Will White-Color Criminals Be Punished Too Harshly?
from
November/December 2003
by Bonnie Azab Powell
ImClone Systems founder Sam Waksal has started serving three-plus years in federal prison for securities fraud and other crimes. Martha Stewart and executives from Enron, Tyco, Rite Aid, WorldCom, and others are also looking at stiff jail terms if convicted of financial shenanigans. But in one sense, they all have reason to be glad they did what they did when they did it, assuming they did do it. Those who commit so-called economic crimes after November 1 will face even harsher sentences. The maximum jail term for violating the Securities Exchange Act, for instance, goes from 10 years to 20.
Many welcome such increases—but not Frank Bowman, a professor of law at Indiana University School of Law in Indianapolis. Before joining academia in 1998, Bowman spent plenty of time in federal courtrooms as a prosecutor and deputy district attorney. He was also a special counsel to the Justice Department and an adviser to the U.S. Sentencing Commission, which establishes sentencing policies for the federal courts, among other things. While at the last two jobs, he helped write a whole new set of sentencing guidelines that brought penalties for white-collar crimes to a historic peak. For Sarbanes-Oxley to stiffen them further is a mistake, he says. Worse, a new law—the so-called Feeney Amendment, named for Representative Tom Feeney (R-Florida)—limits the ability of federal judges to use discretion when meting out punishment. Any decision by a judge to lessen a stipulated minimum sentence for a white-collar crime will be reported to Congress, which can question the judge’s decision and even overrule it.
Bowman talked to Corporate Board Member’s Bonnie Azab Powell about crime, punishment, and the white-collar perp. Excerpts:
Do you think all these changes in the sentencing guidelines will reduce white-collar crime?
They may have some marginal deterrent effect. But I have a somewhat cynical view of Sarbanes-Oxley’s push for increased criminal sentences and, for that matter, the Justice Department’s continuing focus on higher penalties. Some participants in the debate over Sarbanes-Oxley sought to define the corporate-scandal problem primarily as a criminal problem—as the fault of a few crooked people. If you can address it by prosecuting those few bad apples, then you can reduce the pressure to increase regulatory control of corporate governance, to rethink management’s relationship to boards of directors, to focus on accounting practices. In short, treating corporate scandal as a criminal phenomenon shifts the focus away from accepted behavior and business practices.
Painting with a very broad brush, this administration and the Republican members of Congress support business interests and free markets. They tend to be skeptical about efforts to have the government make rules about corporate governance and the operation of markets. All these calls for increased penalties for offenders say, “Look, we’re doing something! We’re prosecuting Martha Stewart! So you don’t have to worry about whether the regulation of stockbrokers or insider trading is strong enough. What’s more, we brought down Arthur Andersen, so you don’t have to worry about incestuous relationships between outside auditors and their large corporate clients. And we’re going after Dennis Kozlowski! No need to think seriously about outrageous—but legal—levels of executive compensation, or the fact that so many boards of directors seem oblivious to the operations of the corporations they are paid handsomely to oversee.”
Before the Sarbanes-Oxley Act was passed, you testified at Senate hearings that white-collar offenders often deserve lengthier sentences than virtually any other category of offender. But you argued against any increase in penalties by Sarbanes-Oxley. Please explain.
You have to take the historical perspective. Before the Sentencing Commission was formed in 1984 and passed the first guidelines in 1987, the sentences for economic crimes were really very low, certainly relative to other sorts of offenses. The original commission set out to create a regime under which white-collar offenders would go to prison more often and for longer periods than had previously been the case. Starting in 1987, that proved to be true.
And the penalties have been increasing ever since?
Yes. Between 1987 and 2000, the commission, sometimes on its own and sometimes at Congress’s urging, raised white-collar sentences, particularly for the more serious fraud offenders. And for the five years prior to 2001, the commission had been engaged in the long, difficult process of producing the Economic Crime Package, which raised sentences, particularly for mid- to high-level economic-crime offenders, even further. The reason I told the Senate that on the one hand economic crimes are serious and deserve stiff penalties, and on the other they should go slow in revising those penalties, was because we had just spent five years doing it.
Yet the Sarbanes-Oxley Act mandated additional increases.
Right. Although I would query how much it really “mandated.” But that, of course, was the crux of the debate over the last year.
The Department of Justice seems to think it did, and has been seeking to increase sentences for all white-collar crimes across the board. Is it misinterpreting the act?
That’s certainly my fear. Part of the problem is that Sarbanes-Oxley—I’ll put this as politely as possible—was written hastily. If you trace the events of summer 2002, Senator Joe Biden called a meeting of the Senate Subcommittee on Crime and Drugs on June 19. He invited a representative of the Justice Department, Paul Rosenzweig of the Heritage Foundation, a couple of state securities regulators, and me. The subject of the hearing was “Are we getting tough on white-collar crime?” And the consensus was that white-collar sentences were quite adequate as a result of the Economic Crime Package.
On July 9 President Bush made the speech to Wall Street about corporate responsibility. The very next day was the second round of hearings on white-collar crime, which Joe Biden had already scheduled. This time, in response to the new White House line, the Justice Department takes a rather different position. Now they want increased sentences for white-collar crime, although at that time they spoke of raising the possible maximum sentences, rather than changing the guidelines for all defendants.
So Sarbanes-Oxley gets thrown together, and the legislation is passed something like two weeks after Bush’s speech—warp speed. As you can imagine, if you’re trying to put together a very complicated regulatory and criminal package and get it through Congress in 15 days, you end up with something that resembles Frankenstein’s monster: a lot of somewhat unrelated pieces all stitched together. Inevitably there was some ambiguity in the language, which the Justice Department interpreted as calling for across-the-board sentences for both high- and low-loss offenders. In my view, that’s a stretch.
Nevertheless, the Sentencing Commission voted this April to increase penalties significantly, effective November 1. Summarize the revisions for us.
First, they responded to some very specific provisions of Sarbanes-Oxley that deal with high-level corporate crime of the Enron-Tyco-WorldCom variety, offenses that affect the stability of corporations, the stability of markets. The commission has provided a specific increase if the fraud offense seriously affected the financial stability of a large number of victims and if the accused is a high-level corporate executive. For example, an officer of a public company who defrauds more than 250 employees out of
$1 million or more will now get 10 years in prison instead of five.
At the last minute they also added an increase for certain other fraud offenses. That will affect everybody, from Aunt Tillie, who keeps on cashing Uncle Joe’s Social Security checks after he dies and swindles the government out of $10,000, to a crooked CEO who causes the collapse of a Fortune 500 company. It will have the greatest effect on the large number of small fish in the federal system, because the guidelines will often restrict the ability of a sentencing judge to grant straight probation or some sort of alternative punishment, like home confinement or a halfway house.
So were the new guidelines, which were revised by the Sentencing Commission after a mere six months of review, necessary? Fair?
They’re certainly not necessary. That’s been my position throughout. If anything needed to be done to increase sentences, it was done in 2001 with the Economic Crime Package. People who stole $10 million—or in the case of Enron, if they’re ever charged, hundreds of millions—were already going to get serious time: 15, 20 years or more.
Are the increases fair? That’s a little bit harder to define. How much does somebody who causes the collapse of a corporation like Enron and causes thousands of people to lose their pensions—how much time does that person deserve? I don’t know. As a lifetime prosecutor before I became an academic, I don’t have a heck of a lot of sympathy for people who treat their positions at corporations as a license to steal. But the post-Sarbanes-Oxley amendments to the guidelines changed the sentence for a person like that from 10 to 15 years to mandatory life, which is usually reserved for criminals who have killed people. That certainly seems a little incongruous.
If longer sentences don’t serve as a deterrent, what do you think would?
An increased likelihood of being caught—which can only result from a marked increase in the time, money, and manpower devoted to prosecuting complex corporate crime. The curious thing about Sarbanes-Oxley is that it spent all this time on raising criminal penalties, which is something that all the experts who appeared before Congress said we didn’t need, but then made no provisions for increasing the funding for the Department of Justice to prosecute these kinds of cases. The government has increased the budget of the Securities and Exchange Commission, but the main work of a lot of these fraud prosecutions is done by the U.S. Attorneys’ offices, Justice’s Fraud Section, the FBI, and other investigative agencies, which received no increases. If you’re really serious about these kinds of cases, you allocate your resources accordingly.
Let’s talk about last spring’s Feeney Amendment, which makes it harder for judges to grant “downward departures,” or exceptions to the tough new sentencing guidelines. The Feeney Amendment wasn’t directly sponsored by the Justice Department . .
.
But it was! That’s terribly important. A year ago Representative Feeney couldn’t have found the federal sentencing guidelines with a seeing-eye dog.
So what is the Justice Department getting in terms of judicial discretion on white-collar crimes?
In its original form, the Feeney Amendment would have eliminated the ability of federal judges to depart downward from federal sentencing guidelines in virtually any kind of case. However, in response to the huge outcry, including from the chief justice of the Supreme Court, the Judicial Conference, and sentencing commissioners, it was significantly scaled back so that judges are only absolutely forbidden to depart from the guidelines in child-sex cases. But they also put in a provision that requires the commission to study—and to substantially reduce—the incidence of downward departures. It also subjects district courts to much more scrutiny from appellate courts when they decide to depart, which will inhibit them.
Feeney is about institutional control over sentencing. The Sentencing Commission was created partly on the idealistic notion that we should take politics out of sentencing. In years past, the Justice Department was an active participant in sentencing debates, but it did not insist that its views were the only acceptable ones. And the people who headed the judiciary committees protected the Sentencing Commission from too much political meddling within Congress. That’s not true anymore. What you see now is a willingness to just reach right in and say, “We’re going to create the rules, and we don’t care what judges or probation officers or defense lawyers or the commission think.” Politics can never be completely removed from criminal law, but politics should not be the dominant factor driving the decision about how long human beings are locked in a cage.
Restitution is the one white-collar penalty that doesn’t seem to have grown sharper teeth. Why is that?
Well, restitution is not really my area, but in general it’s certainly true that most restitution orders go unsatisfied. This statistical truth relates to the fact that most people who cause damage and loss end up being virtually destitute by the time they’re convicted. Even if they have swindled thousands of old people out of their money, they often blow it on high living. That said, restitution tends to be a good deal more effective in white-collar cases. But not always. Consider Enron: If you look at all the people who lost money in Enron, the loss amounts to billions. But a lot of that is because the corporation failed, the pension plan collapsed, the value of the stock went to zero. And that’s where the big losses were—it wasn’t because Andrew Fastow has billions of dollars in a bank account somewhere. Is he responsible for that? Criminally, he could be. If convicted, the judge can sentence him based on hundreds of millions of dollars of loss. But they can’t collect that much money from him.
