misleading information related to investing. This could be lying about a company’s financial performance, hiding risks, manipulating stock prices, or any number of other shady practices that trick investors.

Some common types of securities fraud include:

  • Accounting fraud – cooking the books
  • Insider trading – using non-public info to trade stocks
  • Pump and dump schemes – artificially inflating stock prices through misleading hype
  • Churning – excessive trading to generate commissions
  • Misrepresenting assets

The laws around securities fraud are designed to protect investors and keep markets operating fairly and transparently. The main laws are the Securities Act of 1933 and Securities Exchange Act of 1934.

Individuals vs Companies

When securities fraud occurs, both individuals and companies can face consequences. Individual executives, stockbrokers, accountants, etc. can be criminally charged for committing fraud. But the company itself can also be charged as a legal entity.

However, companies don’t act on their own – they act through their employees and agents. So for a company to be charged criminally, prosecutors need to show that the fraud was committed by employees acting within the scope of their authority to benefit the company. The actions have to be tied back to the company somehow.

Simply showing that an employee committed fraud isn’t enough. The prosecution has to demonstrate that there was some complicity, negligence, or lack of oversight by the company that enabled the fraud to happen.

What kinds of charges can companies face?

There are a few main criminal charges that companies often face for securities fraud:

  • Fraud – General criminal fraud charges under Title 18 or other statutes. This covers lying, deceiving, concealing, etc. to obtain money or property.
  • False statements – Charges under Section 1001 for knowingly and willfully making false statements or concealing facts from government agencies like the SEC.
  • “Books and records” offenses – Charges under the Foreign Corrupt Practices Act for knowingly falsifying accounting records or having insufficient internal controls.

There are also many civil penalties companies can face from regulatory agencies like the SEC and criminal restitution they may have to pay.

Famous Examples

Some of the most well-known examples of companies criminally charged for securities fraud include:

  • Enron – The energy company that notoriously collapsed in 2001 amid massive accounting fraud. Enron was charged with securities fraud, wire fraud, and making false statements to regulators.
  • WorldCom – The telecom company that filed for bankruptcy in 2002 after revealing $11 billion in fraudulent accounting. WorldCom pleaded guilty to securities fraud.
  • Tyco International – The conglomerate charged in 2002 with falsifying business records to hide executive perks and stealing $600 million from the company.

In these and similar cases, prosecutors were able to show that the frauds were directed by or known to senior leadership and that the companies benefitted from the illegal activity through inflated stock prices, concealed losses, or siphoned money.

Requirements for Charging a Company

For a company to be charged criminally, prosecutors generally need to prove these elements:

  • An underlying criminal violation was committed by an employee or agent
  • The employee was acting within the scope of their authority
  • The actions were intended, at least in part, to benefit the company
  • The company had knowledge of, tolerated, or was criminally negligent in allowing the behavior

Showing that executives were involved in or aware of the fraud goes a long way. But sometimes just demonstrating negligence, loose oversight, or incentives encouraging fraud can be enough.

Challenges of Charging Companies

Despite some big corporate convictions, charging companies with crimes can be tricky for a few reasons:

  • Complex structures – Large companies have diffuse management structures, so pinpointing responsibility is hard.
  • Proving intent – Showing a company specifically intended for fraud to occur, rather than just negligently allowing it, can be difficult.
  • Executive defense – Executives often say they weren’t aware of wrongdoing or point fingers at subordinates.
  • Limited budgets – Investigating and trying complex corporate fraud cases requires huge resources.

For these reasons, prosecutors sometimes rely on deferred prosecution or non-prosecution agreements where companies pay fines and implement reforms instead of being indicted.

Arguments For and Against Charging Companies

There are good-faith arguments on both sides of this issue:

Arguments for charging companies:

  • Holding companies accountable deters future fraud.
  • It makes companies police themselves better.
  • Corporations sometimes have a culture that encourages fraud.
  • Fines and reforms can improve compliance.
  • Company charges give leverage to make individuals talk.

Arguments against charging companies:

  • It punishes innocent shareholders and employees.
  • Charges can cause job losses and economic disruption.
  • Individuals should take sole responsibility.
  • It’s unfair to charge companies for rogue employees.
  • Compliance programs demonstrate companies are trying.

Prosecutors have to weigh all these factors when deciding whether to bring charges.

Yates Memo – Focus on Individuals

In 2015, the Justice Department issued new guidance in a memo by Deputy Attorney General Sally Yates instructing prosecutors to focus on charging individual employees – not just companies – in corporate fraud cases. This aimed to make executives more accountable.

But some argue this led companies to scapegoat lower-level employees while protecting top executives in order to avoid charges. Others say focusing on individuals could undermine efforts to reform company cultures.

The Yates Memo is no longer DOJ policy under the Trump administration, but it still influenced thinking on how to balance individual and corporate accountability.

Bottom Line

While challenging, prosecutors can and do bring criminal charges against corporations for securities fraud committed under their watch. High-profile cases have resulted in major companies pleading guilty and paying hefty fines and penalties.

But most experts agree that effectively deterring corporate misconduct requires a mix of criminal, civil, and regulatory actions against both companies and responsible individuals. Relying too much on just punishing companies or just individuals has downsides. The optimal approach depends on the circumstances of each case.

At minimum, the possibility of criminal charges creates an incentive for companies to implement robust compliance programs. But no program is perfect, and prosecutors will act if they believe a company’s culture tolerates or enables fraud. So the threat of criminal liability remains an important safeguard in protecting capital markets.

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