White Collar Crime, Its Types and Remedies

Introduction

A corporate abuse means change or concealment of sensitive information and makes it look normal. There are various modus-operandi to commit corporate abuse such as miss-information in the prospectus, manipulation of accounting books, breach of fiduciary duties vested on the director(s), tax evasion, insider trading etc. There can be several reasons cited for which companies commit such frauds like making more falsified money, creating a false image of the company for the market scenario and misguiding Governmental authorities for tax evasion. The multi-layered fraud cases involve corporate abuse of power and economic exploitation, which are the culmination of events directed by corporations to steal money and benefits from the public and government using fraudulent techniques.

The Companies Act, 2013, is the legislation which focuses on issues related to corporate frauds. Fraud in relation to affairs of a company or any corporate body as defined in S.447 of the Companies Act 2013, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss. In order to amount to Fraud, an act must be confined to acts committed by a party to contract with an intention to deceive another party or his agent or to induce him to enter into a contract. Fraud, which vitiates the contract, must have a nexus with the acts of the parties entering into the contract. This definition highlights the precondition to prove the intention of the person who has committed fraud. If that person has willingly committed a fraud, then he will be punished. Here the person means himself or his agent. The acts which include fraud are wrong suggestions or concealment of facts or false promises or any fraudulent act to deceive others.

Types of corporate abuses

There are various types of abuse committed in a corporate world; it is not easy to limit the corporate abuse due to the emergence of the companies, other ways corporate abuse has also emerged. Some of the corporate abuse has been mentioned bellow as follows:-

Breach of fiduciary duty

In a corporation, the board of directors Board of directors' fiduciary duty refers to the highest standard of care. Fiduciary duty means unique responsibilities related to monitoring, distribution, administration, etc along with the reputation of the company. A corporate director has to act in such a manner which is in the best interest of the business and the members and according to the provision of law. The breach of fiduciary duty not only affects the corporation but also affect the members of the company and society at large. Duties can be breached in two ways:

• Commits overt acts that constitute mismanagement
• No action can also be construed as a failure to direct.

Exception: “Business Judgment Rule” which shields a corporate director who acts in good faith and without corrupt motive. In Texas, it is generally held that the business judgment rule protects non-interested directors from liability unless the challenged action is ultra vires or tainted by fraud or self-dealing. Gross negligence on the part of directors is not protected by the business judgment rule. Further, a director who abdicates responsibilities or fails to exercise any judgment similarly cannot use the business judgment rule to avoid liability.

Oppression

The term oppression not defined in the Companies Act and is left to the court to decide on the facts and circumstances of the case whether there is oppression or mismanagement of minority or not. The word oppression in common parlance refers to a situation or an act or instance of oppressing or subjecting to cruel or unjust impositions or restraints. Oppression may be past or continuing. Generally there is a oppression of minority but there can be a oppression of majority also.

According to Lord Keith,” Oppression means, lack of morality and fair dealings in the affairs of the company which may be prejudicial to some members of the company. The term mismanagement refers to the process or practice of managing ineptly, incompetently, or dishonestly.

Falsifying financials

Falsifying financials means creation of account entries and misrepresenting the financial situation of the corporation. It include trades that falsely show an increase in profits or the hiding of losses, the covering up of transactions that should have been regulated by the government, insider trading, and the reporting of misleading asset values. They were falsifying financials and reporting misleading profits.

Manupulation of security market

The companies gain huge profits when they manipulate the market through a security, may be through the currency or by manipulating a commodity. These activities are created to generate the interest of an investor but due to this the state and individual can both face losses. The wrong and misleading information is posted, spread or published related to a stock to either increase or decrease stock price of a share of company. Huge ripple effects can be faced by the stock exchange within minutes of manipulation and it can lead to crash of markets too.

Corporate bribery

This involves exchange of monetary benefits between private/public individuals to grab hold of a deal. Multinational corporations pay the governments to secure their business. Generally the developing countries and the under developed countries are involved in these activities, which results into revenue loss, loss of opportunity, illicit flow of money, unemployment along with loss of trade and reputation.

Money laundering

Money laundering is the process by which companies conceal money made illegally by making it appear legitimate. The goal of this white collar crime is to hide the illegal activity while evading taxes and making money. Money Laundering affects everyone because it affects our tax base.

In cases of CSR, if a company is obligated to spend, say, Rs 10 crore on CSR, it writes out a cheque in favour of a trust that works in education, healthcare, or any of the activities specified by the government. The trust, after deducting its commission, discreetly returns the money in cash to the officials or promoters, instantly turning Rs 10 crore of white money into black.

Some of the abuse of corporate power by management as identified by Marshall B. Clinard are as follows:

• Abuse of democratic process: This is evidenced by the efforts of corporations to conscript the political process for their own benefit via large financial contributions to political parties or leaders. This may be done both legally and illegally,
• Abuse of workers and local community: This is done by means of shut down of plants through lock-out etc., without any advance warning.
• Abuse of stakeholders: This is done by completely overlooking stakeholder’s claims in the corporate accountability process.
• Abuse of consumers: Several methods are adopted to dupe the consumers such as through price fixing, misleading or deceptive advertising.
• Environmental abuse: It is done by widespread pollution of air, water and soil, improper disposal of hazardous wastages.
• Abuse of Third world: It is done by selling already restricted or even banned products in the third world countries, bribing of public officials, defiance of host country’s tax and other laws.

Remedies for corporate abuse

There are various remedies available in case of corporate abuses and it keeps evolving from time to time as per the demand of the situation. Some of the remedies available for corporate abuse are as follows:

In cases of breach of fiduciary duties:

• Injunction: Director will be suspended to act to prevent company or business suffer from his or her misappropriate acts.
• Recession: This remedy can be sought in the situation where director did not disclose his/her personal interest in the company, with whom transaction is being carried out or planned to be carried out in future. The company has the power to make such transaction void on the grounds that director failed to disclose his or her conflicting interest in the transaction, company is entering into.
• Damages: The one who involved in the breach of their duties will be held liable to the company, in whatsoever capacity they breached the duties that is either jointly or individually.
• Disciplinary Proceedings: a person that has breached his fiduciary duties can be disciplined, for example in the case of a director of a company, removal of director(s).

In cases of oppression: Any members of a company who complain that the affairs of the company are being conducted” oppressively may apply to the tribunal and the tribunal grant such relief, which should be in best interest of the members of the company and will also regulate conduct of the company’s affair in future. Some of the remedies are reduction of share capital, restriction on transfer or allotment of shares, purchase of the shares or interests of the members of the company by the other members or company, etc.

In cases of misappropriation of fund or financial statement, a common remedy may require the payment of damages for financial losses other remedies may include a re-writing of the financial agreement, and/or a replacement of the person managing the funds.

Case law: Ritchie vs Rupe

Rupe Investment Corporation (RIC) was a corporation including four Board of Directors Paula Dennard, who chaired the board; Dallas Gordon Rupe, III(Buddy), who was Dennard’s brother; Lee Ritchie, who served as president of RIC; and Dennis Lutes, an attorney whose clients included RIC, Dennard, and her family. Paula Dennard and Buddy Rupe were the descendants of RIC’s founder, and Ritchie is the descendant of one of its early owners. Three different family trusts collectively owned approximately 72% of RIC’s voting stock. Dennard, Ritchie, and Lutes served as trustees of those trusts and thus collectively controlled a majority of RIC’s voting power. Ritchie and his family also owned an additional 10% of the shares directly, increasing the combined voting power to 82%. Buddy owned the remaining 18% directly. There was no shareholders’ agreement. Ann Rupe joined the family being second wife of the Buddy. Gordon’s will created Gordon’s Trust, which named Gordon’s wife, his children (Dennard and Buddy), and Dennard’s three children as beneficiaries. Rupe and Buddy wanted to make their child as one of the beneficiary but the same was denied by the Dennard and her children. After the refusal dispute arose between the family and in between this Buddy died. At one point the other directors offered to appoint Rupe to replace Buddy on RIC’s board of directors, but only if she would agree not to file suit against Gordon’s Trust. Rupe declined, and instead asked Ritchie if RIC would be interested in buying out her shares, on which Ritchie decline this by stating financial crisis of the subsidiaries of the RIC. On behalf of RIC, Lutes later offered to redeem Rupe’s shares for $1 million by taking advantage of the Rupe condition. Rupe tried to sell out her share with the help of attorney but couldn’t succeed even after offering the lowest price of the share on the ground that prospective buyer wanted to meet the directors but they refused to meet the prospective buyer of the Rupe’s share. In attorney’s view, however, it would be “incredibly difficult” to market Rupe’s shares without such meetings, and the likelihood of selling the shares was “zero.”

In July 2006, Rupe filed this suit against Dennard, Ritchie, Lutes, and RIC, alleging that they engaged in “oppressive” conduct and breached fiduciary duties to her. Rupe requested an accounting and valuation and an order requiring RIC to purchase her shares at fair market value or, alternatively, appointing a receiver to liquidate RIC. The jury found in Rupe’s favor and found that the fair value of Rupe’s stock was $7.3 million. The trial court rendered judgment on the jury’s verdict, concluding that Dennard, Ritchie, Lutes, and RIC had “engaged in oppressive conduct and held that the most equitable remedy for this oppression was to require RIC to redeem Rupe’s shares, and that this remedy was “less drastic” than liquidating the company or appointing a receiver. Based on these conclusions and the jury’s findings, the trial court ordered RIC to purchase Rupe’s shares for $7.3 million. Dennard, Ritchie, Lutes, and RIC appealed.

The court of appeals held that their refusal to meet with Rupe’s prospective purchasers constituted oppressive conduct as a matter of law. Having reached that conclusion, it did not consider whether other actions by Dennard, Ritchie, and Lutes were oppressive, as Rupe had alleged. The court upheld the trial court’s order requiring RIC to purchase Rupe’s shares (buy-out order), but concluded that the trial court had erred by instructing the jury not to discount the shares’ value to account for their lack of marketability and control. The court thus affirmed the finding of oppressive conduct but reversed as to the $7.3 million purchase price, and remanded the case to the trial court for a new determination of the shares’ fair value. Dennard, Ritchie, and Lutes petitioned this Court for review, which we granted.

Supreme Court of Texas held that:

1. The directors’ conduct was not “oppressive” under the relevant statute;
2. The statute does not authorize courts to order a corporation to buy out a minority shareholder’s interests; and
3. There is no common-law cause of action for “minority shareholder oppression.”

Conclusion

The Companies Act 2013 in many ways ensures that the rights of the minority shareholders are protected in every possible manner. The Act and the Courts try to strike a fine balance between the Rights of Majority to rule and the protection of interests of the minority shareholders through the prevention of Oppression and Mismanagement. Corporate abuse is committed for corporate gain or to bring harm to any other person or body corporate. These are also considered to be general varieties of white collar crimes. Corporate abuses are socially injurious or blameworthy acts which affect the members, companies, State as well as persons directly or indirectly associated with the corporation. There are various acts which are considered to be corporate abuse and to deal with such situation there are various provisions of law as well, which are continuously evolving as per the demand of the situation. It is not easy to detect the abuse in corporate world because the whole act is being done in a planned manner such as in the case of CSR, Money laundering, etc. It is very tough for the aggrieved member to know the motive before wrongful act. Politician and other top level members are generally involved in the corporate abuse because they both have good hold in the market. There is a need of more strict law to deal with corporate abuse cases.