Like a character in Bonfire of the Vanities (Thomas Wolfe) mid-level executives at Enron and WorldCom may face unexpected
criminal liability. Why focus on mid-level executives in this article? The reason is simple. The public attention is on upper
management but in many cases they are prepared to defend themselves against the government’s criminal prosecution. The
people who get chewed up and thrown away are the mid-level executives who rarely profit directly from accounting irregularities,
insider trading or other ethical violations.
Instead, the middle levels are high enough to take the heat but several rungs away from access to sufficient insider information
to profit from corporate manipulations. Despite their removal from the core of the decision making and despite the absence
of direct profit from criminal wrongdoing these middle level executives may face potential criminal liability close to if
not equal to those at the top of the pyramid.
The concept of criminal conspiracy can increase potential liability grossly out of proportion to any wrongdoing. The bizarre
plea bargaining structure in the federal system often allows the most guilty to escape punishment by cooperating with the
government while leaving those with a little knowledge (but large liability) with little to offer in exchange for their freedom.
These factors can lead to a sentencing exposure that will shock both the mid-level managers and anyone with a sense of
fair play.
In what is the criminal equivalent of trickle down economics the federal system has trickle down liability. Simply stated,
if you are a small cog in the larger machine you can be held liable for the full scope of a conspiracy. You do not have to
know the full details or scope of the conspiracy and you do not have to personally profit in any manner. Doing a favor or
following orders can be almost as damaging as being at center of the criminal wrongdoing.
The basic rule is the "essence" of a conspiracy offense "is in the agreement or confederation to commit a crime," (U.S.
v. Bayer, 331 U.S. 532 at 542 (U.S.N.Y., Jun 09, 1947). Once you have crossed that line you are in the quicksand whether
you fell in inch by inch or jumped in with enthusiasm. The law is not completely unforgiving. You do have to know that what
you did was wrong but it does not mean that you had to see the entire big picture before you are liable for the whole picture.
By analogy it is like getting in your car and driving drunk. You might not intend to kill someone but like that poor character
on the HBO series "OZ", one day you can be a "drunk driver" and the next day you are a "murderer" (despite having no intention
whatsoever to harm another person).
In a sense this can happen in the corporate world. What is so frightening is that in the little picture or day to day picture
there is a large grey area of corporate behavior. How many times have you commented on the actions of a co-worker or competitor
and wondered how they could get away with what they did? Most executives have themselves taken actions either on their own
initiative or by instruction which made them uncomfortable. Now in the context of Enron and WorldCom two troubling questions
arise. First, where is the line between aggressive business practice and illegality. Second, if one crosses the line just
how much of other people’s conduct can be blamed on you?
The law is clear in theory and mimics basic business partnership law. As a partnership in crime continues, the partners
act for each other in carrying it forward. It is settled that "an overt act of one partner may be the act of all without any
new agreement specifically directed to that act." (United States v. Kissel, 218 U.S. 601, 608 (1910)). Of course, this
presupposes that there was an agreement to do wrong but if that line was crossed the mid level executive might find that the
scope of the wrongful conduct is far beyond that he or she ever contemplated.
At first, the law seems merciful. "[T]he scope of an agreement determines the scope of the conspiracy, which in turn determines
the scope of derivative liability..." (U.S. v. Sergio, 934 F.2d 875, 878 (7th Cir.(Ind.), Jun 11, 1991). But the devil
is in the details and just what the scope of a conspiracy is can be very subjective. A delay in booking an expense or a sale
might seem innocuous and may even be business as usual. However, if the purpose in delaying such booking is to affect corporate
earnings for the present or future quarter such a delay might be fraudulent and may be seen as part of a stock price manipulation
scheme. This is a far cry from booking expenses as capital investment but it may be wrongful nevertheless. If it is wrongful
and ultimately investors are hurt by a drop in stock price the mid-level corporate executive who made the delay could find
himself on the hook for a large loss calculation. (And in the federal system the size of the loss affects the punishment).
The federal sentencing law holds that liability extends to reasonably foreseeable acts in furtherance of charged conspiracy.
(U.S.S.G. §1B1.3(a)(1)(B)) If you are not a lawyer, just imagine that the previous sentence is a contract provision. You wouldn’t
sign a contract containing that type of vague language and yet acts that appear to be business as usual inherently carry with
them a liability that is so defined.
In conclusion, if you are an executive who has just "touched" a portion of a conspiracy you should obtain legal representation
immediately. Remember, the big fish have an exit strategy ---- Do you?
Daniel Horowitz March, 2003
For More White Collar Information
Visit our other website:
http://www.whitecollar.us
