The Market for Corporate Criminals

Andrew Jennings is an Assistant Professor of Law at Brooklyn Law School. This post is based on his recent paper, forthcoming in the Yale Journal on Regulation.

There’s a problem at the intersection of M&A and corporate crime. The problem arises from buyers’ acquisition of not just targets’ private assets and liabilities but also their criminal and regulatory (i.e., quasi-criminal) liabilities. That is, if A commits a criminal offense, and if B acquires A, B is liable for A’s offense despite being uninvolved in its commission. In the case of tort or contract claims, successor liability can be justified as preventing firms from evading private obligations through restructuring. In arm’s-length transactions, buyers can manage private successor liability through contractual terms that reallocate those costs and risks onto sellers. In the case of successor liability for criminal offenses, however, the serious non-financial consequences of criminal conviction (or even potential conviction) cannot be neatly managed through contractual risk allocation. Instead, distinctive consequences of criminal liability could frighten potential buyers away from otherwise-attractive deals. The result would be a suboptimal level of M&A activity: firms that would be ideal targets for acquisition but for their criminal exposure might sell for less efficient prices or to less efficient buyers, or they might not sell at all. As a result, this problem could represent social cost in that one of corporate law’s key mechanisms for addressing business deficiencies—the market for corporate control—might fail when the deficiency in question is a culture of lawbreaking.

The acquisition of Bankrate—a once-public financial firm—by Red Ventures—a private marketing company—is an instructive example. In 2012, the SEC raised concerns with Bankrate about its financial reporting, leading to the discovery that its CFO had engaged in a form of securities fraud known as a cookie-jar accounting. In 2017, Red Ventures, although it was aware of the accounting issues, bought Bankrate for approximately $1.4 billion. The investigation continued and later that year Red Ventures and the DOJ entered into a non-prosecution agreement (NPA). Under the NPA, the DOJ acknowledged that “Red Ventures acquired Bankrate, Inc. after the criminal conduct had taken place and had been investigated by the government, and Red Ventures had no involvement in any of the misconduct . . .”. Nevertheless, Red Ventures “admit[ted], accept[ed], and acknowledge[d] that it [wa]s responsible under United States law for the acts of [Bankrate’s former] officers, directors, employees, and agents” in connection with the old CFO’s fraud.

By the time Red Ventures signed the NPA, Bankrate’s former CFO was a year into a ten-year fraud sentence and had not worked at the company for over four years. Nevertheless, Red Ventures was obliged to pay $15 million, plus interest, in disgorgement and another $13 million in restitution to former Bankrate shareholders harmed by the fraud. These amounts represented a righting of the world: victims were compensated and Red Ventures was not allowed to keep its predecessor’s ill-gotten gains. In one light, this criminal resolution had a similar effect to successor liability for private claims: those with tort or contract claims against a predecessor may seek compensation from its successor. Yet, beyond those compensatory provisions, the NPA also required Red Ventures to pay an additional $15.54 million penalty. That is, Red Ventures was punished for misconduct that the DOJ acknowledged it had nothing to do with. These amounts were in addition to the company’s legal fees and other costs of cooperating with the government’s investigation. The NPA also imposed future costs in the form of cooperation and compliance undertakings, which were meant to ensure that the company would not engage in further misconduct notwithstanding that Red Ventures didn’t own Bankrate at the time the accounting fraud happened. The disclosed restitution, disgorgement, and penalties represented about 3% of Bankrate’s $1.4 billion purchase price. Other costs, like legal fees, are not publicly available but were likely significant: corporate investigations can cost over a million dollars per month.

All this, despite the government’s acknowledgment that Red Ventures hadn’t engaged in the prior misconduct: Bankrate, the company it acquired, had. Yet the Bankrate case demonstrates that what would be remarkable in the individual context—that one person assumes criminal liability for another—is unremarkable in the corporate context. This effect follows from two doctrines. First, a firm is vicariously liable for crimes committed by employees and agents within the scope of their employment, so long as they had some intent to benefit the firm, however slight the intent or the benefit. Second, an acquirer bears successor liability for wrongdoing of a predecessor firm, even if all misconduct stopped before the succession. Successor liability makes a buyer responsible for torts or contractual breaches committed by its predecessor. Indeed, the restitution Red Ventures paid under the NPA to Bankrate shareholders had a compensatory effect similar to what private securities litigation could have achieved. But successor liability also makes an acquirer responsible for criminal offenses committed by its predecessor. Beyond the economic transfer effected by its NPA with the DOJ, Red Ventures was made to bear penalties and other sanctions as if it itself should be blamed for the misconduct of Bankrate’s former CFO.

Jumping off from the Bankrate case, in my article The Market for Corporate Criminals I explain why criminal successor liability risks undermining both M&A markets and the public interest in compliance. There is social cost in otherwise-sound deals not happening. There is a related, more specialized social cost in compliance-enhancing M&A not happening. I propose prosecutorial policies and practices in the article that would go a long way toward addressing these problems. They include M&A-contingent penalties, clear and generally applicable amnesty policies for nonculpable buyers, and—in certain cases—forced M&A. Under these approaches, criminal M&A would no longer be inhibited by the threat of prosecutors holding buyers responsible for sellers’ misdeeds. Prosecutors, meanwhile, would realize powerful new approaches for addressing corporate wrongdoing and achieving more effective general and specific deterrence. This new direction would require pragmatic policy carveouts—including buyer amnesties—from the doctrines underlying criminal successor liability. All in, though, these new policies and practices would help foster M&A while advancing the public’s interest in deterring, punishing, and reforming corporate criminals.

The complete paper is available for download here.

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