Corporate Fraud Initiative—Bad for Colorado Companies or Good for Colorado Investors? (Part 2)

The Colorado Corporate Fraud Initiative, or Amendment 53 to the Colorado Revised Statutes, would hold an executive officer criminally liable for failure to discharge a specific duty imposed on the business entity by law. 

Liability occurs, for example, when the executive knew or should have known of the specific duty to be performed. Amendment 53 is unclear regarding what constitutes the specific duties of executive officers.  Additionally, Amendment 53 provides a defense to certain criminal charges if the executive officer, prior to being charged, reports all relevant facts concerning the conduct of the business entity to the Attorney General.

The business community strongly opposes Amendment 53.  The Denver Metro Chamber of Commerce filed suit challenging the ballot measure claiming the measure would hurt Colorado businesses and trigger baseless lawsuits.  Amendment 53 survived that challenge.  The Denver Metro Chamber of Commerce also launched a group called Coloradans for Responsible Reform, which is raising money from business interests to oppose what they see as an anti-business measure.

According to Coloradans for Responsible Reform, this amendment’s likely effects include hindering recruitment of talent, higher insurance costs, and politically motivated and frivolous charges filed against business executives.  The National Federation of Independent Business of Colorado has also joined Coloradans for Responsible Reform in opposing Amendment 53.  Additionally, the board of the Colorado Women’s Chamber of Commerce voted collectively to oppose this measure.  Donna Evans, CEO of the chamber, said the initiative, if passed, “would damage businesses, especially small and medium sized businesses.”  

The Colorado Economic Leadership Coalition came out against the proposed amendment because they believe the amendment will make it hard to recruit businesses to Colorado.  They further stated that the initiative is an economy killer and businesses will not move to Colorado if this measure passes.”

Some argue that the ballot measure could be a great disincentive for individuals seeking to serve as directors or officers. The measure would make directors, officers, and executive staff criminally liable for knowing or being in a position to know about criminal conduct by the organization even if they were not directly involved.  Groups opposing the amendment are concerned that the amendment will impose criminal penalties on individual executive officers based on what they are presumed to know given their position and not necessarily actual knowledge of or participation in criminal activity.

The Official Comment provides a number of possible objections to the proposal.  These include:

• Amendment 53 may negatively impact a business climate in which most businesses and their executives comply with the law. For example, the new criminal penalties could drive higher insurance costs for law-abiding executives, which may ultimately be passed along to consumers. Additionally, fear of prosecution could hinder recruitment of top business talent and may leave community leaders reluctant to serve on nonprofit boards.
• State and federal laws already hold business executives accountable. For example, executives can be prosecuted under Colorado law for their own criminal conduct on behalf of their business. Recent federal laws have strengthened criminal and civil penalties for business executives who commit fraud. High-profile prosecutions of business executives demonstrate that current laws are sufficient to address corporate wrongdoing.
• Amendment 53 creates a way to avoid accountability. Business executives who are aware of their business's failure to comply with the law, and who should be held responsible, may escape prosecution through reports to the attorney general.
  

The proposed amendment is available here.