Tuesday, December 28, 2010

My 12/28/10 whistleblower comments

Subject: File No. S7-33-10
From: Robert Shattuck
Affiliation: none

December 28, 2010

Comments of Robert Shattuck on File No. S7-33-10
Proposed Rules for Implementing the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934
(submitted electronically on December 28, 2010)

December 17, 2010 deadline for submissions

I was out of the country from December 8 through December 16. I first learned of the proposed rules on December 26. I request that my comments be received and considered by the SEC even though not submitted on or before December 17th.

Background of submitter

I am a retired lawyer with no professional or corporate affiliation.

For many years I have had an acute interest in corporate wrongdoing and what society can do to lessen the same. I have had a special interest in whether the work of plaintiffs lawyers aids in the deterrence of corporate wrongdoing. I have concluded that their work undermines business ethics and deterrence. I have recently devoted much time urging ethics professionals to evaluate the validity of my belief that plaintiffs lawyers undermine the deterrence objective of the civil law, and, if they agreed, in turn for those ethics professionals to raise the matter with management and/or make advocacy to lawmakers and others regarding how to increase the deterrence efficacy of the civil law.

I have a blog How To Combat Plaintiffs' Lawyers (URL http://robertshattuck.blogspot.com) in which I have reported my work during the past several years. I have an article Does the Civil Liability System Undermine Business Ethics? (URL http://robertshattuck.blogspot.com/2007/11/i-thought-this-would-be-effective-email.html) in my blog in which I set forth my argumentation that plaintiffs' lawyers undermine business ethics and deterrence.


A main consideration confronting the SEC regarding the proposed rules is how they will interact with, and whether they will undermine, internal compliance programs.

Based on the experience I have had in my work, I offer the following comments on the foregoing important consideration confronting the SEC:

Corporate wrongdoing is perpetrated by corporate officers and employees who participate in the design, implementation and execution of corporate actions and activities that comprise a wrongdoing.

As regards deterrence, I believe more efficacious deterrence is achieved by punishing the responsible corporate officers and employees individually than is achieved by punishing the corporation.

Based on my experience, I believe corporate management is less than fully supportive of trying to achieve deterrence through the punishment of responsible officers and employees individually. I further believe that corporate compliance and ethics officers, as well as corporate counsel, follow the lead of management in this regard and are less than fully assiduous in advocating for punishment of officers and employees individually to achieve a maximum deterrent effect.

The basis for my foregoing beliefs is that I have engaged in very extensive communications to corporate management (and proxies for corporate management such as the chamber of commerce), to ethics and compliance officers and their organizations (such as the Ethics Compliance Officer Association), and to corporate counsel (including the Association of Corporate Counsel). These parties largely exhibited no interest in the question of whether punishing responisble officers and employees would achieve better deterrence than punishing the corporation. These extensive communications are memorialized in my blog.

It is possible that I have misinterpreted the responses of the foregoing parties to my communications. It is possible that they do have an interest in what better deters corporate wrongdoing and that they have beliefs about whether punishing responsible officers and employees individually achieves or does not achieve better deterrence. To seek clarification of this, I will re-contact the parties and ask them whether I have misinterpreted their responses. I will provide whatever answers I receive to the SEC as a further submission.

If there is less than full support within the corporation for that which maximizes deterrence, that is a factor that the SEC should weigh in the balance concerning how the proposed rules will interact with, and whether they will undermine, internal compliance programs.

Respectfully submitted,

Robert Shattuck
Birmingham, AL 35223

SEC whistleblower rules

The SEC proposed whistleblower rules pursuant to Dodd Frank in November. These have drawn many comments and presented a public forum in which to make argumentation related to plaintiffs' lawyers. I submitted comments on December 28, 2010 and January 3, 2011.

Friday, December 24, 2010

Private Securities Litigation: Important Deterrent or Wasteful Churn?

From: RDShatt@aol.com
To: grundfest@stanford.edu, Cox@law.duke.edu, klacroix@oakbridgeins.com
Sent: 12/24/2010 4:30:08 A.M. Central Standard Time

Subj: Private Securities Litigation: Important Deterrent or Wasteful Churn?

Dear Professors Grundfest and Cox, Mr. LaCroix, and Mr. Coffey (address for Mr. Coffey not yet found),

I have read with interest Mr. LaCroix's above referenced post in his blog. You may glean the extent of my interest from my own blog How To Combat Plaintiffs' Lawyers .

I would like to offer some comments.

First, some rhetorical and/or loaded questions: Who and what are the drivers and determinants of the state of the law? Is it plaintiffs' lawyers and their lobbying and other influence with lawmakers, judges and others? Is it judges who have done an adequate policy evaluation of their judicial actions and decisions, insofar as they have discretion regarding the same? Is it academics who have debated the way the law should be and who make recommendations about the same that are accepted by lawmakers and judges? Is it critics, such as The Wall Street Journal?

Also, insofar as plaintiffs' lawyers are the drivers and determinants. to what extent do they exert their influence to achieve a state of the law that benefits themselves to the detriment of the societal interest in how the law operates? How demanding should academics and citizens be of their lawmakers and judges that those persons exert great skepticism about any input the plaintiffs' lawyers have regarding how the law should be and give the plaintiffs' lawyers no benefit of the doubt, including, for example, not finding it an adequate justification that there is "some deterrent effect" from private securities litigation, or that a "private/public partnership" has performed better than "public" alone when there is a choice to beef up with more funding for the "public" effort?

I took particular note of Mr. LaCroix's statement that "there are a large number of sophisticated, well-informed and profit motivated institutional investors that continue to actively participate in securities litigation, some serving frequently as lead plaintiffs." The reason for my interest is that I was once notified of a class action that caused me to send scores of emails to governmental retirement plans and members of the National Institute of Pension Plan Administrators, asking why they weren't "screaming bloody murder." You may read the text of those emails here http://robertshattuck.blogspot.com/2008/11/why-arent-government-retirement-systems.html and here http://robertshattuck.blogspot.com/2008/11/why-arent-retirement-plan-trustees.html . I did not get a single response.

I did not think, at the time, about "pay to play" type stuff going on in securities class action litigation that could keep parties from screaming bloody murder. Trust The Wall Street Journal to enlighten me in February with this item Trial Lawyers Contribute, Shareholder Suits Follow .

On the question of whether individual contibution is needed in order to achieve a better deterrent effect, I have taken the tack of trying to introduce the subject to academics and other professionals in the business ethics field. I have done this mainly through an article I have written that you can find at this link: Does the Civil Liability System Undermine Business Ethics? I have made scant headway in interesting ethics professionals in the subject matter.

Thank you for reading this email.

Rob Shattuck

ECOA Government Affairs group

From: RDShatt@aol.com
To: nwine@theecoa.org
Sent: 12/21/2010 7:37:10 A.M. Central Standard Time
Subj: If Government Affairs should ever get slow

Dear Ms. Wine,

If Government Affairs should ever get slow for you (or if you are just interested in a challenge), you might take a look at my article Does the Civil Liability System Undermine Business Ethics? and decide whether the contentions I make in the article warrant ECOA's Government Affairs to undertake an initiative to engage with Federal and state lawmakers and judges, and others, regarding the matter.

If you would like to discuss this subject with me, I would be very happy to talk with you.

Rob Shattuck

Wednesday, December 22, 2010

WSJ on trial lawyers contributing to pension officials

  • The Wall Street Journal

Trial Lawyers Contribute, Shareholder Suits Follow

Norfolk County, Mass., has only a small pension fund, but it is a big player in court.

Two weeks ago, the fund joined with two others in a shareholder suit against drugstore chain CVS Caremark Corp., whose stock had fallen. It was the 12th time since 2006 the pension fund has gone to court after a stock it owned declined.Former Ohio Attorney General Marc Dann received campaign contributions from out-of-state plaintiffs' firms.

For 10 of the suits, including the latest, the pension fund hired a New York plaintiffs' law firm called Labaton Sucharow LLP. That firm, in turn, has taken a keen interest in the political fortunes of Norfolk County Treasurer Joseph A. Connolly, who heads the pension fund's board. Attorneys at the New York law firm and their relatives have made 68 separate donations, of the maximum $500 apiece, to Mr. Connolly's campaign war chest since late 2005, public records show.

Asked why its lawyers gave to a county treasurer in a state not its own, Labaton Sucharow said its "members and their families make perfectly legal political contributions to elected officials and candidates who support shareholder rights." Mr. Connolly didn't respond to requests for comment.

It is legal for lawyers, like anyone else, to give campaign money to politicians. But questions arise when the politicians are local officials with influence over the selection of legal counsel for shareholder lawsuits filed by public pension funds, a role that can be lucrative.

A Wall Street Journal analysis documented the extent of campaign giving by plaintiffs' law firms specializing in shareholder litigation. It found that 25 leading firms, their lawyers and family members contributed a total of more than $21 million in the past decade to state-level candidates and party funds, as well as to national-party groups that work to elect state officials. Less than 40% went to candidates within the law firms' home states.

Labaton Sucharow was among the donation leaders. The law firm, its lawyers and their family members made $612,000 in campaign contributions in 24 states outside its New York home base in the decade.

Some lawyers say widespread political giving by plaintiffs' law firms, especially outside their home states and near the time when counsel are chosen, is evidence of a corrosive pay-to-play culture in the securities-litigation industry.


"Plaintiffs' lawyers donate because they think it buys them access to people who make decisions over how pension funds select counsel," says Fred Isquith, a partner at Wolf Haldenstein Adler Freeman & Herz LLP, a plaintiffs' firm in New York. Such giving "creates an appearance of complete impropriety," he says, and "should be outlawed."

The American Bar Association takes a similar position. The ABA, in giving guidance on ethics, says lawyers shouldn't accept a "government assignment" if they made a political contribution "for the purpose of obtaining or being considered for" such a job.

The Journal looked at donations in all 50 states from Jan. 1, 2000, through mid-2009, compiled by the National Institute on Money in State Politics, as well as data from other state and federal sources. About 72% of contributions went to Democrats.

The Journal also examined the 25 largest recent class-action settlements in which public pension funds served as lead plaintiff, as calculated by NERA Economic Consulting. In 15 of the cases, one or more law firms representing a lead pension fund had donated to a politician in the fund's home state.

Most plaintiffs' lawyers say they give simply to support like-minded officials. "We make sizable contributions to candidates we believe support investor causes," said Stanley Bernstein, of the New York firm of Bernstein Liebhard LLP.

The firm and people associated with it made $1.2 million in campaign donations, mostly in 31 states other than New York. Plaintiffs' lawyers also say their contributions help offset cash from pro-business interests opposed to shareholder litigation.

Public officials who favor shareholder suits say these are a needed check on corporate misbehavior and have recovered billions of dollars of losses caused by past abuses at WorldCom, Tyco International and elsewhere. They deny any pay-to-play dynamic, and say lawyers are chosen on merit.

Public pension funds increasingly are the lead plaintiffs in shareholder suits, partly because a federal law encourages judges to pick big institutional investors for this role.

As a result, plaintiffs' law firms focus their marketing efforts on wooing public pension funds and the state and local officials who influence them. Some firms enlist the help of lobbyists and attend pension-fund conferences.


Some lawyers say they aren't sure whether contributing helps them get government business, but are afraid not to. Some track how much rivals donate so they don't fall too far behind.

"There are certain places where, to be in the game, you have to donate," said Steven Toll, a partner at Cohen Milstein Sellers & Toll PLLC in Washington. It has contributed only modestly—$62,000 to out-of-state candidates—and Mr. Toll says he is sure its low level of giving has cost the firm business. But "we want to be chosen on merit, not because we contributed money," he said.

Ohio politicians received the most donations from out-of-state plaintiffs' firms in the past decade—more than $1.65 million, by the Journal's analysis. Ohio pension funds have filed at least 21 shareholder suits since 2002, according to state officials.

Running for Ohio attorney general in 2006, Democratic candidate Marc Dann told plaintiffs' law firms he favored shareholder suits and would file more of them than his rival would, he says. He received at least $59,500 from out-of-state securities litigators.

He won, and in the next 16 months, his office filed at least four securities suits on behalf of state pension funds, mostly using law firms that had given to his campaign or to the state Democratic Party. "I have no doubt I received donations with the expectation of work," Mr. Dann said. But, he said, attorneys were chosen strictly on merit.

Legal Tenders


How donations and decisions converged in Rhode Island. Click to see full chart.

Ohio's legislature tried to crack down on perceived pay-to-play abuses with a 2007 law that prohibited giving a state contract to any firm that had donated more than $2,000 to a politician overseeing such a contract. A court later overturned the law because of defects in the legislative process. While the law was in effect, it appeared simply to redirect the money flow to party committees.

Mr. Dann resigned after 16 months in office. After an interim appointment, the state held an election for a successor, won by another Democrat, Richard Cordray. Out-of-state plaintiffs' law firms gave little cash directly to Mr. Cordray's campaign, but in 2007 and 2008 they contributed $830,000 to the Ohio Democratic Party candidates' fund, which passed about $2 million to support Mr. Cordray.

Mr. Cordray then launched what he called an "aggressive" litigation strategy. Six law firms so far have been retained to represent Ohio pension funds in new lawsuits; five of the firms donated a total of $300,000 to the state Democratic party candidates' fund in 2008.

Mr. Cordray said the shareholder suits "have nothing to do with politics and everything to do with standing up for Ohio's pension systems, retirees and investors who have been harmed by corporate wrongdoing."

Massachusetts Treasurer Tim Cahill received campaign contributions from out-of-state plaintiffs' firms.

State officials, in deflecting pay-to-play allegations, often say they pick law firms on merit by first issuing a public "request for proposals," or RFP; law firms then compete to be on a list that pension funds will use for any future litigation. But some lawyers say the RFP process itself can be a political fund-raising opportunity.

Rhode Island General Treasurer Frank Caprio told the state Investment Commission on March 26, 2008, that he planned to issue an RFP for additional securities-litigation law firms. Five days later, Mr. Caprio received 26 campaign donations, totaling $23,000, from people associated with two New York plaintiffs' firms, Labaton Sucharow and Bernstein Litowitz Berger & Grossmann LLP. Both were among the four selected.

Last summer, after local reporters asked about law-firm contributions, Mr. Caprio returned $54,250 from those firms and five others. His campaign committee said it hadn't solicited the donations, and returned them because Mr. Caprio "wanted to assure taxpayers that he makes decisions based on what is best for the state of Rhode Island."

Neither Bernstein Litowitz nor Labaton Sucharow had any comment on the Rhode Island matter.

Once law firms make it onto a pension fund's list of potential litigators, they typically monitor the client's holdings and suggest lawsuits when they spot a stock drop that may be due to some corporate abuse. There's no cost to the pension fund in suing, because the lawyers work on a contingent-fee basis.

In the case of CVS Caremark, on Jan. 15 a lawyer representing Labaton Sucharow contacted Norfolk County's Mr. Connolly and other Massachusetts pension-fund overseers by email.

In the message, reviewed by the Journal, the lawyer recited an alleged "fact pattern" of belated disclosures by the drugstore chain leading to the "biggest drop in 8 years" in CVS's stock price in November.

Two of the pension funds agreed to be represented by Labaton Sucharow in the suit, which alleges CVS didn't disclose certain problems early enough. CVS said it doesn't comment on pending litigation.

A third pension fund suing CVS, the Brockton (Mass.) Retirement System, also received the Labaton Sucharow solicitation, but had just signed up with another law firm. Harold Hannah, the Brockton fund's executive director, says he gets many duplicate lawsuit suggestions. "I'm tired of it," he said.

"A good portion of these cases are ginned up by the plaintiffs' attorneys who go shopping for clients," said Robert Litan, a former Clinton administration Justice Department official now at the Brookings Institution.

"It shouldn't be the case that plaintiffs' lawyers should make contributions to public officials and turn around and get legal business from them," he said. "You want the best lawyer, not the one with the biggest campaign checkbook."

Tensions over the confluence of politics and lawsuits are on show at the $40 billion Massachusetts state pension fund, which in recent years has sued companies including Bear Stearns, Schering Plough and Fannie Mae.

The pension-fund board's executive director, Michael Travaglini, seems a reluctant litigant. "Nobody has convinced me of the value" of filing such a lawsuit, he said, as opposed to simply claiming a pro-rata share of any eventual settlement in a suit filed by somebody else.

Asked why the Massachusetts board has filed shareholder suits, Mr. Travaglini said the state treasurer and the state's current and past attorneys general have been interested in using such suits to spur corporate-governance reforms. All three officials received donations from securities class-action lawyers, records show.

The state pension board's most recent hiring of securities litigators came in 2005. Mr. Travaglini says the board issued an RFP, mostly at the behest of its chairman, Massachusetts Treasurer Tim Cahill.

While the RFP was pending, Mr. Cahill received $10,000 in $500 donations from people associated with Labaton Sucharow. It was one of four firms later selected. Bernstein Liebhard lawyers and family members contributed $5,500 to Mr. Cahill in the weeks after that firm, too, was selected.

Mr. Travaglini said he didn't know about the donations and they had no effect on the selection process. Mr. Cahill said he would let Mr. Travaglini speak for him.

Massachusetts Attorney General Martha Coakley pushed for a new RFP in 2009 to expand the state's stable of plaintiffs' law firms to as many as 12, according to Mr. Travaglini. "I said, 'This is crazy,' " he said, because his staff was already busy with lawsuit suggestions from the current four firms.

The RFP was put on hold while Ms. Coakley ran, unsuccessfully, for Ted Kennedy's vacant Senate seat. Her staff didn't respond to requests for comment.

In the biggest cases, legal fees can run in the millions. That's what happened in a suit by Calpers, the California pension fund, against UnitedHealth Group Inc., where stock options were backdated. The suit was filed for Calpers by the San Diego law firm of Coughlin Stoia Geller Rudman & Robbins LLP.

That firm is a descendent of the famed plaintiffs' firm once called Milberg Weiss Bershad Hynes & Lerach, which split in two in 2004.

Coughlin Stoia filed the suit for Calpers in July 2006. A month later, Coughlin Stoia and its attorneys contributed $107,000 to the gubernatorial campaign of Phil Angelides, who as California's then-treasurer was a member of Calpers's board.

Asked whether the donations were related to the hiring of the law firm, a spokeswoman for Mr. Angelides declined to say, but said that Mr. Angelides "was one of a number of members of the Calpers board and he had tens of thousands of donations during the eight years he was treasurer." He now leads a national board investigating the causes of the financial crisis.

Coughlin Stoia's spokesman—who previously worked for Mr. Angelides—said some of the firm's lawyers "actively support causes they believe in," including candidates.

Calpers said that its general counsel, not the board on which Mr. Angelides sat, picks outside litigators, adding that Coughlin Stoia was chosen based on its experience and resources.

The UnitedHealth suit was settled in August for $925 million. Calpers's share of that came to $3.2 million. The legal fee was $65 million. Most of it went to Coughlin Stoia.

Write to Mark Maremont at mark.maremont@wsj.com, Tom McGinty at tom.mcginty@wsj.com and Nathan Koppel at nathan.koppel@wsj.com

Tuesday, October 26, 2010

Follow up to Legal Reform Summit panelists

From: RDShatt@aol.com
To: ________
Sent: 10/26/2010 4:23:58 P.M. Central Daylight Time

Subj: To Legal Reform Summit Panelists: I hope you will be "fulsome" tomorrow

In follow up to my previous email to you, I wish to say that it seems to me there is a potential "conflict of interest" for panelists who are partners at large law firms which earn large legal fees from representing corporate defendants in class action lawsuits and that this may prevent them from being "fulsome" in speaking about the need for legal reform.

I wrote Mr. Nocera and Ms. O'Donnell this letter raising this question.

I hope you will be "fulsome" tomorrow.

Rob Shattuck

Friday, October 15, 2010

"Conflict of interest" at Legal Reform Summit

Reporters Joe Nocera of The New York Times and Norah O'Donnell of NBC News are moderators at the U.S. Chamber of Commerce Legal Reform Summit. I sent them the following letter about a "conflict of interest" at the conference:

From: RDShatt@aol.com
To: bizday@nytimes.com, nbcnews@msnbc.com
CC: lrickard@uschamber.com
Sent: 10/15/2010 7:33:47 A.M. Central Daylight Time
Subj: "Conflict of interest" at US Chamber of Commerce Legal Reform Summit

October 15, 2010


Mr. Joe Nocera
The New York Times
620 Eighth Avenue
New York, NY 10018

Ms. Norah O'Donnell
NBC News
60 Rockefeller Plaza
New York, NY 10012

Re: "Conflict of interest" at US Chamber of Commerce Legal Reform Summit

Dear Mr. Nocera and Ms. O'Donnell,

This is in follow up to my previous email/letter to you.

Most of the panelists at the Legal Reform Summit are lawyers from large law firms. These law firms make tens of millions of dollars in legal fees from representing the corporations which are defendants in the class action lawsuits and other litigation that the US Chamber of Commerce and the Institute for Legal Reform find objectionable and regarding which they believe legal reform is badly needed.

Given the financial interest that these panelists and their law firms have in the objectionable litigation in question, and in its continuation, one can wonder about the extent to which this "conflict of interest" will color what the panelists are willing to say at the Legal Reform Summit.

I am sure there are reasons for the Chamber's selection of its panelists at the Legal Reform Summit. You, as reporters, however, might be skeptical about the fulsomeness of the presentations you hear at the conference. I hope you will think about this.


Robert Shattuck
Birmingham, AL

cc. Ms. Lisa Rickard (via email)

Legal Reform Summit

The Institute for Legal Reform of the U.S. Chamber of Commerce has been having an annual Legal Reform Summit for several years ( www.legalreformsummit.com ). I have sent this year's panelists the following email:

From: RDShatt@aol.com
To: ______________
Sent: 10/13/2010 ________.M. Central Daylight Time

Subj: To Legal Reform Summit Panelists: re Business Ethics

I contend that plaintiffs' lawyers undermine business ethics. You may find my argumentation set forth in this article: Does the Civil Liability System Undermine Business Ethics?

I believe this contention provides a further reason for the need for legal reform, which reason has been little explored.

I hope you will read my article and tell me what you think.

Thank you.

Rob Shattuck
Birmingham, AL

Wednesday, October 13, 2010

AL AG candidates Strange and Anderson

I live in Alabama and am trying to get the candidates for Alabama attorney general, Luther Strange and James Anderson, to articulate their positions:

From: RDShatt@aol.com
To: james@AndersonforAG.com
CC: info@lutherstrange.com
Sent: 10/13/2010 6:55:43 A.M. Central Daylight Time

Subj: Economic recovery, ethics, plaintiffs' lawyers, and attorneys general

Dear Mr. Anderson,

I have previously emailed you and other Alabama AG candidates in July.

I continue to believe there are important questions related to the roles of plaintiff's' lawyers and the Alabama attorney general that have bearing on important public concerns of economic recovery and ethics. These are elucidated in entries I have made in my blog here and here.

I don't know the extent to which you or Luther Strange is prepared to state your views about these questions.

I am prepared to do volunteer campaigning on your behalf (and/or on behalf of Luther Strange- see below email to him) depending on the views you are prepared to enunciate on these issues.

Thank you.

Rob Shattuck
Birmingham, AL

From: RDShatt@aol.com
To: info@lutherstrange.com
Sent: 10/12/2010 7:53:44 A.M. Central Daylight Time
Subj: I am possible volunteer re: your ethics campaign issue

Dear Mr. Strange,

Last November I sent you the below email. I continue to be interested. Please contact me if you would like me to do volunteer work for you on this matter.

Thank you.
Rob Shattuck

From: RDShatt
To: info@lutherstrange.com
Sent: 11/21/2009 5:57:34 A.M. Central Standard Time
Subj: I am possible volunteer re: your ethics campaign issue
Dear Mr. Strange,

I may like to volunteer as a campaign worker related to your campaign issue of ethics.
If you are interested, please go to this link: http://robertshattuck.blogspot.com/search/label/E1.%20State%20attorney%20generals and read my blog posts there, which will indicate certain views I have about ethics, plaintiffs' lawyers, and attorneys general.

If, after you read the posts, you think there is some correspondence between your thinking and my thinking about these subjects, and that I might be of assistance to you in your campaigning related to the same, please let me hear from you.

Thank you.

Rob Shattuck
3812 Spring Valley Circle
Birmingham, AL 35223
(205) 967-5586

Thursday, September 30, 2010

Another email to candidates

From: RDShatt@aol.com
To: ___________
Sent: _/__/2010 ______M. Central Daylight Time

Subj: Voter anger and lawsuit abuse

Dear _______,

I am following up on earlier emailing I did.

Voters are angry in this election.

They are angry about an unaccountable federal government that has run up out of control deficits and national debt, that bailed out Wall Street with sweetheart deals and shortchanged Main Street, and that passed a health care law monstrosity a majority of the voters do not want. Voters are angry about their state and local governments that have gotten themselves in financial straits, with a main contributing factor being outlandish pension and medical retirement benefits promised to public employees to get their votes and their unions' support.

Another thing that voters can be angry about is the way the legal system is exploited by lawyers to enrich themselves to the detriment of society, enabled by judges and lawmakers who don't take steps to stop the lawsuit abuse.

This exploitation of the legal system is counterproductive to the nation's economic recovery. It engenders contempt for the law and it undermines business ethics. Justice is traduced in effectuating large transfers among non-wrongdoing parties (in order to provide lawyers large fees) and in not holding wrongdoing persons accountable.

At the beginning of this year I sent this email about plaintiffs' lawyers to over four hundred announced candidates for the US House of Representatives and Senate. Since then I have done further election campaigning that you may read about here.

As the election campaign enters its final month, I am continuing my efforts to get candidates to state their positions on lawsuit abuse for the benefit of the voters. I hope your campaign has done that or will do that before election day.

Thank you.
Rob Shattuck
Birmingham, AL

Tuesday, September 21, 2010

Suggested ERC white paper

From: RDShatt@aol.com
To: pat@ethics.org
Sent: 9/21/2010 5:10:12 P.M. Central Daylight Time
Subj: ERC white paper muscle flexing

Dear Dr. Harned,

The ERC's March 2010 white paper "Ethical Leadership and Executive Compensation: Rewarding Integrity in the C-Suite" (http://www.ethics.org/files/u5/execComp.pdf) is an exposition of policy and position by the business ethics community that trenches on the turf of management, stockholders, lawmakers and regulators.

This encroachment is justified because of the perceived relevance of corporate compensation to the mission of the business ethics community.

The following sentences from the white paper are indicative of its tone and thrust:
In our view, problems with compensation are symptomatic of the larger challenge of ethics.
If we want to encourage leaders to think of themselves as stewards, ethics and ethical
leadership belong at the heart of the compensation discussion.
* * * *
In hindsight, it is now plain that many compensation plans were flawed by poorly designed
incentives that allowed CEOs to win, but never lose. Particularly in financial service industries,
pay structures often encouraged CEOs to focus on short-term gain without regard to
its sustainability, roll the dice on high-risk strategies in order to trigger incentive pay, and
neglect long-term planning.
* * * *
But absent an ethical culture, even the best designed compensation plan can only do so
much. Barry Schwartz, a professor of psychology at Swarthmore, says the problem with incentives
is that “they get you exactly what you pay for, but it never turns out to be what you
want” because smart people figure out how to manipulate almost any numeric metric.
* * * *
Isn’t it really about ethics when:

Leaders expose their companies and employees to needless risk in order to
meet short-term financial goals?
* * * *
ERC recommends that a corporate board:

Establish an Ethics Committee of the board to monitor its own activity,
to assess the organization’s ethical culture, and to ensure that ethical leadership
is a priority for senior management
Recruit knowledgeable ethics professionals for board seats to provide
other directors with a strong understanding of how to make ethics part of
the organization’s culture

The ERC's white paper is commendably bold in claiming a stake of the business ethics community in the matter of corporate compensation and in vying to have its say about flawed compensation structures contributing to unethical behavior. The ERC's views may or may not coincide with the views of management, stockholders, lawmakers and/or regulatory agencies; the ERC is staking out an independent stand regardless.

I have contended that there is a flawed compensation structure in the operation of the civil liability system, and that this operates to undermine business ethics. See Does the Civil Liability System Undermine Business Ethics? . The civil liability system is a domain in which judges, lawmakers, corporate management, the US Chamber of Commerce, plaintiffs' lawyers, and others have a significant interest and have views . If the system undermines business ethics, the ethics community also has a stake and should have a say.

I hope the ERC's bold intrusion into corporate compensation signifies that it may be prepared to make a similar intrusion into the domain of the civil liability system, its flawed compensation structure, and its adverse effect on business ethics.

I urge the ERC to undertake a white paper on the subject in the same way it has regarding corporate compensation. In such an initiative, the ERC should seek input from the US Chamber of Commerce's Institute for Legal Reform and other specialized resources of information and expertise.

Thank you.

Robert Shattuck

Follow up email to Conference Speakers

From: RDShatt@aol.com
To: __________

Subj: Two ECOA conference speakers replied
Dear ____________,
I wish to thank two speakers who indulged me with replies to my previous email and to share with you some of the resultant email correspondence, in the hope that the subject matter is or will become of interest to you. The email correspondence in question can be found here.
Thank you.
Rob Shattuck

Saturday, September 11, 2010

Speaker emails

Two of the 2010 conference speakers have replied. Below is email correspondence from that.

[first speaker]

From: _________________
To: RDShatt@aol.com
Sent: 9/3/2010 8:17:36 A.M. Central Daylight Time
Subj: RE: To ECOA 2010 conference speakers

Dear Mr. Shatt:

Thank you for your email. I do not believe that I received your previous email that you indicated was sent to all speakers at the Chicago ECOA conference.

In any case, I have read your email as well as the supporting arguments that you made on your blog.

I am afraid I cannot agree with your arguments as presented. Your proposition that civil law liability is antithetical to promoting ethical conduct by business or deterring them for being unethical is not supported by any evidence or logic theory. Instead, you present it as “self-evident” truth and as a matter of strong belief on your part. Given this level of faith in your belief, I cannot see how a reasonable argument can be made as part of thoughtful discourse.

Taken at face value, and extended to other arenas of unlawful or unethical behavior, you would suggest that white collar crime can best be eliminated or reduced by allowing criminals to continue with their behavior. And that any indication of punishment would encourage them to continue with their unlawful conduct because it is profitable.

Furthermore, you are concerned about the compensatory aspects of the law that provide at least some restitution to the victims. Why not make a counter arguments that a higher level of punishment, both monetary compensation and even prison time, would serve as a deterrent to dissuade unethical conduct prohibitively expensive.

I am not suggesting that you are wrong, but simply that your arguments are just assertions which must be proved.

May I suggest that you reach out to ECOA leadership, or for that matter, ask some members of the business community, to organize a panel to raise and discuss these issues. However, to do so, you need to make sure that the sponsors of such a discussion panel are not merely interested in it as a matter of self-interest, but are concerned about it as a matter of wise public policy that would promote social good.



From: RDShatt@aol.com
To: __________
Sent: 9/6/2010 4:17:20 P.M. Central Daylight Time
Subj: Re: To ECOA 2010 conference speakers

Dear ______,

Thank you very much for taking the time to reply.

We may have a misunderstanding related to the fourth paragraph of your email.

I strongly believe financial penalties, liabilities, criminal punishments, and other sanctions are needed and should be imposed. That being said, I think a paramount question, whether the criminal law or the civil law is involved, is the extent to which enterprise level penalties and liabilities are sufficient, and, if not, the extent to which corporate officers and employees need to be held personally accountable and penalties and liabilities must be imposed upon them to achieve a satisfactory deterrent effect.

It is true that I have some strong beliefs, and that they have as a starting point common knowledge about human nature, to wit, that, in human nature, self-serving motivations are powerful and predominant, and altruism is weak.

If that is a fair evaluation of human nature, it immediately raises the questions posed above about whether enterprise level sanctions will suffice, or whether they are insufficient, because of human nature that can be too inclined to pursue self-interest and, in doing so, to discount costs and risks as long as those will get imposed on others and not on one's self.

I don't think I am taking undue liberties in my argumentation that starts with the foregoing common knowledge about human nature. I think I have as much evidence and logic that backs up my argumentation as have the authors of the Ethics Resource Center March 2010 white paper entitled "Ethical Leadership and Executive Compensation: Rewarding Integrity in the C-Suite" (http://www.ethics.org/files/u5/execComp.pdf), who say this:
From across the spectrum of experts and advocates, of political leaders and ordinary
citizens, there is a belief that executive incentives have overemphasized short-term performance,
encouraged excessive risk-taking, and failed to penalize poor performance. Many
believe that incentive plans have tempted some CEOs to put personal financial interests
ahead of good stewardship that serves the long-term interests of their organizations.

I have been endeavoring for three years to reach out to the ECOA leadership, but they will have nothing to do with me.

If you are interested, you may learn the gory details by scrolling down through my blog entries that appear here.

Again, many thanks for replying.

Rob Shattuck
[please note that my email address rdshatt@aol.com represents a shortening of my last name Shattuck]

[second speaker]

From: RDShatt@aol.com
To: __________
Sent: 9/5/2010 10:48:08 A.M. Central Daylight Time
Subj: Re: To ECOA 2010 conference speakers
Here is my quick reaction:

Plaintiffs' lawyers don't care about compliance. If there is an opportunity they will take it.

A compliance program may be helpful if a case gets to a jury.

Your concerns would be best addressed in a scholarly article. The ECOA conference is aimed at practical concerns.

There is nothing that a compliance officer can do with regard to class actions, so it would not be something they would worry about.


From: RDShatt@aol.com
To: _____________
Sent: 9/9/2010 7:26:53 A.M. Central Daylight Time
Subj: Re: To ECOA 2010 conference speakers

Thanks very much for replying, _______.

Are you referring to plaintiffs' lawyers not caring about compliance by themselves or not caring about compliance by other parties? If the latter, can I interpret your comment to mean that, in prosecuting their class action and other litigation and how they endeavor to shape the civil liability system, plaintiffs' lawyers don't care about how they impact compliance and/or business ethics?

I have attempted a scholarly article, but I think I lack needed credentials to get it published. Here is link to my article: http://robertshattuck.blogspot.com/2010/08/whither-quest-of-business-ethicists.html

I appreciate that, within the business ethics community, there is a range of perspectives, from the more practical to the more theoretical (which latter may be a basis for advocating change to improve ethics and compliance). I further appreciate that the ECOA probably has a more practical bent.

In recent years there has been a lot of theoretical consideration of how the criminal law can most effectively foster ethics and compliance. How much the ECOA has sought to inform its members about the various theories, I cannot say offhand. I would think ethics and compliance officers would have an interest in learning about the theories, and that knowledge about the same could be helpful to them in doing their jobs. I would like to think the same about my theorizing about the civil liability system.

Further, I think ethics and compliance officers, with their frontline experience with the conduct of corporate officers and other employees, and the factors that influence the same, are a very important source of information and evidence for evaluating theories about how the criminal law or the civil law can possibly be improve to better foster ethics and compliance.

Again, many thanks for your replying.

Rob Shattuck

From: RDShatt@aol.com
To: __________
Sent: 9/14/2010 5:20:14 A.M. Central Daylight Time
Subj: Re: To ECOA 2010 conference speakers

Thank you very much for replying again, _______.
I posted your first email on my blog (without identifying you) prior to seeing your second email. See http://robertshattuck.blogspot.com/2010/09/speaker-emails.html Would you prefer that I remove your non-attributed first email from my blog?

From a compliance and a compliance officer's perspective, do you think it is objectionable the extent to which class action lawsuits get settled (usually with no admission of wrongdoing), because such settlements on a pervasive basis generate significant uncertainty about what is and what is not permitted under the law, such uncertainty greatly complicates compliance (because what is or is not permitted under the law does not get determined in particular cases to provide guidance to company lawyers and compliance officers), and, in the face of such uncertainty, compliance becomes based on an irrational in terrorum reaction to the legal uncertainties?

Rob Shattuck

From: RDShatt@aol.com
To: _____________
Sent: 9/14/2010 4:25:11 P.M. Central Daylight Time
Subj: Re: To ECOA 2010 conference speakers

Thanks once again, ______.

I am a retired lawyer who has had no experience as a litigator. I got onto the business ethics subject because I thought I discerned that it could provide novel argumentation against plaintiffs' lawyers, which argumentation I have articulated in my article Does the Civil Liability System Undermine Business Ethics? .

I have made little headway in propagating my argumentation.

I consider it progress in eliciting from you a view about whether there is a connection between compliance and uncertainties about the law that results from widespread incidence of legal settlements which are made without determinations or guidance about what is and what is not permitted by the law.

My lack of experience as a litigator includes a lack of experience in evaluating, on behalf of a corporation, relevant case law and known litigations, judgments, verdicts and settlements, and, based thereon, advising compliance officers and other corporate employees about what is and is not permitted under the law and what their activities for the corporation need to be in order to be in compliance with the law.

As a layperson, I have done a lot of review of class action lawsuits of which I have received class action notices (these are catalogued under labels J and J0 through J91 on the left hand side of How To Combat Plaintiffs' Lawyers) and of other lawsuits, such as are chronicled at http://overlawyered.com/.

Possibly there are few corporate officers and employees who have awareness of, give thought to, and, consciously or subconsciously, incorporate in their thinking and decision making processes understanding of how the law does not hold personally accountable wrongdoing officers and employees and instead allows risks, costs and liabilities to be shifted to non-wrongdoing persons.

Ethics and compliance officers have frontline involvement for having views about the foregoing. I am appreciative that you offered me your views, but virtually no one else has. I will probably continue in my quest to elicit views from other ethics and compliance officers, as well as academics and others.

Rob Shattuck

Sunday, September 5, 2010

To ECOA 2010 speakers

From: RDShatt@aol.com

Subj: To ECOA 2010 conference speakers

Dear _______,

I continue to endeavor to propagate argumentation that class action and other civil lawsuits undermine business ethics. (See
Does the Civil Liability System Undermine Business Ethics? )

In connection with this year's ECOA conference, I identified Mr. Greg Andres of the Justice Department Criminal Division as a speaker whose topic and background seemed auspicious for seeking to obtain his perspective on my argumentation. I have sent Mr. Andres this

In connection with last year's Chicago conference I wrote numerous speakers emails trying to connect my contentions with their respective presentations. You may find these emails
here .

None of last year's speakers replied to me, and I wish to ask this year's speakers this question: Why the lack of interest by business ethicists in my argumentation about the system of civil law liability?

One explanation could be that the compensatory purpose of civil law liability is paramount, a deterrence objective is secondary, and that makes the civil law liability system a nut that is simply too big for business ethicists to try to crack.

A "too big a nut to crack" reaction would be unfortunate, given the large amount of corporate resources that are consumed in the civil law liability arena, a lot of which may be wasted or counterproductive to ethical objectives.

If my argumentation is correct about the undermining of business ethics, it would seem that ethicists would want to call this to the attention of management, the judiciary, and lawmakers, to the effect of "we ethicists recognize the primacy of the compensatory purpose of the civil law liability system, but you should recognize that the system undermines ethics and does not achieve a deterrent effect. In your management, judicial and lawmaker roles, you should be clear about that, and in your policies, actions, and decisions, you should limit your concern and objective to solely that of accomplishing appropriate compensation for loss. If you limit yourself that way, it could alter your actions and decisions in a way that results in a lesser detrimental impact on business ethics."

To the extent my argumentation is debatable, it would seem that business ethicists would want to debate the same, try to reach conclusions, and decide whether or not to follow the suggestion in the preceding paragraph.

It further needs to be acknowledged that plaintiffs' lawyers are a powerful adversary with whom business ethicists may not want to tangle, and further ethicists may not desire to get in the way of management that has its own ideas and agenda about plaintiffs' lawyers or in the way of the US Chamber of Commerce's
Institute for Legal Reform

If you think there are other reasons for the lack of interest, I would be very interested in hearing of them.

I hope the ECOA has a terrific conference in Anaheim.

Robert Shattuck

Tuesday, August 24, 2010

ECOA 2010 keynoter

From: RDShatt@aol.com
To: Criminal.Division@usdoj.gov
CC: aweissmann@jenner.com
Sent: 8/16/2010 7:52:39 A.M. Central Daylight Time
Subj: For Mr. Greg Andres

Mr. Greg Andres,
Deputy Assistant Attorney General,
U.S. Department of Justice
Criminal Division 9
50 Pennsylvania Avenue, NW
Washington, DC 20530-0001

Re: Your ECOA keynote presentation

Dear Mr. Andres

I am a non-credentialed layperson who has taken a significant interest in the business ethics field.

My focus has been propagating argumentation to the effect that class action lawsuits and other elements of the civil liability system undermine business ethics. You may find that argumentation set forth in this online article of mine: Does the Civil Liability System Undermine Business Ethics?

Both the criminal law and the civil law have potential for affecting corporate behavior, and further it seems to me the criminal law and civil law liability raise common questions about how they can be employed most effectively to improve corporate behavior, subject to the significant difference that civil law liability has a compensatory objective as well as a deterrence objective.

Business ethicists have paid a great deal of attention to how the criminal law is or should be applied to improve corporate behavior, but there seems to be a dearth of attention to the civil law. I tried to publish a scholarly article describing the foregoing situation with respect to the criminal law and the civil law and urging that much of the attention that has been given to the criminal law should be carried over to an evaluation of the civil law. I could not get my article published so I published it online myself. See this link Whither the Quest of Business Ethicists?

Your position as Deputy Assistant Attorney General of the Criminal Division focuses you on the criminal law as a mechanism to improve corporate and individual behavior. I do not know how much you have ventured outside the criminal law in your thinking and considered the civil law, and whether you have attempted to utilize your knowledge and understanding of the criminal law in order to contemplate how well the civil law operates to improve corporate behavior, and whether any changes in the civil law would be desirable.

I hope you will, in connection with your presentation to the ECOA Ethics and Compliance Conference in September, take the time to read my above online articles and ascertain what you think about what I say in the articles in the context of what you propose to say in your keynote presentation.

Thank you.

Robert Shattuck

cc. Mr. Andrew Weissmann

Sunday, August 15, 2010

Whither the Quest of Business Ethicists?

Criminal law has received much attention; civil law liability should too
Robert Shattuck


The quest of business ethicists to promote ethical corporate behavior expands,
seemingly endlessly. Disagreements about what is ethical and about how best to
engender ethical behavior abound. Much attention has been paid to how the
criminal law should be applied to improve corporate behavior. In the 1990’s the
federal government initiated new approaches; business ethicists have done
extensive critical review of these; and important questions are unresolved about
how to apply the criminal law. Civil law liability also affects corporate
behavior and is a potential tool for promoting good behavior, but ethicists have
not devoted much attention to it. Ostensibly the criminal law and civil law
liability raise common questions about how they can be employed most effectively
to improve corporate behavior. There is a significant difference that civil law
liability has a compensatory objective as well as a deterrence objective. Given
the quest of business ethicists, it is submitted that civil law liability is
deserving of much more investigation about how effective it is in improving
corporate behavior, and whether it can or should be changed to be more

The quest of business ethicists (and of regulators) to engineer ethical corporate behavior expands, seemingly endlessly. This article argues for an additional area for ethicists to investigate, to wit, that of civil law liability.

The federal government initiated noteworthy actions in the 1990’s intended to improve corporate behavior in the form of the Federal Sentencing Guidelines for Organizations and the Justice Department’s Principles of Federal Prosecution of Business Organizations. These provided incentives for corporations to be proactive in preventing criminal behavior and to assist prosecutors in uncovering and prosecuting the commission of crimes. This approach to improving corporate behavior has been referred to as the "cooperative model".

In response to massive accounting frauds that came to light early in the decade, Congress enacted Sarbanes-Oxley, which provided for increased application of the criminal law directly against corporate officers and accountants.

In the past year’s national financial crisis, perverse compensation structures have been blamed for leading management of commercial and investment banks to take improper risks with bank assets and wrongfully inflict significant financial harm on their shareholder owners. The banks packaged and sold mortgage securities to investors who were misled about the risks and who suffered losses as a result. These securities contributed to the mortgage industry making improper inducements to homebuyers to buy houses they could not afford. Other wrongdoers participated in creating the financial crisis, such as unethical mortgage brokers, appraisers, and rating agencies.

The country’s lawmakers and regulators have been at work this past year trying to fashion legal mechanisms to prevent future occurrences and to address related financial abuses.
In the health care domain, drug and medical equipment cases, such as Vioxx, have raised ethical questions about honesty of medical research and adequacy of disclosure of health risks by corporations. Concerns have been raised about researcher and physician conflicts of interest in conducting clinical studies and in promoting drugs and medical equipment. Class action lawsuits have been utilized to remedy ethical lapses in the health care domain and in other commercial areas.

Almost on a daily basis, the media reports stories of unethical activity in the business world, as well as in government and politics, and in educational and charitable organizations.

The current situation for business ethicists
Business ethicists seem to have an endlessly full plate.

It is doubtful there is an ethicist who thinks the profession has sufficiently advanced in researching, theorizing, designing and implementing mechanisms to prevent unethical corporate behavior that ethicists can slacken in their quest. The proliferating literature and the growth in ethics centers attest to expanding and intensifying investigation and theorizing about how society can most effectively promote ethical corporate behavior.

In their quest, business ethicists would seem to have a choice of either leaping over, or alternatively possibly getting mired in, attempting to resolve what is ethical in situations in which it is probably impossible to attain agreement. This is because there are competing considerations, interests and values, as to which ethicists and non-ethicists can have differences of opinion about the priorities to be assigned in determining what the ethical action is that should be taken. At one point, MacIntyre posited basically that only shareholder interest mattered. (1) Subsequently, there has evolved extended debate about a stakeholder interest approach to corporate actions wherein a corporation makes (and justifies as ethical) decisions that mediate among competing interests of shareholders, employees, customers, and even the environment. (2)

Some ethicists entertain theories that competing interests can be channeled in a way that converts zero sum games into win/win outcomes. (3)

If there are situations in which the ethical answer is unclear, there are also many situations in which there would be a consensus about what is ethical or not and what a corporation should or should not do (e.g., a corporation should not commit accounting fraud). Here, the business ethics field nonetheless harbors significant disagreements and differing emphases about how to promote ethical decisions and deter action that is unethical.

One very significant difference concerns that of an internally oriented approach versus an externally imposed sanctions approach. An internally oriented approach seeks the inculcation of an ethical sense or ethos in individual employees or in an organization that will engender ethical behavior independently of the application of externally imposed punitive sanctions. At the level of the individual employee, this can take the form of straightforward teaching through books, business school courses and corporate ethics programs about how to make ethical decisions.(4) At the organizational level, there is much theorizing about how to construct an organizational ethos to promote ethical behavior, and some of this theorizing has undergone a progression of highly attenuated refinement.(5)

Ethicists who focus on internally oriented approaches can do so without addressing whether or how they should be combined with a system of externally imposed sanctions, such as the criminal law. Most ethicists who focus on internalized approaches probably believe there is a need for externally imposed sanctions, even if they say little about that in their writings.

Other ethicists focus more on the use of externally imposed sanctions. The criminal law in particular is discussed below, and, as will be seen, there are disparate views about how best to use externally imposed punitive sanctions, particularly the criminal law.

One important area of inquiry relevant to this article that hovers over the various approaches to improving corporate behavior is a debate about whether specific detailed rules are better or whether a less specific "principles" approach to regulating corporate behavior is better.(6)

Enormous amount of attention focused on criminal law

An enormous amount of attention has been given to the application of the criminal law to corporations to promote ethical behavior.

A main source of this attention was Congress and the Justice Department instigating the criminal law "cooperative model" referred to above by means of the Federal Sentencing Guidelines for Organizations and the Principles of Federal Prosecution of Business Organizations. Also the enactment of Sarbanes-Oxley providing for increased application of the criminal law directly against corporate officers and accountants heightened the attention paid by ethicists.

The "cooperative model" has been characterized as a "sea change in the legal approach to corporate crime"(7) and naturally has received a great deal of attention, including two books that in differing ways raise significant questions about the efficacy and appropriateness of the "cooperative model."(8)

Currently it is fair to say that the question of how to most efficaciously apply the criminal law to engender ethical corporate behavior has not been finally resolved.

In trying to determine what is most effective, ethicists have had to wrestle with a number of important questions.

First, there is the proposition that a corporation acts only through its employees, and to prevent a corporation from committing a crime, it is necessary to prevent the employees from committing the crime.(9) While this proposition may manifest some obviousness, it is probably not greatly simplifying of the ethicist’s task.
Second, there is a critically important question of the extent to which it is necessary to hold wrongdoing employees personally accountable in corporate crimes in order to have a deterrent effect. In other words, is the deterrent of the criminal law materially undermined to the extent only the corporation is criminally prosecuted, and employees have the belief they will not be held personally accountable if they participate in a corporate crime?

On this question, our lawmakers, in enacting Sarbanes-Oxley, weighed in on the side of a need for personal accountability of employees under the criminal law in order to increase the efficacy of the criminal law.

Ethicists have had more disparate views about the question. Ethicists who focus on internally oriented approaches intended to foster ethical conduct independently of externally imposed sanctions might logically downplay a need of holding employees individually accountable under the criminal law.

Ethicists who believe strongly in the importance of externally imposed punitive sanctions may have differing views on holding employees personally accountable.

Laufer espouses the crafting of a new concept and foundation for holding a corporation criminally liable and, in his book(10), has little discussion of the role or relevance of holding employees individually accountable. Hasnas has articulated a conundrum (that is described below) connected to the use of direct punitive sanctions against employees.(11) Boatright appears to think that sanctions must be brought to bear on employees. (12)In Di Lorenzo’s article cited above, one could wish Di Lorenzo said more about the subject of holding employees individually accountable or not.(13)

Third, if it is believed critical to deterrence by the criminal law that employees be held personally accountable, this presents significant practical difficulties in pinpointing the culpability of individual employees. In the words of Boatright, "In practice, the complexity of organizational behavior and the secrecy around it make it very difficult for prosecutors to obtain evidence of wrongdoing and to identify the individuals responsible." (14)

Another significant issue ethicists have investigated relative to the application of the criminal law is the previously mentioned matter of whether a specific rules based approach is better or whether a more general "principles" based approach is more effective.(15) Internal to the corporation, this translates into a parallel investigation of whether a "command and control" approach is more effective or whether "self-regulatory" is better.(16)

One can almost despair about whether it is possible to "get it right" in the application of the criminal law to obtain desired corporate behavior. Hasnas, in his article "Up from Flatland: Business Ethics in the Age of Divergence"(17), articulates a conundrum as follows: First, Hasnas posits, for various reasons, an extreme difficulty in enforcing an "expanded" federal code within the confines of American criminal law.(18) This difficulty, continues Hasnas, has resulted in a practical necessity of getting the cooperation of the corporation itself, i.e. the cooperative model. Then Hasnas, in his article, proceeds to explain that the cooperative model is counterproductive to the desired end, including that it is based on seeking to apply direct sanctions against employees, but the use and application of such direct sanctions is counterproductive because employees respond better to "organizational justice" and direct punitive sanctions cannot be mixed in.(19)

In their quest, it is appropriate that ethicists wrestle with all the questions that are presented concerning how the criminal law should be applied in order best to engender ethical corporate behavior. As suggested by the above discussion, this has opened up expansive areas of investigation, and much remains to be resolved in more definitive ways about the criminal law.

Business ethicists should expand their attention to the civil law

The purpose of this article is to suggest that, besides investigating and considering how best to apply the criminal law in order to regulate corporate behavior, business ethicists ought also to consider the civil law liability system.

In the raising of this suggestion, it needs to be acknowledged at the outset that civil law liability serves a compensatory purpose, as well as a deterrent purpose. This is unquestionably a complicating factor that cannot at any point be lost sight of if business ethicists are going to consider how civil law liability affects corporate behavior and how civil law liability can be best utilized to engender ethical conduct.

For some business ethicists, it may be a matter of first impression to consider how the civil law does or does not affect corporate behavior and does or does not deter corporate wrongdoing and does or does not foster more ethical corporate behavior. Except for this author’s self-published online article(20), it seems that thus far business ethicists have left the civil law liability system largely unexamined.(21) Hopefully this article and the aforesaid online article will persuade ethicists that they ought to explore civil law liability more than they have thus far.

To introduce the subject, the force of the civil law in affecting corporate behavior derives from large monetary liabilities, or the threat of large monetary liabilities. How efficacious are they in engendering ethical corporate behavior?

To begin to answer that question, it seems manifest that there is significant commonality of relevance to both the criminal law and civil law liability of the above mentioned issues that have been considered on the criminal law front

To repeat those issues here: First, there is significant validity to the proposition that a corporation acts only through its employees, and to deter a corporation from engaging in wrongdoing that will give rise to a civil liability, it is necessary to deter the employees from engaging in that wrongdoing.
The second common question is the extent to which it is necessary to hold employees personally accountable for corporate wrongdoing that gives rise to civil liability in order for the civil liability to have a deterrent effect.

Third, if it is believed critical to deterrence by the civil law that employees be held personally accountable, it needs to be recognized that there can be very significant difficulties in identifying and holding accountable culpable employees, as Professor Boatright points out concerning the criminal law.

Fourth, the debate over a specific rules based approach under the criminal law versus a more general "principles" based approach would seem potentially to have relevance to the civil law liability domain.

Possibly the conundrum that Hasnas has articulated related to the criminal law has relevance on the civil liability law front as well.

There are also at least two important differences. One is the previously mentioned matter that civil law liability has a compensation objective that the criminal law does not have, and this will likely inject a substantial problem for ethicists if they begin exploring civil law liability. An additional matter that will weigh heavily is a suggestion this author has made to the effect that leading actors on the civil law liability front have little or no interest in civil law liability being efficacious in engendering ethical behavior, and those actors have achieved some success in creating a civil law liability system that undermines business ethics. See the author’s self-published online article.(22)

Going from the criminal law to the civil law, and back

A good starting point for a foray into the civil law liability system would be the foregoing matters that have been raised in the context of the application of the criminal law that would seem to be applicable on the civil law liability front. This starting point includes considering the modes of investigation and research in the criminal law context, a review of what the thinking and learning are about those matters on the criminal law front, and evaluating how all of the same are or may be applicable on the civil law liability front.

First, what are those modes of research and investigation in the criminal law context?

The business ethics literature regarding the application of the criminal law to foster ethical business conduct has found useful and has cited scientific studies of human psychology and behavior. For example, in arguing that a more general "principles" based approach is better than a rules based approach, Michael cites scientific experiments that used magnetic resonance imaging (MRI) to monitor brain activity as subjects considered a series of personal and impersonal moral dilemmas.(23) Those experiments and other scientific studies could also be relevant on the civil law liability front.

The literature also draws a lot on much less scientific and more anecdotal, observational, and common human experienced based data and understanding as a basis for theorizing. Again to cite Michael, one of his arguments against rules is how they can be used to deflect criticism and shield against regulatory sanctions. Michael does not cite any scientific investigation about this and seems to be mainly relying on common human knowledge about human nature and psychology.(24)

Another instance previously referred to of an ethicist positing something that seems not based on scientific research and that is derived from less rigorous observational methods is Boatright’s observation quoted above to the effect that there can be very significant difficulties in identifying and holding accountable culpable employees due to "the complexity of organizational behavior and the secrecy around it . . .."(25)

Regardless of where a line is drawn between scientific research and "unscientific"observational evidence, the questions of human psychology, and motivation that affect and possibly determine employee decisions and actions manifestly have some commonality whether the criminal law or civil law liability is under consideration. Di Lorenzo, in his discussion of "decision making heuristics" in his article, relates it to civil penalties and private lawsuits (26) and that makes a start for the investigation this article argues for.

To focus the above discussion in a concrete manner, consider the Vioxx case.

A recent general interest book about Vioxx entitled Poison Pills: The Untold Story of the Vioxx Scandal (27) depicts many different actors who contributed to whatever wrongdoing Merck perpetrated. These included top level corporate management who have a job to produce profits for shareholders, the Merck product development department and its employees who had the job of conceiving and carrying out product development including Vioxx, Merck’s marketing department that designed and implemented the marketing plan for Vioxx, the Merck sales force whose job was to be an enthusiastic "boots on the ground" component of the marketing effort, physicians who were recruited to promote Vioxx in medical association meetings and seminars, Merck researchers who had an economic bias in favor of Vioxx, and outside researchers who questioned Vioxx.

If business ethicists try to address how best to try to deter a Vioxx from happening again, it would seem that scientific experiments at this point cannot provide much substitute for knowledge and understanding that business ethicists employ in their work that is gained from an extensive fact based depiction of actual events and activities, such as transpired in the Vioxx story and is revealed, for example, by means of a book.

That being the case, the quest could be very daunting for business ethicists. They obtain information such as by reading a book depicting a significant corporate story, such as Vioxx. After reading the book, business ethicists who take their work seriously by trying to respond to "real" world situations, could well scratch their heads and say, "How in the world are we going to corral all these disparate actors with all their disparate roles and motivations in order to prevent the occurrence of another Vioxx case?"

That is highly daunting for coming up with a "real" world answer. It could be that there simply is not one at the moment.

Alternatively, it might not be unreasonable for an ethicist to say, just sock Merck with a ten, twenty or thirty billion dollar civil law liability, and that will send a message to business corporations generally and cause them to get their act together.

Will that have any efficacy? It certainly employs the bludgeoning force that is the theoretical basis for the civil law liability affecting corporate behavior.

After reading Poison Pills, this author wrote to the book’s author and other persons mentioned in the book inquiring about the efficacy of corporate civil law liability alone without personal accountability of the employees and others who have a role in corporate wrongdoing. Professor Marcia Angell, an expert in ethics in the health care arena, replied and said:

I agree with you that the treatment of corporations as individuals undermines
business ethics. Most of the big drug companies have agreed to pay hundreds of
millions of dollars to settle criminal and civil charges of fraud, and it is
just a cost of doing business. Even the $1.4 billion Eli Lilly will pay for
marketing Zyprexa for off-label uses is small compared with the sales income
from Zyprexa. Like you, I believe the individuals within the drug companies who
were responsible for unethical or illegal decisions should be held accountable,
and until that happens, nothing much will change.

Note that, while this author inquired only about civil law liability, Professor Angell, in responding expressly referred to both criminal and civil charges of fraud. In other words, Professor Angell seems to view both criminal and civil law liabilities as of a piece, and, if individuals are not held personally accountable, corporations will not be deterred from their unethical behavior regardless of civil or criminal liability. This response of Professor Angell is very supportive of the argumentation contained in this article to the effect that business ethicists, having given great attention to the criminal law, should expand their attention to the civil law as well.

To repeat and conclude: for many business ethicists, it may be a matter of first impression to consider how the civil law does or does not affect corporate behavior and does or does not foster more ethical corporate behavior. Except for this author’s self-published online article previously referred to, it seems that ethicists have left the subject of civil law liability largely untouched, arguably woefully so when compared to the way they have delved into the criminal law. The purpose of this article is to broach this as a new area of exploration for ethicists. Hopefully this article and this author’s online article will trigger an interest in further consideration, investigation and evaluation of what effect the civil law liability system has on influencing corporate behavior, how well it contributes to making corporate behavior more ethical, and whether there are defects and deficiencies in the system that could or should be changed to better foster ethical corporate behavior.

As mentioned, civil law liability serves a compensatory objective as well as a deterrence objective, and that additional objective may dissuade some ethicists from delving into the subject. At a minimum, sufficient investigation needs to be made to evaluate the extent to which the compensatory objective is a bar or limitation on utilizing the deterrence objective to help ethicists in their quest. Further, insofar as judges and lawmakers are in fact attempting to accomplish both objectives, they are deserving of guidance and input from ethicists about how effectively the deterrence objective is being achieved under the circumstances, whether the two objectives conflict with each other, and whether there are ways to augment the effectiveness of the deterrence objective and at the same time accomplish the compensatory objective adequately.

Civil law liability and the threat of liability forces corporations to expend enormous amounts of resources, and ethicists should want those resources, if possible, to have a resultant improvement in corporate behavior, and not be wasted. Ethicists should be especially concerned if, as this author has suggested, the civil liability system undermines business ethics. Investigation and consideration of civil law liability by ethicists would almost seem to rise to the level of a moral imperative for them.


(1) Alasdair MacIntyre, After Virtue, 2nd ed. (London: Duckworth, 1985).

(2) See, e.g., Joseph R. DesJardins and John J. McCall, Contemporary Issues in
Business Ethics, 5th ed. (Belmont, Calif.: Wadsworth, 2005).

(3) See, e.g., Ingo Pies, "Moral Commitments and the Societal Role of Business:
An Ordonomic Approach to Corporate Citizenship", 19 Business Ethics Quarterly ____ (2009).

(4) See, e.g., Laura Nash, Good Intentions Aside: A Manager's Guide to Resolving Ethical Problems (Harvard Business School Press 1990); Gary R. Weaver and Linda Klebe TreviƱo, "Compliance and Values Oriented Ethics Programs: Influences on Employees’ Attitudes and Behavior", 9 Business Ethics Quarterly 315 (1999).

(5)See, e.g., Geoff Moore, "Re-Imagining the Morality of Management: A Modern Virtue Ethics Approach", 18 Business Ethics Quarterly 483 (2008).

(6) Compare Vincent Di Lorenzo, "Does the Law Encourage Unethical Conduct in the Securities Industry", 11 Fordham Journal of Corporate & Financial Law 765 (2006), which makes an argument against vague standards, with Michael Michael "Business Ethics: The Law Of Rules", 16 Business Ethics Quarterly 475 (2006), which makes an argument in favor of general principles over specific rules.

(7) .John Boatright, Book Review, 18 Business Ethics Quarterly 417, 422 (2008) (reviewing. William Laufer, Corporate Bodies and Guilty Minds: The Failure of Corporate Criminal Liability).
(8) John Hasnas, Trapped: When Acting Ethically Is Against the Law
(Washington, D.C: Cato Institute, 2006); William S. Laufer, Corporate Bodies and Guilty Minds: The Failure of Corporate Criminal Liability, University of Chicago Press, 2006.

(9) ". . . ultimately the only actors that can be deterred are individuals;
organizations can be deterred only by influencing the behavior of their agents." Boatright, supra note 7, at 422. See also John Hasnas, "Up from Flatland: Business Ethics in the Age of Divergence"; 17 Business Ethics Quarterly 399, 404 (2007).

(10) Laufer, supra note 8.

(11) Hasnas, supra note 8.

(12) Boatright is open to a choice between applying the criminal law directly against employees and creating incentives for shareholders to monitor employees. The relevant difference between sanctioning organizations and individuals is whether individuals will be deterred directly by the application of the criminal law or indirectly by creating incentives for shareholders to monitor employees. . Boatright, supra note 7, at 422.

(13) Di Lorenzo supra note 6 at 788-791.

(14) Boatright, supra note 7, at 417.

(15) Michael, supra note 6.
(16) Hasnas, supra note 8, at 413-4.

(17) Hasnas, supra note 8.

(18) "The federal fraud offenses are directed against the type of deceptive behavior that is intentionally designed to be indistinguishable from non-criminal activity. As a result, considerable investigation may be required merely to establish that a crime has been committed, and even then, a great deal of legal and accounting sophistication may be required to unravel the deception. Proving such an offense beyond reasonable doubt can therefore be an arduous and expensive task. Furthermore, because such behavior often occurs within corporations in which decision-making responsibility is diffused among many parties, it can be exceedingly difficult to prove that any individual acted with the level of intentionality required by the fraud statutes. In addition, the evidence necessary for a conviction, which will predominately consist in the business records of the individual or firm under suspicion, will frequently be protected by the individual’s Fifth Amendment right against self-incrimination or the firm’s attorney-client privilege, and hence be unavailable to the government.30 And although there is no need to prove that a defendant acted intentionally to obtain a conviction for a public welfare offense, such offenses are so numerous, and frequently so technical and arcane, that no police agency could have a budget large enough to enforce them in a country as populous as the United States. Hasnas, supra note 8 at 404.

(19) Hasnas, supra note 8 at 412-3.

(20) Author, 2007.

(21) Di Lorenzo supra note 6 at 788-791 addresses civil penalties and private lawsuits and is an opening to the subject of this article, and perhaps he would be in agreement with this article to the effect that civil law liability is deserving of much more attention by ethicists.

(22) Author, 2007.

(23) Michael, supra note 6 at 482.

(24) Michael, supra note 6 at 492.

(25) This sort of observation not based on scientific research would seem to play a very substantial and useful role in the theorizing work of business ethicists. At this time, it seems indispensable as to some relevant matters in the work of ethicists, and scientific experimentation is not capable of providing a substitute.

(26) Di Lorenzo supra note 6 at 788-791.
Tom Nesi, Poison Pills: The Untold Story of the Vioxx Scandal (New York : Thomas Dunne Books, 2008).

(27) Di Lorenzo, also possibly views the criminal law and civil law liability as of one piece. See Di Lorenzo supra note 6 at 788-791.