Some Stupid Questions from White Collar Crime Prof Blog, and Answers

It asks some really stupid questions apropos of Enron CFO Andy Fastow:

White Collar Crime Prof Blog: Fastow to Be Sentenced This Week: Andrew Fastow will be sentenced. He will receive a sentence of ten years pursuant to an agreement, although he will have to first listen to the sad testimony of victims who suffered as a result of his conduct as CFO at Enron. (see Houston Chronicle here). His lawyers will ask for leniency premised on him being a "changed" man (see here)

Several issues deserve mention here -

1. Is it fair for Fastow to receive this low a sentence all because he cooperated with the government? This is yet another case of the government providing an enormous benefit to someone who cooperates, while demanding a higher sentence for those who decide to go to trial. Selecting to use the constitutional right of a jury trial comes with the enormous risk of a significantly greater sentence if the jury returns a verdict of "guilty."
2. Should the government have given the plea for cooperation to this person, or did they select the wrong person in using their discretion? The government discretion to provide a "deal" to whoever they decide they would like, often produces inequities. In this case one has to ask whether Fastow was more culpable than Jeff Skilling or the now deceased Ken Lay.
3. Is putting Fastow in prison the correct way to punish a white collar offender? We did not fear Andrew Fastow while he was free pending his sentencing. The Houston Chronicle reports on his admirable deeds and recognition for being a good father. (see here). This is a no-win situation. As with so many white collar cases, the individual is not someone we fear once their ability to commit future white collar offenses is removed. The sentence is for retribution, and incorporating the victim statements at the hearing just emphasizes this point. But many will suffer by sending Andrew Fastow to prison, most notably his children. Is prison really the appropriate way to punish this individual, or should the sentence consider the unique characteristics and qualifications of the individual and punish the person with a sentence that will maximize those skills for the betterment of society?

Answer to 1a: No, it is not fair. Fastow deserves a higher sentence. But without the government's offer of leniency, Fastow's three equally guilty superiors would have escaped scot-free. That would have been a significantly greater miscarriage of justice than Fastow's too-lenient sentence.

Answer to 1b: The significantly greater verdict if the jury comes in "guilty" is highly likely to be fair. If you are in fact guilty--and nearly everybody found guilty is--then you have not only committed the crime, but you have perjured yourself and conspired to cover it up in the process of mounting your and your co-defendents' case. These aren't actions we wish to encourage, or reward. These are actions we wish to penalize.

If you are factually innocent, of course, the miscarriage of justice is created by the fact that there is evidence to convince every member of the jury that you are guilty beyond a reasonable doubt. In the case of rich guys with money, there are few such miscarriages--and this isn't one. I know of nobody not paid to do so who maintains that Fastow, Skilling, Lay, and company were factually innocent.

Answer to 2: If Ken Lay had wanted to become a witness for the government immediately after the collapse of Enron, the door was open. If Jeff Skilling had wanted to become a witness for the government immediately after the collapse of Enron, the door was open. The fact that they did not choose to walk through that door--while Fastow did--does not create an "inequity" about which Skilling or Lay have any standing to complain.

Answer to 3: The imprisonment of Andrew Fastow is for both retribution and deterrence. The fact that Fastow is not the only high Fortune 500 executive being sent to jail this year for similar crimes suggests that our mechanisms of deterrence have been inadequate to date.

The question of retribution is a harder one than WhiteCollarCrimeProfBlog admits. Yes, those harmed by Fastow's imprisonment are greatly harmed. Yes, the slight warm glow that the victims of Fastow's frauds get by knowing that he was sent to jail is small and feeble in each individual victim's case. But there were a huge number of victims. And small benefits to each of tens of thousands of victims--they add up.

WhiteCollarCrimeDefenseBlog's belief that Fastow has "unique characteristics and qualifications" and that the sentence should "maximize those skills for the benefit of society" has sent four people I know rolling on the floor in laughter this evening. Fastow's "unique skills and characteristics" are a talent for creating false accounts and undertaking large-scale financial fraud. What company would want him as a CFO? What CFO would want him on his staff? The skills he has are not for the betterment but for the worsening of society.

Final comment: If WhiteCollarCrimeDefenseBlog is trying to inform its readers about the Enron case and America's legal system, it is doing a very lousy job. On the other hand, it is doing a good job if it is auditioning for a place in the teams that defend high corporate excecutives accused of white-collar crimes.

Comments

[jerry]

White collar criminals should be treated more harshly than blue collar or no collar criminals.

White collar criminals, especially CxOs have nothing but greed on their mind, and they do not have any sort of claim to needing to feed a family. And they have had all the education and benefits that society can shower on them.

I am very tired of white collar criminals extracting millions from stockholders and employees and customers, paying some pittance of that back, and doing five years in FEDERAL non-PMITA resort prison. Yes, Mimsy, Duddy is away, but when he gets out we will be able to travel the world again.

[Jon Fernquest]

"Fastow's 'unique skills and characteristics' are a talent for creating false accounts and undertaking large-scale financial fraud. What company would want him as a CFO? What CFO would want him on his staff? The skills he has are not for the betterment but for the worsening of society."

Like computer hacker felons maybe Fastow could preemptively plan all the twisted plans that future Fastows will plan, in ten years you'd have quite a hefty encyclopedia of perverse finance, supplement this with a little humiliating Boy George street sweeping to cultivate a sense of shame.

On the other hand, 1. maybe he needs a greed motive and radically untransparent niche/hinding place to commit these crimes plus his Enron buddy co-conspirators, 2. perhaps there isn't anything really sophisticated about what he did, maybe he really was **just a criminal** without respect for laws and social norms that separate man from beast, 3. maybe cold steel bars will create more interest in business ethics courses and the notion of other stakeholders in corporate governance which really needs to have some meat added to it.

[Joe S.]

I pretty much agree with Brad, but . . .

There is often a huge gap in sentencing between cooperators and noncooperators. The bigger the gap, the greater the incentive to cooperate with the prosecution. But what if the cooperator is innocent? Or what if the noncooperator is innocent? Or--more commonly--what if both are guilty in fact, but the cooperator just makes up a story to please the prosecutor? Or what if the more guilty party is in a position to inculpate a large number of less guilty parties? This is common in drug cases--the people higher up in the organization are in a better position to put lots of folk in jail, and often get lower sentences than the mules?

There are zillions of problems with giving time off for cooperation. It is amazin' that WhiteCollarCrimeDefenseBlog managed to miss them all.

[save_the_rustbelt]

Read enough by the criminal defense bar (blogs and other commentary) and you will find many of them believe there were no crimes at Enron.

Many also seem to believe (this is still evolving) that backdating options is not only legal but adds to an efficient market. (I think some economists believe insider trading improves efficient markets).

No wonder there is so little respect for lawyers. They belong to the Richard Scrushy School of Ethics.

[Cranky Observer]

> Fastow's "unique skills and characteristics"
> are a talent for creating false accounts
> and undertaking large-scale financial fraud.
> What company would want him as a CFO?

Director of the White House Budget Staff? Secretary of the Treasury? Chairman of the Federal Reserve Board? CEO of LTCM?

Cranky

[Doctor Jay]

I just watched Band of Brothers, having recieved it for my birthday. In it, the company CO talks to another officer who has been gambling with the men. "I don't think its a good idea," says Winters, "Never put yourself in a position to take anything from these men."

Fastow, Skilling, and Lay not only stole millions from the public at large, investors and so on. They also stole from their own employees. They ruined the retirement plans of said employees. They put thousands of employees out of work at a time they could ill afford it.

Not just by business mistakes, and not just by pumping Enron stock, either. They structured the company 401k to use only Enron stock. Whose interest was THAT in? Stock options, yes. 401k exclusively in company stock, no.

He has to get less sentencing for cooperation. That's just the way it has to be. But more leniency for him. No way. Mr Fastow needs a lot of time to reflect on what he's done.

[SamChevre]

Dr J,

The 401(K) was not exclusively in company stock--that has never been legal. The match was in company stock, and the employees contributions could be.

On the larger point--fairness/sense of the sentence--my problem isn't with Fastow vs Skilling, but with Fastow vs the people who reported to him. "I worked for him, and he said it was legal and ordered me to do it" should have been more of a defense than it was.

My suggested sentence for white-collar crimes is "hard-labor probation." Everything you earn goes to those you've defrauded except a poverty-line level income, which you have to earn--all gifts go directly to repayment.

[kid bitzer]

"Selecting to use the constitutional right of a jury trial comes with the enormous risk of a significantly greater sentence if the jury returns a verdict of "guilty.""

Jesus H--has this whiner ever followed the details of a drug conviction? Ever read about an anti-mafia operation?

I mean--maybe he wants to make a case that the entire US prosecution system is unconstitutional without the judiciary realizing it.

I'll listen to this guy *only* after he goes to the barricades for low-level drug-runners who rat out their higher-ups.

But to phrase this as though it has some special relevance to *white collar* crime--"special pleading" is far too polite a term.

[Auto]

Sorry, Jerry, but the reason we treat BC as harshly as we do is that their crimes have socially corrosive effects that WC crimes usually don't.

This is not to say Fastow doesn't deserve a long sentence (he does).

But I fear muggers and burglars and rapists. Their crimes affect my behaviors (and if enough people feel as I do, then public policies and social attitudes as well) in ways that inside traders, tax cheats and self-dealing corporate executives don't.

Rampant street crime is a social disaster even if most people are never direct victims.

But, yeah, most WC criminals get off easy. I want Andrew Fastow to serve a decade or two in some place where his new name is Audrey and he's somebody's girlfriend.

It's too bad that getting a conviction in many WC crimes is difficult. Tax and accounting issues are sufficently complex that defense lawyers have a short at muddying the prosecution's case enough to raise reasonable doubt -- is there any defense in a street crime the equivalent of Lay/Skilling's defense that Enron was in great shape but for the action short sellers? That's sort of like a drug dealer trying to argue that the cocaine was really corn starch.

[RSA]

"Prison should be reserved for violent criminals with a future risk of physically harming others."

I think that this view entails opposition to life sentences. Eventually, even the most murderous criminals become too old and decrepit to do anyone else harm. Sound right? As for appropriate punishment for white collar criminals, I think that some sort of enforced poverty would be reasonable in principle (most such criminals seem to have been driven by greed), but impossible in practice.

[Cranky Observer]

> Sorry, Jerry, but the reason we treat
> BC as harshly as we do is that their
> crimes have socially corrosive effects
> that WC crimes usually don't.

Until you get to the Al Capone level (and one could argue that criminal enterprise of that size is white collar anyway) very few direct criminals affect more than a few hundred law-abiding citizens in their "careers".

Whereas Fastow destroyed the retirement security of tens of thousands (I am counting here only the people whose employers were purchased and pension funds looted directly, not the people who put Enron in their 401(k) which amounts to at least 100,000). Without doubt a good number of those people have or will die early due to increased stress from having to live on an extreme budget and/or go back to work at 65-80. How is that "less corrosive" than climbing through a few windows and stealing some (probably insured) TVs?

Cranky

I guess my perspective about what is a corrosive crime is distorted from the time I spent living in a neighborhood with a bunch of Wisconsin Steel retirees...

[shander]

The Retribution point is interesting, I'm generally against it, and deterence in the case of violent crime is probably overated...however I suspect that with white collar crime and very driven and educated people, that correlations of possible punishment, likelyhood of punishment, and magnitude of punishment distribute far differently than deterence for 1) teenage males, 2) violent temperments(or sexual pathologies) 3) substance abuse related crimes.

While deterence of others seems a bit rougher form of justice than I would prefer, certainly Society must act in ways it can to promote justice not for "fairness" but to promote the "rule of law". To prevent vigalantism, for instance, crooks must be penalized...I shouldn't expect the tempers of peoples lives ruined by malfeaceance and fraud to be restrained should a perpatrator be golfing and fishing etc even in reduced circumstances from before.

Beyond the victims perspective, society must find ways to act where Markets have holes in the incentive systems. Part of the corporate govenenace structure leans heavily on state created institutions like central bank assistance to financial firms, tax incentives advocating agency controlled assets for retirement etc. .

There are issues in the Agency of capital management and agency of corporate management that do not let the market vet self dealing as well as it might...extranalities etc. Regulation is one road society can take but in the debates about Sarbanes etc we understand that over-regulation has high societal prices (especially if mis formed)

It seems to me that deterence by criminalizing breaching responsiblilties to shareholders (and Indeed I would like to see agents and bankers and attornies burnded with a fiduciary interest towards shareholders of the firms they represent) is necessary to prevent Fraud, Vigilantism, and Excessive Regulation.

[shander]

CRB,

Its not only the enron shareholders society needs to protect and who were hurt.

Honestly run energy companies (an executives trying to be honest) were at a disadvantage for years competing against enron accessing capital unusually cheaply, using their inflated shares as security or wapum to buy out "lower return on capital" (cause their books weren't cooked} companies and insinuating that there management was second tier compared to enron (where they werent better after a few decade((they started better though in terms of building better pipelines cheaper))).

The societal cost of fradulent behaviour reached far beyond the dollars on enron stock that went poof.

[Cranky Observer]

> >Whereas Fastow destroyed the
> > retirement security of tens of
> > thousands...

> One could argue that without Fastow's
> "creations", Enron shares would not have
> risen to their heights in the first place.

Before the Really Big Scam(tm) got going, Enron went around the US buying up old-line formerly-regulated electric utilities, gas companies, and pipelines. SOP was to loot the defined-benefit pension fund, then terminate the retirement program and all retiree benefits. Some of which had been earned over 40-50 years of shift work and manual labor by the helpless and hapless employees and retirees. Leaving retirees from those companies, and anyone in the 50-65 age bracket, basically doomed as far as retirement went.

That's what I am talking about.

Cranky

[d'Nile]

The lack of effective punishment for white collar crime makes a mockary of the 'justice' system. The worst violent crime--murder--ends one life, ruins the lives of the victim's immediate family, and effects a relatively small number of peripherally connected persons. One murder directly effects perhaps 50 people at most. In contrast, fraud on the Enron scale will result in ten of thousands of people eating cat food throughout their retirement.

By the measure of harm caused, it makes absolutely no sense to dish out 10-to-death for murder while letting most white collar criminals get away with a few years in a minimum security country club prison. Large scale financial crime should be subject to the death penalty.

[rope]

i get a kick out of the periodic justifications from various corporate law "theorists" who seem to grasp onto the "counter-intuitive" idea that imprisoning corporate fraudsters really hurts our "economy/society/etc." due to the fact that these high worth/skill folks are getting put away instead of being allowed to continue to drive the various engines of our civilization's success.....

at the same time i can only assume that these "theorists" are pathologically reality-blind randists who fail to ever acknowledge that much more of the success of our society is due to the concept of rule of law than to the often-times simple luck of a fortunate minority that's far too often interpreted as individual "skill/talent". the actions of these fraudsters are direct attacks on the rule of law, and to leave them unpunished is to essentially abandon the very concept....

...eventually (in the extreme) there will simply be no incentive (or lack of cost) to adhere to "rules" at all.....and this better serves our society in what way?

[Jim]

Maybe after he get out of the can, he can bid on a city contract to remove illegally parked automobiles etc. Use his name. Honest work. Well, not so honest in San Francisco. So he can do it in Houston.

[FXKLM]

The significantly greater verdict if the jury comes in "guilty" is highly likely to be fair. If you are in fact guilty--and nearly everybody found guilty is--then you have not only committed the crime, but you have perjured yourself and conspired to cover it up in the process of mounting your and your co-defendents' case. These aren't actions we wish to encourage, or reward. These are actions we wish to penalize.

This is brilliant. If you ever want to get out of jury duty, just give the judge a link to this post. You'll be out in time for lunch.

[Seth Gordon]

In one of his books, Alan Dershowitz pointed out that if the courts offered to knock five years off the sentence of any defendant who waived his right to an attorney, most people would recognize this as unfair. He opined that offering plea bargains was, in a similar fashion, letting defendants bargain away their right to a trial.

[jerry]

"I am very tired of white collar criminals extracting millions from stockholders and employees and customers, paying some pittance of that back, and doing five years in FEDERAL non-PMITA resort prison. Yes, Mimsy, Duddy is away, but when he gets out we will be able to travel the world again."

I was pretty darn close. Fastow got six years today, instead of the stump and the axe he deserved. Congratulations to his children are due.

[Alex R]

"If you are in fact guilty--and nearly everybody found guilty is--then you have not only committed the crime, but you have perjured yourself and conspired to cover it up in the process of mounting your (...) case."

You know, it's entirely possible to (a) commit a crime, (b) plead not guilty, (c) take your case before a jury, and (d) be convicted, without ever committing perjury.

In fact, in the US, we have this little thing called the Fifth Amendment which states that "No person shall be ... compelled in any criminal case to be a witness against himself," which explicitly forbids the courts from forcing criminal defendants to choose between perjuring themselves and incriminating themselves.

While I recognize that the realities of the criminal justice system mean that plea bargains must be common, and rewards to cooperating witnesses are necessary, it's good to remember that the right to a trial is an important one -- especially these days.

[derrida derider]

The US is famously the most Christian nation in the world. Why then are you yanks all so keen on vengeance for vengeance's sake? Isn't there something about "Vengeance is mine, saith the Lord. *I* will repay."?

Given that all the econometrics say that prison does not deter much crime, and the other consequentialist argument for prison (incapacitation - ie keepin' em off the streets) doesn't really apply here, it seems to me that in cases like this people really should be looking for more creative solutions.

[pj]

As someone who is part of the "teams of people defending white collar defendants" (and gets paid well to do it), I join in the absolute shock that Fastow got only 6 years. Its jawdropping. At the same time, the sentences given to Ebbers and that will be given to Skilling are absurd. Nonviolent criminals shouldn't get life in prison, especially where they had no prior criminal record.