White collar crime's gray area: the anomaly of criminalizing conduct not civilly actionable.

ABSTRACT

Substantive and procedural differences between criminal and civil treatment of conduct sounding in securities fraud combine to cause the following anomaly: certain false statements to investors may be actionable criminally--subjecting individual defendants to imprisonment--but not civilly--leaving victims without remedy. The imposition of criminal punishment for conduct that does not invoke civil liability risks disrupting the current scheme of securities regulation, at the expense of considerations deemed important by Congress and the courts. Moreover, the extension of criminal liability beyond the scope of civil liability debunks the assumption, which underlies the current scholarship on the civil-criminal divide, that criminal liability is a subset of civil liability in circumstances where the relevant conduct injures identifiable individuals. This article demonstrates that criminal liability is more expansive than civil liability in the context of securities fraud, analyzes the impact of this anomaly on the current scheme of securities regulation, and considers whether the rationales underlying the leading theories of the civil-criminal divide explain this unique liability configuration. This article concludes that, although this configuration has destabilizing effects, it is arguably consistent with many of the theories underlying the civil-criminal divide. Therefore, this article proposes a two-step solution to further the rationales of the civil-criminal divide while preserving the delicate balance of the current scheme of securities regulation.

I. INTRODUCTION

Substantive and procedural differences between criminal and civil treatment of conduct sounding in securities fraud combine to cause the following anomaly: certain false statements to investors may be actionable criminally--subjecting individual defendants to imprisonment--but not civilly--leaving victims without remedy. This article examines five of these differences, demonstrates how they combine to cause this anomalous civil and criminal treatment of conduct sounding in securities fraud, analyzes the impact of this anomaly on the current scheme of securities regulation, and considers whether the rationales underlying the leading theories of the civil-criminal divide explain the anomaly.

Part II of this article demonstrates that discrepancies between criminal and civil liability for securities fraud result in the criminalization of conduct not civilly actionable. First, the elements of the federal crime are often broader than the elements of the civil cause of action. In federal criminal prosecutions for conduct sounding in securities fraud, a lower materiality standard often applies than in civil cases, forward-looking statements are not protected by the "safe harbor" that is often invoked in civil cases, and liability is not confined to primary violators as in private civil actions. Moreover, at the state level, broad blue-sky laws and federal preemption of state civil securities class actions combine to criminalize conduct that is not civilly actionable. Finally, courts do not subject criminal indictments to the same level of pretrial scrutiny as civil complaints, and motions to dismiss are less favored in criminal cases than in civil cases.

Part III of this article shows that the imposition of criminal punishment for conduct not civilly actionable risks disrupting the current scheme of securities regulation, at the expense of considerations deemed important by Congress and the courts. The lower materiality standard and the unavailability of the safe harbor in criminal cases may chill corporate disclosure and may affect what information reasonable investors rely upon when making investment decisions. In addition, the potential of criminal aiding and abetting liability may discourage secondary actors from advising less established companies. Further, the broader criminal statutes may shift enforcement responsibility away from the Securities and Exchange Commission ("SEC") to the Department of Justice and to the states. Moreover, the criminalization of wide swathes of corporate conduct affords prosecutors broad discretion to decide whom to prosecute, invoking concerns about selective prosecution and separation of powers, and affords the SEC remarkable leverage in negotiating civil settlements. Finally, the narrow scope of private civil liability leaves injured investors without remedy.

Part IV of this article examines whether any of the dominant theories about the civil-criminal divide explains the anomalous relationship between civil and criminal liability in the context of securities fraud. The extension of criminal liability beyond the scope of civil liability debunks the assumption underlying the current scholarship on the civil-criminal divide that criminal liability is a subset of civil liability, but an examination of the rationales behind the leading theories of the civil-criminal divide lends some support for this unique configuration of liability in the context of securities fraud.