When criminal liability attaches to a busted project

Authors: Keith M. Rosen, Ilana Beth Sinkin Publication | October 2017

Executives and directors of infrastructure developers may be wondering under what circumstances they could face individual criminal prosecution for a busted project in the wake of news that there may be a criminal investigation after SCANA, an investor-owned utility holding company in South Carolina, said it is cancelling plans to add two more reactors to the V.C. Summer nuclear power plant after it and Santee Cooper, another South Carolina utility owned by the state, had already spent US$9 billion on the project.

SCANA, a publicly traded company, announced in late September that South Carolina government officials have asked the state’s law enforcement authorities to conduct a criminal investigation into its handling of the shuttered V.C. Summer nuclear project.

This announcement came only a few days after SCANA and its partner, Santee Cooper, received a subpoena from the US Department of Justice requesting documents related to the project.

According to press reports, questions have been raised about whether SCANA and its affiliates made fraudulent statements to enable the company to charge customers—and seek rate increases—for what it allegedly knew was a failing project.

There is no reason to believe the investigations reflect anything other than frustration over the amount of money spent. The rest of the article is intended to help infrastructure executives understand where lines are drawn.

Public companies have a legal obligation to shareholders not to release misleading information. Electric utilities have the same obligation to their regulators. Private companies can similarly cross a line into criminal fraud when they make material false or misleading statements to obtain funds from banks or equity from investors. Private companies also risk prosecution if they make false representations to regulators, even if those false statements are not designed to obtain funding or other benefits.

Knowledge

Since 2015, with the announcement of the so-called Yates memorandum, the US Department of Justice has had a renewed focus on the prosecutions of individual officers (and not just companies) for corporate malfeasance. The Yates memorandum expesses the department’s view that fighting corporate misconduct requires accountability from the individuals involved. While the Trump administration has recently signaled that changes to the Yates policy may be forthcoming, it has emphasized that a central focus will remain on individual prosecutions in corporate fraud cases.

Scienter, or the intent or knowledge of wrongdoing, is the critical element in determining individual liability in criminal fraud cases.

It is well understood that individual criminal liability can arise when a corporate officer intentionally undertakes an act, or agrees that someone else will take an act, that is wrongful. In most instances, the government must prove that the individual knowingly participated in a scheme to defraud – that is, the individual acted voluntarily and intentionally and did not act through ignorance, mistake or accident.

To prevail, the government must usually establish that the individual intentionally participated in the making of the alleged fraudulent representations with an awareness that the claims were in fact false or misleading.

But what if the corporate executive did not personally make or direct the fraudulent statements?

Even if an individual officer or director did not directly participate in the alleged fraudulent submissions, a prosecution could still proceed if the government can demonstrate that the individual acted with “deliberate ignorance.” A person cannot have his or her head in the sand. The legal terms for behaving like an ostrich are “willful blindness” or “conscious avoidance,” and they reflect the notion that an individual cannot avoid responsibility for his or her role in allowing fraud to occur by deliberately ignoring what is obvious.

Put differently, the government can demonstrate an individual’s guilty knowledge in a fraud case by showing that the individual was presented with facts to put him or her on notice that illicit activity was likely or strongly suspected, and the individual intentionally failed to inquire further into the facts.

If a corporate officer strongly suspects that misrepresentations are being made to a government agency, he or she cannot avoid liability by failing to ask questions.

To be clear, this is not a negligence standard. It is not enough for the government to prove that management was negligent in its supervision of junior employees who engaged in misconduct. To establish culpability based on willful blindness, the government must prove that a corporate executive deliberately closed his or her eyes to misconduct at the company when the executive was presented with evidence that would create a strong suspicion that fraud was occurring.

It is not necessary that the government prove that the defendant knew to a certainty that a fraudulent scheme existed; rather, it is enough for the government to prove that the defendant was aware of a high probability that wrongdoing was afoot. Therefore, even when an executive lacks direct knowledge that the statements being made to the government are false, an executive may be held criminally liable for deliberately closing his eyes to facts that should have prompted further investigation.

Good faith

On the other hand, it is generally a defense to fraud allegations if the individual acted in “good faith.” That is because good faith is inconsistent with intent to defraud.

A person who acts on a belief or opinion that is honestly held, even if by mistake or error, does not act with criminal intent. For example, if an officer makes a false statement believing the facts are true, then he or she could not have made a false statement “knowingly.” However, executives or officers cannot contend to have acted in good faith when they consciously have chosen to remain ignorant.

The bottom line for executives overseeing representations made to government agencies in connection with similar projects, care must be taken to ensure that accurate information is being provided. A failure to know the truth or the failure to undertake reasonable good faith steps to ensure the transmission of accurate information to regulators and the public can result in the threat of criminal investigation. 


Contacts

Keith M. Rosen

Keith M. Rosen

Washington, DC
Ilana Beth Sinkin

Ilana Beth Sinkin

Washington, DC