Scooter, Paris, Criminal Sentencing and Corporate Law

Pundits, politicians and ordinary citizens are vigorously debating whether famous defendants Scooter Libby and Paris Hilton are getting what they deserve, or whether, instead, they are unfairly being made an examples of because of their fame and notoriety.  Similar questions were raised when Martha Stewart served her sentence for obstruction of justice.

This roiling debate has led me ponder what we want from criminal sentences and how to judge whether they are fair.  Our sentencing policies and practices are expected to acheive many goals.  We want criminal sentences to deter future crimes, punish the wrongdoer, teach the criminal “a lesson”, and avenge harm to society or individual victims.  Fairness also requires that like cases be treated alike, a sentiment that seems to be driving the current popular debate.

Where one of society’s goals in sentencing is deterring future crime, we may misstep when we reflexively demand “hard time for hard crime.”  This view is advanced by scholars Paul Robinson and John Darley, who argue that, counter to common perceptions, excessively harsh penalties are not likely to deter crime.  Instead Robinson and Darley argue that to induce compliance with law, legal penalties must be consistent with citizens’ intuitions of desert.  That is, the public must believe the law is fair and reasonably enforced if they are to be expected to obey it. 

This insight from criminal law can also be applied to the corporate liability context, where the corporate officials who breach their fiduciary duties or violate securities laws can face the prospect of harsh monetary penalties.  In each instance, the financial penalty is measured by harm caused to the corporation and its investors, a figure which can easily run into hundreds of millions of dollars. 

This specter of draconian penalties for corporate law violations has led to a peculiar reality that corporate officers and directors almost never personally pay damages for their violations of law.  Instead, such penalties are averted through a number of protective legal doctrines and through insurance and indemnification provions which ensure that third parties almost always pay costs associated with defending corporate officials against charges of wrongdoing.

In my article Law, Norms, and the Breakown of the Board I argue that a new approach is needed to enhance the legitamacy of corporate law rules and promote law compliance by corporate officials.  Moderate penalties, applied more consistently would likely fit the bill.  To be effective, such penalties must directly affect culpable actors.  We should therefore should require corporate wrongdoers to pay personally at least a portion of the penalty for the legal violation.  Requiring personal payments from culpable corporate officials can be accomplished through changes in D&O insurance policies and practices, or through reforms of the litigation settlement process.  In particular, judges can reject settlements of shareholder lawsuits that do not provide for personal payments when there is credible evidence of wrongdoing by individual defendants.


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