The recent guilty plea of SAC Capital to insider trading, as well as the paying of a $1.2 billion fine, is a big victory for Preet Bharara, the US Attorney on the case, as well as his team of prosecutors. It also is a major vindication for their investigation of one of the biggest hedge funds in the country.
But this decision to indict the company rather than the founder and billionaire manager – Steven Cohen – is getting a good deal of criticism.
According to Edwin Burton, a professor of economics, a company is not able to commit a crime. The federal government should go after the people who are doing things that are illegal. There are many innocent bystanders who got hurt. Why is the bad guy the one who sweeps the floor, Burton asked this week.
The Department of Justice notes in its Principles of Federal Prosecution of Business Organizations that corporate prosecutions can hurt investors, employees and other innocent parties. For instance, Arthur Anderson collapsed after it was indicted 11 years ago. This reduced the number of major accounting firms to only four. This is often cited as a good example of the serious collateral damage that can result from corporate prosecutions.
However, SAC Capital is not very similar to Arthur Anderson.
According to Lawrence Friedman, who is a professor of law at the New England School of Law, justice was probably done in this case. He noted that it is hard to come up with a better case example where the goals of criminal liability were advanced.
Bharara noted in an interview this week that he did not want to give comments on the SAC case and plea, which must still be approved by a judge. But he said that there are many ways to punish wrongdoing. Sometimes a person is charged, and sometimes you look for a big financial penalty. Sometimes people are sent to jail, and sometimes you make the entire company take the blame. He said that just because you do one thing in one case does not mean you can’t do something else in another case.
The SAC case may turn out to be a textbook example of how to prosecute a company, and a sign of much more aggressive prosecutions for corporate crimes.
Burton is right that only a human can do a crime, but the idea that corporations are the same as people according to law goes back to an early Supreme Court case in the early 1800s. That case stated that corporations, like people, are able to enter into a contract. That view was reestablished recently with the Citizens United Case, which stated that companies are entitled to free speech rights.
The US government has prosecuted corporations for years whose bosses engaged in criminal activity. According to the DOJ, corporations should not be given lenient treatment because they are not people, but they should not be given harsher treatment. Strong enforcement of criminal laws against corporations has great benefits for the public.
And the prosecution of SAC Capital was well deserved. That firm engaged in brazen insider trading, some of the worst in the history of Wall Street. The firm admitted to doing five felonies, and six traders at the firm have pleaded guilty to fraud. Two more are waiting for a trial for an insider trading scheme and securities fraud that was in operation for more than 10 years.