Criminal Investors

A criminal or civil investigation into corporate wrongdoing asks both whether wrongdoing occurred at a firm and, perhaps more importantly, who is responsible for it. Rank-and-file employees, senior executives, outside contractors, the firm itself, and even directors are all potentially within prosecutors’ charging scope. But one group of powerful corporate actors tends to escape such scrutiny. Indeed, its members are treated as victims of corporate wrongdoing. In a new article (Criminal Investors, George Washington Law Review, forthcoming 2025), I bring new scrutiny to those actors and ask: do investors ever bear part of the blame for corporate offending. If so, what should prosecutors do about them?

Motivating example

I begin answering those two questions with a recent (and still-developing) criminal case.

Federal prosecutors have accused Ruthia He (RH), a former Facebook product designer, of running a massive illegal drug operation. They allege that between 2020 and 2024, RH illicitly distributed forty million pills of Adderall and other stimulants. From these forty million pills, RH is said to have generated about $100 million in revenue. She is alleged to have achieved these staggering sums not as the leader of a drug-trafficking network or as a prolific street dealer but rather as the founder and chief executive officer of telemedicine startup Done Global, Inc. (DGI). DGI employed licensed clinicians to remotely examine patients and write prescriptions for controlled substances that pharmacies filled and insurers paid for. Prosecutors allege, however, that despite these trappings of being a legitimate medical provider, DGI was in fact an illegal pill mill. Publicly, RH said her company’s mission was “to empower everyone living with [attention deficit hyperactivity disorder (ADHD)] to reach their fullest potential.” But her true business model, prosecutors say, was giving drug-seeking customers false ADHD diagnoses and medically unnecessary prescriptions, all in violation of the Controlled Substances Act and healthcare-fraud statutes.

DGI raised capital from three San Francisco Bay Area-based VC firms with, collectively, over $3.5 billion in assets under management. This case thus serves as a productive example for thinking about corporate criminal activity and investors’ contributions to it. It wasn’t cheap, after all, for DGI to grow large enough to distribute forty million pills or generate $100 million in revenue. Finding customers is a challenge for any startup. In DGI’s case, according to RH’s indictment, it required “spending tens of millions of dollars on deceptive social media advertisements, intentionally targeting drug-seeking patients, and advertising that members could obtain easy access to prescriptions for Adderall and other stimulants in exchange for payment of a monthly subscription fee.” There is no public reporting just how much cash DGI received from its three VC funders. But part of its cost-intensive scaling, presumably, was supported by those investors.

Investment can be criminogenic

Whether DGI’s investors might themselves be exposed to criminal liability depends on several unknowns, particularly what they knew about any illicit drug distribution and when they knew it. But whether done culpably or not, providing DGI with capital bore on the occurrence and scale of its alleged criminal activity. Financial investment in an illicit business, in other words, can enable and increase returns to crime. This effect appears in three forms. First, investment can satisfy upfront costs needed to get illicit activity going. Second, it can fund the growth of preexisting illicit activity. And third, and perhaps most troubling, it can shape the incentives of a firm’s personnel to engage in or foster illicit activity that otherwise would not have occurred. Given this potential for investment’s criminogenic influence on illicit corporate activity, the role of investors in corporate crime requires reconsideration along doctrinal, structural, and policy lines.

When are investors culpable?

Although under most circumstances shareholders—in their capacities as such—are shielded from corporate liabilities, corporate law does not protect them against liability for their own acts or conduct. Thus, to the extent that investment-related conduct can satisfy a theory of criminal liability, corporate law leaves shareholders exposed. This point yields in practice, however, to a rhetoric of investor “innocence” that more readily treats investors as victims of corporate wrongdoing rather than as persons who might bear responsibility for it. Although this rhetoric and its solicitude for investors has superficial appeal, it relies on erroneous assumptions about investors’ role within business enterprises. Investors bear responsibility for corporate crime. That responsibility is partly financial: part of the deal investors accept in return for financial reward is financial risk, including potential loss due to misconduct by a firm or its people. Beyond this no-fault economic exposure, investors might even be responsible for corporate crime in a moral or legal sense, or both. Yet despite their potential culpability, the rhetoric of investor innocence has removed those influential actors from decision-making about the appropriate targets of corporate enforcement.

As for investors’ potential criminal liability, there are three categorical theories under which prosecutors could charge investment-related conduct. The first is that an investor acts as an accomplice to corporate crime. The second is that an investor joins a conspiracy by agreeing to finance some corporate criminal objective. And the third is that the act of investment itself is sometimes a principal offense. For each theory, the underlying act and its effect—making an investment that advances some illicit corporate activity—are indistinguishable between culpable and nonculpable investors. For example, whether DGI’s VC investors knew that RH would use their cash to violate federal law or did not, the act (investment in DGI) and its alleged effect (illegal distribution of controlled substances) were the same. The distinguishing mark of a culpable investor, then, is the presence of criminal intent.

When should culpable investors be prosecuted?

When investors can be prosecuted for illicit activity that happens within a firm, when should they be? Answering this question requires appreciating the social cost of prosecuting culpable investors, as well as that of not doing so. The chief social cost of doing so is that culpable investors’ realistic risk of prosecution is apt to increase ex ante risk perception among even investors who lack the criminal intent that demarks their culpable peers. If so, the consequence would be less, and less-efficient, capital formation. But not prosecuting culpable investors tends to impose parallel social cost in the form of diminished law compliance. If investors know that they will not be held accountable for culpable investment-related conduct, then they will be more likely to engage in that conduct and hence foster illicit corporate activity.

The decision whether to prosecute culpable investors requires careful balancing of both costs. The composition of the investor class matters to that calculus. Culpable investors are likely a small minority of all investors. Given the substantial cost of chilling good-faith investors, balancing the social costs of investor prosecution and non-prosecution would lead to charging only egregious cases in which pursuing investors would contribute meaningfully to general deterrence. Prime cases will be those in which an individual investor has made a substantial investment in a non-public law-breaking firm, with knowing or purposeful intent, and with a significant law violation resulting from the firm’s activities.

Safe harbors for good-faith investors

Beyond outlining when investors are culpable for corporate wrongdoing and when, if ever, prosecutors should pursue them, I close the paper by urging prosecutorial agencies (including civil enforcers in regulatory agencies) to adopt safe harbors to protect good-faith investors. I propose two safe harbors designed to reduce criminogenic investment, motivate corporate compliance, and protect good-faith investors. Each turns on negating criminal intent and so establishes that law-abiding investors are not to blame should their investments go on to facilitate corporate wrongdoing. Neither alters the scope of investor criminal liability; rather, they clarify conditions under which investors lack criminal intent.

Full policy text and commentary for such safe harbors can be found in the paper. At a high level, the first safe harbor would allow investors to rely in good faith on firms’ representations that they have appropriate compliance programs or are undertaking appropriate remedial efforts (if and after violations do occur). This safe harbor would be particularly protective of investors in public companies. The second safe harbor would provide that investors who conduct good-faith due diligence into a firm’s compliance before investing in it will be presumed to lack criminal intent regarding any wrongdoing that should happen later. This safe harbor would be particularly protective of investors in private companies, including startups. In that light, it would be the more important of the two, given that enforcement against investors will tend to be appropriate only in the private-company context.