Management Chapter 14 Bert May Also Held Vicariously Liable For

Chapter Fourteen

Criminal Law

A MANAGER’S DILEMMA: PUTTING IT INTO PRACTICE

From Cookie-Jar Reserves to Booking Sales of “Buggy” Software

Issue Presented: How should a CFO respond when pressured to manage earnings?

Under no circumstances should a manager report fraudulent earnings, either by creating

a “cookie–jar” reserve or by shipping product it knows is so defective that it will give rise to a

right of return. Some software bugs are to be expected, but the revenues from the sales should

not be booked unless the CFO is confident that the products satisfy the requirements of the sale

After confirming with the outside auditors that doing what the CEO suggests would

violate Generally Accepted Accounting Principles, you should try to talk the CEO out of his or

her position. Failing that, you should consult with Medtech’s legal counsel and enlist their

support. If the CEO persists in threatening adverse action if you don’t “cook the books,” you

QUESTIONS AND CASE PROBLEMS

Question 1

Issue Presented: Is GPS tracking a “search” under the Fourth Amendment?

The U.S. Supreme Court held in United States v. Jones, 132 S. Ct. 945 (2012), that the

attachment of a GPS device to a vehicle, and subsequent use of that device to monitor the

vehicle’s movements on public streets, was a “search” within the meaning of the Fourth

Amendment and thus required a warrant.

. . .

Our later cases, of course, have deviated from that exclusively property-based

approach. In Katz v. United States, 389 U.S. 347, 351 (1967), we said that “the

Fourth Amendment protects people, not places,” and found a violation in

Relying on Katz, the Government argued that no search occurred because Jones had no

“reasonable expectation of privacy” in the underbody of his Jeep (where the GPS was attached)

and in the location of the Jeep on the public roads, which were visible to all. The Government

pointed to previous Court decisions holding that electronic monitoring of a vehicle did not

infringe on a person’s reasonable expectation of privacy since the information obtained – the

In short, “[T]he Katz reasonable–expectation-of-privacy test has been added to, not

substituted for, the common-law trespassory test.”

In Knotts and Karo, explained the Court, the common-law trespassory test was not at

issue because the electronic monitors had been placed in vehicles with the consent of the then–

Justice Scalia stressed that the majority of the Court did not make trespass the exclusive

test in a Fourth Amendment analysis:

For unlike the concurrence, which would make Katz the exclusive test, we do not

In a concurring opinion, Justice Sotomayor stated:

[I]t may be necessary to reconsider the premise that an individual has no

reasonable expectation of privacy in information voluntarily disclosed to third

parties. This approach is ill suited to the digital age, in which people reveal a

great deal of information about themselves to third parties in the course of

In a concurring opinion by Justice Alito, in which Justices Breyer, Ginsburg, and

Kagan, joined, Justice Alito stated:

This case requires us to apply the Fourth Amendment’s prohibition of

unreasonable searches and seizures to a 21st-century surveillance technique, the

use of a Global Positioning System (GPS) device to monitor a vehicle’s

movements for an extended period of time. Ironically, the Court has chosen to

decide this case based on 18th-century tort law. By attaching a small GPS device

to the underside of the vehicle that respondent drove, the law enforcement

. . .

[I]t is almost impossible to think of late–18th-century situations that are

analogous to what took place in this case. (Is it possible to imagine a case in

which a constable secreted himself somewhere in a coach and remained there for

a period of time in order to monitor the movements of the coach’s owner? [In a

. . .

Recent years have seen the emergence of many new devices that permit the

monitoring of a person’s movements. In some locales, closed-circuit television

video monitoring is becoming ubiquitous. On toll roads, automatic toll collection

systems create a precise record of the movements of motorists who choose to

V

In the pre-computer age, the greatest protections of privacy were neither

constitutional nor statutory, but practical. Traditional surveillance for any

extended period of time was difficult and costly and therefore rarely undertaken.

The surveillance at issue in this case—constant monitoring of the location of a

vehicle for four weeks—would have required a large team of agents, multiple

To date, however, Congress and most States have not enacted statutes regulating

the use of GPS tracking technology for law enforcement purposes. The best that

we can do in this case is to apply existing Fourth Amendment doctrine and to

ask whether the use of GPS tracking in a particular case involved a degree of

intrusion that a reasonable person would not have anticipated.

Under this approach, relatively short-term monitoring of a person’s movements

on public streets accords with expectations of privacy that our society has

recognized as reasonable. But the use of longer term GPS monitoring in

For these reasons, I conclude that the lengthy monitoring that occurred in this

case constituted a search under the Fourth Amendment. I therefore agree with

the majority that the decision of the Court of Appeals must be affirmed.

Question 2

Issue Presented: Is it a violation of a paper mill’s Fourth Amendment right for federal agents

to take samples of its wastewater discharge from sewer pipes 300 feet from that mill’s

dumping site?

If the Environmental Protection Agency (EPA) agents conducting the search violated a

constitutional provision while acquiring the water sample, the test results would be

inadmissible at trial. Asserting a “Bivens action,” the mill owner claimed the agents violated his

In Riverdale Mills Corp. v. Pimpare, 392 F.3d 55 (1st Cir. 2004), the court rejected the EPA’s

assertion that there is never a reasonable expectation of privacy in wastewater. However, the

court found that under the first prong of the qualified immunity test, in this case the owner had

no reasonable expectation of privacy in wastewater and therefore had no Fourth Amendment

Question 3

Issue Presented: What criminal liability do corporations and senior management face for the

negligence of employees?

On the facts of the present case, Joe Mountain did not intentionally violate the law, nor

does he appear to have been reckless, although this might be a jury question. If either

Lake will almost certainly be convicted of violating the statute. Because Lake knew of

the statute and knew that Mountain was not complying with it, the state should have no

difficulty in demonstrating that his failure to supervise Mountain constituted intentionally

wrongful conduct.

Thus, Bert’s liability will probably turn on whether the company had a general policy of

requiring its sales staff to check the records of its customers. If the company did have such a

policy and if Lake was responsible for its implementation, Bert will probably be held

vicariously liable only if it can be shown that he knew or should have known Lake was not

fulfilling his supervisory responsibilities. If the company had no policy of checking its

customers’ records, and if Bert had taken no steps to ensure compliance with the law by his

employees, it will be much easier to argue that he should be held vicariously liable, because his

failure to institute adequate compliance procedures may well constitute the kind of wrongful

conduct necessary for vicarious liability.

Question 4

Issue Presented: Under what theory of criminal liability could the president of a company be

held liable for food contamination at his company? Could the defense of impossibility be

successfully asserted in a situation such as the one described?

Under the Federal Food, Drug, and Cosmetic Act, the president of a company could be

held liable for food contamination under both theories of vicarious liability (failure to supervise)

To establish the impossibility defense, a corporate officer must introduce evidence that

he exercised extraordinary care, but was unable to prevent violations of the act. The defense is

successfully raised when the defendant introduces “sufficient evidence of the exercise of

extraordinary care to justify placing an additional burden on the government—that of proving

beyond a reasonable doubt that had the defendant indeed exercised such extraordinary care, he

could have prevented or corrected those violations.”

Question 5

Issue Presented: Is photographic evidence sufficient to demonstrate that an employer

willfully violated the Occupational Safety and Health Administration’s loose

material safety standard?

Upon discovery of a violation of an Occupational Safety and Health Administration

(OSHA) regulation, an officer may issue a citation in one of three categories: “not serious”

“serious,” or “willful.” Violations falling under the last category are subject to the highest

penalties, with a minimum fine of $5,000 and a maximum fine of $70,000.

During the initial proceedings, it was further revealed that the project’s general

contractor had fallen behind on the demolition schedule as a result of unexpected difficulties

during asbestos removal. Witnesses testified that American Wrecking Corporation (AWC), a

subcontractor, was not responsible for the deadlines, and that no pressure was brought to bear

on AWC to expedite its portion of the demolition process. Nonetheless, the ALJ found that

AWC willfully violated OSHA’s loose material safety standard. Upon review, the Commission

concluded that the ALJ failed to provide sufficient findings of fact to support its finding of

willfulness. The Commission remanded the case to the ALJ, who again found that AWC

Question 6

Issues Presented: (a) What charges may be brought against employees who

knowingly falsify the time records they present to the government? (b) What charges

may be brought against a manager who falsifies the results of tests conducted on

computer systems installed at the government? (c) What charges may be brought

against the company’s owner and the company itself for the fraudulent activities of

the company’s employees?

(a) The government may proceed against the employees under the Wire and Mail Fraud

Acts, the False Statements Act, and RICO. In order to sustain a conviction under the Wire and

Mail Fraud Acts, the prosecutor must demonstrate (1) a scheme to defraud and (2) the use of the

mails in furtherance of the fraudulent scheme. Although the precise meaning of “fraudulent

scheme” has never been established, the repeated doctoring of time records would appear to

Finally, because virtually any business fraud may be the basis of a RICO prosecution,

the government may also bring a RICO charge against the employees. In order to succeed under

RICO, the government must establish that the employees were involved in a pattern of

(b) Michelle Laff, in addition to facing liability under the False Statements Act, may face

liability under the Computer Fraud and Abuse Act. Under the CFAA, any individual who

alters, damages, or destroys information on a federal interest computer (or on certain computers

used in interstate commerce) and causes a loss of over $1,000 commits a felony. Federal interest

(c) The owner of Bermel Enterprises may be liable for the criminal acts of all his

employees, although the courts will probably require at least negligence, and probably

Question 7

Issue Presented: Can a defendant be found guilty for willfully making a false statement to a

U.S. government official if he did not intend to deceive the government?

A court may find a factual basis for guilt through evidence in the record even if the

defendant affirmatively denies, or simply never admits, having possessed the necessary

criminal intent for a crime. In United States v. Russo, 202 F.3d 283 (10th Cir. 2000), Russo claimed

that he did not possess “willful intent.” However, for purposes of Section 1001, “willful” does

Question 8

Issue Presented: Can Safeguard raise any valid objections to Shurgard’s CFAA claims?

Under the Computer Fraud and Abuse Act (CFAA) Section 1030(a)(2)(C), “[w]hoever . . .

intentionally accesses a computer without authorization or exceeds authorized access, and

thereby obtains . . . information from any protected computer if the conduct involved an

First, Safeguard argued that Shurgard’s former employees all had authorized access to

the information they obtained and transmitted to Safeguard. Shurgard responded by claiming

that the authorization for its former employees ended when the employees began acting as

agents for Safeguard. The court sided with Shurgard, citing Restatement (Second) of Agency,

which provides:

Unless otherwise agreed, the authority of an agent terminates if, without

Safeguard’s next claim rested on CFAA Section 1030(a)(5)(C). Under this section,

“[w]hoever . . . intentionally accesses a protected computer without authorization, and as a

result of such conduct, causes damage” violates the CFAA. Safeguard raised objections to

Shurgard’s claim under this section on two grounds.

Second, Safeguard argued that Shurgard had not pled that it incurred “damage” as

defined in the statute. Specifically, Safeguard argued that the alleged loss of information by the

plaintiff was not “damage” under the statute. The statute defines “damage” as “any impairment

to the integrity . . . of data . . . of information.” 18 U.S.C. Section 1030(e)(8). The court did not

Because Safeguard failed to raise a valid objection to Shurgard’s CFAA claims, the court

denied Safeguard’s motion to dismiss.