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Following the recent spate of corporate accounting scandals, popular attention has focused on legislative responses at the federal level, particularly on the Sarbanes-Oxley Act of 2002. This attention certainly is merited as Sarbanes-Oxley has opened a new chapter in the federalization of criminal law. Among other things, the Act creates additional protections for corporate whistleblowers, 18 U.S.C. § 1513(e), prohibits officers and directors of any public company from seeking to improperly influence outside auditors, and amends the federal obstruction of justice statute to prohibit anyone from destroying documents related to a securities fraud investigation. 18 U.S.C. §§ 1519-1520. Nonetheless, the various states have not allowed Congress’ recent activity to diminish their own efforts to regulate business activity and to formulate their own legislative responses to the real and perceived problems facing corporate America. Indeed, a recent study conducted by Stateside Associates of Arlington, Virginia, reveals that since January 2000, twenty-eight states have made significant changes to their criminal laws governing business conduct, including new statutes, stronger criminal penalties for existing crimes, and developments in case law and attorney general procedures. This essay highlights some of the study’s findings on the recent developments in state corporate criminalization. 

Stateside Associates undertook its Criminalization Assessment to examine state policy that could affect business-related crimes. To complete this study, Stateside Associates reviewed all pending and enacted legislation from 2000-2003 for legislation that created new crimes for activities conducted in the course of business, changed the mens rea standard for crimes, or otherwise changed the exposure of a corporation and its employees to criminal prosecution. Stateside Associates also examined whether relevant state agencies provide any written or informal guidance as to how they interpret their respective state’s new laws governing environmental protection, securities, and consumer protection. Finally, Stateside Associates reviewed the various states’ caselaw for judicial precedents on criminal prosecutions of corporations and their effect on the mens rea standard.

The study reveals several trends in the states’ laws governing white collar crime. First, several states have criminalized aspects of business conduct that previously had been governed by civil laws. Mississippi, for example, recently enacted a bill that seeks to make it easier to prosecute white collar crime by using a corporate conflict of interest theory. Specifically, Mississippi’s H.B. 463 (2001) prohibits directors or officers, under pain of up to five years imprisonment, from taking any business actions that would create a conflict of interest between their personal interests and the interests of the corporation. 

Mississippi has not been alone in enacting legislation to address corporate fraud. Several states have moved to align their corporate law with the requirements of Sarbanes-Oxley. California, for example, has recently enacted a trio of corporate anti-fraud bills, which closely resemble SarbanesOxley’s requirements. S.B. 777 (2003) creates a $10,000 fine for unjustified firings of a whistle-blower, and protects from retaliation workers who alert authorities about illegal practices. S.B. 523(2003) requires major corporations and publicly traded companies to quickly report to shareholders and other authorities important false or misleading statements made by corporate officers. It also establishes a fine up to $1 million for withholding this information. Finally, A.B. 1031 (2003) increases criminal penalties in California for securities fraud to $25 million and up to five years in prison. That provision also makes it illegal to destroy documents during a securities fraud investigation. Several other states, including Connecticut, Kansas, and Wyoming, also have enacted legislation to align their corporate law with Sarbanes-Oxley’s various requirements.

The trend toward increasing criminal penalties for white collar offenses has not been limited to the fraud context. The Massachusetts legislature, for example, recently responded to an April 2003 oil spill in Buzzards Bay by enacting what some environmental experts have described as the toughest environmental protection law in the country. The Environmental Endangerment Act, H.B. 4004 (2003), creates criminal punishment for any person or organization that knowingly or recklessly commits an environmental violation and causes serious bodily injury to another person or damages natural resources. The potential penalties include prison sentences of up to 20 years and impose fines up to $500,000 for a first offense, and up to $2 million for subsequent offenses. Moving beyond the realm of environmental law, the Washington legislature has enacted a new law regarding the licensing and regulation of money services with criminal penalties for false statements, material misrepresentations, or deliberate omissions in records required under the Act. H.B. 1455 (2003). Texas, moreover, recently enacted H.B. 2424 (2003), which assigns new criminal penalties to advertising violations for tobacco products and auto dealers.

In addition, many other states are presently considering legislation which would create new criminal penalties. In Massachusetts, for example, S.B. 103 (2003) was approved and became effective on July 1, 2004, creating new criminal penalties for officers and directors of corporations when they knowingly sign a false statement or report. A bill was also considered (and eventually referred to study) that would have created new penalties for employers who attempt to restrict employees from selling or divesting the securities of the employer if it is in connection with an employee benefit plan (S.B. 59). Likewise, the Louisiana legislature recently considered a bill that would have provided that a business corporation may be subject to criminal liability in a felony case based on failure to maintain effective supervision by the board of directors, an executive officer, or any other person who is involved in forming company policy. H.B. 492 (2003). The bill further would have provided that acquittal of the individual upon whose conduct liability of the corporation is based is not a valid defense for the accused corporation.

The Stateside Associates’ study also reveals that several states have recently moved to weaken the mens rea standard in the criminal laws governing business conduct. Some of these changes have occurred through legislation. Delaware, for instance, has recently toughened the mental state standard for filing environmental reports with the state Department of Natural Resources and Environmental Control. S.B. 60 (2003). Whereas the statute previously had been limited only to “knowing” violations, the amended version subjects even those who commit “reckless” violations to the possibility of up to 6 months imprisonment. In other instances, the courts of the various states have altered the mens rea standard. The study concludes that in twenty-four states, the courts have weakened the general mens rea requirement for criminal liability in the context of corporate white collar crime. In Pennsylvania, for example, the state courts have created a broad public-welfare exception to general criminal intent requirements, specifically in the context of corporate environmental violations. In Commonwealth of Pennsylvania v. Sanico, 830 A.2d 621 (Pa. 2003), the state supreme court affirmed the trial court’s order finding the defendant guilty of hauling illegal solid waste because the transportation equipment did not indicate the type of waste. In examining the mens rea issues, the court noted that, “[a] criminal conviction typically requires both an actus and a criminal negligence . . . As we noted in CSX, however, ‘public welfare statutes’ often dispense with the intent requirement imposing, instead, absolute liability.” 830 A.2d at 626. The court reasoned that because the solid waste disposal statute was intended to protect the public health, and because the statute did not specifically annunciate a mens rea standard, the statue “was intended to be enforced without regard to criminal intent.” 830 A.2d at 627-28.

Finally, the Stateside Associates study reveals that many states have responded to the real and perceived problems facing corporate America by enacting harsher criminal penalties for white collar offenses. For instance, Kansas enacted the 2003 Securities Penalties Act, S.B. 110, to increase criminal penalties levels based on the amount of loss. Under the Act, the maximum prison sentence for a defendant of white collar crimes (with no prior criminal convictions) would be 43 months—more than double the previous Kansas penalty. Likewise, Texas has enacted H.B. 1218 (2003), which increases the penalty for violating the Public Accountancy Act from a Class B misdemeanor to a felony and increases the administrative penalty the agency could levy from $1,000 to $100,000 per violation. Similar increases in penalties have occurred in Connecticut, Delaware, Illinois, and Massachusetts, and legislation intended to accomplish the same result is pending in New York.

Note from the Editor: The Federalist Society takes no positions on particular legal and public policy matters. Any expressions of opinion are those of the author. We welcome responses to the views presented here. To join the debate, please email us at info@fedsoc.org.