BU2760 Week 6 Ethics and Corporate Responsibility
Click on attachment to download and analyze the Northeast Iowa Ethanol, LLC v. Drizin case, dealing with ethical misconduct and the doctrine of piercing the corporate veil. Reflect on the following:
The court held that the corporate veil of the company could be pierced to reach one of its shareholders. Explain what is meant by the terms “Piercing the Corporate Veil” and the Alter Ego doctrine, keeping in mind the liability limits in business for an individual and for a corporation.
Next, discuss ethics and corporate responsibility (accountability) and explain the Sarbanes-Oxley Act of 2002 and why it was enacted. How important is it to have outside independent accounting firms reviewing financial transactions?
Finally, the fact that monies were stolen was proven in this case. The issue is not whether monies were stolen; rather, the bigger issue of ethics and lack of oversight. Did the owners of this company have any responsibility for the losses that were suffered? Remember, they may have had the legal right to authorize the defendant to transfer the monies, but did they have an ethical responsibility to their shareholders? Explain.
Submit the essay in a minimum of a four-page, double-spaced Microsoft Word document. Please make sure you include the title page and the reference page as part of your submission.
Cite sources in the APA format.
Adhere to Standard English grammar, spelling, and punctuation requirements.
Use 12-point Arial font.
CASE 37.1 Piercing the Corporate Veil Northeast Iowa Ethanol, LLC v. Drizin Web 2006 U.S. Dist. Lexis 4828 (2006)
United States District Court for the Northern District of Iowa
“If capital is illusory or trifling compared with the business to be done and the risk of loss, this is a ground for denying the separate entity privilege.” —Judge Jarvey
Local farmers in Manchester, Iowa, decided to build an ethanol plant in the Manchester area. An ethanol plant produces ethanol and feed grain, which can be sold at a profit exceeding that of the sale of grain. After many meetings, the local farmers invested $2,365,000 for the project. The farmers formed Northeast Iowa Ethanol, LLC (Northeast Iowa), to hold the money and develop the project. William Ethanol Service agreed to invest $1 million, and North Central Construction agreed to invest $500,000. In all, $3,865,000 was raised for the construction of the ethanol plant. The funds were placed in an escrow account. The project needed another $20 million, for which financing needed to be secured.
Jerry Drizin formed Global Syndicate International, Inc. (GSI), a Nevada corporation, with $250 capital. GSI was formed for the purpose of assisting Northeast Iowa raise the additional financing for the project. Traditional financing from banks was not available for such a project, so Drizin looked for other sources of money. Drizin talked Northeast Iowa into transferring money to a bank in south Florida to serve as security for a possible loan. Drizin commingled those funds with his own personal funds. Through an array of complex transfers orchestrated by Drizin, all of the funds of Northeast Iowa were stolen. Drizin invested some funds in a worthless gold mine and lost the rest of the money in other worthless investments. Plaintiff Northeast Iowa sued Drizin for civil fraud to recover its funds. Drizin defended, arguing that GSI was liable but that he was not liable because he was but a shareholder of GSI. The plaintiffs alleged that the doctrine of piercing the corporate veil applied and that Drizin was therefore personally liable for the funds.
Issue Does the doctrine of piercing the corporate veil apply in this case, thus allowing the plaintiffs to pierce the corporate veil of GSI and reach shareholder Drizin for liability for civil fraud?
BU2760: Week 6 Ethics and Corporate Responsibility
Essay 6.1 2
Language of the Court
In every financial scam like that perpetrated on the plaintiff here, there comes a point at which the victim must make an exceedingly quick decision and seemingly, the entire fate of the project depends on taking that leap of faith. From that point on, very bad things follow and only time will tell what they are. Generally a corporation is a distinct entity from its shareholders. This distinction usually insulates shareholders from personal liability for corporate debts. However, this protection is not absolute. Personal liability may be imposed upon shareholders in “exceptional circumstances.” The corporate veil may be pierced, for example, where the corporation is a mere shell, serving no legitimate business purpose, and used primarily as an intermediary to perpetuate fraud or promote injustice.
If a corporation lacks substantial capital such that it would not be able to meet its debts, this is a ground for denying the privilege of separate entity. If capital is illusory or trifling compared with the business to be done and the risk of loss, this is a ground for denying the separate entity privilege. Secondly, if corporate funds are not segregated, there is a strong inference that they are being used by the shareholders for their individual purposes. A major corporate officer cannot avoid liability be emulating the three fabled monkeys, “hearing, seeing and speaking no evil.”
Without question, this case presents the “exceptional circumstance” warranting the piercing of GSI’s corporate veil and finding Mr. Drizin personally liable for GSI’s misdeeds, as the sole purpose of establishing GSI was to perpetuate fraud. GSI engaged in no legitimate business transactions whatsoever. The $250.00 initial capitalization of GSI is, in fact, “trifling compared with the business to be done and the risk of loss.” GSI had no errors and omissions insurance. Mr. Drizin used GSI’s accounts as his own, constantly transferring money from the GSI escrow account to his personal accounts for “reimbursement” and to other accounts for “safe keeping” and “diversification.” And now, GSI is a defunct corporation. Justice and equity call for piercing the corporate veil. Drizin’s actions with respect to plaintiff’s money were both outrageous and malicious. As a result of Drizin’s tortious conduct, good people were hurt. The evidence is clear, convincing, and satisfactory that punitive damages are appropriate in this case to punish Drizin and to deter others from engaging in similar conduct.
The U.S. District Court held that the corporate veil of GSI could be pierced to reach its shareholder Drizin. The Court awarded the plaintiff compensatory damage of $3.8 million and punitive damages of $7.6 million against Drizin.
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