Opinion

Felix Salmon

Why harsh white-collar sentences make sense

By Felix Salmon
December 21, 2009

Matthew Kelley asks whether the 14-year sentence for the former head of El Paso Corp.’s natural gas trading business isn’t excessive; my feeling is that it makes a certain amount of sense.

For one thing, there are lots of excessive sentences in US jurisprudence, and there’s no reason why white-collar crimes should be exempted from that phenomenon. Indeed, the opposite is arguably the case: in the case of most crimes, it’s pretty obvious in the wake of the crime that a crime has taken place, and as a result a police investigation is immediately launched. Much of the attraction of white-collar crime, by contrast, lies in the fact that if it works, there’s a very good chance that no one will ever know that a crime ever happened at all.

As a result, a much lower proportion of white-collar crimes is investigated than of crimes as a whole — and that’s before you get to the question of whether or not they can be successfully prosecuted. After all, these are complex things, and hard to prove beyond reasonable doubt, as the prosecutors of Ralph Cioffi know full well.

Given (a) the low probability of being investigated, then, along with (b) the far-from-certain probability of being successfully prosecuted even if you are investigated, and (c) the enormous potential rewards, it’s easy to see how white-collar crime is very attractive. And the government has very few tools against it beyond very stiff sentences for those criminals who are investigated and tried and found guilty.

Against all of that one has to put the strong principle that the punishment should always fit the crime — and in this case, which is arguably victimless, a 14-year sentence does seem harsh. Still, it’s important to remember the amount of money involved in these cases. Few Texans would object to a 14-year sentence for a simple thief who stole $1 million, and I’m sure that James Brooks ended up making much more than that in excess bonuses tied to his fraudulent reporting.

More generally, it’s easy to lose sight, in the high-speed world of trading, of the fiduciary responsibility shouldered by people moving billions of dollars of other people’s money. A huge amount of the anger directed at Wall Street, especially in the wake of the financial crisis, is a result of the fact that this is real money we’re talking about here, and a lot of the brash young traders on the Street seem to have no conception of the value of a dollar. If sentences like this help to sober them, that’s undoubtedly a good thing.

Comments
9 comments so far | RSS Comments RSS

Right wingers love to punish the black man who smokes crack cocaine – with a lengthy, mandatory prison sentence.

But they want to forgive the rich guy who steals millions of dollars from people who cannot afford those losses.

In my opinion, white collar criminals get off easy. When convicted, each victim ought to be able to demand – and the judge should be mandated to grant – an extra one year added to the prison sentence.

Posted by MarkWolfinger | Report as abusive
 

Felix, I disagree strongly with your analysis.

The problem with this policy is that the government is prosecuting agency costs, such as KPMG pushing the edge of the envelope on tax shelters, Arthur Andersen not using very good sense in executing its document retention policy, or James Brooks not using good judgment in the information that he gave to an industry publication.

There is a big difference between prosecuting agency costs and prosecuting clear-cut crimes, such as embezzlement or most blue-collar crimes. The difference relates primarily to the nature of the evidence involved, the relevance of contracts, and the subtleties of dividing responsibility between corporate actors.

Larry Ribstein of the University of Illinois Law School has put it this way. Suppose somebody mugs you on the street. There is no question that is a crime.

However, what if they ask you first if they can borrow your wallet, you loan it to them, and then don’t give it back in time? What if they ask your employee who’s running the store for you whether they can borrow some money and then don’t pay it back? What if the “thief” is another employee who says the manager gave him the money as bonus compensation?

Who is liable in these situations turns on the contracts among the various parties. Proof depends on who said what to whom. Can we rely on what the witnesses say about this? What if the prosecutor tells the guy who’s minding the store that he’ll not face a prosecution for conspiracy if he spills the beans on the employee?

Take the Tyco case as an example. It was widely reported that the jurors in post-trial interviews said that they convicted Kozlowski and Swartz in part because they assumed the directors were so firmly in the defendants’ pockets that they would have provided a consent in writing for their bonuses if the defendants had asked for it, and therefore it follows that the defendants didn’t ask for it.

But why wouldn’t the defendants have asked for such a writing if they surely would have gotten approval? Not because they wanted to hide their bonuses because there was evidence that the bonuses were well known within the company and by the company’s auditors.

Consequently, shouldn’t the directors have faced prosecution also for allowing such excess compensation? Shouldn’t the auditor (Richard Scalzo) also have been prosecuted? Similarly, in the Enron case, if Arthur Andersen is prosecuted, shouldn’t Vinson & Elkins be prosecuted for their conduct in facilitating Fastow’s SPE’s and covering up their alleged invalidity in connection with their investigation into Sherron Watkins’ memo to Ken Lay?

I concede that society needs to have some punishment and accounting for clear-cut crimes. But in the Tyco case, the shareholder suits are still pending and they include — unlike the criminal prosecution — all the people involved, including the directors who approved the wrongful payments and the accountants who knew about them. My sense is that this is a much more rational way in which to deal with agency costs than attempting to make them appear to be clear-cut crimes, which is something that they are not.

The supposed payoff to criminal prosecutions of agency costs is deterrence. But businesspeople such as Kozlowski will keep on pulling these shenanigans while the legitimate risk-takers who create jobs and wealth for the community sorts will be the ones who are deterred. I’m not suggesting that the conduct in Tyco should be encouraged, but the cases against Mike Milken, Jamie Olis, Dan Bayly, Jeff Skilling and Ken Lay are significantly different, and I am not comfortable that politically ambitious prosecutors such as Eliot Spitzer can tell the difference.

Posted by bigtkirk | Report as abusive
 

Wow. Just wow. This may be the dumbest post I’ll read all day. Thank goodness you picked finance and not law. Unfortunately, I fear there is a lot of people out there whose thinking on jurisprudential matters is equally fuzzy.

Posted by MiddleBrowser | Report as abusive
 

*are* (darn, I hate when that happens.)

Posted by MiddleBrowser | Report as abusive
 

Wow. Just wow, Middlebrowser. Jump on, call the post “dumbest I’ll read all day,” and split.

No justification whatsoever for your criticism. I guess you really, really don’t believe in accountability, do you?

Posted by Dollared | Report as abusive
 

And yes, Felix, white collar crime should be punished harshly. It is the tip of the iceberg in societal corruption. And societal corruption is the antithesis of everything we should celebrate – meritocracy, true market economics, public and private integrity. Every day in business, honest mid-level managers compete with dishnonest, and sometimes criminal, slime. And they lose – promotions, bonuses, approval of their business plans, often their jobs.

Remember, the person at Verizon that arranged for people to be hit with a $1.99 data charge every time they accidentally invoked their browser was probably credited with million$ in revenue in their annual scorecard, and probably earned themself a five figure bonus for screwing hundreds of thousands of customers on their wireless bill. Not criminal, but unethical – and an internal competitive advantage for that midlevel marketing exec.

The more that every sector of society values honest success through hard work and ethical innovation (as opposed to Enron innovation), the more true innovation and societal wealth we can create. And keep.

Posted by Dollared | Report as abusive
 

China’s been doing some interesting things lately with less-than-adequately-connected white (now red) collar criminals.

Posted by Uncle_Billy | Report as abusive
 

I am reminded of an old New York cartoon: “And how much justice can you afford, Mr. ___?” Because of our system of justice, the rich get off much more easily. Read Bogira’s Courtroom 302 for how the poor get justice.

I believe the amount of punishment should correlate to the amount of harm done. So large white-collar crimes require heavy punishment. Making restitution may be part of the sentence, but unless full restitution is made (rarely possible) the sentence should tie to the harm which is not repaired.

Further, we should not allow plea agreements with no admission of guilt.

Posted by BobPendleton | Report as abusive
 

“For one thing, there are lots of excessive sentences in US jurisprudence, and there’s no reason why white-collar crimes should be exempted from that phenomenon.”

So because one sentence is excessive all sentences should be excessive? What logic! Kind of along the lines that since you broke one arm, you should break the other just for parity’s sake.

How about levying sentences that are appropriate to the offender’s role, culpability, etc. and that meet the purposes of punishment. That means amending overly harsh sentences. It also means sentencing white collar criminals to fines and prison terms that refelct culpability and is informed by societal demand for punishment, rehabilitation, etc.

I know I’m late to comment on this post. But for goodness sake…

Posted by mixlpixl | Report as abusive
 

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