Saturday, July 8, 2017

Corporate Trompe L’oeil

As most readers of this blog are likely aware, Hobby Lobby is in the news again.

Hobby Lobby is a privately-held corporation that runs a chain of arts and crafts stores.  Its shareholders consist of members of the Green family, who also manage the corporation on a day to day basis.  The Greens are religious Christians, and Hobby Lobby’s statement of purpose declares that the company will be run in accordance with biblical principles.

When Hobby Lobby last made the news, it had just won its case in the Supreme Court, Burwell v. Hobby Lobby Stores.  The Greens argued, successfully, that the Affordable Care Act impermissibly burdened their religious beliefs by requiring that Hobby Lobby provide birth control coverage to its employees.  The difficulty with this argument, from a corporate law perspective, is that it draws no distinction between burdens placed on Greens in their personal capacities, and burdens placed on the Hobby Lobby corporation itself.  (The Supreme Court opinion did little to clarify the matter, which is why I use it in my class as part of my introduction to business law).

Now the company making headlines again, for smuggling ancient artifacts out of Iraq.


[More under the jump]

I’m going to preface this discussion with a disclaimer: not a lot has been made public about the case.  We have a Justice Department complaint and news release, plus a statement from Hobby Lobby itself.  I’m basing my comments on what I can glean from these materials, but there’s a lot of detail missing.

According to the complaint, the Hobby Lobby corporation assembled a collection of ancient materials, with purchases approved by the president – Steve Green – in consultation with an unnamed consultant.  Green personally traveled to the UAE to inspect certain artifacts.

He was informed by Customs that he had an obligation to declare the importation of high value items.  He was also advised by an expert about the legal requirements for importing cultural items from Iraq.

Green authorized Hobby Lobby’s purchase of the materials, and in so doing, signed an invoice that falsely stated they originated from Israel – even though he had inspected them in the UAE.  He authorized Hobby Lobby to pay for the items by depositing the monies in the accounts of seven seven different persons, none of whom was the actual purported seller of the items.  The items were falsely labeled as ceramic tiles and some were shipped directly to Green as president of Hobby Lobby “and/or” his executive assistant.  Green also authorized that some shipments be sent to other corporations that were related to Hobby Lobby, rather than to Hobby Lobby directly, even though Hobby Lobby was the purchaser.  The packages were not declared to Customs.  They falsely described their country of origin.

Other shenanigans, apparently designed to evade customs authority, were not traced to Green directly, but to his executive assistant and one or two other Hobby Lobby employees.

According to the Justice Department press release, Hobby Lobby entered into a “stipulation of settlement” whereby Hobby Lobby agreed to forfeit the items and pay a $3 million fine.  The news release states that “Hobby Lobby further agreed to adopt internal policies and procedures governing its importation and purchase of cultural property, provide appropriate training to its personnel, hire qualified outside customs counsel and customs brokers, and submit quarterly reports to the government on any cultural property acquisitions for the next eighteen months.”

I haven’t seen any documents except the complaint; as far as I can tell, the stipulation of settlement is not available online.  But from what I can tell, the case is rather eyebrow-raising.

We begin with the unusual fact that Hobby Lobby the crafts corporation was buying these materials in the first place, and Hobby Lobby the crafts corporation was therefore responsible for paying the fine.  As far we know, these purchases were for the personal use of Steve Green, who is collector of biblical artifacts and is establishing a private bible museum in Washington DC.  Nonetheless, he – apparently – has been using Hobby Lobby resources and personnel to enlarge his collection.

Hobby Lobby itself has issued a statement simply declaring that “Developing a collection of historically and religiously important books and artifacts about the Bible is consistent with the Company’s mission and passion for the Bible.  The goals were to preserve these items for future generations, to provide broad access to scholars and students alike to study them, and to share the collection with the world in public institutions and museums.”  This sounds an awful lot like the mission of the bible museum - which is not formally connected to Hobby Lobby and has tried to distance itself from the company (the distance is not that far, however; apparently, the two share a headquarters).

Now, from a corporate perspective, there’s no prohibition on this behavior, exactly; if all of the shareholders agree, Green may use corporate resources as he chooses.  Nonetheless, the situation does suggest a blurring of the lines between Hobby Lobby’s corporate functions and Green’s personal interests, and yet – for reasons that are unclear – the Justice Department seemed content to respect the corporate form and impose penalties solely on Hobby Lobby.

Which brings me to the next odd aspect of this case, which is the requirement that Hobby Lobby improve its internal practices for purchasing cultural artifacts.  We’re used to seeing corporations accused of wrongdoing reform their compliance policies as a condition of settlement.  But usually, that’s due to the nature of the crimes themselves.  In the typical case (think the mortgage crisis, or Wells Fargo’s unauthorized account scandal) lower level functionaries of a sprawling corporation are links in a chain of misbehavior.  A culture of risk taking and lawbreaking develops, facilitated by a lack of procedures to prevent it.  At the same time, there’s no evidence that management had specific knowledge of the misbehavior, let alone directed it.  Lacking proof of managerial involvement, and reluctant to scapegoat smalltime functionaries, the authorities instead focus their attention on corporate procedure.  They insist that the corporation adopt more stringent controls, on the assumption that with proper controls in place, misconduct cannot occur without managerial authorization.  Managers, presumably, will not so authorize, and if they do, there will be a firmer evidentiary basis for attributing responsibility.

There’s plenty of argument about whether that’s a useful or just system for addressing corporate misconduct, but the problem is simply that we aren't well equipped to deal with crimes that are accomplished piecemeal by large groups acting at lower levels within a firm; reform via internal codes of conduct is the best we’ve been able to come up with.

But all of that has very little to do with the facts of the Hobby Lobby case (formally, United States v. Approximately Four Hundred Fifty Ancient Cuneiform Tablets; and Approximately Three Thousand Ancient Clay Bullae).  Yes, a couple of lower level personnel were involved, but the president of the company personally authorized these shipments, which were personally directed to him, for his personal use, after he traveled to the UAE to inspect the merchandise and received a legal briefing on import procedure.  I mean, sure, Hobby Lobby’s position is that he was simply a naïf, and, you know, whatever, but this is not a problem of lower level personnel operating without proper oversight. 

In other words, the Justice Department seems to have transferred over a remedy designed for a specific type of crime – one that the law doesn’t have great tools to address – to a completely different sort of crime, one far more ordinary, and that we do have tools to address.  I’m not saying Steve Green actually had the intent to commit a crime – maybe he did, maybe he didn’t – but the nature of the offense appears to be essentially personal misconduct using corporate resources, and if so, it is to Green personally – not the corporation – that remedial measures should be targeted.

Thus, we see the flipside of Burwell.  Once again, the Greens are able to use the corporate form to advance personal interests, while simultaneously benefitting from the limited liability and diffusion of responsibility that the corporate form confers.

Ann Lipton | Permalink


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