Conscious Avoidance as a Basis for Criminal Supervisory Liability: A Viable Theory?
By Joseph W. Martini and Melissa Fernandez – October 9, 2013
Under the responsible-corporate-officer doctrine, a corporate officer faces criminal liability based solely on the officer’s position of authority within the company. See United States v. Dotterweich, 320 U.S. 277 (1943); United States v. Park, 421 U.S. 658 (1975). But prosecutions under this theory have been limited to violations of “‘public welfare’ or ‘regulatory statutes’ that encompass a strict liability standard” and that typically involve misdemeanor offenses. 1 Treatise on the Law of Corporations § 8:22 (3d ed.). Outside this limited context, individual criminal liability is otherwise almost always based on individual conduct or concerted criminal activity prosecuted as conspiracy or aiding and abetting.
However, the SEC’s recent administrative charges against SAC Capital Advisors’ owner, Steven A. Cohen, for failing to supervise two employees who engaged in insider trading may portend an effort by prosecutors to target corporate officers on the basis of supervisory liability beyond the narrow class of public-welfare statutes that have supported prosecutions up to this point. In particular, prosecutors may seek to craft such a theory of criminal liability based on conscious avoidance, a well-established criminal-law concept. While such an effort should fail for the reasons described below, it is nevertheless prudent to think about the possibility of such a theory of criminal prosecution and ways to combat it.
Failure to Supervise
We start with the well-developed body of law holding supervisors subject to civil liability for the torts of their subordinates based on the supervisor’s negligent or reckless failures to supervise. For example, under 42 U.S.C. § 1983 supervisors may be liable for their subordinate’s unconstitutional conduct. Supervisory liability under section 1983 is based on the “‘personal involvement of defendants in alleged constitutional deprivations’ [which] can be shown by nonfeasance as well as misfeasance.” D’Olimpio v. Crisafi, 718 F. Supp. 2d 340, 347 (S.D.N.Y. 2010) aff’d, 462 F. App’x 79 (2d Cir. 2012) (quoting Colon v. Coughlin, 58 F.3d 865, 873 (2d Cir. 1995)). The Second Circuit in Colon v. Coughlin articulated five bases for finding that a supervisory defendant has sufficient personal involvement with the alleged constitutional violation to be liable for the underlying conduct:
(1) the defendant participated directly in the alleged constitutional violation, (2) the defendant, after being informed of the violation through a report or appeal, failed to remedy the wrong, (3) the defendant created a policy or custom under which unconstitutional practices occurred, or allowed the continuance of such a policy or custom, (4) the defendant was grossly negligent in supervising subordinates who committed the wrongful acts, or (5) the defendant exhibited deliberate indifference to the rights of [the plaintiffs] by failing to act on information indicating that unconstitutional acts were occurring.
Colon, 58 F.3d at 873.
Although these categories were developed in the context of civil liability for constitutional torts, the underlying concepts are not alien to the criminal law. Criminal punishment for negligent conduct is not a new phenomenon. See Kyron Huigens, "Virtue and Criminal Negligence," 1 Buff. Crim. L. Rev. 431 (1998) (discussing theory of criminal negligence); see also Model Penal Code § 2.02, General Requirements of Culpability (including “criminal negligence” among the “kinds of culpability”). And, as early as 1899, the U.S. Supreme Court was discussing concepts of deliberate indifference. See Spurr v. United States, 174 U.S. 728, 735 (1899) (acknowledging propriety of a jury instruction in criminal prosecution of a national-banking-act violation that willful ignorance of a fact could satisfy mens rea requirement where there is a statutory duty to ascertain the fact and noting that “an evil design may be presumed if the officer purposely keeps himself in ignorance of whether the drawer has money in the bank or not”). Indeed, the doctrine of conscious avoidance is based on the premise that deliberate indifference can be a substitute for positive knowledge. Considering the overlap between these foundational concepts, it may not be difficult to envision an aggressive prosecutor’s attempt to take the theory of supervisory liability and apply it to criminal liability. We suspect that as prosecutors continue to seek ways to target high-level corporate officials, the doctrine of conscious avoidance could be used in an attempt to establish criminal supervisory liability for felony offenses.
Conscious avoidance or willful blindness is well established in criminal law. As the U.S. Supreme Court recently remarked, the “traditional rationale for this doctrine is that defendants who behave in this manner are just as culpable as those who have actual knowledge. . . . It is also said that persons who know enough to blind themselves to direct proof of critical facts in effect have actual knowledge of those facts.” Global-Tech Appliances, Inc. v. SEB S.A., 131 S. Ct. 2060, 2068–69 (2011) (citing Edwards, "The Criminal Degrees of Knowledge," 17 Mod. L.Rev. 294, 302 (1954) and United States v. Jewell, 532 F.2d 697, 700 (9th Cir. 1976) (en banc)). According to the Second Circuit, “[t]he rationale for the conscious avoidance doctrine is that a defendant’s affirmative efforts to ‘see no evil’ and ‘hear no evil’ do not somehow magically invest him with the ability to ‘do no evil.’” United States v. Adeniji, 31 F.3d 58, 62 (2d Cir.1994) (other internal quotation marks omitted). Therefore, it is considered “a practical necessity given the ease with which a defendant could otherwise escape justice by deliberately refusing to confirm the existence of one or more facts that he believes to be true—an end we wish to avoid because we adjudge deliberate ignorance and positive knowledge [to be] equally culpable.” United States v. Nektalov, 461 F.3d 309, 315 (2d Cir. 2006) (internal quotations marks and citations omitted). Further it is “essential to the concept of conscious avoidance[ ] that the defendant must be shown to have decided not to learn the key fact, not merely to have failed to learn it through negligence.” United States v. Rodriguez, 983 F.2d 455, 458 (2d Cir. 1993) (emphasis omitted).
Following this rationale, a conscious-avoidance instruction may only be given in the Second Circuit if
(1) the defendant asserts the lack of some specific aspect of knowledge required for conviction [ ] and (2) the appropriate factual predicate for the charge exists, i.e. the evidence is such that a rational juror may reach the conclusion beyond a reasonable doubt that the defendant was aware of a high probability of the fact in dispute and consciously avoided confirming that fact.
United States v. Goffer, 721 F.3d 113, 126–27 (2d Cir. 2013) (internal quotations marks and citations omitted). “
[T]he same evidence that will raise an inference that the defendant had actual knowledge of the illegal conduct ordinarily will also raise the inference that the defendant was subjectively aware of a high probability of the existence of illegal conduct.” United States v. Svoboda, 347 F.3d 471, 480 (2d Cir. 2003) (internal quotation marks and citation omitted).
The concept of criminal “supervisory liability” could potentially be established where a supervisor aids or facilitates his or her subordinate’s criminal conduct while deliberately indifferent to information indicating that criminal conduct is occurring. Indeed, the Second Circuit has applied the conscious-avoidance doctrine to conspiracy charges, finding that although “conscious avoidance cannot establish specific intent, it can still show knowledge of the ‘unlawful objectives of the conspiracy.’” United States v. Bakal, 20 F. App’x 37, 42 (2d Cir. 2001) (citations omitted). In coming to this conclusion, the Second Circuit distinguished between the “two aspects of knowledge involved in a conspiracy: 1) knowing participation or membership in the scheme charged and 2) some knowledge of the unlawful aims and objectives of the scheme” finding that “[c]onscious avoidance may not be used to support a finding as to the former, i.e., intent to participate in a conspiracy, but it may be used to support a finding with respect to latter, i.e., knowledge of the conspiracy’s unlawful goals.” United States v. Ferrarini, 219 F.3d 145, 154–55 (2d Cir. 2000) (internal quotation marks and citation omitted). The reason the Second Circuit does not “permit conscious avoidance instructions on the issue of knowing participation in a conspiracy is that it is logically impossible for a defendant to intend and agree to join a conspiracy if he does not know that it exists.” United States v. Scotti, 47 F.3d 1237, 1243 (2d Cir. 1995).
A supervisor could potentially be subject to criminal liability on a conspiracy charge where knowledge of his subordinate’s unlawful scheme is found through conscious avoidance. A prosecutor may try to paint such a picture in the context of insider trading. For example, a supervisor who conspires with his subordinates to make insider traders could be found liable where that supervisor consciously avoided learning that his subordinate traders were in receipt of material nonpublic information in breach of a fiduciary duty.
United States v. Goffer
Indeed, the Second Circuit recently affirmed the applicability of the conscious-avoidance doctrine to insider trading to demonstrate knowledge of inside information. In United States v. Goffer, 721 F.3d 113 (2d Cir. 2013), defendants Zvi Goffer, Michael Kimelman, and Craig Drimal were convicted of conspiracy to commit securities fraud for their roles in conducting a double-blind, high-volume, insider-trading network. Defendant Kimelman objected to the trial court’s decision to give a “conscious avoidance” instruction as to each charge. The Second Circuit found there was a factual predicate for the instruction because there was ample evidence that Kimelman consciously avoided learning that Goffer’s tip regarding Bain Capital’s bid to acquire 3Com was from inside sources. In particular, the Second Circuit found that “a reasonable juror was entitled to conclude that Kimelman was aware of a high probability that Goffer had insider information about 3Com” on the basis of a 27-minute telephone conversation Kimelman had with Goffer on the evening of August 7; “the abrupt and pronounced change in his trading pattern of 3Com stock immediately thereafter[;] his subsequent outreach to Goffer about 3Com trading on August 15” in an email where Kimelman complained that his employer restrained him from making further purchases of 3Com stock; and the fact that “Goffer had shared the tip with other co-conspirators whom Kimelman knew.” 721 F.3d at 127. The Second Circuit also pointed to the fact that Goffer asked Kimelman, a former corporate attorney, about the significance of signature pages on the eve of the 3Com deal announcement and the routine manner in which Kimelman answered the question without “expressing astonishment as to Goffer’s knowledge or expression of concern about the sensitivity of such information” as further evidence that Kimelman knew or must have been aware of a high probability that Goffer had inside information.
Although Kimelman did not supervise or even work with Goffer, one could easily see the same factual predicate playing out for a supervisor particularly where“‘[r]ed flags about the legitimacy of a transaction can be used to show both actual knowledge and conscious avoidance,’” id. (quoting United States v. Ferguson, 676 F.3d 260, 278 (2d Cir. 2011)), and a “sudden change in a defendant’s stock trading pattern, which cannot be readily explained by other reasons, could be probative of trading on insider information.” Id. at 125. Goffer reveals that conscious avoidance could be found where supervisors ignore red flags indicating their subordinates’ information came from illicit inside sources, respond to their subordinates’ knowledge of seemingly inside information without shock or concern, and look the other way when their subordinates abruptly change their stock-trading patterns.
Although a prosecutor may seek to craft such a theory of liability by applying conscious avoidance to a conspiracy charge, such an effort will likely fail for a number of reasons. First, the Second Circuit’s refusal to extend the doctrine as a substitute for the “knowing participation and membership in the scheme charged” makes criminally prosecuting willfully blind supervisors of insider traders, while theoretically possible, an uphill battle. Second, such a theory invites the jury to punish supervisors based on their failures to investigate because they should have known about the insider trading, which risks convicting supervisors on a negligence standard. Under such a theory, there is a strong possibility that the jury may confuse or conflate the specific intent to join the conspiracy with negligence, which is an outcome likely not tolerated by courts charged with ensuring legal accuracy.
Considering the SEC’s push to hold Cohen accountable in an administrative proceeding for failing to supervise his employees, attempts to impose criminal liability for failures to supervise may not be far behind. Although such an effort would likely fail for the reasons discussed above, it is still prudent to consider the possibility that high-level corporate officials could be subject to significant criminal liability by failing to supervise their subordinate employees in certain circumstances. To avoid being found willfully blind, corporate officials should be vigilant in responding to their employees’ trading patterns and actively enforce any insider-trading compliance protocols. The same is true for other industries; red flags should not be ignored, compliance policies should be enforced, and sanctions should be meted out for known transgressions of policies and codes of conduct.
Keywords: criminal litigation, responsible corporate officer doctrine, failure to supervise, conscious avoidance, U.S. v. Goffer
[an error occurred while processing this directive]