Why Elizabeth Warren’s Effort to Hold Bank Executives Accountable May Fall Short

Why Elizabeth Warren’s Effort to Hold Bank Executives Accountable May Fall Short


Even if it did pass — which seems unlikely in the current anti-regulation environment — the proposed certification requirement is unlikely to result in a wave of prosecutions. The criminal law is a blunt instrument for pursuing corporate misconduct, and executives are experts at keeping problems at arms-length, or at least maintaining the kind of plausible deniability that makes it difficult to prosecute them.

Prosecuting a bank is easier than proving an individual committed a crime. The intent of all employees is attributed to the organization, which is vicariously liable for what individuals do on its behalf. But prosecuting executives means showing they had knowledge of a violation. That can be difficult.

Ms. Warren’s bill tries to remedy that by forcing management to make the necessary inquiries to determine that the organization is not violating the law.

The bill would add a new offense for an executive who “willfully” files a false certification, including violations that are “part of a pattern of any illegal activity involving more than $100,000” in a year. The maximum penalty would be up to 10 years in prison and a $500,000 fine.

The challenge for prosecuting such violations would be showing the requisite intent. The Supreme Court noted in Bryan v. United States that “willfully” is “a word of many meanings whose construction is often dependent on the context in which it appears.” That means a court could interpret the provision as requiring proof a defendant purposely sought to mislead the government in filing a false certification. Such an interpretation would be a substantial hurdle to proving a violation.

Another possibility is having to show merely that executives knew they were engaged in wrongful activity. That is much easier to prove and something that prosecutors would no doubt prefer.

Congress adopted a similar certification requirement in the Sarbanes-Oxley Act in 2002 in response to the accounting frauds at Enron and WorldCom. Under the law, the chief executives and chief financial officers of publicly traded companies must certify that any report filed with the Securities and Exchange Commission “fairly presents, in all material respects, the financial condition and results of operation” of the company, with a knowing or willful violation subject to criminal prosecution.

The first high-profile prosecution under the statute involved Richard M. Scrushy, the former chief executive of HealthSouth. But the case resulted in an acquittal, a black eye for the Justice Department.

The Sarbanes-Oxley certification statute has been used in only a few cases since. In each instance, prosecutors had evidence that the executive had direct knowledge of the fraudulent activity.

Absent proof of an executive’s involvement, or at least knowledge, of the fraud, a willful violation of the certification requirement in Ms. Warren’s legislation would be difficult to prove. We can expect executives to put in new procedures to show that they tried to comply with the law, which can provide a basis for claiming there was not an intentional violation of the certification requirement.

For those reasons, I doubt the Too Big to Jail Act would result in increased criminal liability for executives. There is no simple cure to the challenge of holding senior managers responsible for what takes place within their organizations.



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