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Tuesday, September 20, 2005

Corporate Criminals Doing Hard Time

Prof. Bainbridge asks: "[a]s matter of sound sentencing policy, should first offender white collar criminals serve their sentences in a maximum security prison?"  He worries, in particular, about the risks of over-deterrence and disproportionate sentencing.  He has expressed these concerns before, particularly well in this Tech Central Station column where he wrote: "[p]ut bluntly, Dennis Kozlowski faces spending the rest of his life worrying about prison rape."

I guess I have a few reactions.  First, I agree with Prof. B. that hard time exposes convicts to shocking risks of violence, including forcible sexual intercourse, and that such risks ought not be tolerated.  To the extent that maximum security prisons have a higher risk of prisoner-on-prisoner violence than other detention centers, then it is fair to question any maximum security sentence on that basis.  Second, I agree that over-deterrence is a particularly delicate problem in the corporate crime arena, especially because, as Prof. B. notes, the crimes themselves "rarely involve black-and-white issues; instead, they typically involve prudential judgments among a number of plausible alternatives."  In such circumstances, post-hoc decision making may lead to over-enforcement.

But, on the other hand, it is commonly believed that corporate criminal laws are under-enforced.  (How can they not be, when the feds are apparently now diverting resources from the fight on terror to chase adult pornographers?)  Moreover, because those laws are difficult and expensive to prove, it seems as likely that decision  makers will under-enforce the law as they will over-enforce it.  Moreover, the Kozlowski case itself doesn't seem particularly gray - the conduct, if proven, was surely wrongful.  Finally, it is surprising to me that Prof. B. didn't mention the retributive conception of punishment, which itself might explain (even celebrate) punishing corporate scofflaws with maximum security prison.

Dan M.: you can take it from here.  What does CCR have to say on this problem?

Posted by Dave Hoffman on September 20, 2005 at 10:22 PM in Corporate, Criminal Law | Permalink

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"[p]ut bluntly, Dennis Kozlowski faces spending the rest of his life worrying about prison rape."

Best argument for prison reform I've heard yet. Perhaps no one in prison should have to worry about being raped...

Posted by: Dave! | Sep 21, 2005 12:00:09 AM

Plus, from 2% to 4% of the inmate population is HIV positive. Thus, he might also have to worry about getting HIV. There's an interesting article (can't remember the title) arguing that with such high HIV rates, any prisoner now faces a potential death sentence.

Thus far, we as a society have turned on back on prison rape. We throw people into the lion's den, and when they're eaten, argue it's not our fault. We say, "It was the lions who ate them."

Posted by: Mike | Sep 21, 2005 3:32:04 AM

Dave, good questions. I'll try to work up a post in response...in the backlog.

Posted by: Dan Markel | Sep 21, 2005 10:25:28 AM

This is an interesting question, but the statement that white collar crime "rarely involve[s] black-and-white issues; instead, they typically involve prudential judgments among a number of plausible alternatives" is simply untrue. Bad prudential judgments among a number of plausible alternatives lead to civil liability; knowingly breaking the law leads to criminal liability. Martha Stewart, for example, told outright lies to a federal prosecutor, an FBI agent and an SEC investigator. That choice is not one of a number of plausible alternatives. Dennis Kozlowski used corporate funds to pay for a gross amount of personal expenses and created fake loans that were later forgiven to increase his personal income. Again, that's not one of a number of plausible alternatives for a business executive trying to do the right thing in a complex regulatory environment. Bernie Ebbers told his subordinates to falsify records about WorldCom's profits; again, that's not one of a number of plausible alternatives. Same with the Rigases (at least, the two that were convicted) at Adelphia.

White collar crime cases almost always come down to whether someone told a lie. In order to make the case, the govt needs to prove that they knew that what they were saying was wrong but said it anyway (presumably to gain some advantage for themselves). In Kozlowski's case it was that the funds were being used for business expenses or that he intended to repay the loans (also, I think, that certain valuable paintings had in fact been sent to his house in NH when in fact they remained in NY and should therefore have been subject to NY sales tax worth more than $1m). In the WorldCom case it was that the profit numbers were accurate. In the Rigas case it was some combo of saying that personal expenses were actually business costs and false reporting.

Under any circumstance, however, white collar crime is not subject to the same "over-deterrence" calculations that generally accompany risk calculation structures because the perpetrator understands that their conduct is wrong in advance. It's not a question of laudable risk-taking being punished by overly aggressive plaintiff's lawyers. If corporate officers don't place a high premium on true reporting, our markets won't work. There may be some circumstances where generally accepted accounting principles might lead to different classifications of income or profit, but those cases don't result in criminal prosecutions and certainly aren't what occurred in Adelphia, WorldCom, or Martha Stewart.

Posted by: SG | Sep 21, 2005 11:52:54 AM

This is all so racist and classist. Not the stuff on this blog, but the way that the media, and yes, Bainbridge are dealing with it. All of a sudden there's this huge public outcry about "white collar criminals" having to serve their time with all the nasty rapists? Well, how about some kid from the 'hood who gets talked into being a drug mule? It's ok for them to serve their time with all the nasty rapists because they're not white[-collar]?

I know this argument is a bit of a cliche, but that doesn't make it less true or mean it doesn't need to be said. It's really astonishing now how the media has suddenly discovered -- ooh look, there's rape in prison!" This is the sort of thing that the old TV show "In Living Color" would just have a field day with.

Bainbridge's argument to the contrary, once he admits that his "overdeterrence" claim doesn't apply to Kozlowski, is patent nonsense. In his blog, he adopts Ellen Pogdor's argument, which is that Kozlowski is unlikely to be a repeat offender. The reason that Kozlowski is unlikely to be a repeat offender is because he is an upper-middle class privileged executive. When/if he gets out of prison, he will have ample economic opportunities. Prison, frankly, can't damage him too much except for the raw loss of years.

By contrast, poor black kids from the hood end up in the same prisons and get recruited into even nastier gangs, lose their employment prospects, etc.

If we're determining our prison policies by the effect on the outside world, it's the kid who gets suckered into being a drug mule that should go into the camp fed, because that kid is more vulnerable to the risk of being driven into reoffending. Kozlowski can go into Attica, because he isn't going to be turned into a recidivist by the experience!

Posted by: Paul Gowder | Sep 21, 2005 12:55:50 PM

Bainbridge asserts that white-collar crimes involve ambiguous behavior and therefore should be punished less severely. Other commenters have correctly noted that his factual premise is generally incorrect.

But the "therefore" is dubious even where the factual assertion of ambiguity is accurate. White-collar criminologists recognize that "control frauds" (i.e., frauds in which the person controlling the organization uses it as a weapon of fraud) often do seek ambiguity. When the CEO is the lead criminal he can (1) optimize the corporation's business operations to support the fraud, (2) use the corporation's resources and apparent legitimacy to purchase support for the fraud, and (3) maximize "systems capacity" limitations. Each of these devices can involve the creation/exploitation of ambiguity. For example, in a "looting" control fraud the CEO will cause the corporation to enter business lines in which accounting fraud is easier to accomplish (typically because of weak/ambiguous accounting guidance). The corporation then massively overstates its net worth and the CEO can enrich himself through normal corporate mechanisms that make it very difficult to prosecute. (Fortunately, many of the looting CEOs become emboldened by their success and adopt progressively more blatant forms of looting than allow successful prosecution. Similarly, the cover up stage of hiding the corporation's insolvency often lead the CEO to cruder violations that are easier to prosecute.)

CEOs use of corporate resources/legitimacy also leads to the deliberate creation of ambiguity. The outside law firm and auditor are the looting control fraud's most valuable allies. CEOs that have made "their" corporations deeply insolvent have routinely been able to get clean audit opinions for fictional financial statements. Indeed, one of the most common characteristics of looting control frauds is that they report extraordinary earnings. When the corporation fails the CEO purports to have relied on the expert advice of his attorneys and auditors. One major difference between elite white-collar criminals and street criminals is that the elite consult their attorneys BEFORE (and during) their crimes and the attorneys help them structure the crimes in a manner that aids the looting and reduces the chances of a successful prosecution.

The third means of creating ambiguity is to use the corporation's power/legitimacy to maximize "system capacity" limitations (criminology jargon). The criminal justice system often under deters elite crimes because so few resources are devoted to its detection/investigation/prosecution. But audacious control frauds can increase, not simply exploit, these capacity limitations. One leading tactic is deregulation. Violating a regulation is generally not a criminal act, but it filing a false report (typically to hide a regulatory violation) with a federal agency is almost always a crime and this gives us the means to prosecute many criminal corporate actions. The most audacious control frauds use political contributions to deregulate, to block reregulation, and to attempt to control the appointees that will Chair regulatory agencies. Taken together, these actions maximize systems capacity problems and increase ambiguity -- vigorous enforcement is portrayed as contrary to the administration's policy goals. Rules shaped by the control frauds may be deliberately vague, weak and full of loopholes.

So, the deliberate creation and exploitation of ambiguity by elites does not clearly provide a rationale for weaker punishment of such elites. The behavior of control frauds could more logically be seen as cynical and dangerously manipulative and requiring greater punishment.

Best,
Bill Black

William K. Black
Executive Director, Institute for Fraud Prevention
Associate Professor of Economics and Law, UMKC

Posted by: Bill Black | Apr 12, 2006 3:22:41 PM

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