When Businesses are Charged with Crimes: Organizational Offenders

Posted on October 26, 2023 by Michael Lowe.

First things first, we all know they’re not people. In legal jargon, corporations are “legal entities” that exist through the operation of state law (usually) under things like the Texas Business Organizations Code, where “corporation” is defined as “…an entity governed as a corporation under Title 2 or 7. The term includes a for-profit corporation, nonprofit corporation, and professional corporation.” Tex. Bus. Orgs. Code § 1.002(14).

They are given the respect of “corporate separateness” under the law, where barriers and protections are built from holding that legal entity liable or responsible for things done (or not done) by parent companies or subsidiaries; officers; directors; or shareholders.

However, when bad things happen this legal protection can be disregarded by the courts. This is called “disregarding the corporate fiction,” where shareholders, officers, and directors can be held liable for company activities. Explains the Texas Supreme Court, the corporate fiction shall be disregarded:

(1) when the fiction is used as a means of perpetrating fraud;

(2) where a corporation is organized and operated as a mere tool or business conduit of another (alter ego);

(3) where the corporate fiction is resorted to as a means of evading an existing legal obligation;

(4) where the corporate fiction is employed to achieve or perpetrate monopoly;

(5) where the corporate fiction is used to circumvent a statute, and

(6) where the corporate fiction is relied upon as a protection of crime or to justify wrong.

Castleberry v. Branscum, 721 S.W.2d 270, 272 (Tex. 1986).

When the corporate veil is pierced, the individuals who operated the business and did the bad activities become liable as legal parties. This is called “piercing the corporate veil.”

However, corporations themselves can also be targeted for doing all sorts of bad things in civil court or in criminal proceedings, where an actual indictment brings criminal charges against them. While these legal entities cannot be thrown into prison upon conviction, they can be held guilty of criminal activity and forced to pay significant sums in fines and through forfeiture of assets as punishment.

Crime Victim Damage Claims

An important distinction here: these criminal matters pursued by government prosecutors are entirely independent of any claims filed by alleged victims of the corporation’s activities. These people must hire their own lawyers and proceed in separate lawsuits where they will seek monetary damages for injuries. They must prove they have suffered harm caused by the corporation’s breach of legal duties in these lawsuits. If they prevail, then they get a civil judgment for damages against the corporation that is entirely independent of any fines or forfeitures mandated in the criminal proceedings. See, e.g., “Parents in California are suing Snapchat over fentanyl deaths,” written by Lolita Lopez and published by NBC-New York on October 19, 2023.

A defense note: restitution damages may also be sought by alleged crime victims pursuant to the Mandatory Victims Restitution Act (18 U.S.C. §3663A); the Victim and Witness Protection Act (18 U.S.C. §3663); and the Crime Victims’ Rights Act (18 U.S.C. §3771).

Three Examples of Texas Criminal Indictments of Corporations

Here are three examples of varied criminal charges brought against corporations here in Texas:

1. Boeing – Conspiracy to Defraud Leading to Fatal Crashes

A federal indictment was filed against The Boeing Company in the Fort Worth federal district court, charging conspiracy to defraud the United States Government by disregarding or disrespecting federal safety regulations and rules regarding its Boeing 737 Max jets, allegedly causing two plane crashes where hundreds of people died. Read, “In a Texas federal courtroom, families of those killed in Boeing 737 MAX crashes finally have their voices heard,” written by Roxanna Asgarian and published by the Texas Tribune and the news release regarding the 2023 Deferred Prosecution Agreement released by the Department of Justice.

2. Netflix – Promotion of Lewd Material Involving Children

An indictment from the Grand Jury of Tyler County, Texas, was filed of record on September 23, 2020, naming Netflix, Inc. as a defendant allegedly committing illegal acts involving the promotion of lewd material involving minors (child porn). Read the indictment here. The charges were allegedly based upon the movie “Cuties.” Read, “Netflix indicted on felony charges in Texas for ‘Cuties,’ promoting ‘lewd material of children’,” written by Bryan Alexander and published by USA TODAY on October 7, 2020.

3. Speed Fab Crete – Employing Undocumented Immigrants

A Tarrant County construction company operating in Kennedale, Texas, Speed Fab Crete was indicted and later entered into a plea deal with federal prosecutors where the corporation admitted to employing over 40 undocumented immigrants in violation of federal law. Read the press release issued on January 27, 2020 by the U.S. Attorney’s Office for the Northern District of Texas as well as “DFW Company Fined $3 Million for a ‘Stupid’ Attempt to Fool ICE,” written by Lucas Manfield and published by the Dallas Observer on January 29, 2020.

How Are Criminal Charges Brought Against a Corporation?

Corporations are recognized targets of law enforcement. They can be named in indictments and charged with crimes just like an individual human defendant. From the Justice Manual of the United States Department of Justice (JM):

Corporations should not be treated leniently because of their artificial nature nor should they be subject to harsher treatment. Vigorous enforcement of the criminal laws against corporate wrongdoers, where appropriate, results in great benefits for law enforcement and the public, particularly in the area of white-collar crime. Holding corporations accountable for wrongdoing enables the government to be a force for positive change of corporate culture, and a force to prevent, discover, and punish serious crimes.

– JM 9-28.200(A)

AUSAs are instructed certain factors (as outlined in the JM) should be considered when deciding whether or not to charge the corporation with a crime while being considerate of the “…public benefits that can flow from charging a corporation in appropriate cases.” JM 9-28.200(B).

It is noted that “…certain crimes that carry with them a substantial risk of great public harm—e.g., environmental crimes or sweeping financial frauds—may be committed by a business entity, and there may therefore be a substantial federal interest in charging a corporation under such circumstances.”

Sometimes, the prosecution will decide to enter into things like non-prosecution agreements or pre-indictment guilty pleas. However, the JM is clear that AUSAs have “substantial latitude in determining when, whom, how, and even whether to prosecute for violations of federal criminal law,” with formal criminal prosecutions based upon indictments and that they need to make sure that:

…the general purposes of the criminal law—appropriate punishment for the defendant, deterrence of further criminal conduct by the defendant, deterrence of criminal conduct by others, protection of the public from dangerous and fraudulent conduct, rehabilitation, and restitution for victims—are adequately met, taking into account the special nature of the corporate “person.”

– JM 9-28.200(B).

How Does a Corporation Commit a Crime?

Since corporations are legally created organizations, built upon documents with names like Articles of Incorporation, then how can they be shown by the government prosecutors to have committed a crime? They cannot physically act, right?

Well, under the law a corporate entity can be held liable for an illegal act committed by its human agent (employee, officer, director) if that person was acting within the scope of employment or authority and the illegal activity could have benefited the corporation.

Important from a defense standpoint is the reality that the corporation does not have to be shown to have received any actual benefit from these activities. The key here is that the employee or officer acted with the intent to benefit the corporation. Moreover, the corporation may face an indictment based upon these actions even if there is a stated corporate policy against this type of activity. JM 9-28.210(A)(B), citing U.S. v. Automated Medical Laboratories, Inc., 770 F.2d 399, 407 (4th Cir. 1985) and United States v. Grayson Enterprises, Inc., 950 F.3d 386, 408 (7th Cir. 2020).

Sentencing Under the United States Sentencing Guidelines

In federal criminal prosecutions, sentencing is done pursuant to the United States Sentencing Guidelines (USSG), which are found in the United States Sentencing Manual (Manual) promulgated by the United States Sentencing Commission (USSC).

For details on how the Sentencing Guidelines work (including examples using the Sentencing Tables), read our discussions in: Federal Crimes and Sentencing Guidelines: Health Care Fraud; Methamphetamine Trafficking and Federal Sentencing; and Loss Amounts In Federal Sentences: Calculating Economic And Financial Losses In Federal Felonies.

Organizational Offenders

According to the USSC, federal criminal courts can render judgment with criminal sentences against various legal entities which are labelled as “Organizational Offenders.” These are not only corporations, but partnerships, unions, trusts, and other forms of legal entity. This comes from 18 U.S.C. § 18, where “organization” is defined as “a person other than an individual.”

The Manual commentary explains that this “…includes corporations, partnerships, associations, joint-stock companies, unions, trusts, pension funds, unincorporated organizations, governments and political subdivisions thereof, and non-profit organizations.”

Calculation of the sentences against the organization pursuant to the Sentencing Guidelines may be found in Chapter Eight of the Manual. Here, there is a calculation of a range for monetary fines based upon a list of factors that help establish the extent of the Organizational Offender’s guilt. There is also guidance on probation for these defendants as well as forfeiture of assets.

Note: an exception here is the allegation that the corporation (or other Organizational Offender) has committed environmental crimes. Here, the Manual points to the determination of the fine to be assessed through application of 18 U.S.C. §§ 3553 and 3572.

Sentencing of Organizations

Sentencing of these corporations and organizational offenders is to be done pursuant to the United States Sentencing Guidelines just as sentencing is assessed for human defendants. Courts are instructed in the Manual that the first consideration in sentencing of an organization found guilty of a criminal offense is to make sure that “whenever practicable” the organization remedies any harm that has resulted from the criminal act(s).

Defense consideration: the Manual instructs that here that “[t]he resources expended to remedy the harm should not be viewed as punishment, but rather as a means of making victims whole for the harm caused.” Zealous prosecutors may need to be reminded of this goal.

Secondly, there must be a consideration of the organization itself. Was it operated basically as a legitimate concern, or was business “…primarily for a criminal purpose or primarily by criminal means”? If it was a crime factory, then the court is to make sure the fine is “sufficiently high to divest the organization of all its assets.”

Next, the court is to look at the seriousness of the offense and the culpability of the organization itself. The fine range will be calculated based upon both these factors, with the Manual explaining:

The seriousness of the offense generally will be reflected by the greatest of the pecuniary gain, the pecuniary loss, or the amount in a guideline offense level fine table.
Culpability generally will be determined by six factors that the sentencing court must consider.

Here, there are four (4) factors that increase the ultimate punishment of an organization:

(i) the involvement in or tolerance of criminal activity;

(ii) the prior history of the organization;

(iii) the violation of an order; and

(iv) the obstruction of justice.

Meanwhile, there are two (2) factors that mitigate the ultimate punishment of an organization:

(i) the existence of an effective compliance and ethics program; and

(ii) self-reporting, cooperation, or acceptance of responsibility.

What about probation? Manual guidance regarding probation for an organizational offender is that there should be probation when “…needed to ensure that another sanction will be fully implemented, or to ensure that steps will be taken within the organization to reduce the likelihood of future criminal conduct.”

For more detail, read USSG §8A1.2. Application Instructions – Organizations:

(a) Determine from Part B, Subpart 1 (Remedying Harm from Criminal Conduct) the sentencing requirements and options relating to restitution, remedial orders, community service, and notice to victims.

(b) Determine from Part C (Fines) the sentencing requirements and options relating to fines:

(1) If the organization operated primarily for a criminal purpose or primarily by criminal means, apply §8C1.1 (Determining the Fine – Criminal Purpose Organizations).

(2) Otherwise, apply §8C2.1 (Applicability of Fine Guidelines) to identify the counts for which the provisions of §§8C2.2 through 8C2.9 apply. For such counts:

(A) Refer to §8C2.2 (Preliminary Determination of Inability to Pay Fine) to determine whether an abbreviated determination of the guideline fine range may be warranted.

(B) Apply §8C2.3 (Offense Level) to determine the offense level from Chapter Two (Offense Conduct) and Chapter Three, Part D (Multiple Counts).

(C) Apply §8C2.4 (Base Fine) to determine the base fine.

(D) Apply §8C2.5 (Culpability Score) to determine the culpability score. To determine whether the organization had an effective compliance and ethics program for purposes of §8C2.5(f), apply §8B2.1 (Effective Compliance and Ethics Program).

(E) Apply §8C2.6 (Minimum and Maximum Multipliers) to determine the minimum and maximum multipliers corresponding to the culpability score.

(F) Apply §8C2.7 (Guideline Fine Range – Organizations) to determine the minimum and maximum of the guideline fine range.

(G) Refer to §8C2.8 (Determining the Fine Within the Range) to determine the amount of the fine within the applicable guideline range.

(H) Apply §8C2.9 (Disgorgement) to determine whether an increase to the fine is required.

For any count or counts not covered under §8C2.1 (Applicability of Fine Guidelines), apply §8C2.10 (Determining the Fine for Other Counts).

(3) Apply the provisions relating to the implementation of the sentence of a fine in Part C, Subpart 3 (Implementing the Sentence of a Fine).

(4) For grounds for departure from the applicable guideline fine range, refer to Part C, Subpart 4 (Departures from the Guideline Fine Range).

(c) Determine from Part D (Organizational Probation) the sentencing requirements and options relating to probation.

(d) Determine from Part E (Special Assessments, Forfeitures, and Costs) the sentencing requirements relating to special assessments, forfeitures, and costs.

Defending Corporations and Organizational Offenders in Criminal Cases

Defending organizations facing criminal charges is a complicated matter. Criminal defense strategies must include careful consideration of the entirety of the prosecution’s legal and factual case and the underlying law enforcement investigation. Proper consideration must be given to the current political or social implications of the case should it receive significant public scrutiny, because this can impact plea negotiations as well as trial presentation and sentencing hearing preparation.

For instance, the defense must delve into the actual facts forming the basis of the government’s case. Was the employee really acting within the scope of their employment or were they outside their actual or apparent authority? Is there any logical connection between the acts of the human agent alleged to be illegal activity and their job duties defined by the corporation? If the human agent was outside the scope of employment, then there may be a defense to corporate liability. A bookkeeper who was pilfering funds is very different from a company organized to commit institutional fraud, for instance.

For more, read: White Collar Crime: Indictments of Texas Professionals.

Another consideration: mitigation factors as defined within the Manual. Has the organizational offender demonstrated cooperation with the government in this matter? When this is coupled with facts presented by the defense that the overall operations of the business were for a legitimate purpose, then sentencing should be lessened accordingly. Sentencing on racketeering charges, for example, may not be appropriate for an organization that is cooperating with authorities and cannot be shown to be involved in an ongoing, criminal enterprise.

For more, read: Racketeering in Texas: Criminal Defense Against RICO Charges.

Moreover, criminal defense of corporations facing criminal charges must be zealous, aggressive, and able to negotiate with experienced prosecutors. Sometimes, deals can be made where there is a settlement reached with the government long before a formal indictment is filed.

A recent example of this: the October 2023 announcement by the Office of Public Affairs for the Department of Justice that Dallas architectural and engineering firm AECOM will pay $11,800,000 in settlement without any of determination of liability, resolving allegations that AECOM violated the False Claims Act regarding educational facilities damaged by Hurricane Katrina. Read, “AECOM to Pay $11.8 Million to Resolve False Claims Act Allegations in Connection with Hurricane Disaster Relief,” published on October 24, 2023, by the Department of Justice.