A post at Global Corporate Law blog poses a perennial question:
UBS admitted to fixing Euribor and Tibor – interest rates (financial benchmarks) set by lenders in the Eurozone and in Japan.
UBS has stated that it has agreed to pay fines to financial watchdogs in Europe and the US. These include:
- $1.2bn or £740m in combined fines to the US Department of Justice (DoJ) and theCommodities Futures Trading Commission
- £160m to the FSA
- 59m Swiss francs or £40m to Switzerland’s Financial Market Supervisory Authority
As a lump sum, the above penalties comprise the second largest fine to be imposed in banking history: the first largest, of course, was when HSBC opted to pay US $1.9 billion authorities to settle allegations of money laundering.
But do these fines go far enough?
Not really. Surely, the people, these modern day Robert Clives, behind all this rigging and manipulation should be charged under the criminal law and sentenced accordingly.
I have pretty strongly held views that in these cases institutional liability punishes the wrong people. In an important article, Vicarious Liability for Fraud on Securities Markets: Theory and Evidence, 1992 U. Ill. L. Rev. 691, Jennifer Arlen and William Carney, tackled this question with regard to corporate liability for securities frauds committed by agents of the firm. As they demonstrate, when a corporation pays a large fine the resulting balance sheet effect is to reduce assets on the left side. On the right hand side, liabilities remain constant. To offset the decline in net assets, accordingly, shareholder equity must fall. As a result, the effect of civil monetary liability is to replace "one group of innocent victims with another: those who were shareholders when the fraud was revealed. Moreover, enterprise liability does not even effect a one-to-one transfer between innocent victims: a large percentage of the plaintiffs' recovery goes to their lawyers. Finally, enterprise liability may injure innocent people in addition to shareholders. For example, employees are injured if enterprise liability sends a firm into bankruptcy or causes it to lay off employees." Id. at 719.
The case for corporate criminal liability is even weaker. The principal functions of criminal liability are retribution and deterrence. As I have argued elsewhere in the context of corporate reparations:
A corporation is not a moral actor. Edward, First Baron Thurlow, put it best: "Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and nobody to be kicked?" The corporation is simply a nexus of contracts between factors of production. As such, there is no moral basis for applying retributive justice to a corporation - there is nothing there to be punished.
So who do we punish when we force the corporation to pay reparations? Since the payment comes out of the corporation's treasury, it reduces the value of the residual claim on the corporation's assets and earnings. In other words, the shareholders pay. Not the directors and officers who actually committed the alleged wrongdoing (who in most of these cases are long dead anyway), but modern shareholders who did nothing wrong. Retributive justice is legitimate only where the actor to be punished has committed acts to which moral blameworthiness can be assigned. Even if you assume the corporation is still benefiting from alleged wrongdoing that happened decades or even centuries ago, which seems implausible, the modern shareholders are mere holders in due course. It is therefore difficult to see a moral basis punishing them. They have done nothing for which they are blameworthy.
As always in corporate accountability, both efficiency and morality require that punishment be directed solely at those who actually commit wrongdoing. In this context, it would be the directors, officers, or controlling shareholders who actually enslaved people. Since they're long dead, there is nobody left who properly can be punished.
That conclusion was influenced in part by the Arlen and Carney paper, which argues for imposing liability on the corporation's agents:
... we find that there is little reason to believe that enterprise liability is the superior rule from the standpoint of deterrence, and there are many reasons to suspect the contrary. The deterrent effect of the available monetary sanctions under agent liability probably exceeds the deterrent effect of enterprise liability because a civil judgment against an agent hurts his reputation more than does a sanction imposed by the firm in private. Moreover, the threat that sanctions will be imposed appears to be greater under agent liability. Agent liability places the responsibility of sanctioning wrongful agents with the victims, who have no reason not to proceed against them and have every reason to proceed. Enterprise liability, by contrast, places the responsibility of proceeding against the wrongful agents with the firm, and thus with the very agents (and their close associates) most likely to have committed fraud. Moreover, agent liability in effect enlists insurance companies as corporate monitors and disciplinarians, thereby eliminating the agency costs associated with firm managers monitoring and disciplining each other. Furthermore, the judgment proof problem under agent liability can be completely eliminated if, in addition to civil liability, the government imposes sufficient nonmonetary criminal penalties on agents, such as imprisonment.
Although they are discussing civil liability, their comments on deterrence seem equally applicable to the criminal law.
