Credit: Jeb White

Last year, the pharmaceutical giant Pfizer agreed to pay over $2 billion as part of the largest healthcare fraud settlement in history. Half of this payment was to cover the largest criminal fine ever imposed in the United States. However, in signing off on this settlement, US District Court Judge Douglas Woodlock raised concerns that no individual was going to serve prison time for this massive corporate fraud involving the illegal promotion of various pharmaceutical drugs, including Bextra and Lyrica. Unfortunately, the Pfizer settlement is the norm in that no corporate mastermind emerged as criminally liable for the misconduct.

When a wayward corporation is found liable under the thumb of the law, the corporate masterminds of the malfeasance often evade liability. The US legal system generally shields individual employees from the reach of the law, even when the employees' decisions directly lead to the corporation being held liable in a court of law. The application of the 'beyond a reasonable doubt' standard for evidence limits the ability of the law to reach many individual corporate criminal masterminds.

In the context of holding a corporation criminally liable, the courts regularly permit the imputation of knowledge to the corporation by use of the so-called 'collective knowledge'. Thus, even when the government cannot identify a single employee who had all of the requisite knowledge of the crime, the government can still proceed with the case by simply aggregating the knowledge of all of the relevant employees.

For example, the Pfizer settlement related to allegations involving corporate subsidiaries, thousands of pharmaceutical sales representatives and dozens of regional sales managers. It was difficult for the government to identify one individual within the corporation who fully understood and witnessed the entire scheme. However, by using the collective knowledge of the component parts of this corporate web, the government was able to build an ironclad case against the company.

To find an individual personally responsible for a crime, the courts generally require that the government prove that the particular individual either personally performed the illegal actions or had direction or control over the conduct. Needless to say, this level of specificity about a particular employee is rarely available, even after a thorough government investigation.

The complex organizational structure of most large corporations prevents government prosecutors from readily building a criminal case against a particular employee. Modern corporations are highly compartmentalized.

The complex organizational structure of most large corporations prevents government prosecutors from readily building a criminal case against a particular employee. Modern corporations are highly compartmentalized. For example, in the pharmaceutical or biotechnology industry, the research and development divisions operate largely separately from the marketing divisions that promote the resulting drugs. A marketing division itself might be divided into teams that each concentrate on the promotion a particular drug. In turn, one department may be wholly unaware of the activities of another unit of the corporation. This dispersion of knowledge, in essence, shields a corporate criminal mastermind, for he or she can orchestrate his or her scheme without the fear of any one individual having a full understanding of his or her criminal enterprise.

Hurdles such as these greatly undermine the government's ability to hold individual employees responsible for their corporate criminal activity. That said, I do not advocate watering down the evidentiary standard for criminal prosecutions of individual employees. Instead, we should offer better incentives to corporate whistleblowers so that they feel encouraged to unmask the intricacies of complex corporate crime schemes.

In the recent financial overhaul legislation, Congress did just that, by offering substantial financial rewards to those who uncover fraud on the marketplace. Similarly, the Internal Revenue Service has a program that offers incentives to individuals who help recover underpayments of tax payments. Additionally, the Federal False Claims Act rewards and protects citizens who report fraud on the government.

Often, the inside information provided by whistleblowers allows the government to identify the criminal leader lurking behind corporate walls. In the $2 billion Pfizer settlement, six whistleblowers stepped forward with detailed information about the inner workings of an illegal marketing campaign. The whistleblowers supplied evidence that allowed the government to pierce the corporate veil and prove its case against the company. Ultimately, though, when it came to holding individual Pfizer officers or employees personally liable, the government concluded that it did not have the necessary evidence. With that being said, this case study demonstrates the difficulty of piecing together the necessary evidence to hold individuals criminally liable, even with well-placed whistleblowers.

The government increasingly needs the assistance of corporate whistleblowers who can provide information about the inner workings of a corporate crime scheme. Their help remains key to ensuring that the people behind misconduct are held accountable, which—one hopes—will lead to less corporate crime.