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June 28, 2011

Do would-be white-collar offenders actually "get the message" from long sentences?

The question in the title of this post is prompted by this new piece by Professor Peter Henning from the New York Times headlined "Long Sentences Send a Message Few May Hear."  Here are excerpts:

The Justice Department has asked for a sentence of as much as 385 years for Lee B. Farkas, former chief executive of the Taylor, Bean & Whitaker Mortgage Corporation, who was convicted of orchestrating a $2.9 billion fraud that caused the collapse of Colonial Bank.  The reason for seeking such a severe penalty is to “draw the attention of corporate executives” to the potential for severe punishments for fraudulent activity, but the question is whether anyone will actually listen.

Mr. Farkas was convicted by a jury on 14 counts for selling falsified mortgage loans in a scheme that lasted from 2002 to 2008, and then trying to orchestrate a $533 million investment by the federal government through the Troubled Asset Relief Program to keep Colonial Bank afloat. Prosecutors say that he diverted some $40 million from Taylor Bean for personal investments in bars in Atlanta and Fort Lauderdale along with various trinkets, including a $28 million jet....

In order to grab the attention of other executives, Justice Department officials have asked for more than just a life sentence, instead requesting the maximum term for each charge to be served consecutively, which adds up to 385 years.

In seeking a punishment even greater than that imposed on Bernard L. Madoff, now serving a 150-year sentence, the Justice Department wants to use Mr. Farkas’s sentence as an example to other corporate officers who might be tempted to stray into illegality. According to prosecutors: “Sentencing him to the maximum penalty allowed by law will send the most forceful and unequivocal message to senior corporate executives that engaging in fraud and deceit in order to pump up your company or line your own pockets is unacceptable and will have severe consequences.”...

It is an interesting question whether the “unequivocal message to senior corporate executives” from a particularly harsh sentence would in fact be heard.  I think the answer is that it would not. 

Taylor Bean was a privately held company based in Ocala, Fla., and its primary lender, Colonial Bank, was based in Montgomery, Ala. Both were far from the major financial and banking centers. Taylor Bean was not a major player in the mortgage-backed securities market, and the prosecution took place somewhat off the beaten path for financial prosecutions: in the Eastern District of Virginia in Alexandria, not in New York where it might have garnered more attention....

It is unlikely that Mr. Farkas will become the face of the government’s efforts to root out criminal conduct arising from the financial maelstrom that hit in 2008.  The intended audience for the government’s recommendation may well write off whatever sentence Mr. Farkas receives as hardly a blip on their radar screen.  Packaging fake mortgages and diverting corporate funds to private ventures like bars is not something any self-respecting Wall Street executive would ever stoop to doing, at least so the thinking might go.  Mr. Farkas can be classified an outlier who engaged in the type of naked fraud that corporate executives would never be so crass as to try, at least in their own minds....

In United States v. Martin, a case involving the sentencing of a former chief financial officer at HealthSouth, the United States Court of Appeals for the 11th Circuit asserted that “because economic and fraud-based crime are more rational, cool, and calculated than sudden crimes of passion or opportunity these crimes are prime candidates for general deterrence.”

I wonder whether corporate executives can be deterred by sentences given to others when they can rationalize misconduct they might engage in as necessary to preserve the company or to make a quarterly estimate, and they would never be caught doing something blatantly illegal.  Even Mr. Madoff did not view himself as doing anything particularly troublesome while taking money from new investors and passing much of it on to old investors -- he even described some of his victims as “greedy.”

If executives can convince themselves that there’s nothing “really” wrong with what was done, like inflating revenue or paying a foreign official to obtain a contract, because there was a good reason for doing it, then the likelihood of being deterred by a long prison sentence seems fairly minimal.  Corporate executives might not be good candidates for deterrence because they perceive themselves as different from -- and often better than --those who have been caught and punished, even if they are not.

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June 28, 2011 at 09:17 AM | Permalink

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Comments

I agree that after reading dozens of white collar cases, they often seem to stem from "fixing" problems in an inappropriate way that led to disaster---or the idea to temporarily "hide" a problem: a cash deficit, an unexplained loss, a shortage; until the fix or solution comes along, and it just can't be done, and then comes criminal indictment. Was it just poor judgment? A genuine belief things would work out? If the case actually goes to trial (and now ONLY about 5% of all cases do---which is absolutely astounding) and a jury finds guilt, there are seldom ANY breaks to the defendant---see judicial comments such as "a rational juror could infer...." "harmless error", etc. One thinks that "beyond a reasonable doubt" would rule, and then one wonders if in fact, in complex cases,
the jury, bless their hearts, really understood the case.

Posted by: folly | Jun 28, 2011 10:54:37 PM

Folly:

I am glad (seriously) that you hit the nail on its head. That is why I have been advocating circumstances should govern the crimes and their consequences. (In Madoff's case, I sadly cannot find even one mitigating ground.) Please see my post at
http://sentencing.typepad.com/sentencing_law_and_policy/2011/06/judge-denny-chin-and-bernie-madoff-talk-about-a-sentence-of-150-years.html#comments.

What I said was this:
"What I really think that convicted white-collar defendants should get is what hits them the most in their pocketbooks. They should be forced to pay back the monies that were wrongfully obtained. This way, everyone could be “made whole.” Yes, I do realize that the fulfillment of this seemingly noble goal may not happen in many cases, but it will at least make the defendants realize that they have the Damocles’ sword hanging over their head and they, I believe, would be more productive (and not to mention the reduced costs to the government). You see, by sending these defendants to prison for 5, 10, 20, or even 30 years, everyone knows that they are not going to pay back the victims. Most of these defendants literally hide their money, or cut deals with the prosecution to let them keep the money, with the hope that once they get out, they would be able to “enjoy” life again. (Of course, there are exceptions to every position.) A better way, in my opinion, to enforce money judgments by civil penalties and forfeiture actions. In Madoff’s particular case, he could not have done all this fraud on this massive a scale without external help (read: banks, PE firms, investment banks, etc.). There are civil RICO provisions to get the money back for these alleged victims from these coconspirators, even if the defendants are allegedly pauperized during the proceedings. Criminal restitution statutes are sheer farce and they look fantastic on paper, but enforcing them is whole different ball of wax. Defendants have and do use numerous “legal” loopholes to get around these restrictions. Just incarcerating these guys (for however long) does not make any economic sense at all."

Posted by: John Marshall | Jun 28, 2011 11:42:44 PM

My intuition is that longer sentences won't deter more. Longer sentences only deter more when the decisionmaking calculus is: Expected Value Accrued by Crime >= (chance of getting caught) times (punishment). I think that these crimes are committed by people who estimate (chance of getting caught) as zero.

Posted by: Gray Proctor | Jun 29, 2011 10:01:48 AM

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