978-1285427003 Chapter 7 Lecture Note Part 2

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Crimes That Harm Business

Businesses must deal with four major crimes: larceny, fraud, arson and embezzlement.

Larceny is the trespassory taking of personal property with the intent to steal.

Fraud refers to a variety of crimes, all of which involve the deception of another person for the

purpose of obtaining money or property. Wire fraud and mail fraud are specific types of fraud that

violate federal statutes. The theft of honest services statute prohibits public and private employees

from taking bribes or kickbacks.

Arson is the malicious use of fire or explosives to damage or destroy real estate or personal property.

Embezzlement is the fraudulent conversion of property already in the defendant’s possession.

Case: Skilling v. United States1

Facts: Enron Corporation was an energy company in Houston, Texas that hired Jeffrey Skilling, a

young Harvard Business School graduate, to run one of its subsidiaries. Eleven years later, he was

promoted to president and chief operating officer. At that time, only six companies in America had

higher revenues than Enron. Sixth months after Skilling’s promotion, he resigned. Four months after

that, Enron filed for bankruptcy protection.

The company’s stock, which had been trading at $90 per share became virtually worthless. A

government investigation uncovered an elaborate conspiracy to prop up Enron’s stock prices by

overstating the company’s finances.

Skilling was convicted of violating the honest services statute, sentenced to 24 years in prison,

and ordered to pay $45 million in restitution. Skilling appealed, arguing that the honest services statute

only applied to bribery and kickback schemes. The Fifth Circuit affirmed his conviction. The Supreme

Court granted certiorari.

Issue: Did Skilling violate the honest services statute?

Decision: No, Skilling was not in violation.

Reasoning: The due process clause of the Constitution provides that a criminal statute must define a

violation so precisely that an ordinary person knows what activities are illegal. Skilling argued that the

honest services statute did not meet this standard because it was too vague. It could apply to a very

wide range of behavior, including some that is quite innocent.

Traditionally this statute was used against people who took bribes or kickbacks. That is a clear

standard everyone can understand. Therefore, we hold that the honest services statute is Constitutional,

but only when applied to someone who has taken bribes or kickbacks.

The government did not allege that Skilling took bribes to misstate Enron’s financials. The

wrong-doing was for his own benefit. Therefore, he was not in violation of the honest services statute.

Question: What is the honest services statute?

Question: Did Skilling violate the honest services statute?

Answer: The Supreme Court chose to interpret this statute in a strict manner, thus Skilling did not

1 538 U.S. 11, 123 S. Ct. 1179, 155 L. Ed. 2d 108, United States Supreme Court, 2003.

Crimes Committed by Business

A corporation can be found guilty of a crime based on the conduct of any of its agents, who include

anyone undertaking work on behalf of the corporation. An agent can be a corporate officer, an

accountant hired to audit a statement, a sales clerk, or almost any other person performing a job at the

company’s request.

If an agent commits a criminal act within the scope of his employment and with the intent to benefit

the corporation, the company is liable. This means that the agent himself must first be guilty.

Case: Commonwealth v. Angelo Todesca Corp.2

Facts: Brian Gauthier, an experienced truck driver, worked for Todesca, a paving company. After about

a year driving a particular 10-wheel tri-axle dump truck, Gauthier noticed that the back-up alarm had

stopped working. When he reported this, the company mechanic realized that the old alarm needed

replacement. The mechanic had none in stock, so the company instructed Gauthier to drive the truck

without the alarm.

About a month later, Gauthier and other Todesca drivers were delivering asphalt to the work site on

a highway at the entrance to a shopping mall. A police officer directed the construction vehicles and the

routine mall traffic. A different driver asked the officer to “watch our backs” as the trucks backed

through the intersection. All of the other trucks were equipped with back-up alarms. When it was

Gauthier’s turn to back up, he struck the police officer, killing him.

The State charged the Todesca corporation with motor vehicle homicide and the jury found the

company guilty. The trial judge imposed a fine—of $2,500. The court of appeals reversed the

conviction. The prosecution appealed to the state’s highest court.

Issue: Could the company be guilty of motor vehicle homicide?

Decision: Yes, the company was guilty of motor vehicle homicide.

Reasoning: The defendant maintains that a corporation can never be held criminally liable for motor

vehicle homicide because a corporation cannot “operate” a vehicle. We disagree. A corporation can act

only through its agents. By the defendant’s reasoning, a corporation never could be liable for any crime.

A corporation can no more serve alcohol to minors, or bribe government officials, than operate a

vehicle negligently. Only human agents are capable of these actions. Nevertheless, we consistently

have held that a corporation may be criminally liable for such acts when performed by corporate

employees, acting within the scope of their employment and on behalf of the corporation.

Gauthier’s truck was not equipped with a functioning back-up alarm, and he knew the alarm was

missing. The defendant had a written safety policy mandating that all its trucks be equipped with such

alarms. An employee’s violation of his employer’s rules, intended to protect the safety of third persons,

is evidence of the employee’s negligence, for which the employer may be held liable.

Gauthier never informed the victim that his truck did not have an alarm. The jury could have inferred

that the victim, a veteran police officer, knew that the defendant routinely equipped its trucks with

back-up alarms. The victim expected to hear a back-up alarm and would have, almost right in his ear,

had the truck been properly maintained.

Affirmed.

Question: The Court answers two entirely separate questions in this case. What are they?

Answer: First, the Court has to decide whether corporations could be criminally liable for the acts

Question: Todesca wants the Court to read the law strictly. What does this mean?

2 446 Mass. 128, 842 N.E.2d 930, Supreme Court of Massachusetts, 2006.

Answer: Todesca is asking the Court to look at the exact language of the statute. The law says

Question: What did the Court think about that argument?

Answer: Not much. Taken to its logical conclusion that line of thinking would make it impossible

Question: If the employee commits the criminal act, why is it fair to hold the corporation liable for

the employee’s conduct?

Answer: Because if the employee is acting within the scope of his or her employment, they are

engaging in the conduct for the benefit of the corporation. In this case, Gauthier was at the work

Question: A corporation cannot go to jail. What criminal penalties do courts impose on

corporations?

Question: If individuals have been harmed by a corporation’s crime, would they receive payment

of a fine imposed on the corporation?

Answer: No. A court might order a corporation to pay restitution to victims of a crime. The victims

Selected Crimes Committed by Business

Workplace Crimes

The most important statute regulating the workplace is the federal Occupational Safety and Health Act

of 1970 (OSHA), which sets safety standards for many industries.

Additional Case: U.S. v. Atlantic States Cast Iron Pipe Company et

al.3

Facts: McWane is one of the world’s largest makers of cast-iron water and sewer pipes and has

subsidiaries located throughout the United States and Canada. Atlantic States, located in New Jersey,

manufactures iron pipes, which involves melting scrap metal in a multi-story furnace that reaches

temperatures approaching 3,000 degrees Fahrenheit. EPA’s investigation revealed a corporate

philosophy and management practice of threats and intimidation of workers. These practices led to an

extraordinary history of environmental crimes, workplace injuries and fatalities, and ultimately

obstruction of justice. The company and various officials routinely violated Clean Water Act permits by

discharging petroleum-contaminated water and paint into storm drains that led to the Delaware River.

It repeatedly violated Clean Air Act permits by burning tires and excessive amounts of hazardous

waste paint. The company systematically altered accident scenes and routinely lied to federal, state,

and local officials who were investigating environmental and worker safety violations.

Atlantic States was named in all counts of the indictment and was convicted on five counts of making

materially false statements to state and federal environmental agencies and the federal Occupational

Safety & Health Administration (OSHA); four counts of obstructing OSHA investigations; 22 counts of

violating the federal Clean Water Act and one count of violating the Clean Air Act.

Holding: On April 26, 2006, a jury found Atlantic States Cast Iron Pipe Company (“Atlantic States”), a

division of McWane Industries, and the plant manager, maintenance supervisor, finishing supervisor,

and former human resource manager guilty of environmental crimes.

3 627 F.Supp.2d 180 (New York).

The trial began in September 2005 and is the longest federal trial (defined in length, from jury selection

to verdict) in environmental crimes history.

Question: What purpose does the OSHA (Occupational Safety & Health Administration) statute

serve?

Answer: The OSHA statute was created to protect employees from workplace hazards.

Answer: The OSHA statute itself contains very limited criminal enforcement provisions. A

violation of the OSHA workplace safety law and its rules and regulations can give rise to criminal

Hiring Illegal Workers

Employers are required to verify their workers’ eligibility for employment in the United States.

The government has the right to arrest illegal employees. It can also bring charges against the

business that hired them.

RICO

The Racketeer Influenced and Corrupt Organizations Act (RICO) is one of the most powerful and

controversial statutes ever written. Congress passed the law primarily to prevent gangsters from taking

money they earned illegally and investing it in legitimate businesses.

There is a two-step process to prove that a person or an organization has violated RICO.

• The prosecutor must show that the defendant committed two or more racketeering acts, which are

any of a long list of specified crimes: embezzlement, arson, mail fraud, wire fraud, and so forth. Thus,

if a gangster ordered a building torched in January and then burned a second building in October, that

would be two racketeering acts. If a stockbroker told two customers that Bronx Gold Mines was a

promising stock, when she knew that it was worthless, that would be two racketeering acts.

• The prosecutor must then show that the defendant used these racketeering acts to accomplish one

of the three purposes listed above. If the gangster committed two arsons and then used the insurance

payments to buy a dry cleaning business, that would violate RICO. If the stockbroker gave fraudulent

advice and used the commissions to buy advertising for her firm, that would violate RICO.

Money Laundering

Money laundering consists of taking the proceeds of certain criminal acts and either (1) using the

money to promote crime, or (2) attempting to conceal the source of the money.

Money Laundering Cases and Prosecutorial Ethics

Federal prosecutors have sharply increased the number of people they charge with money laundering.

Because more people are funneling drug money out of the country? Not necessarily, argue defense

lawyers. They say that prosecutors are now routinely adding on money laundering charges to cases that

used to be routine fraud cases. For example, a medical supply company bills the federal government for

prosthetic devices that it never delivered. Formerly, that would have been a simple Medicare fraud

case. Today, though, it is likely to be a Medicare fraud and money laundering case. Prosecutors in such

a case argue that the money obtained illegally from the federal government is used to invest in and

maintain a legitimate business, and that is money laundering. If the medical supply company uses

money obtained from fraudulent bills to pay the rent on its company headquarters, it has laundered the

money.

What is the big deal? Time in prison. A simple fraud conviction typically results in a sentence of five

years or less; a money laundering conviction can increase the penalty to 20 years in prison. In addition,

a prosecutor who tacks on a money laundering charge puts extra pressure on the defendant to plea

bargain, because the penalty for a conviction could be so high.

Defense lawyers claim that this practice is unethical because Congress intended stiff money laundering

penalties for big-time drug dealers who gravely damage our country by importing harmful substances.

A small business dealer who cheats once or twice should not be treated like a drug kingpin. Prosecutors

respond that 1) they are ethically required to charge the most serious provable crime and that 2)

Congress wrote the money laundering statute broadly in order to discourage all fraud, not just

drug-related offenses.

Additional Case: United States v. Kennard4

Facts: The reverend Abraham Kennard bilked hundreds of churches out of millions of dollars through a

phony grant scheme. Abraham created the Network International Investment Corporation and then

approached churches and other nonprofits with an offer: for every $3,000 in membership fees that an

organization paid to the Network, the Network would award $500,000 in grants. Abraham told

investors that the grants were possible because he had secured wealthy investors who would provide

financing, and that the Network expected to earn a profit from its Christian resorts. More than 1,600

churches and other nonprofits paid Abraham over $8.7 million.

Abraham deposited the money into an escrow account in the name of his lawyer, and then

transferred the money into another account in the name of Promotional Times International, Ltd., which

was controlled by Abraham’s brother Laboyce Kennard.

The investors never received their money and Abraham was found guilty of various crimes.

Laboyce was found guilty of money laundering. He appealed, arguing there was insufficient proof that

he knowingly laundered money.

Issue: Was there sufficient evidence that Laboyce knowingly laundered money?

Holding: Yes, conviction affirmed. Laboyce claims that there was not enough evidence for a jury to

find beyond a reasonable doubt either the existence of a criminal agreement or his knowing

participation in it.

To convict Laboyce on the money laundering conspiracy charge, the prosecution had to prove that

some agreement existed to launder the proceeds of Abraham’s fraud scheme, and that Laboyce

knowingly participated in that agreement. The extent of Laboyce’s knowledge of the details in the

conspiracy does not matter if the prosecution can show that he knew the essential objectives of the

conspiracy.

There was sufficient evidence to prove that Laboyce knowingly participated in the agreement

to launder the proceeds from Abraham’s fraud. Laboyce set up the Promotional account and made large

deposits to that account of cashier’s checks from Abraham and checks drawn on the escrow account.

Laboyce made most of the withdrawals from the Promotional account including cashier’s checks made

payable to Abraham.

Laboyce was also involved in Network events. For example: Laboyce went with Abraham to a

Network meeting in Charlotte, North Carolina at which Abraham gave Network members fake checks

instead of the promised grant money; Laboyce videotaped Abraham at a fake groundbreaking ceremony

for a Network resort, which was used to hold off member complaints; Laboyce “worked security” at a

Network meeting where Abraham told the members their grants would be delayed again; and Laboyce

was present at a meeting where Abraham told him that an FBI investigation of the Network led to a

seizure of the escrow account.

This evidence, according to the Court, was enough for a jury to find beyond a reasonable doubt that

Laboyce knowingly participated in the conspiracy to launder the proceeds of the fraud.

Question: How did the money laundering occur here?

Answer: Payments received from members based on a fraudulent investment scheme was passed

Question: If Laboyce did not commit the fraud, what crime did he commit?

4 472 F.3d 851, 11th Circuit Court of Appeals, 2006.

Question: How is that different than money laundering?

Answer: Conspiracy to launder money involves an agreement to launder money, and Laboyce’s

Punishing a Corporation

Fines

The most common punishment for a corporation is a fine. This makes sense in that the purpose of a

business is to earn a profit, and a fine, theoretically, hurts. But most fines are modest by the present

standards of corporate wealth.

Compliance Programs

The Federal Sentencing Guidelines are the detailed rules that judges must follow when sentencing

defendants convicted of crimes in federal court. The guidelines instruct judges to determine

whether, at the time of the crime, the corporation had in place a serious compliance program, that

is, a plan to prevent and detect criminal conduct at all levels of the company.

Multiple Choice Questions

1. In a criminal case, which statement is true?

(a) The prosecution must prove the government’s case by a preponderance of the evidence.

(b) The criminal defendant is entitled to a lawyer even if she cannot afford to pay for it herself.

(d) All federal crimes are felonies.

2. The police are not required to obtain a warrant before conducting a search if:

(a) A reliable informant has told them they will find evidence of a crime in a particular location.

(b) They have a warrant for part of a property and another section of the property is in plain view.

(d) Someone living on the property has consented to the search.

3. Under the exclusionary rule, which statement is true?

(a) Evidence must be excluded from trial if the search warrant is defective, even if the police

believed at the time of the search that it was valid.

(b) The prosecution cannot use any evidence the police found at the site of the illegal search but it

can use any evidence the police discover elsewhere as a result of the illegal search.

Miranda rights.

(d) If a conviction is overturned because of the exclusionary rule, the prosecution is not allowed to

retry the defendant.

4. Benry asks his girlfriend Alina to drive his car to the repair shop. She drives his car alright, to Las

Vegas where she hits the slots. Alina has committed

(a) Fraud

(b) Embezzlement

(d) A RICO violation

5. Which of the following elements is required for a RICO conviction:

(a) Investment in a legitimate business

(b) Two or more criminal acts

(d) Operating a business through criminal activity

Essay Questions

1. You Be the Judge: WRITING PROBLEM. An undercover drug informant learned

from a mutual friend that Philip Friedman “knew where to get marijuana.” The informant asked

Friedman three times to get him some marijuana, and Friedman agreed after the third request.

Shortly thereafter, Friedman sold the informant a small amount of the drug. The informant later

offered to sell Friedman three pounds of marijuana. They negotiated the price and then made the

sale. Friedman was tried for trafficking in drugs. He argued entrapment. Was Friedman entrapped?

Argument for Friedman: The undercover agent had to ask three times before Friedman sold him a

small amount of drugs. A real drug dealer, predisposed to commit the crime, leaps at an opportunity

to sell. If the government spends time and money luring innocent people into the commission of

crimes, all of us are the losers.

Argument for the Government: Government officials suspected Friedman of being a sophisticated

drug dealer, and they were right. When he had a chance to buy three pounds, a quantity only a

dealer would purchase, he not only did so, but bargained with skill, showing a working knowledge

of the business. Friedman was not entrapped—he was caught.

Answer: Friedman argued entrapment, claiming that there was no evidence of his predisposition to

traffic in drugs. The Alabama Supreme Court ruled against him. The Court noted that Friedman

admitted to occasional use of marijuana, that he had been able quickly to locate marijuana to resell

to the agent, and that he showed a sophisticated knowledge of the drug when bargaining over the

price of three pounds. The Court held that there was no evidence of entrapment. Friedman v. State,

654 So.2d 50, 1994 Ala. Crim. App. LEXIS 179 (1994).

2. Conley owned video poker machines. Although they are outlawed in Pennsylvania, he placed them

in bars and clubs. He used profits from the machines to buy more machines. Is he guilty of money

laundering?

3. Karin made illegal firearm purchases at a gun show. At her trial, she alleged that she had

committed this crime because her boyfriend had threatened to harm her and her two daughters if

she did not. Her lawyer asked the judge to instruct the jury that the prosecution had an obligation

to prove beyond a reasonable doubt that Karin had acted freely. Instead, the judge told the jury that

Karin had the burden of proving duress by a preponderance of the evidence. Who is correct?

(2006).

4. An informant bought drugs from Dorian. The police obtained a search warrant to search Dorian’s

house. But before they acted on the warrant, they sent the informant back to try again. This time,

Dorian said he did not have any drugs. The police then acted on the warrant and searched his

house. Did the police have probable cause?

5. Shawn was caught stealing letters from mailboxes. After pleading guilty, he was sentenced to two

months in prison and three years of supervised release. One of the supervised release conditions

required him to stand outside a post office for eight hours wearing a signboard stating, “I stole

mail. This is my punishment.” He appealed this requirement on the grounds that it constituted cruel

and unusual punishment. Do you agree?

Discussion Questions

1. Under British law, a police officer must now say the following to a suspect placed under arrest:

“You do not have to say anything. But if you do not mention now something which you later use in

your defense, the court may decide that your failure to mention it now strengthens the case against

you. A record will be made of anything you say and it may be given in evidence if you are brought

to trial.” What is the goal of this British law? What does a police officer in the United States have

to say, and what difference does it make at the time of an arrest? Which approach is better?

Answer: Answers will vary. In both British law and American law, the police may not force a

suspect to say anything. The primary difference is that the British law encourages suspects to

reveal information by claiming that failure to do so may result in a negative result later, while

under American law, suspects are warned against revealing information, saying that if they do

reveal such information, it may be used against them. Under American law, this warning is part of a

suspect’s Miranda rights. The person in custody must, prior to interrogation, be clearly informed

that he or she has the right to remain silent, and that anything the person says will be used against

that person in court; the person must be clearly informed that he or she has the right to consult with

an attorney and to have that attorney present during questioning, and that, if he or she is indigent,

an attorney will be provided at no cost to represent her or him.

2. ETHICS You are a prosecutor who thinks it is possible that Naonka, in her role as CEO of a

brokerage firm, has stolen money from her customers, many of whom are not well-off. If you

charge her and her company with RICO violations, you know that she is likely to plea bargain

because otherwise her assets and those of the company may be frozen by the court. As part of the

plea bargain, you might be able to get her to disclose evidence about other people who might have

taken part in this criminal activity. But you do not have any hard evidence at this point. Would such

an indictment be ethical? Do the ends justify the means? Is it worth it to harm Naonka for the

chance of protecting thousands of innocent investors?

Answer: Answers will vary.

3. Van is brought to the police station for questioning about a shooting at a mall. The police read him

his Miranda rights. For the rest of the three hour interrogation, he remains silent except for a few

one word responses. Has he waived his right to remain silent? Can those few words be used against

him in court?

Answer: In Berghuis v. Thompkins, 130 S. Ct. 2250, the Supreme Court ruled (5-4) that to maintain

4. Police arrested Hank on a warrant issued in a neighboring county. When they searched him, the

police found drugs and a gun. Only later did the police discover that, when they had used the

warrant, it was not valid because it had been recalled months earlier. The notice of recall had not

been entered into the database. Should the evidence of drugs and a gun be suppressed under the

exclusionary rule?

Answer: In Herring v. United States, 129 S. Ct. 695, the Supreme Court ruled (5-4) that this type of

5. Andy was arrested for driving under the influence of alcohol (DUI). He had already been convicted

of another driving offense. The court in the first offense was notified of this later DUI charge and

took that information into consideration when determining Andy’s sentence. Did the State violate

Andy’s protection against double jeopardy when it subsequently tried and convicted him for the

DUI offense?

Answer: The court in a similar case ruled that there was no double jeopardy because the additional