A federal grand jury in New York recently returned a 41-page indictment charging securities and wire fraud against SAC Capital, a hedge fund run by reputed billionaire Steven A. Cohen. Prosecutors said the indictment was the culmination of a longstanding investigation and crackdown against insider trading. SAC, based in Connecticut, reportedly has about 1,000 employees throughout the world.
It remains to be seen what the government can prove against the company. However, acts of fraud can only be carried out by people. Cohen has not been indicted, although he faces civil charges brought by the Securities and Exchange Commission accusing him of failing to supervise employees suspected of insider trading. The SAC indictment is reminiscent of other significant corporate indictments which in the past have served to destroy major companies, such as the accounting firm Arthur Andersen, where some 28,000 people lost their jobs.
Obviously, people who commit criminal offenses — business fraud or otherwise — deserve to be prosecuted. However, it is difficult to find a useful social purpose to be served by indictment of an inanimate object such as a corporation. If the people responsible for criminality are removed from an entity, innocent employees and shareholders should not necessarily be deprived of the fruits of their labor and investments. And there often is a significant change in the ownership and directorship of a corporation occurring after the alleged wrongdoing, which may result in the imposition of penalties on innocent parties.
Of course, indictment of principals of companies may result in elimination of the corporate entities they served, but that should be a matter to be determined by those directly involved. In order to prove criminal charges against a corporation, it will be necessary to demonstrate that individuals committed the acts for which the company was indicted. If those individuals are criminally charged, so be it. And a corporation can be sued civilly for damages. But we question whether government, state or federal, gains anything significant from the expenditure of funds and resources required for criminal prosecution of the company itself.
Board members Rosemary Alito, Robert Bartkus and Thomas Bitar recused from this editorial.