Can a Company Be Charged With a Crime?

According to the New York Times, Arthur Andersen has agreed to admit it committed a crime by shredding Enron-related documents. How can a company, as opposed to an individual, be charged with a crime in the first place? You can’t put a whole company in jail, can you?

The criminal charge facing Andersen is obstruction of justice under 18 U.S.C., Section 1512(b). In order to violate that section, the defendant must “corruptly persuade” someone to destroy documents. The defendant also has to intend that the documents won’t be available for legal proceedings. Former Arthur Andersen partner David Duncan pleaded guilty to obstruction as an individual on April 10.

But since a company—or a limited liability partnership such as Andersen—is simply a legal construct, it cannot commit a physical act such as obstruction of justice. So, how does Congress get past this problem when it wants to punish a company as a whole? By attributing the acts and intentions of the company’s employees to the company itself, an approach the Supreme Court first endorsed in the 1909 case of New York Central and Hudson River Railroad Co. v. United States. That case held that since corporations were already liable in civil cases for their employees’ bad conduct (within the scope of their job), it was perfectly appropriate to extend that rule to the criminal law.

Why? Deterrence. If only an individual employee could be punished for bad acts, the firm could pressure other employees to carry on the same criminal conduct. (If the crime is outside the scope of the employee’s job and isn’t meant to help the company, the company can’t be liable. Robbing a 7-Eleven after you’ve delivered soft drinks there won’t get the soda distributor you work for in trouble.)

But why seek criminal sanctions against a company rather than civil ones? One reason is the power of a grand jury. In a civil proceeding, Andersen can bring its attorneys to any employee deposition, and the proceeding’s scope is limited to the misdeeds alleged in the complaint. But in a criminal grand jury investigation, prosecutors can use subpoenas to force employees to testify—with no company lawyer at their side. The proceedings may go on for months, even years, and there’s almost no limit to what the grand jury can investigate.

In addition to heavy fines meted out in a criminal conviction, the court can put a company on probation for several years. No corporation wants a judge as an overseer.

Also, under Securities and Exchange Commission rules, if Andersen were found guilty, it would be barred from practicing before the SEC, which means audited financial statements produced by Andersen couldn’t be filed with the commission. The Andersen deal is structured to avoid an SEC bar, which is one reason the firm may have agreed to it. Otherwise, a bunch of Andersen employees would have little to do but clean out their offices, shred their documents, and go home.

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Explainer thanks Frank Partnoy at the University of San Diego Law School; Jennifer Arlen at the USC Law School; Robert Weisberg at Stanford Law School; and Peter Arenella at the UCLA School of Law.