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CHAPTER 5
CRIMINAL LAW AND BUSINESS
CRIME—May be a positive or negative act that violates a penal law—an offense against a state
or the federal government. A breach of duties one owes to the community as defined by the
legislature. Distinguish from civil law.
CRIME CATEGORIES—Crimes and misdemeanors are both crimes, but they are generally
categorized differently in penal codes. Felonies are serious crimes generally meaning an offense
for which one could be sentenced to more than one year in prison. Felonies may be classified as
to level of seriousness—Class A, Class B and Class C. If one is convicted, the penalty will be
prescribed by statute.
Types of Felonies—Crimes are defined by law in various categories. Violent crimes include
robbery, rape, and assault; property crimes are generally less serious, such as burglary and theft.
White collar crimes are usually non-violent crimes by persons and businesses.
Lesser Offenses—Misdemeanors are generally crimes that may be punished by less than a year
in jail. Many punished by fines and/or by forfeiture of goods. These may also be classified by
degree of seriousness—Class A, Class B, etc. Local governments usually are given power by the
state to enact ordinances, most of which can be punished by fines and, in some cases, jail time.
CRIMES AND ELEMENTS OF CRIME—Legislatures determine criminal offenses and
penalties. Various agencies are empowered to investigate and prosecute crimes. Limits on
budgets mean all alleged crimes cannot be investigated. Prosecutors have discretion, which
means personal preference and political bias plays a role. A person accused of a crime must be
shown to have committed the wrongful deed, the actus reus, and have had the intent necessary,
the guilty mind—mens rea. The guilty mind may be based on intent or based on criminal
negligence—disregard for the rights of others. A business can be convicted of a crime.
CASE: Commonwealth v. Angelo Todesca Corp. (Sup. Ct., Mass., 2006)—Gauthier, a truck
driver for Todesca, backed over and killed a police officer directing traffic at an intersection
where construction was occurring. The backup horn on the truck was not working, in violation of
state law. Gauthier was ticketed; Todesca was convicted of motor vehicle homicide and fines.
Appeals court reversed the conviction; the Commonwealth appealed.
Decision: Judgment of trial court affirmed. Criminal liability may be imposed on a corporate
defendant. The conduct in question need not be shown to have been specifically approved by
Questions: 1. Why would the fine be so small for a fatal incident?
That is in the range established by the Massachusetts legislature, which determine fines.
2. Why would the Todesca Corp. incur the cost of appealing such a small fine? The legal fees are
much greater than the fine.
One reason would be to help preserve the reputation of the company; another would be the
possibility of losing the ability to participate in state contracts, as most governments put
Add. Case: People v. Salas (Sup.Ct., Calif., 2006)—Salas ran various partnerships that sold
investments in real estate developments. The state of California charged him with selling
unregistered securities. He claimed he did not know they needed to be registered. He knew
securities had to be registered, but he did not believe he was selling securities, so was unaware
of a violation. The trial judge told the jury that his good faith defense was not relevant and he
was convicted. The court of appeals held the judge was wrong; that knowledge is an element of
the crime in that is alleged to have occurred. That decision was appealed by Salas to the
California high court
Decision: The conviction of Salas stands. It depends on the crime whether the knowledge of the
defendant is relevant. In every crime there must be criminal intent or criminal negligence. In a
securities case, if a defendant presents enough evidence to raise reasonable doubts about his
Constitutional Right: Fifth Amendment—When a person is arrested, they must be read their
Miranda rights.
DEFENSES—Most crimes have a statute of limitations; bring the action in time or the clock
tolls. One may offer an alibi. An affirmative defense is rare—the facts claimed are true, but other
facts prevent conviction. Entrapment may exist. Insanity and intoxications are defenses, but not
common. Self-defense can arise in some violent crimes.
Evidence—Standards for criminal trials are higher than for civil trials. Taint the evidence and the
case is out. Search and seizure rules must be followed or the exclusionary rule kicks in.
Authorities obtain warrants based upon presentation of probable cause to the judge or magistrate.
CASE: U.S. v. Young (11th Cir., 2003)—Young had a permit to buy fuel without paying federal
taxes because the fuel was used for marine purposes. The IRS believed he sold the fuel to
non-marine users. It took x-rays of FedEx packages to see bundles of cash. Then a warrant was
obtained to seize the package and charge Young with tax evasion. Young claimed the x-rays
needed a warrant, so that evidence should be excluded. The trial court rejected the argument.
Young appealed.
Decision: Affirmed. The contract with FedEx said there was no right of privacy, so Young had no
Questions: 1. If the FedEx notice did not say anything about contents being subject to being
searched and did not say anything about shipping cash. Would the IRS have been allowed to
x-ray the packages without a warrant?
No. There would have been a much stronger expectation of privacy. A warrant would have been
2. Suppose Young had been carrying a briefcase filled with cash in his car, driving from Florida
to Texas. Could an IRS agent stop him and inspect the briefcase?
No; unless the agent had a warrant, there would be no right to pull Young over and open his
Add. Case: U.S. v. Grubbs (Sup. Ct., 2006)--An undercover postal inspector ran a Web site
selling videotapes of child porno. Grubbs bought a tape. The inspector then submitted a search
warrant request to a magistrate with an affidavit describing the proposed operation. The
execution of the search warrant would not occur until the parcel had been delivered to Grubbs.
Then law enforcement officers would move in, as allowed by the warrant. The anticipatory
warrant was issued. The parcel containing the tape was delivered and signed for. Grubbs was
arrested. He admitted ordering the video and pleaded guilty, but reserved his right to appeal the
denial of his motion to suppress the evidence, as it was obtained by use of an anticipatory
warrant, which he claimed violated the Fourth Amendment. The Ninth Circuit held the warrant
to be defective and the search illegal. The government appealed.
Decision: Reversed and remanded. An anticipatory warrant is one based upon an affidavit
showing probable cause that at some future time certain evidence of a crime will be located at a
specific place. Most subject their execution to a condition other than the mere passage of time; a
PROSECUTION PROCESS—Bringing charges is at the discretion of the prosecutor. The
police or other authorities may do an investigation and then charges be brought should the
prosecutor think justified. Some felony cases use a grand jury to obtain an indictment; they are
not hard to get.
Arraignment—An arrested suspect may be booked and taken to court for arraignment and
reading of the charged. A plea may be entered. Usually defendants released, but in violent crimes
cases bail may be set or even denied. Most cases are settled by plea bargains to save time and
cost.
Discovery—Criminal procedure is quite different from civil procedure. In civil cases, all
evidence is shared—no surprises. In criminal cases, each side does its own work and need
disclose only certain parts of known information. Investigations may be on-going before a
defendant is arrested or knows he is under suspicion. Prosecutors must reveal exculpatory
evidence, but that can be slippery in practice. If never revealed, the defense may never know
what existed. 5th Amendment may be pleaded at trial.
Trial—If no settlement, then a trial. Parties present cases; standard is beyond reasonable doubt.
One found innocent may not be tried on the same charges again. Judge decides sentence, often
based on sentencing guidelines as well as statutory punishment boundaries. No double jeopardy,
but if jury is hung, case may be retried or new trial may be on other charges.
Add. Case: U.S. v. Ohayon (11th Cir., 2007)--Ohayon was arrested when he took a bag of drugs
(ecstasy) from a hotel room occupied by a confidential informant and put the bag in the trunk of
a car. His defense was that he did not know what was in the bag. He was tried on charges of
conspiracy to possess with intent to distribute and attempt to possess illegal drugs. The jury
acquitted him of the attempt count and could not reach a verdict on the conspiracy account. The
government wanted to retry him for conspiracy, but the district court held that his acquittal of
attempt estopped the government from retrying him on the related conspiracy charge. The court
dismissed the conspiracy charge. The government appealed.
Decision: Affirmed. Acquittal on a charge of an attempted drug offense required, under the
Double Jeopardy Clause of the Fifth Amendment, dismissal of the charge of drug conspiracy. It
WHITE COLLAR CRIME—A made-up term that refers to people in positions of authority
who abuse their position for personal gain. List of things in this category keeps expanding.
Losses from crimes in these categories run in the hundreds of billions of dollars a year.
Antitrust—Sherman and Clayton Acts have criminal penalties for certain violations, the worst
being price fixing and bid rigging. (Chapter 20 will cover.)
Bankruptcy Fraud—Usually involves hiding assets in bankruptcy proceedings.
Bribery—Offer or taking of money or other goodies to influence official actions.
Add. Case: K&H v. USDA (D.C. Cir., 2007)--K&H ran a facility in New York City licensed to
buy and sell produce under the Perishable Agricultural Commodities Act (PACA). It was owned
and run by Hirsch and John Thomas. USDA inspectors must certify the freshness of
commodities. It is known that many USDA inspectors are corrupt and demand bribes to certify
commodities as fresh when they are not. Companies that do not pay bribes may wait a long time
for an inspection, by which time the quality of produce drops. One inspector, when caught,
cooperated and was wired to help document bribes. John Thomas gave the inspector a bribe and
was then convicted of bribing a public official. The USDA charged K&H with violating PACA by
bribing an inspector. The company argued that the bribes were extorted by USDA inspectors
because, if not paid, produce would be allowed to rot without certification. K&H was fined
$180,000 and had it license revoked by the USDA. It appealed.
Decision: Affirmed. Even if a merchant’s payments to federal inspectors were induced by
extortion, such extortion is not a reason under PACA for the merchant’s failure to perform the
Counterfeiting—The copying of a genuine article without authorization that is passed as real.
Add Case: U.S. v. Prosperi (11th Cir., 2000)--Prosperi, a Florida attorney, represented
Donovan’s investments, which included Amaretto, a company organized in the Netherlands
Antilles and owned by Donovan. According to the government, Prosperi began stealing millions
from Donovan in 1987. He was convicted of various violations, including counterfeiting
certificates of deposit (CDs) that purported to be from J.P. Morgan for the purpose of fooling
Donovan. Prosperi appealed the conviction for counterfeiting. The trial judge acquitted him on
that count, accepting his contention that the counterfeit CDs looked nothing like the real thing.
Decision: Reversed. Conviction stands. The statue prohibiting making or possessing a
counterfeit security does not require the counterfeits to be similar to genuine securities. It
concerns “a document that purports to be genuine but is not, because it has been falsely made or
manufactured in its entirety.” This is a change from the common law, which required that
Add. Case: People v. Carratu (Sup. Ct., N.Y., 2003)--Cablevision reported to the police that
illegal cable TV access devices were being sold. An investigator for Cablevision bought one of
the devices being advertised. Tests showed that it allowed the user to receive all premium and
pay-per-view channels. Based on the investigator’s information, and observations by the police,
Carratu was arrested for criminal possession of forgery devices. His property, including his
computer, was searched. Numerous devices were found. Carratu moved to suppress evidence.
Decision: Motion denied in part, granted in part. The officers had probable cause to arrest
Carratu for criminal possession of forgery devices in the form of cable boxes. The Cablevision
Credit Card Fraud—Unauthorized use of a credit card to obtain goods, services or cash.
Computer and Internet Fraud—Various federal statutes provide penalties for fraud and
unauthorized access to financial accounts, computer files, and for sabotage (hacking).
Economic Espionage—The taking of valuable business information such as a trade secret
violates federal law.
Add. Case: U.S. v. Hsu (3rd Cir., 1998)--Hsu and others were indicted, in an FBI sting, for
violating the Economic Espionage Act (EEA) by conspiring to steal trade secrets for a valuable
anti-cancer drug. The defense requested a copy of the trade secret documents. The government
contended that the defense did not need access to the documents except in camera under
supervision of the judge. The defense maintained that constitutional and procedural
requirements of criminal prosecutions dictate full access to the documents so they could
establish the defense of legal impossibility–they could not steal trade secrets that did not exist.
District court agreed with the defense; government appealed.
Decision: Reversed. Legal impossibility is not a defense to the charge of conspiracy and attempt
to steal trade secrets, rather than a charge of actual theft of trade secrets, under the EEA. So
Embezzlement—The taking of money or property when in a position of trust that is subject to
various state and federal laws.
Environmental Law Violations—Criminal penalties can apply to violating various state and
federal statutes concerned with different parts of the environment. There are hundreds of criminal
prosecutions annually.
Financial Fraud—Primarily applies to financial institutions where employees could abuse
positions of trust making them and their employer liable for criminal penalties.
Government Fraud—Improper billing of government agencies or delivering inferior goods or
taking benefits for which one is not qualified.
Healthcare Fraud—Improper billing by health care providers for services rendered that are
covered by various government programs or private insurers. This can be expected to be a
growth area.
Insider Trading—Violation of securities laws that restrict those in positions of trust from
exploiting privileged information for personal gain by securities trading. (See Chapter 21)
Insurance Fraud—Failure to provide insurance benefits that are due and, more commonly, lying
to insurance companies about losses actually suffered.
Add. Case: State v. Beciraj (Sup. Ct., N.D., 2003)--The Becirajs were accused of conspiracy to
commit arson to collect insurance for the loss. Evidence convinced the jury that the couple
burned down their house to collect insurance money. Defendants did not know until after the fire
that their policy had lapsed, so they could not collect. They appealed that they could not be
convicted since they did not have insurance.
Decision: Affirmed. Sufficient evidence was presented at trial to support a conviction for arson.
The couple believed their home was insured; they did not learn until after the fire that the policy
Mail Fraud—Almost any fraud or illegal scheme that uses the mail to transmit materials related
to the fraud. A common way for the federal government to be able to attack a wide range of
scams.
Add. Case: Cleveland v. U.S., 121 S.Ct. 365 (2000)--Cleveland, a lawyer, helped TSG, a
company owned by Goodson, prepare applications to Louisiana for licenses to operate video
poker machines. The licenses were approved and renewed for several years. Cleveland and
Goodson were then indicted on charges in connection with a scheme to bribe state legislators to
provide favors for the video poker industry. The indictment included counts of mail fraud related
to obtaining the licenses. The defendants moved to charges dismissed on the ground that the
alleged fraud in applications did not deprive the state of “property” under the mail fraud
statute. They were convicted on these counts and the appeals court upheld the conviction for
mail fraud, holding that video poker licenses were property of the state. Defendants appealed.
Decision: Reversed. State and municipal licenses in general do not rank as “property” for
purposes of federal mail fraud. Mail fraud is largely limited to the protection of money and
property. That does not include the kind of license involved here. Otherwise, mail fraud would
International Perspective: Multinational Employers and Criminal Charges Abroad
People working in other nations are subject to the laws of that nation. They may also be subject
to domestic law—e.g., Foreign Corrupt Practices Act applies to U.S. employees working outside
of the country. An Australian citizen who worked for Rio Tinto in China was sent to prison for
stealing trade secrets. As the trial was held in secret, no one has a clue if true or not. The
Australian government appealed the matter, but there is no legal recourse.
Money Laundering—Hiding the truth about the origins of money and failing to report all sources
of income. A common tool in going after criminal activities such as drug dealing.
Add. Case: Whitfield v. U.S. (Sup. Ct., 2005)--Whitfield and others were convicted under
federal law of conspiracy to launder money as part of a scam known as Greater Ministries
International Church (GMIC). It took in more than $400 million over four years. Investors were
promised double their money back, but the funds disappeared. Defendants appealed, claiming
that to be convicted, there had to be proof of an overt act in furtherance of the money laundering
conspiracy. The trial court and appeals court held that was not the case; defendants appealed.
Decision: Affirmed. The Money Laundering Control Act of 1986 penalizes the knowing and
intentional transportation or transfer of money from specific illegal activities. A 1992
Add. Case: U.S. v. Jose (1st Cir., 2007)--Otilio Jose was flying from Puerto Rico to St. Maarten.
When his luggage was inspected in Puerto Rico, Customs discovered $114,948 in cash. Federal
law requires persons to declare cash in excess of $10,000 being transported in or out of the
country. Jose had stated that he had $1,400. When confronted, he claimed he found the money in
a trash can. He was convicted of knowingly and willfully failing to file a report, of making a
materially false or fraudulent statement in the matter to Homeland Security officials, and
concealing more than $10,000 in currency without filing a Treasury report. Jose was sentenced
to 18 months in prison and ordered the $114,948 to be forfeited to the government. Jose
appealed.
Decision: Affirmed. Jose contends that the forfeiture violates the Eighth Amendment restriction
on “excessive fines.” The forfeiture is not excessive. Congress made clear the gravity of the
Issue Spotter: Internal Fraud
Internal controls usually exist in all companies, but if those in charge of the controls steal, it is harder
to uncover. Employee theft is more costly than shoplifting. Hence, managers should pay attention to
