Excessive Corporate Risk-Taking and the Decline of Personal Blame

INTRODUCTIONThere has been significant frustration with the Obama administration,1 as well as with foreign governments,2 for not seeking criminal or even civil liability against individuals responsible for the excessive risk-taking that was a principal cause of the 2008-2009 global financial crisis (the financial crisis) and its associated banking failures.3 Despite criticism-and against the historical trend during much of the twentieth century4-few financial executives have been prosecuted.5 Rather, the primary focus of prosecutors has been the financial firms themselves.6Numerous firms have been fined for activities related to the financial crisis, including the origination, packaging, and sale of mortgage-backed securities. These fines are certainly substantial7-aggregating in the tens of billions of dollars,8 which is comparable if not larger than the aggregate yearly income of the largest financial firms.9 But from the perspective of multiple-year earnings, some experts view the fines as simply the "cost of doing business."10 Professor Coffee similarly claims that "the SEC is settling cheaply with entities and ignoring individuals-a policy of parking tickets for securities fraud."11Whether or not firms are settling cheaply, the real concern is that, being managed by individuals, firms themselves are second-best targets of deterrence.12 Targeting managers in their personal capacity is thus widely viewed as a greater,13 if not also a more optimal,14 deterrent than firm-level liability. Better deterrence is critical because insufficient deterrence could sow the seeds-as may already be occurring15-for future systemic meltdowns.16 The consequences could be horrific. The financial crisis itself was an economic assault that cost millions of Americans their jobs and homes, while wiping out investors, good businesses, and markets . . . . High risk lending [and other activities] contaminated the U.S. financial system with toxic mortgages and undermined public trust in U.S. markets.17Moreover, in addition to increasing deterrence, targeting managers in their personal capacity can help to increase accountability and fairness:[W]hen it comes to financial fraud, the [U.S. Justice] department recognizes the inherent value of bringing enforcement actions against individuals, as opposed to simply the companies that employ them. We believe that doing so is both important-and appropriate-for several reasons: First, it enhances accountability . . . [because] corporate misconduct must necessarily be committed by flesh-andblood human beings. . . .Second, it promotes fairness-because, when misconduct is the work of a known bad actor, or a handful of known bad actors, it's not right for punishment to be borne exclusively by the company, its employees, and its innocent shareholders.And finally, it has a powerful deterrent effect.18This Article examines the extent to which managers, in their personal capacity, should be subjected to liability (personal liability) in order to better deter excessive corporate risk-taking.19 Individuals potentially can be subjected to criminal liability and to non-criminal liability. Criminal personal liability ordinarily involves incarceration and sometimes involves monetary penalties. Non-criminal (or civil) personal liability ordinarily involves only monetary penalties.Because this Article is concerned with deterring excessive corporate risk-taking, it focuses on personal liability in the form of monetary penalties. Excessive corporate risk-taking is not-and arguably should not be20- criminal per se, or even criminally fraudulent.21 Although most of the actions leading to the financial crisis represented excessive corporate risk-taking, that risk-taking largely resulted from poor decisions, bad judgment, and greed- and not criminal intent.22 The head of the Criminal Division of the U.S. Department of Justice has likewise recognized the inapplicability of criminal law to deter excessive corporate risk-taking:I've literally had lawyers and U. …