Scheme Liability and Common Law Fraud Under State Law: Holding Corporate Officers and Their Co-Conspirators Accountable to Shareholders

Abstract

This article examines non-director corporate officers’ accountability to shareholders and calls for strengthening the role of shareholders in monitoring the conduct of non-director corporate officers by allowing shareholders to bring direct claims against non-director corporate officers and their non-fiduciary co-conspirators for schemes to defraud. The debate over increasing shareholder power is mainly focused on shareholders’ voting rights and not on whether directors or shareholders should monitor non-director corporate officers’ conduct. This article confines its discussion to schemes to defraud involving non-director corporate officers and third-party, non-fiduciary co-conspirators and argues that schemes to defraud result in two structural challenges that are better addressed by shareholders in a direct claim. These structural challenges are information blockages and demand requirements. This article explores recent examples of schemes to defraud, illustrating how information blockages limit the effectiveness of directors in monitoring corporate officers’ conduct. Part II illustrates examples of how schemes to defraud involving corporate officers and non-fiduciary third parties work. Part III examines the elements of common-law fraud, equitable fraud, conspiracy to defraud, and aiding and abetting to induce a breach of fiduciary duty in Delaware. Part IV explores whether shareholders’ claims for fraud against non-director corporate officers and third-party, non-fiduciary co-conspirators are direct or derivative claims and whether the demand and the demand futility tests present structural biases to recovery by shareholders. Part V concludes in support of a direct claim by shareholders for fraud against non-director corporate officers and third-party, non-fiduciary co-conspirators.

Keywords: Scheme liability, common-law fraud, equitable fraud, conspiracy to defraud, and aiding and abetting, fiduciary, co-conspirators, director, defraud, corporate law