It’s not unusual for a politician to return a political contribution after finding out that it comes from a disreputable source. So what does it say that the two major political parties received $9.3 million from convicted criminals during the 2002 election cycle and didn’t blink an eye? Without shame, they just pocketed the cash.
What does it say? It says that the money came from criminals who are themselves without shame: corporate criminals. It says that despite all of the publicity surrounding the most recent corporate crime wave, we still see such violations as less violent or abusive than street crime: while the latter is evil, the former is just business as usual.
After all, the two parties would never consider accepting cash from street thugs, muggers, and crooks. But corporate thugs, muggers, and crooks? No problem.
According to Corporate Crime Reporter, thirty-one major convicted corporations gave the $9.3 million to the two political parties in the 2002 election cycle. Archer Daniels Midland (ADM) tops the list. In 1996, ADM pled guilty to one of the largest antitrust crimes ever. The company was convicted of engaging in conspiracies to fix prices, eliminate competition, and allocate sales in the lysine and citric acid markets worldwide. ADM paid a $100 million criminal fine—at the time, the largest criminal antitrust fine ever.
ADM then gave $1.7 million to Democrats and Republicans during the 2002 election cycle.
In May 2004, Warner-Lambert, a unit of Pfizer Inc., pled guilty and paid more than $430 million to resolve criminal charges and civil liabilities in connection with its Parke-Davis division’s illegal and fraudulent promotion of unapproved uses for one of its drugs products.
Pfizer, the pharmaceutical giant, is the maker of Lipitor, Viagra, and Zoloft. In 1999, Pfizer pled guilty to fixing prices in the food additives industry. The company paid $20 million in fines. During the 2002 election year cycle, Pfizer gave $1.1 million to the Democrats and Republicans. Chevron was convicted in 1992 of environmental crimes and paid a $6.5 million criminal fine. Chevron gave $875,400 to both parties during the 2002 election cycle. And both political parties said thank you and looked the other way.
How can that be? How can our two major political parties knowingly deposit money from guilty corporate criminals that do real damage to average Americans and not be ashamed? It happens because of a failure of our institutions—educational, political, civic, and media—to tackle a problem that strikes at the heart of our democracy—the double standard.
A case in point is the recent major financial frauds that dominated the headlines over the past few years and cost investors trillions of dollars. These crimes resulted directly from a calculated decades-long effort by big business and its lobbyists in Washington to compromise, weaken, or effectively dismantle the policing agencies and institutions—the regulatory agencies, the lawyers, the accountants, the civil justice system, and the banks. Inside the beltway, this dismantling is affectionately known as deregulation.
Once the law and the police were emasculated, an immoral and unethical managerial class ignored the tattered constraints that remained, cooking the books and setting up a market crash that would wipe out the pension funds and savings of millions of innocent investors and workers.
According to William Lerach’s seminal article, “The Chickens Have Come Home to Roost,” the 1990s attack on corporate crime police was led by the Big Five accounting firms (now, with the demise of convicted criminal Arthur Andersen, the Big Four), the securities industry, high-tech firms, and their law firms and lobbyists in Washington. They were driven by bad memories from the 1980s, when trial lawyers representing securities fraud victims and federal prosecutors, including former U.S. Attorney Rudolph Giuliani, held Wall Street cheats like Michael Milken accountable by demanding multimillion dollar settlements and federal prosecutions.
Determined to escape accountability and seeking revenge for these mild efforts at justice in the 1980s, Big Business launched its attack on and in the courts and in Congress in the 1990s. The Supreme Court weighed in on the side of the crooks with two major rulings. First, the Court held that the federal racketeering statute doesn’t apply to securities fraud. Next, it held that professionals like lawyers, accountants, and bankers who knowingly aid and abet a securities fraud artist are not liable under federal securities law.
Then, in 1995, Congress, in its questionable wisdom, passed a law making it more difficult for victims of securities fraud to recover from the crooks. The Private Securities Litigation Reform Act established a difficult standard of proof, imposed a freeze on plaintiffs’ ability to discover evidence until much later in the legal process, and replaced joint and several liability with proportionate liability.
In 1999 at the behest of the securities industry, Congress and President Clinton repealed the Glass-Steagall law, which for six decades had separated the business of commercial banking from investment banking to prevent conflicts that contributed to the financial disarray of the 1930s.
At the same time, Republican and Democratic presidents put corporate lawyers and executives at the helm of the Securities and Exchange Commission (SEC), arguably the top corporate crime beat in the country. President Clinton named Arthur Levitt, a Wall Street executive who, despite his reputation as a reformer, sided with the securities industry in its hour of need and helped push through the 1995 law limiting investor protections.
President Bush named Harvey Pitt, the accounting industry’s lawyer, to succeed Levitt. True to form, upon taking office Pitt said he wanted the SEC to have a “gentler” relationship with his former client, the accounting industry. (This same Harvey Pitt, according to Forbes magazine, gave the following advice at an October 2000 seminar for in-house counsel: Chief financial officers whose e-mails detail cozy conversations with analysts about earnings estimates should “destroy” the incriminating messages “because somebody is going to find this, and it will probably be the SEC when they investigate.” The destruction should stop “when you hear about an inquiry ramping up.”)
In testimony to Congress and through articles in major newspapers, citizen, consumer, and investor groups warned that history was about to repeat itself, that naming corporate lawyers to police their own would destroy the legal structure that had kept the corporate chieftains in check and would result in a wave of corporate crime that would rival the 1930s.
In January 2000, I wrote in the Progressive magazine about the newly passed bill to gut Glass Steagall and the Bank Holding Company Act:
Never underestimate the ability of Congress to repeat its mistakes. A decade ago, after it gambled and lost on deregulation, Congress was forced to launch a $500 billion taxpayer-financed bailout of the savings and loan industry. Congress has just rolled the deregulation dice again. This time, the outcome may be even more costly. The current gamble, which President Clinton signed into law on November 12 to the enthusiastic applause of Congressional leaders, makes the savings and loan schemes of the 1980s look like schoolyard marble games.
Warren Buffett, the conservative Omaha investor, also saw the wave of corporate frauds coming. In 1999, Buffett wrote:
In recent years, probity has eroded. Many major corporations still play things straight, but a significant and growing number of otherwise high-grade managers—CEOs you would be happy to have as spouses for your children or as trustees under your will—have come to the view that it’s OK to manipulate earnings to satisfy what they believe are Wall Street’s desires. Indeed, many CEOs think this kind of manipulation is not only OK, but actually their duty. These managers start with the assumption, all too common, that their job at all times is to encourage the highest stock price possible (a premise with which we adamantly disagree). To pump the price, they strive, admirably, for operational excellence. But when operations don’t produce the hoped-for result, these CEOs resort to unadmirable accounting stratagems. These either manufacture the desired “earnings” or set the stage for them in the future.
Fortune magazine predicted the same. In an August 1999 article, “Lies, Damned Lies and Managed Earnings,” Fortune’s Carol Loomis wrote that the “eruption of accounting frauds…keeps suggesting that beneath corporate America’s uncannily disciplined march of profits during this decade lie great expanses of accounting rot, just waiting to be revealed.”
Exposure of these frauds began with corporate restatements of earnings—the most watched indicator of corporate fraud. The numbers of restatements, complied by the Huron Consulting Group, rose steadily from 158 in 1998 to 233 in 2000 to 270 in 2001, and 330 in 2002.
In many of the cases, the details of the frauds were exposed by investors, by reporters, by former executives. For example, a group of investors caught the WorldCom fiasco early, but a politically connected judge dismissed their complaint in 2001. A year later, WorldCom collapsed in the largest bankruptcy in American history. In July 2002, one month after the WorldCom collapse, Forbes magazine ran an article titled “Asleep at the Switch” that described the debacle:
WorldCom book-cooking was laid out chapter, line and verse in a shareholder suit over a year ago. Sadly, a judge with knotty political ties tossed it out as directors, auditors, regulators—and the press—snoozed. WorldCom’s board of directors, shocked by word in late June that WorldCom had buried $3.8 billion in costs in one of the biggest accounting frauds in history, had good reason not to be shocked at all. Over a year ago a raft of former employees gave statements outlining a scandalous litany of misdeeds deliberately understating costs, hiding bad debt, backdating contracts to book orders earlier than accounting rules allow.
According to Forbes, the shareholder complaint “was backed by one hundred interviews with former WorldCom employees and related parties.”
“The allegations were startling in their breadth and detail,” Forbes reporter Neil Weinberg wrote. “A former New York sales rep told of WorldCom’s cutting bandwidth prices in half for client Aubrey G. Lanston & Co., then booking the order twice—once at the old rate and once at the new one. A Tulsa, Oklahoma, quality-assurance analyst said WorldCom’s balance sheet listed assets that included receivables as much as seven years past due. A billing specialist in Hilliard, Ohio said the company held off paying suppliers to delay recognizing expenses and to boost profits.”
The judge who dismissed the case? U.S. District Court Judge William H. Barbour Jr., a first cousin and former law partner of Haley Barbour, former Republican National Committee chairman and now governor of Mississippi.
The pattern exhibited in the WorldCom case was repeated over and over again: “alleged” fraudulent activity, predicted and documented in the mainstream press, and preventable with law and law enforcement tools at our disposal. The result: huge sums lost to investors. Thousands of jobs displaced or lost. Pension funds wiped out.
Let’s take a quick tour of some of the damage:
Interestingly, the banks and brokerage firms following these and other failing companies knew something was up but didn’t blow the whistle. They, along with the law firms and accountants, were conflicted out of an independent judgment. They made money and looked the other way.
In June 2002, Weiss Ratings released a study that found that among the fifty brokerage firms covering companies filing for bankruptcy that year, forty-seven continued to recommend that investors buy or hold shares in the failing companies even as they were filing for Chapter 11. Lehman Brothers maintained six buy ratings on failing companies, while Salomon Smith Barney maintained eight hold ratings up through the date the companies filed for bankruptcy. Also sticking with buy ratings on failing companies until the very end were Bank of America Securities, Bear Stearns, CIBC World Markets, Dresdner Kleinwort Wasserstein, Goldman Sachs, and Prudential Securities.
“This analysis shows that Wall Street’s record is far worse than previously believed,” says Martin D. Weiss, chair of the independent ratings firm Weiss Ratings. “Even when there was abundant evidence that companies were on the verge of bankruptcy, over 90 percent of the latest ratings issued by brokerage firms continued to tell investors to hold their shares or buy more.”
Merrill Lynch was caught recommending stocks in failing companies to the regular Joe investors, while accurately telling investment banking clients that the stocks were “crap” and “junk.” New York Attorney General Eliot Spitzer exposed some e-mails from Merrill Lynch analysts and forced the company to pay $100 million.
A handful of other big Wall Street banks settled similar cases, paying fines barely worth a day’s revenues, and the executives got away. But not Martha Stewart. The executives engaged in wrongdoing on a scale far greater than what she has been convicted of doing.
Every year, the Federal Bureau of Investigation (FBI) releases an annual report titled “Crime in the United States.”
The report should more accurately be titled “Street Crime in the United States,” since it surveys primarily crimes like murder, manslaughter, robbery, assault, burglary, and arson. Last year, I wrote to Attorney General Ashcroft asking that the Justice Department produce a parallel report on corporate crime, documenting the financial and accounting frauds and the environmental, workplace safety, consumer products, and food safety crimes that kill, injure, and sicken millions of Americans every year.
It’s clear why the attorney general chooses not to produce such a report. It would galvanize public opinion to support the local, state, and federal corporate crime police—a threatening prospect to an attorney general and president so closely allied with big business interests.
Without such a comprehensive annual report, we are left to rely on outside evidence as to the nature and scope of the problem. But such evidence suffices to establish, without question, that corporate crime and violence inflict far more damage on society than all street crime combined.
In 2002, the FBI estimated that the nation’s total loss from robbery, burglary, larceny-theft, motor vehicle theft, and arson was a not in-significant $18 billion. Let’s compare that to just one segment of corporate fraud: health care fraud. The General Accounting Office puts health care billing fraud at $150 billion, but Malcolm Sparrow, a professor at Harvard and author of the authoritative License to Steal: Why Fraud Plagues America’s Health Care System, says fraud could account for as much as 30 percent of all health care expenditures. Last year, health care expenditures were $1.6 trillion. A Dartmouth study estimated that about a third of health care is useless, redundant, or harmful.
And that’s just health care fraud.
The savings and loan fraud, which former Attorney General Dick Thornburgh called “the biggest white collar swindle in history,” cost us anywhere from $300 billion to $500 billion. Then you have the lesser frauds: auto repair fraud, $40 billion a year; securities fraud, $15 billion a year before the recent crime wave hit; and on down the list.
Corporate crime is about more than just money. It’s also about inflicting physical injuries and even the taking of innocent human life.
In 2002, the FBI documented 16,204 homicides in the United States. Compare that to the more than 55,000 deaths on the job or from occupational diseases, the 420,000 who died from promoted tobacco-induced disease, the 10,000 who die every year from illnesses caused by asbestos, the 65,000 deaths from air pollution, and the 80,000 people who lose their lives from medical incompetence in hospitals annually.
In 1995, Ralph Estes, a professor emeritus of accounting at American University, took a comprehensive look at what he called the social costs that corporations externalize onto workers, consumers, and the environment. This is another way of looking at the costs of corporate crime, both prosecuted and not. Estes totaled private and government estimates of these various costs, including: pollution $307.8 billion; defense contract overcharges $25.9 billion; price-fixing, monopolies, deceptive advertising $1.16 trillion; unsafe vehicles $135.8 billion; workplace injuries and accidents $141.6 billion; death from workplace cancer $274.7 billion. He came up with a total cost of $3 trillion. He calls this “the public cost of private corporations.” Many of these costs in turn generate economic demand for goods and services—health care, insurance, repairs, and so on.
Every once in a while, corporate crime explodes into the headlines in a spectacular fashion:
Despite these convictions, for the most part, the drip, drip, drip of intentional, serious corporate wrongdoing that takes one life at a time, or steals one pension plan at a time, remains either underprosecuted or not prosecuted at all—because of either the failure of the law or the failure of law enforcement.
Let’s look at corporate homicide, for example. For most of the 16,000 street murders in the United States, a criminal homicide prosecution results. Tens of thousands of Americans die every year due to corporate criminal recklessness, yet you can count the annual corporate criminal prosecutions every year on your fingers.
Why so few? Lack of political and prosecutorial will.
In July 2003, in a state courtroom in Wilmington, Delaware, attorneys for Motiva Enterprises (a joint venture company between Saudi Aramco and Royal Dutch Shell) entered a plea of no contest—the equivalent of a guilty plea—to one felony count of criminally negligent homicide and six misdemeanor counts of assault in the third degree. The charges arose out of an explosion and fire at the company’s Delaware City facility in 2001 that resulted in the death of boilermaker Jeffrey Davis and injuries to six other workers. Delaware Attorney General M. Jane Brady said the “company did not take their responsibilities to the plant workers or the community seriously, and disregarded the potential consequences of their decision-making.”
Of the thousands of Americans killed on the job every year, how many are deserving of a homicide prosecution to bring a modicum of justice to their families and loved ones? Surely more than the tiny handful whose cases are currently tried every year in the United States.
Homicide prosecutions are for the most part state law prosecutions. When a tough, principled state prosecutor comes along, corporate homicide prosecutions are sure to follow. But tough, principled prosecutors are few and far between. The last homicide prosecution brought against a major American corporation was in 1980, when a Republican prosecutor in northern Indiana charged Ford Motor Co. with homicide for the deaths of three teenage girls who were incinerated when their Ford Pinto was rear-ended—the a gas tank collapsed and spilled fuel, starting the fire that caused their deaths. The prosecutor alleged that Ford knew it was marketing a defective product. But Ford brought in a top-flight criminal defense lawyer, who, together with a local lawyer who was a friend of the judge, secured a not guilty verdict after convincing the judge to keep key evidence out of the jury room.
In January 2003, the New York Times ran a series of articles exposing McWane, Inc., a privately held company based in Birmingham, Alabama, and one of the world’s largest manufacturers of cast-iron sewer and water pipe. The Times’ investigation determined that McWane is one of the most dangerous employers in America. Since 1995, at least 4,600 injuries have been recorded in McWane foundries, hundreds of them serious. Nine workers have been killed. McWane plants, which employ about 5,000 workers, have been cited for more than 400 federal health and safety violations.
One McWane worker, Frank Wagner, was killed in an industrial explosion in upstate New York that, according to a team of state prosecutors, resulted from reckless criminal conduct by his employer. “The evidence compels us to act,” the prosecution team wrote in a confidential memorandum to then state attorney general, Dennis C. Vacco, in 1996.
According to the Times, the team of prosecutors urged Vacco to ask a grand jury to indict McWane and its managers on manslaughter and other charges. But Vacco never sought a criminal indictment against the company. The company did eventually plead guilty to a state hazardous waste felony and paid $500,000, but it was not held accountable for Mr. Wagner’s death.
According to the Times report, three of the nine workers killed at McWane facilities since 1995 died as a result of wanton violations of federal safety standards. But referrals to the Justice Department for criminal prosecution of fatalities resulting from federal safety crimes are considered a waste of time. Why? Because under federal law, causing the death of a worker by willfully violating safety rules is a misdemeanor carrying a maximum prison term of six months. (Harassing a wild burro on federal lands, apparently considered a more serious crime, is punishable by a year in prison.) As a result, according to the Times, McWane viewed the burden of regulatory fines “as far less onerous than the cost of fully complying with safety and environmental rules.”
“At the time of Mr. Wagner’s death, company budget documents show McWane calculated down to the penny per ton the cost of OSHA and environmental fines, along with raw materials,” the Times reported.
According to the Times, Wagner’s death is similar to at least one hundred deaths of Americans every year—the results not of accidents, but of intentional wrongdoing or indifference. These are acts deserving of homicide prosecutions. “They happened because a boss removed a safety device to speed up production, or because a company ignored explicit safety warnings, or because a worker was denied proper protective gear,” the Times reported.
The investigation found that from 1982 to 2002, OSHA investigated 1,242 of these horror stories, instances in which the agency itself concluded that workers had died because of their employer’s “willful” safety violations.
Yet in 93 percent of those cases, OSHA declined to seek prosecution. “A simple lack of guts and political will,” John T. Phillips, a former regional OSHA administrator in Kansas City and Boston told the Times. “You try to reason why something is criminal, and it never flies.”
The same for tobacco. Ira Robbins, a professor of law at American University in Washington, D.C., argues that the time is ripe to bring a homicide prosecution against tobacco executives.
“Government should not ignore the criminal aspects of what the tobacco companies were doing,” Robbins said last year. “In fact, a good argument can be made that, over time, tobacco company executives consciously disregarded the substantial and unjustifiable risk that people might be killed. If this could be proven, then it would come under the classic definition of involuntary manslaughter.”
As Robbins observes, to gain a second-degree murder conviction, a prosecutor must show “the conscious disregard of a substantial and unjustifiable risk that death would occur under circumstances manifesting extreme indifference to the value of human life.” Professor Robbins argues that a 1,400-page summary of evidence against the tobacco companies filed in the Justice Department’s civil racketeering case against these companies lays the groundwork for homicide charges. The Justice Department is seeking to recover $289 billion from tobacco companies.
The Department alleges that in 1953 the tobacco companies launched a decades-long “fraudulent scheme to deceive the public about the dangers of smoking and discredit scientific and medical evidence that smoking was a cause of disease.”
How about the petrochemical industry? In 2001, Bill Moyers ran an exposé of the chemical industry and how it killed hundreds of workers on the front lines, “how the chemical companies, through their silence and inertia, subjected at least two generations of workers to excessive levels of a potent carcinogen, vinyl chloride, that targets the liver, brain, lungs, and blood-forming organs.”
Dan Ross died at age 46 of a rare brain cancer. According to Moyers, Ross was convinced that his job was killing him, and he died not knowing how right he was. The documentary shows his widow, Elaine Ross, who vows to her dying husband that she would “never, ever let the chemical industry forget who he was—never.” She joins up with Louisiana trial attorney Billy Baggett, who through legal discovery amasses thousands of internal company documents. The documents formed the basis of a twelve-part series by then Houston Chronicle reporter Jim Morris (“In Strictest Confidence”) that ran from June 1998 to December 1998.
Morris and Moyers reported on a 1959 Dow Chemical memo showing that vinyl chloride exposure at 500 mg “is going to produce rather appreciable injury when inhaled seven hours a day, five days a week for an extended period.” The memo says, “As you can appreciate, this opinion is not ready for dissemination yet and I would appreciate it if you would hold it in confidence but use it as you see fit in your own operations.”
Then there is the 1973 Ethyl Corp. memo claiming that results on rat tests “certainly indicate a positive carcinogenic effect.” And the 1971 Union Carbide internal memo that voices a general worry about the political climate in the United States and warns that: “a campaign by Mr. R. Nader and others could force an industrial upheaval via new laws or strict interpretation of pollution and occupational health laws.”
Yes, big corporations know that their workplace hazards are taking the lives of workers. They also know how to create a political climate to avoid being brought to justice. But they ought to be criminally prosecuted. The evidence is there. What’s needed is the will to enforce the law.
Facing down the corporate crime lobby presents a formidable task. For one thing, Washington, D.C., and the state capitals are corporate-occupied territory. Corporate lobbyists, corporate PACs, white-collar criminal defense attorneys, corporate propaganda tanks, public relations firms, their apologists at law schools—all work in conjunction to create a climate of leniency for corporate criminals.
First, the brain trust lays down a foundation of amorality. Frank Easterbrook and Daniel Fischel are University of Chicago law professors—Easterbrook is also a federal judge—who believe that nothing, not even law and order, should stand in the way of making money. Twenty years ago, writing in the Michigan Law Review, Easterbrook and Fischel stated that “managers not only may but also should violate the rules when it is profitable to do so.”
The Chicago School considers such corporate crimes as fraud, corruption, pollution, price-fixing, occupational disease, and bribery “externalities” and claims that fines for such “externalities” should be considered “costs of doing business.” Others, like George Mason University Law Professor Jeffrey Parker argue that corporate crime does not, indeed cannot, exist.
“Crime exists only in the mind of an individual,” Parker argues. “Since a corporation has no mind, it can commit no crime.”
Parker argues that a since a corporation is not a person, it should not be treated like one in the criminal law arena. (Very well, Professor, should the Supreme Court revoke the legal fiction of the corporation as person, and all the rights and privileges that follow, including the First Amendment right to speak and associate, the Fourth Amendment right to privacy, and the Fourteenth Amendment right to equal protection?) Parker argues that “there is no legitimate function of corporate criminal liability that cannot be served equally as well, if not better, by civil enforcement.” (How about shaming and deterring wrongdoers and sending a serious message through criminal prosecution? Civil fines can’t do that very effectively.)
Milton Friedman says the only moral imperative for a corporate executive is to make as much money for the corporate owners as he or she can. Management guru Peter Drucker concurs: “If you find an executive who wants to take on social responsibilities, fire him. Fast.” And William Niskanen, chair of the libertarian Cato Institute, says that he would not invest in a company that pioneered in corporate responsibility.
John Braithwaite, one of the world’s foremost corporate criminologists, says that the Friedman, Parker, Drucker, Niskanen position amounts to an argument that corporations are not part of the moral community—it is a “rationalization to insulate corporate actors from shaming by the wider community.”
While the brain trust works from the outside to create a legal system that insulates the corporate actors from shaming by the wider community, the corporate defense attorneys work the system from the inside to the same ends. The corporate criminal justice system has been compromised by an imbalance of power and resources.
Opening just a few windows on this world will give you an idea:
When these or any of the other small, specialized prosecutorial offices bring a charge against a major American corporation, they are overwhelmed by a corporate law firm with hundreds of lawyers and paralegals.
Take the exceptionally unique prosecution of Royal Caribbean Cruise Lines. It is a testament to the federal prosecutors in that case that the company was eventually convicted of criminally polluting the nation’s oceans. Despite overwhelming evidence leading to that conviction, the company was determined to beat the rap.
To defend itself, Royal Caribbean hired Judson Starr and Jerry Block, both of whom served as head of the Justice Department’s Environmental Crimes Section, and former Attorney General Benjamin Civiletti. Also representing Royal Caribbean were former federal prosecutors Kenneth C. Bass III and Norman Moscowitz. Donald Carr of Winthrop & Stimson also joined the defense team. As experts on international law issues, the lawyers hired former Attorney General Eliot Richardson, University of Virginia law professor John Norton Moore, former State Department officials Terry Leitzell and Bernard Oxman, and four retired senior admirals.
As the case proceeded to trial, the company engaged in a massive public relations campaign, taking out ads during the Super Bowl, putting a former Environmental Protection Agency administrator on its board of directors, and donating thousands of dollars to environmental groups.
Federal prosecutors overcame this legal and public relations barrage and convicted the company in July 1999 on twenty-one counts. The company paid a record $18 million criminal fine for dumping waste oil and hazardous chemicals into the ocean and lying to the Coast Guard about it.
But it is this display of corporate crime defense prowess that makes prosecutors think twice about proceeding against a major company. Increasingly, prosecutors go after lower-level executives instead. Even so, scores of major American corporations like Royal Caribbean have been criminally prosecuted and sanctioned in recent years, which tells us something about the extent of corporate crime. Corporate Crime Reporter’s list of the Top 100 Corporate Criminals of the 1990s ranks these corporate criminals by amount of the criminal fine.
Last year Corporate Crime Reporter also published its report on the top 100 False Claims Act settlements. The federal False Claims Act is a remarkable law that says to citizens of the United States: If you have information about corporations that are defrauding the federal government, come forward, tell federal prosecutors about it, and if federal prosecutors can verify your claim, they will join with you and sue the corporation to recover the amount of money that the corporation defrauded from the United States. If you can prove your case, and the government recovers the defrauded money, then you, ordinary citizen, will get a share of the recovery—anywhere from 15 percent to 30 percent. And the law is working. Since 1986, when strengthening amendments to the False Claims Act were passed into law, the government has recovered $12 billion in taxpayer monies from corporate crooks—and more than a few whistleblowers have became millionaires as a result.
There are enforcement actions the public doesn’t hear about. Bob Bennett, one of the nation’s premiere white-collar crime defense lawyers, says that “90 percent of the work I do never sees the public light of day.” Bennett and his colleagues burn the midnight oils to keep their clients out of the public spotlight—cutting special deals, giving up corporate executives to save the corporation from criminal prosecution, seeking civil settlements where criminal prosecutions are warranted. After all, for big corporations, reputation is everything.
Take corporate bribery. In the late 1970s, the Securities and Exchange Commission asked corporations to come forward and disclose bribes and other improper payments overseas. More than four hundred major companies did so, and the revelations led to the passage of the Foreign Corrupt Practices Act, which prohibits U.S. companies from bribing overseas.
Corporate lawyers handling foreign bribery cases report a sharp increase in business in the past couple of years. Some businessmen say it is impossible to do business in China without paying bribes. But where are the criminal prosecutions for bribery? They are few and far between.
Homer Moyer Jr., a partner at the corporate defense firm of Miller & Chevalier, likens his practice of defending corporations against charges of bribery to an “iceberg.”
“Very little of this practice is publicly visible,” Moyer said. “Many of these cases are resolved informally, without publication of consent decrees—many are just dismissed.” When an enforcement action results, information that is made publicly available is often sketchy because defense counsels “negotiate what information can be released,” Moyer said.
Only a handful of bribery charges are brought every year by the Justice Department’s understaffed Fraud Section—a dozen in 2002—and the charges rarely carry criminal sanctions.
It took a lawsuit to unearth a secret settlement practice at the Office of Foreign Assets Control (OFAC) of the U.S. Treasury. OFAC enforces the laws governing doing business with designated enemies of the United States. Big banks and other financial institutions had a sweet deal with OFAC: OFAC would bring an enforcement action against the banks for doing business with, say, Libya. The bank would settle the case, and OFAC would agree not to publicize it. Hundreds of enforcement actions against major American corporations never saw the light of day.
Ira Raphaelson, a defense attorney at O’Melveny & Myers, told reporters last year about how he settled a criminal case brought by the Justice Department against a corporate client of his, and the press never caught wind of it because there was an agreement not to publicize the case. Raphaelson said that there have always been “side deals” between the government and defense attorneys not to publicize a case:
There are settled criminal cases that the government and the defense attorneys agree not to talk about in public. There always have been these side deals. If there is a prosecution that is a bad prosecution that is settled, and I have a side deal with the prosecutors not to talk about the prosecution, I’m not going to talk about it. In my case, the government put out no press release. There was no publicity to the case.
Lanny Breuer, a partner at Covington & Burling, concurs about the existence of a secret settlement practice. “There is this kind of practice of keeping information about criminal cases out of the press,” Breuer said.
Even when prosecutors overcome all odds, and successfully bring a criminal prosecution, and the prosecution is publicized, so the world knows that it happened, there is a price to pay for the imbalance of power.
Take the case of Ball Park Franks. Bil Mar Foods is a unit of the Chicago-based giant Sara Lee Corporation, the maker of pound cakes, cheesecakes, pies, muffins, L’Eggs, Hanes, Playtex, and Wonderbra products. Bil Mar makes hot dogs—Ball Park franks hot dogs.
In July 2001, Sara Lee pled guilty to two misdemeanor counts in connection with a listeriosis outbreak that led to the deaths of at least twenty-one consumers who ate Ball Park Franks hot dogs and other meat products. One hundred people were seriously injured. The company paid a $200,000 fine. Close examination of the evidence shows that a felony charge was warranted but federal prosecutors were overpowered by lawyers for Sara Lee; in particular, the Chicago firm of Jenner & Block, led by former Chicago U.S. Attorney Anton Valukas.
Think of it—twenty-one dead and only two misdemeanors and a $200,000 fine. To announce the slap-on-the-wrist plea agreement, federal prosecutors and Sara Lee issued a joint press release. It was perhaps the first joint press release with a convicted criminal defendant in Justice Department history. Imagine the Justice Department issuing a joint press release with a convicted terrorist or child molester. They would not. They could not.
Larry Thompson is not the kind of lawyer who should have been heading up a Corporate Fraud Task Force. Thompson, a former corporate lawyer, knows the ins and out of corporate wrongdoing. Before his Senate confirmation as deputy attorney general, Thompson sat on the board of Providian Financial Corp. a credit-card company that paid more than $400 million to settle allegations of consumer and securities fraud. He was also chair of the company’s audit and compliance committee.
According to the Washington Post, “Providian was one of the biggest credit-card companies in the so-called subprime market, which targets people with low incomes and bad credit histories.” In 2001, the company settled charges that it inflated its financial results by charging excessive fees and engaging in other practices that state and federal regulators said broke consumer protection rules.
As head of the President’s Corporate Fraud Task Force, appointed by George W. Bush, Thompson told reporters that he wanted to hold corporations accountable for the criminal culture and conduct they promote. Instead, he helped rig the system so that corporations have a way to get out of a criminal jam. In a memo issued under his name in January 2003 (known in defense circles as “the Thompson memo”), Thompson opened a loophole for corporations to escape punishment for criminal behavior.
The memo, titled “Federal Prosecution of Business Organizations,” gives prosecutors discretion to grant corporations immunity from prosecution in exchange for cooperation. These immunity agreements, known as deferred prosecution agreements, or pretrial diversion, were previously reserved for minor street crimes and never intended for major corporate crimes. The U.S. Attorneys’ Manual explicitly states that a major objective of pretrial diversion is to “save prosecutive and judicial resources for concentration on major cases.”
Thompson’s memo was followed by a rash of deferred prosecution agreements in cases involving large corporations, including a settlement with a Puerto Rican bank on money-laundering charges and a Pittsburgh bank on securities charges. Corporate defense attorneys are seizing on these agreements with the Justice Department so as to avoid any publicity.
“This is a favorable change for companies,” Alan Vinegrad, a partner at Covington & Burling in New York, told Corporate Crime Reporter last year. “The memo now explicitly says that pretrial diversion, which had been reserved for small, individual, minor crimes, is now available for corporations.” Vinegrad said that while there have been a handful of publicized pretrial diversion cases, the Justice Department can cut these kind of deals with companies without filing a public document—and therefore without any publicity to the case.
Much of the history of corporate crime and violence in this country has never seen the light of day because of a simple dictate widely followed in corporate boardrooms: When in doubt, shred it.
In 2002, Arthur Andersen was indicted for obstructing justice. Federal officials alleged that on October 23, 2001, Andersen partners assigned to the Enron audit launched “a wholesale destruction of documents” at Andersen’s offices in Houston, Texas.
“Andersen personnel were called to urgent and mandatory meetings,” the indictment alleged. “Instead of being advised to preserve documentation so as to assist Enron and the SEC, Andersen employees on the Enron management team were instructed by Andersen partners and others to destroy immediately documentation relating to Enron, and told to work overtime if necessary to accomplish the destruction.”
During the next few weeks “an unparalleled initiative was undertaken to shred physical documentation and delete computer files,” according to the indictment. “Tons of paper relating to the Enron audit were promptly shredded as part of the orchestrated document destruction,” the indictment alleges. “The shredder at the Andersen office at the Enron building was used virtually constantly and, to handle the overload, dozens of large trunks filled with Enron documents were sent to Andersen’s main Houston office to be shredded. A systematic effort was also undertaken and carried out to purge the computer hard-drives and e-mail system of Enron-related files.”
Andersen was convicted by a jury in Texas and forced out of business. But who is to say that many sizeable American corporation could not be convicted of a similar crime?
Again, the former chair of the SEC, Harvey Pitt, was notorious for giving advice to his fellow defense lawyers on when and how to destroy incriminating documents. For example, in a 1994 article in the Cardozo Law Review titled “When Bad Things Happen to Good Companies: A Crisis Management Primer,” Pitt wrote: “Ask executives and employees to imagine all their documents in the hands of a zealous regulator or on the front page of the New York Times.…Each company should have a system for determining the retention and destruction of documents. Obviously, once a subpoena has been issued, or is about to be issued, any existing document destruction policies should be brought to an immediate halt.”
In a 1980 law review article, “Document Retention and Destruction: Practical, Legal and Ethical Considerations,” former SEC enforcement chief John Fedders took this advice one step further. “On occasion, counsel will be shown a document which could expose the corporation to liability if it became available to adverse parties,” Fedders wrote. “If the document is not yet scheduled for destruction under the terms of the program, management may advocate a waiver of the program to allow the document to be promptly destroyed.”
This sort of advice has been followed. For example, in April 2002 an Australian judge found that British American Tobacco (BAT) engaged in a massive document-destruction scheme intentionally designed to thwart smokers or former smokers from bringing suit against the company. After the conclusion of one plaintiff’s case and before the beginning of another, BAT’s chief counsel told an associate, “now is a good opportunity to dispose of documents if we no longer need to keep them. That should be done outside the legal department.” Thousands of the 30,000 documents were then destroyed, along with electronic versions of the documents, summaries, indices, and ratings.
“The decision to destroy all such lists and records, can only have been a deliberate tactic designed to hide information as to what was destroyed,” the judge wrote.
In response to corporate crime waves, the government usually passes a series of meek reforms (like the Sarbanes Oxley law of 2002). Over the years, our citizen groups have introduced numerous proposals to crack down on corporate crime, including: the FBI creation of an annual Corporate Crime in the United States report; tripling the budgets of the federal corporate crime police; adopting three-strikes-and-you’re-out policies for corporate criminals; banning corporate criminals from government contracts; expanding the False Claims Act to include environmental and securities fraud areas; and creative sentencing alternatives, such as sentencing fit coal mine executives, convicted of violating safety laws resulting in casualties, to working with the miners in the mines.
Some of the shrewdest observers of corporate crime come from that former penal colony, Australia. John Braithwaite, who has written many books on corporate crime, argues that “if we are serious about controlling corporate crime, the first priority should be to create a culture in which corporate crime is not tolerated.” He believes that “the moral educative functions of corporate criminal law are best achieved with heavy reliance on adverse publicity as a social control mechanism.”
“The policy instruments for harnessing shame against corporate offenders include adverse publicity orders as a formal sanction, the calling of press conferences following corporate convictions, encouraging consumer activism and investigative journalism,” he writes.
Braithwaite’s prescription would take us in the opposite direction we’ve been heading in recent years with the Thompson memo, deferred prosecution agreements, and secret settlements. It would move us away from a criminal justice system massaged by the corporate crime lobby to limit adverse publicity.
What is needed is political leadership uncompromised by corporate influence, leadership that will not just talk the talk on corporate crime enforcement, but deliver justice to the American people. For too long people have suffered at the hands of big corporations that defraud consumers; pollute our air, water, and soil; bribe our public officials, injure and destroy the health of workers, and steal from our governments.
Creating a culture in which corporate crime is not tolerated in word, law, or deed is long overdue.