Inasmuch as I’ve been in an extremely busy period in my practice recently, I haven’t had time to blog much. But I came across something yesterday that I wanted to pass along.
Larry Ribstein — the University of Illinois law professor who has done more than anyone in the blogosphere to decry the enormous financial and human cost of the federal government’s criminalization of business lottery over the past decade – has posted on SSRN a new paper that he has been working on for some time – Agents Prosecuting Agents:
Significant questions have been raised concerning the efficiency of criminalizing agency costs and the problems of excessive prosecution of crimes committed by corporate agents. This paper provides a new perspective on these questions by analyzing them from the perspective of agency cost theory. It shows that there are close analogies between the agency costs associated with prosecutors in corporate crime cases and those of the agents being prosecuted. The important difference between the two contexts is that prosecutors are not subject to many of the standard mechanisms for dealing with corporate agency costs. An implication of this analysis is that society must decide if prosecuting corporate agents is worth incurring the agency costs of prosecutors. [. . .]
This paper contributes to this debate by approaching the subject from the perspective of agency theory and analogizing abuses of power by prosecutors to those of corporate agents. It shows that prosecutors’ conduct involves many of the same agency cost problems as the corporate conduct they are prosecuting. At the same time, the sort of market and institutional mechanisms that can constrain corporate agents may not be effective for prosecutorial agents. Moreover, the particular challenges of corporate criminal prosecutions exacerbate prosecutorial agency costs in this context.
This agency analysis illuminates whether and to what extent corporate agency costs should be criminalized. It shows that if the criminal justice system is to be used to punish corporate agents for harm they cause in the course of their employment, then society must be prepared to tolerate increased costs associated with delegating discretion to its own agents, those who prosecute these crimes. Prosecutorial agency costs, in turn, must be taken into account in designing and weighing the costs and benefits of criminal liability of corporate agents. [. . .]
The agency costs associated with prosecution of corporate crime are at least as consequential as those related to the crimes being prosecuted. This matters for at least two reasons. First, combining analyses of the two types of agency costs sheds light on how to appropriately constrain excessive or misguided corporate prosecutions. Second, prosecutorial agency costs bear on the extent to which the conduct of corporate agents should be criminalized at all given the weak constraints on prosecutorial conduct in enforcing the criminal law. The criminal laws may provide significant deterrence of corporate agents’ misconduct that other mechanisms cannot fully supply. However, we should not assume that it is socially valuable to use the criminal laws to ensure totally loyal corporate agents unless we are ready to demand similar perfection from our prosecutors.
We in Houston know all about the implications of the problem that Professor Ribstein addresses.
“It shows that if the criminal justice system is to be used to punish corporate agents for harm they cause in the course of their employment, then society must be prepared to tolerate increased costs associated with delegating discretion to its own agents, those who prosecute these crimes.”
Agreed. Deterring white collar crime is worth the cost of prosecuting corporate agents’ misconduct.
Victims of Enron, Bernie et al. would, in my opinion, agree that the costs of prosecuting
victimless crimes is a huge, unjustifiable cost to society.
Mr. Kirkendall:
I greatly enjoy reading your blog and particularly enjoy your taste in music.
However….
The constant bleating about the criminalization of agency costs and the sobbing over the great con man Jeff Skilling get to be just a bit much.
Somehow American business has not collapsed.
Thieves and con men in expensive suits deserve no more and no less justice than the desperate kid who sticks up a liquor store. Wrapping it into a business law theory and the economics of agency costs does not change a simple fact – stealing with a fountain pen is still stealing.
Rusty, what exactly did Mr. Skilling steal? Even the government did not accuse him of embezzling a dime from Enron.
There is a big difference between prosecuting agency costs and prosecuting clear-cut crimes, such as embezzlement. The difference relates primarily to the nature of the evidence involved, the relevance of contracts, and the subtleties of dividing responsibility between corporate actors.
Professor Ribstein has put it this way. Suppose somebody mugs you on the street. There is no question that is a crime.
However, what if the mugger asks you first if he can borrow your wallet, you loan it to him, and then he doesn’t give it back in time? What if the mugger asks your employee who’s running the store for you whether he can borrow some money, the employee allows it and then the mugger doesn’t pay it back? What if the “thief” is another employee who says the manager gave him the money as bonus compensation?
Who is liable in these situations turns on the contracts among the various parties. Proof depends on who said what to whom. Can we rely on what the witnesses say about this? What if the prosecutor tells the employee who’s minding the store that he’ll not face prosecution for conspiracy if he spills the beans on the other employee who says that the manager gave him bonus compensation?
Society needs to have appropriate punishment and accounting for clear-cut crimes. But in cases such as Enron or Lehman Brothers, the civil lawsuits — unlike the criminal prosecution – included all the people involved, including the directors who approved wrongful corporate conduct and accountants and lawyers who may have facilitated it. That is a much more rational and effective way in which to deal with agency costs than attempting to make them appear to be clear-cut crimes, which they simply are not.
To make matters worse, criminal prosecutions over merely questionable business judgment obscure the true nature of risk and fuel the myth that investment loss results primarily from criminal misconduct. Taking business risk is what leads to valuable innovation and wealth creation. Throwing creative and productive business executives such as Michael Milken and Jeff Skilling in prison does nothing to educate investors about the true nature of risk and the importance of diversification.
The supposed payoff to criminal prosecutions of agency costs is deterrence. But some businesspeople will keep on pulling these shenanigans regardless of the prosecutions, while the legitimate risk-takers who create jobs and wealth for the community sorts will be the ones who are deterred.
I’m not suggesting that the Bernie Madoffs of the world should be encouraged. But the cases against businesspeople such as Milken, Skilling, Hank Greenberg, Jamie Olis, the NatWest Three and the Merrill Lynch bankers are fundamentally different than Madoff’s scam. I am not comfortable that politically ambitious prosecutors can tell the difference.