Understanding New Jersey’s Law on Misconduct by Corporate Officials

Corporate misconduct can take many forms, but in New Jersey one of the main laws dealing with this issue is Section 2C:21-9 of the New Jersey Code of Criminal Justice, which covers “Misconduct by corporate official.” This law makes it a crime for directors, officers, agents or employees of a corporation to engage in certain fraudulent activities that harm or take advantage of the corporation.

What Does the Law Prohibit?

Specifically, Section 2C:21-9 states that a corporate official commits a crime if they:

• Knowingly use, take, transfer, or otherwise exercise unlawful control over any property of the corporation. This could involve embezzling funds, misusing corporate assets, or theft of proprietary information.
• Make an unlawful use of the corporation’s credit. For example, improperly using a company credit card or account for personal purchases.
• Make an unlawful use of any advance, dividend, or profit received from the corporation. This prevents officials from improperly taking corporate funds owed to shareholders.
• Falsify or unlawfully omit any record, account, or other document belonging to the corporation. This prohibits accounting fraud or falsification of financial statements.
• Avoid the full and proper disclosure of transactions in securities, and any interest the official has in such transactions, as required by law. This ensures transparency in securities dealings.

In order to be found guilty, the official must have acted “knowingly” and “with purpose to defraud.” Negligence or mistakes are not enough to establish a violation. There must be intent to obtain an unauthorized benefit or cause harm through fraudulent means.

What Are the Penalties?

Misconduct by a corporate official is a crime of the third degree under New Jersey law if the amount involved is $75,000 or more. This can result in 3-5 years in prison and fines up to $15,000.

If the amount involved is less than $75,000, it is a crime of the fourth degree, punishable by up to 18 months in prison and $10,000 in fines.

In addition to criminal penalties, violators may face civil lawsuits from shareholders or regulatory agencies seeking restitution. The corporation itself could also pursue legal action against officials who harm the company through misconduct.

What Defenses Are Available?

Some potential defenses that a corporate official accused of misconduct may raise include:

• Lack of intent – As mentioned above, the law requires intent to defraud, not just negligence. The official can argue they made an honest mistake and had no purpose to unlawfully benefit themselves.
• Good faith – Similarly, the official may claim they had a good faith belief that their actions were lawful and proper. This could apply if the transactions were ambiguous.
• Authorization – If the official’s actions were authorized or directed by higher level managers or the board of directors, this could provide a defense.
• Statute of limitations – There is a 5 year limit on bringing charges for third and fourth degree crimes in New Jersey. Officials may argue the state missed this deadline.
• Improper venue – The official can try to have the case dismissed if charges were filed in the wrong jurisdiction. This argues proper venue lies elsewhere.

Who Can Be Considered a Corporate Official?

The law applies broadly to any director, officer, agent or employee of a corporation. This captures both high-level executives as well as lower level managers and staff:

• Directors – These are members of the corporation’s board, elected by shareholders. They have oversight and governance responsibilities.
• Officers – Top executives like the CEO, CFO, COO appointed by directors. They manage day-to-day operations.
• Agents – Individuals or entities authorized to act on behalf of the corporation, like lawyers, accountants, consultants.
• Employees – All paid staff of the company, including managers, professionals, clerical staff and more.

Independent contractors would generally not be considered officials or employees under this law. The scope is limited to individuals formally associated with the corporation.

What Types of Fraud Fall Under the Law?

Some examples of fraudulent activities prohibited under Section 2C:21-9 include:

• Embezzlement – This is when an official misappropriates corporate funds or assets and converts them to personal use. For example, an executive transferring company money to their personal account without authorization.
• Expense account abuse – Officials submit inflated or fake expense reports in order to get reimbursed for unauthorized personal expenses.
• Payroll fraud – This can include adding fake employees and pocketing their paychecks or continuing to pay former employees by keeping them on the books.
• Bid rigging – Colluding with vendors to fix bidding processes for contracts in exchange for kickbacks or bribes.
• Accounting fraud – Falsifying financial statements, revenue recognition, or other records to make the company appear more profitable.
• Insider trading – Executives trade company stock based on non-public information before it is released to manipulate the stock price.

How Are Charges Initiated?

Most charges begin with a complaint filed by the corporation itself when internal audits or compliance monitoring detect misconduct. Investigations by regulatory agencies like the SEC could also prompt criminal referrals to prosecutors.

Shareholders who suspect fraud may also bring it to the board’s attention to seek an investigation. In some cases, law enforcement may begin looking into a company on their own initiative if allegations appear in media reports.

To obtain a conviction, prosecutors must prove the elements of the offense beyond a reasonable doubt. The trial process provides opportunities for the official’s defense attorney to argue their innocence.

But because the stakes are high, officials should seek experienced white collar criminal defense counsel if facing misconduct allegations. An attorney can negotiate with prosecutors or seek pre-trial diversion to avoid charges.

What Steps Can Companies Take to Prevent Misconduct?

To avoid issues with Section 2C:21-9 and protect against fraud, companies should take proactive measures like:

• Performing regular audits and implementing strong internal controls and oversight processes.
• Establishing detailed ethics and compliance programs that set clear policies for officials.
• Conducting thorough background checks before appointing corporate officers or directors.
• Maintaining transparency around financial reporting and executive transactions in company stock.
• Creating anonymous whistleblower hotlines and protecting those who come forward.
• Enforcing codes of conduct with appropriate discipline for violations.
• Engaging compliance staff and outside counsel to investigate any warning signs of misconduct.

Conclusion

New Jersey’s law on misconduct by corporate officials imposes criminal liability on directors, officers, agents and employees who fraudulently abuse their position within the company. Charges can result in substantial fines and prison time.

Corporations need to take a proactive approach to prevent and detect unethical behavior. But those who find themselves accused also require experienced counsel to protect their rights. By understanding Section 2C:21-9, both companies and officials can better navigate this complex area of corporate fraud law.