Tag: Corporate liability


Individual Indemnity Protections After the “Yates Memo”

Joseph A. Hall is a Partner and member of the Corporate Department at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum authored by Mr. Hall, John A. Bick, Melissa Glass, and Louis L. Goldberg. This post is part of the Delaware law series; links to other posts in the series are available here.

On November 16, 2015, Deputy Attorney General Sally Quillian Yates gave a speech regarding the implementation of the Department of Justice’s recent policy initiatives to facilitate the prosecution of individuals in corporate cases outlined in the “Yates Memo,” issued on September 9, 2015. These policy initiatives have now been incorporated in the U.S. Attorneys’ Manual. There is some debate about what is new in the Yates memo and what the potential implications for companies and their directors and officers may be, but one thing is clear—the question of individual liability is on the front burner once again. As evidence, note that Assistant Attorney General for the Antitrust Division William Baer recently emphasized the potential for increased civil accountability for individuals as a result of the Yates Memo, and stated that the Antitrust Division in particular was assessing whether there should be more individual liability in civil antitrust investigations. Unsurprisingly, we are now increasingly advising clients on the implications for individual indemnity protections and D&O insurance policies.

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Corporate Risk-Taking and Public Duty

Steven L. Schwarcz is the Stanley A. Star Professor of Law & Business at Duke University School of Law. This post is based on a draft article by Professor Schwarcz, available here.

Although corporate risk-taking is economically necessary and even desirable, it can also be harmful. There is widespread agreement that excessive corporate risk-taking was one of the primary causes of the systemic collapse that caused the 2008-09 financial crisis. To avoid another devastating collapse, most financial regulation since the crisis is directed at reducing excessive corporate risk-taking by systemically important firms. Often that regulation focuses on aligning managerial and investor interests, on the assumption that investors generally would oppose excessively risky business ventures.

My article, Misalignment: Corporate Risk-Taking and Public Duty, argues that assumption is flawed. What constitutes “excessive” risk-taking depends on the observer; risk-taking is excessive from a given observer’s standpoint if, on balance, it is expected to harm that observer. As a result, the law inadvertently allows systemically important firms to engage in risk-taking ventures that are expected to benefit the firm and its investors but, because much of the systemic harm from the firm’s failure would be externalized onto other market participants as well as onto ordinary citizens impacted by an economic collapse, harm the public.

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Holding Corporate Officers and Directors Accountable for Failures of Corporate Governance

The following post comes to us from Greg M. Zipes, a trial attorney with the United States Department of Justice. This post is based on his article Ties that Bind: Codes of Conduct that Require Automatic Reductions to the Pay of Directors, Officers, and Their Advisors for Failures of Corporate Governance that was recently published in the Journal of Business and Securities Law. All comments are in Mr. Zipes’ individual capacity and do not reflect the views of the Department of Justice.

Executives and directors at large corporations rarely face personal liability for failures of oversight that lead to large penalties or losses to their companies. As outlined in my recent article, the American consumer can help provide a solution to this lack of accountability.

I propose that corporate executives and directors sign binding codes of conduct requiring them to uphold specific standards within their corporations. They would agree to specific, transparent reductions in compensation if they fail to live up to these standards. This proposal does not rely on the altruism of these corporate heads to sign. Rather, it assumes that those consumers, dismayed by corporate excesses, will direct at least a portion of their business towards those companies with executives who are willing to put their compensation on the line.

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Corporate Risk-Taking and the Decline of Personal Blame

Steven L. Schwarcz is the Stanley A. Star Professor of Law & Business at Duke University School of Law.

Federal agencies and prosecutors are being criticized for seeking so few indictments against individuals in the wake of the 2008 financial crisis and its resulting banking failures. This article analyzes why—contrary to a longstanding historical trend—personal liability may be on the decline, and whether agencies and prosecutors should be doing more. The analysis confronts fundamental policy questions concerning changing corporate and social norms. The public and the media perceive the crisis’s harm as a “wrong” caused by excessive risk-taking. But that view can be too simplistic, ignoring the reality that firms must take greater risks to try to innovate and create value in the increasingly competitive and complex global economy. This article examines how law should control that risk-taking and internalize its costs without impeding broader economic progress, focusing on two key elements of that inquiry: the extent to which corporate risk-taking should be regarded as excessive, and the extent to which personal liability should be used to control that excessive risk-taking.

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The Credit Suisse Guilty Plea: Implications for Companies in the Crosshairs

The following post comes to us from Christopher Garcia, partner in the Securities Litigation and White Collar Defense & Investigations practices at Weil, Gotshal & Manges LLP, and is based on a Weil Gotshal alert by Mr. Garcia and Raqel Kellert. The complete publication, including footnotes, is available here.

The announcement of the Credit Suisse guilty plea on May 19, 2014 marks the first time in more than a decade that a large financial institution has been convicted of a financial crime in the United States. For this reason alone, some will herald it a watershed moment in the history of corporate criminal liability. But the government’s well-publicized efforts to mitigate the collateral consequences resulting from the plea will likely limit the plea’s practical significance for companies that find themselves in the unenviable position of negotiating a resolution of criminal allegations with the government. This post will explore the potential implications of the Credit Suisse guilty plea for corporate criminal liability.

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The Three Justifications for Piercing the Corporate Veil

Jonathan R. Macey is the Sam Harris Professor of Corporate Law, Corporate Finance and Securities Law at Yale University. The following post is based on an article co-authored by Professor Macey and Joshua Mitts of Sullivan & Cromwell LLP. The views in this post are those of Mr. Mitts and not his employer.

The doctrine of piercing the corporate veil is shrouded in misperception and confusion. On the one hand, courts understand the fact that the corporate form is supposed to be a juridical entity with the characteristic of legal “personhood.” As such courts acknowledge that their equitable authority to pierce the corporate veil is to be exercised “reluctantly” and “cautiously.” [1] Similarly, courts also recognize that it is perfectly legitimate to create a corporation or other form of limited liability company business organization such as an LLC “for the very purpose of escaping personal liability” for the debts incurred by the enterprise. [2]

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The Alcoa FCPA Settlement: Are We Entering Strict Liability Anti-Bribery Regime?

The following post comes to us from Gregory M. Williams, partner focusing on complex commercial litigation and arbitration and the Foreign Corrupt Practices Act at Wiley Rein LLP, and is based on a Wiley Rein article by Mr. Williams, Ralph J. Caccia, and Richard W. Smith.

“This Order contains no findings that an officer, director or employee of Alcoa knowingly engaged in the bribe scheme.”

There are several notable aspects of aluminum producer Alcoa, Inc.’s (“Alcoa”) recent FCPA settlement. The $384 million in penalties, forfeitures and disgorgement qualify as the fifth largest FCPA case to date. Further, it is remarkable that such a large monetary sanction was imposed when the criminal charges brought by the U.K. Serious Fraud Office against the consultant central to the alleged bribery scheme were dismissed on the grounds that there was no “realistic prospect of conviction.” Perhaps most striking, however, is the theory of parent corporate liability that the settlement reflects. Although there is no allegation that an Alcoa official participated in, or knew of, the improper payments made by its subsidiaries, the government held the parent corporation liable for FCPA anti-bribery violations under purported “agency” principles. Alcoa serves as an important marker in what appears to be a steady progression toward a strict liability FCPA regime.

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CEO Compensation and Corporate Risk

The following post comes to us from Todd Gormley of the Department of Finance at the University of Pennsylvania, David Matsa of the Department of Finance at Northwestern University, and Todd Milbourn, Professor of Finance at Washington University in St. Louis.

Every firm is exposed to business risks, including the possibilities of large, adverse shocks to cash flows. Potential sources for such shocks abound—examples include disruptive product innovations, the relaxation of international trade barriers, and changes in government regulations. In our paper, CEO Compensation and Corporate Risk: Evidence from a Natural Experiment, forthcoming in the Journal of Accounting and Economics, we examine (1) how boards adjust CEOs’ exposure to their firms’ risk after the risk of such shocks increase and (2) how incentives given by the CEOs’ pre-existing portfolios of stock and options affect their firms’ response to this risk. Specifically, we study what happens when a firm learns that it is exposing workers to carcinogens, which increase the risks of significant corporate legal liability and costly workplace regulations.

The results presented in this paper suggest that corporate boards respond quickly to changes in their firms’ business risk by adjusting the structure of CEOs’ compensation, but that the changes only slowly impact the overall portfolio incentives CEOs face. After the unexpected increase in left-tail risk, corporate boards reduce CEOs exposure to their firms’ risk; the sensitivities of the flow of managers’ annual compensation to stock price movements and to return volatility decrease. Various factors likely contribute to the board’s decision, including CEOs’ reduced willingness to accept a large exposure to their firms’ risk and the decline in shareholders’ desired investment after left-tail risk increases. Indeed, managers act to further reduce their exposure to the firm’s risk by exercising more options than do managers of unexposed firms. These changes, however, only slowly move CEOs’ overall exposure to their firm’s risk because the magnitude of their pre-existing portfolios continues to influence their financial exposure to the firm.

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Clarifying Aiding and Abetting under the Commodities Exchange Act

Brad Karp is chairman and partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss client memorandum by Mr. Karp, Eric GoldsteinMark Pomerantz, and Daniel J. Toal.

On September 23, 2013, the United States Court of Appeals for the Second Circuit issued a decision clarifying the standard for aiding and abetting liability under the Commodities Exchange Act (“CEA”). The decision, in In re Amaranth Natural Gas Commodities Litigation, No. 12-2075-cv (2d Cir. Sept. 23, 2013), affirmed a judgment of the United States District Court for the Southern District of New York, which dismissed a putative class action filed by purchasers of natural gas futures contracts against J.P. Morgan Chase & Co., J.P. Morgan Chase Bank, Inc. and J.P. Morgan Futures, Inc. (“JPMorgan”). The purchaser plaintiffs claimed that Amaranth, a hedge fund for which JPMorgan provided clearing broker services, manipulated natural gas futures prices on the NYMEX commodities exchange, and that JPMorgan aided and abetted Amaranth’s manipulation.

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Court Curtails Territorial Reach of Criminal Liability Under Section 10(b)

The following post comes to us from Jonathan R. Tuttle, partner in the litigation department at Debevoise & Plimpton LLP, and is based on a Debevoise & Plimpton client update.

On August 30, 2013, the United States Court of Appeals for the Second Circuit unanimously held that Section 10(b) of the Securities Exchange Act of 1934 (“Section 10(b)”) does not apply to extraterritorial conduct, “regardless of whether liability is sought criminally or civilly.” Interpreting the scope of the Supreme Court’s landmark ruling in Morrison v. National Australian Bank Ltd., [1] the Second Circuit’s significant decision in United States v. Vilar, et al. means that a criminal defendant may be convicted of fraud under Section 10(b) only if the defendant engaged in fraud “in connection with” a security listed on a United States exchange or a security “purchased or sold” in the United States. In reaching its conclusion, the court rejected the government’s attempts to distinguish criminal liability under Section 10(b) from the civil liability at issue in Morrison, holding that “[a] statute either applies extraterritorially or it does not, and once it is determined that a statute does not apply extraterritorially, the only question we must answer in the individual case is whether the relevant conduct occurred in the territory of a foreign sovereign.”

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