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March 14, 2007

Refining the Apple Rule

Matthew Bishop of The Economist, who has been writing recently on imposition of ill-advised regulation on business, has come up with a refinement to Larry Ribstein's Apple Rule (see also here) -- i.e., the exception from corporate criminal liability for a popular (as opposed to an unpopular) business executive who is involved in alleged wrongdoing at the executive's company:

This suggests to The Economist the need for a new Apple rule to guide prosecutors—at least in cases, such as backdating, where the main supposed victim is a company’s shareholders. Our rule: if a criminal prosecution is likely to hurt a company’s share price, then don’t prosecute.

Are we serious? Well, we think it's worth a discussion . . . Cost-benefit analysis is largely absent from America’s approach to regulating business wrongdoing, not only in criminal prosecutions, and that is probably one of the main reasons why America’s capital markets are indeed losing their competitive edge. At the very least, encouraging the Department of Justice and the Securities and Exchange Commission to employ a few less lawyers and a few more economists would be a step in the right direction.

But what about the Dell Rule? -- the exception in which a popular chairman of a company gets a pass on criminal liability when the chairman steps back into the CEO seat with the company under the cloud of a criminal investigation. We already know what happens to an unpopular chairman when the Dell Rule does not apply.

Posted by Tom at March 14, 2007 4:30 AM

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