CRIME AND PUNISMENT:
A HARD LOOK AT WHITE-COLLAR
CRIME
In an era marked by more severe federal sentencing guidelinesfor white-collar criminals,
most American corporations still don't have a clue about effectively deterring this type of
misconduct.
BARBARA ETTORE
I t is one of the ironies of doing business today that, while companies are being asked to
do more with less, they are also being told to do so under stricter legal and ethical
guidelines. In a time of tighter rules, the days of tolerance for cutting corners, lookingthe-other-way and one-hand-washing-the-other are rapidly fading. But the experts say
that most companies haven't yet learned how to cope with changing paradigms.
Just being "within the law" doesn't cut it in this ever-more-complicated world. To the
beleaguered manager, it may seem that standards are constantly changing and that their
organizations must scramble to adhere to new norms—even as they are subject to new
regulations that require even more rigorous conformity and self-examination.
"There was a time in our country when white-collar crime was tolerated," says Jeffrey M.
Kaplan, an attorney with the New York firm of Arkin Schaffer & Supino, and an expert
in business ethics and legal compliance. "Now, in a time of diminishing resources, both
the costs of crime and the costs of punishment—including the impact on shareholders,
consumers and employees—have become too great for society to bear."
In support, a new set of far-reaching guidelines came into effect in November 1991.
Called the Federal Sentencing Guidelines—directives for federal judges to follow in
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white-collar crime sentencings—they mandate much stricter punishments, among them
enormous financial settlements up to and exceeding $500 million, depending on the
crime. Slaps on the corporate wrist? Hardly. But the more interesting part of the
guidelines stresses prevention of these kinds of crime, putting the responsibility squarely
on corporations to do so. In fact, for the first time
in modern statutory law, the federal government is telling American business that a
serious, proactive effort to prevent white-collar crime in the workplace can mitigate a
judgment against a company.
These guidelines have accelerated an already strong movement in some corporations to
create ethics and whistle-blowing procedures, to hire ombudspeople, to inaugurate ethics
statements and internal hotlines and to educate employees and define ethical behavior. In
fact, the "business" of business ethics is, arguably, a billion-dollar industry, considering
the consultants' fees and the videos, training programs, interactive psychodramas and
other tools used by companies today.
Some of these organizations are in the vanguard. But professionals glumly delineate two
contradicting attitudes that coexist in American business today. First, any company that
professes to be unaware of the importance of ethics in doing business now is, quite
simply, lying or ignorant. And, second, most companies are giving insufficient attention
to ethics— until they get into trouble and learn the lesson the hard way.
A Little History
To be sure, American corporations have done their fair share of malfeasance. Similar
white collar crimes seemed to run in decade-long cycles. In the '60s, there was a spate of
bid-rigging by electrical companies. In the '70s, it was illegal payments overseas by giant
government contractors. The '80s saw pervasive insider trading, banking abuses and
illegal practices by defense contractors.
The '90s? Well, there have been some brokerage scandals, a corporate finagle here and
there, and one big bond scandal at Salomon Brothers for illegal bidding at US. Treasury
auctions. But no defining set of white-collar crimes has yet emerged to shape this decade.
There are no major cases under the Federal Sentencing Guidelines yet, either. Legal
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specialists say it will take several years for a test case to surface. This is not for lack of
intense government interest; the 1993 Federal Bureau of Investigation budget, for
example, included $200 million earmarked for 20,000 new investigations, most of them
in white-collar areas.
The wheels of law grind exceedingly slow—which is why the guidelines themselves are
an extraordinary instrument for compliance. They came to pass during the long ReaganBush tenure—administrations noted
for getting regulation off the back of business. The rules mandated, in effect, that in
exchange for that business-friendly climate, corporations would have to do their own
policing.
The government got ahead of the curve for once, say the professionals, and defined what
an ethics program might include. At the heart of the guidelines are seven fundamental
points spelling out in detail the ideal ethical compliance policy. "In theory, these are
tremendous strides, creating an organization that is ethically state-of-the-art," says
attorney Kaplan.
In brief, the guidelines call for a company to create powerful internal constituencies with
a mandate to ensure an ethical climate. These could consist of committees of top officers
who must meet regularly, receive information, act and report to the board. Moreover,
what these entities do must be disseminated to the entire organization, and there must be
a public report within the company, involving the CFO, the corporate legal officer and
division heads, as one example.
"To a greater degree, employees, shareholders and officers feel ethical issues are the
issues for them," says Kaplan. "We are seeing the beginning of solutions. That's where
we're at."
But a host of experts might take issue with those statements. Darlene Orlov, president of
Orlov Resources for Business, a human resources consulting and training company based
in New York, maintains that when people look to the law alone as the arbiter of what is
right and wrong, they frequently get into trouble. "A corporation could say, 'If it's legal,
it's okay,' and exempt moral judgments," she says.
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Spirit vs. Letter of the Law
Orlov goes on to say that not only are there morally incorrect laws—slavery is an
historical example—but also that laws themselves occur because of changes in what
people think is right and wrong. These changes come from "internal mechanisms for
recognizing ethical dilemmas."
"People are compartmentalized in their ethics," Orlov continues. "Someone who cheats
on her spouse would never steal a dress. A man who cheats on his taxes would never
cheat a friend at cards."
Another specialist contends that corporate codes of ethics focus too much on the negative
"thou shalt not," what employees should not do. "Employees can always find an
exception," says Craig Dreilinger, president of The Dreiford Group, a management
consulting firm in
Bethesda, Md. "[Corporations] must go beyond the negative particulars and get their
people to see the spirit of the law."
As elusive as the understanding of law and behavior can be, certainly there is no lack of
corporate interest in finding a workable solution to ethical dilemmas. In the past six to 12
months, Dreilinger alone has seen "at least double" the number of serious inquiries for
assistance in setting up ethics programs—introduction and implementation from
companies who haven't had them before, or the need to "drill deep into the issues" from
those who have.
Clearly, American managers have focused on ethical compliance programs as the way to
fulfill their responsibilities and to avert white collar crime in their workplace. Even
Winthrop M. Swenson, deputy general counsel of the U.S. Sentencing Commission—and
chairman of the staff unit that developed the corporate guidelines—says, "If
[corporations] have done everything reasonably necessary to implement a rigorous
compliance program, it doesn't make sense to hit them over the head, because we really
can't ask them to do more than that."
Swenson's statement quite rightly applies to the sentencing aspect of the guidelines—the
"letter" of the law. But many experts maintain that most corporate compliance programs
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fall short of the guidelines, or, worse, that these programs do not prompt more ethical
behavior, the "spirit" of the law.
"I personally don't think [the guidelines] have changed the landscape," says Robert J.
McGuire, former New York City Police Commissioner and president of Kroll Associates,
the New York-based white-collar crime investigative firm. McGuire says the guidelines
have been, "a blip on the radar screen" producing only "modestly more enlightened"
corporations.
Roger J. Magnuson, a partner at the Minneapolis law firm of Dorsey & Whitney and head
of its white-collar and corporate compliance practice groups, concurs. "A surprising
number of compliance programs at companies are not well benchmarked and probably
would not pass guidelines' muster," he says.
If we assume that ethics programs at some American companies—programs executed
from the top down and with the best of intentions—are ineffectual, we must also assume
that these strategies haven't made that much of a difference in the way companies
operate.
This is a conclusion both depressing and frightening.
The Ethics Resource Center, a well-known nonprofit Washington consultancy that has
worked with more than 100 companies on ethics, recently surveyed 10,000 employees
from its client companies in aerospace, telecommunications, healthcare and consumer
products. The survey indicated that ethics programs "failed to penetrate the [corporate]
culture." Fifty-five percent of the respondents said they "never" or "only occasionally"
found their company's standards of conduct "useful in guiding their business decisions
and actions." And, 8 percent had not read the standards. It has become standard practice
to point out that business is becoming ever more complicated. Enterprises will have to
make increasingly sophisticated decisions in less time, with intangible intellectual
property issues and murky technological distinctions. Face-to-face contact has waned;
companies these days often don't fully know who they are doing business with and what
is the source of capital in a deal. In addition to the federal guidelines, corporations can
find themselves subject to other avenues of punishment. The Sentencing Commission's
Swenson points out that a corporation that has honored the letter of the guidelines could
still be subject to antitrust, interstate trade, the False Claims Act, and other
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considerations. "The guidelines control criminal penalties," he says, "but they don't
control penalties from other quarters, such as state laws and corporate liability laws."
So, what is a good-citizen company to do if compliance programs alone don't promise —
or, even foster—ethical behavior? Can ethics be imposed on an organization? How can a
corporation truly raise the level of its ethical behavior?
Attorney Magnuson, author of The White Collar Crime Explosion (McGraw-Hill, 1992),
suggests crossover—temporary job postings, internships and the like—between the
specialists in public policy (i.e., the regulators and think tank people) and those in
corporate law or private practice. aLet everyone see the body of regulations that has an
actual impact in dayto-day corporate life," he exhorts. aEven the good-faith employee has
to have his or her consciousness raised."
Some companies have been aggressively policing themselves beyond ethics compliance
strategies. They have become mini-prosecutors, setting up stringent internal guidelines
for employee compliance and disciplinary action. If any malfeasance occurs, they punish
swiftly, then preemptively take the results to the authorities.
"These companies want to forestall major litigation—multimillion-dollars in attorneys'
fees alone," says Magnuson. "As a mark of good faith, they are hoping that the federal
authorities will say, 'Go, and sin no more.' It works."
Depending on the crime, such corporations use various punishments toward the employee
wrongdoer: forfeiture of bonuses, suspensions with or without pay, letters of reprimand in
permanent files, downward job reclassification for those on management tracks, various
probationary tasks, as well as outright dismissal. Of course, the danger in this "terrible
swift sword" school of policing is that a corporation can become too aggressive in its
search for compliance. The employee can be accused, judged and punished out of hand.
No Law Breaking Here
The Sentencing Commission's Swenson acknowledges that the guidelines give "a strong
incentive" for companies to "disclose and cooperate with authorities," increasing the
likelihood that individuals will be held accountable. "The concern is about getting the
right balance here," he says carefully. "we want to send the message that lawbreaking
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won't be tolerated. Yet, we don't want employees to be scapegoats. It may be a problem
[with the guidelines]. I don't know that it's a weakness."
Employee training is one small step for companies. HR specialist Orlov says that workers
bring to their workplace their ethical makeup, derived from many factors including
society, past experiences, upbringing, role models and institutions, and media attention.
Sometimes, the level of corporate ethics clashes with their own.
"There must be a framework for recognizing ethical dilemmas, and a process for
resolving them and thinking about them pro-actively before problems arise," Orlov says.
"People have to be trained within the context of work." To this, she advocates ethical
training using relevant examples appropriate to an employee's job, level and industry. For
example, training an entry-level worker how not to take a bribe doesn't make sense. What
does is training him or her to recognize pilfering and providing clear-cut steps to report it,
protect confidentiality, and ensure no retribution.
Here we come to the true heart of the matter. Are all the guidelines, programs and
training inadequate because—unless there is a culture change from the skin, bones and
very fiber of America's companies—corporate ethical behavior is just about impossible?
Gary Edwards, president of the Ethics Resource Center, maintains that goal-setting in
today's businesses hampers ethical performance. Goals, he says, are typically set at the
top, with no input from lower levels. Managers exhort workers to exceed goals, and they
empower them to act on their own—all while worker resources are shrinking. Hence, he
says true ethical behavior must examine motivation.
For the Good of the Company
Edwards says the overwhelming number of white-collar crimes arises from the
intentional employee misconduct designed to benefit a
company. "The paradigm of improper conduct," he calls it. The kind of wrongdoing that
puts a corporation on the front page and ruins its reputation. He says these white-collar
criminals think they are different from and above the common criminal, because they did
it "for the good of the company."
"They believe the objectives have overriding importance over legalities and ethics," he
says, adding that this is the basic ethical flaw, especially as employees see goal
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achievement rewarded by promotions and bonuses. This
tacit approval sends strong signals to employees to cut corners ethically.
Without a cataclysmic change in corporate culture and values and in reward systems and
goal-setting, "the guidelines are inadequate," Edwards says. "It is likely that a company
and its attorney can look at the [guidelines'] seven factors and infer from them that
meeting those requirements would reduce substantially the likelihood of misconduct.
"That would be a wrong assumption," he states. "False comfort. The company would be
impaled on the guidelines."
"I'M NOT JUST A COP"
Thomas A. Russo winces at the word "cop." What he is trying to do goes beyond the
description of police work. He is, he says, "not just a cop."
Russo, managing director and an officer at Lehman Brothers, is one of a new breed on
Wall Street: the proactive senior-level compliance officer, with far reaching
responsibilities and clout. He has counterparts at such well-known concerns as Goldman,
Sachs 8 Company, Salomon Brothers, Morgan Stanley and Paine Webber Group Inc.
"Just three to four years ago, [Wall Street] wouldn't have put the emphasis on
preventative steps," says Russo. "The emphasis was on revenue generation." Early last
year, Russo began his tenure at Lehman as head of the corporate advisory division.
Reporting to him are, among other areas, the firm's general counsel and its credit and
corporate audit departments.
"We are putting a system in place to prevent problems," says Russo, who brings heavy
credentials to his position:
15 years as partner at a leading Wall Street law firm, former deputy general counsel of
the Commodity Futures Trading Commission and author of numerous textbooks and
articles on securities law and financial regulation. But even Russo admits that he can't
remember the complex maze of rules governing financial transactions. How should a
trader be expected to? So, Russo is at Lehman to monitor the firm's compliance, educate
its employees before problems occur and get the firm's lawyers out onto the trading desks
to see how the business works.
Under Russo's direction, compliance has become part of the planning process. In
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February, he surprised the firm's senior operating committee with a 60 page summary of
his division's 1994 business plan, the first time in memory that compliance goals were set
out in detail. Preemptive in nature, they are intended to reduce Lehman's regulatory
exposure, limit litigation costs and avoid adverse publicity and erosion of client
confidence-the pragmatic stuff of an ethics strategy.
Russo also co-chairs a new committee, in which new financial products are investigated
thoroughly for compliance before they are actively marketed. "This is a signal to the firm
that compliance is part of everything we do," Russo says, adding that only select,
seasoned traders will deal with sophisticated products, and only to institutions, not to the
general public.
"We are geared very much to developing an [ongoing] relationship with [Lehman's]
businesses," he continues. "They should feel comfortable telling us their problems during
the quiet times. They should know we've thought it through and should have confidence
in us."
Can one create ethical behavior from outside the individual? "You can tweak it," says
Russo. "If leaders at the top say with clarity, 'I don't want an atmosphere where unethical
behavior is acceptable,' then the entire organization can get it. Sure, people will have
unethical thoughts—but maybe they'll think twice."
—B.E.
"NOBODY PUT ME IN PRISON BUT MYSELF"
Edward P. "Ted" Wolfram Jr., is an unlikely whitecollar criminal. He is a 63-year-old
grandfather, a former stockbroker, a public speaker at major corporations—and, a
convicted felon. In 1983, the government charged Wolfram, a managing partner at a
Toledo, Ohio, brokerage firm, with four counts of mail and wire fraud, saying that he
swindled $47 million from the firm, which subsequently went bust. Sentenced to 25
years, Wolfram served, "exactly 10 years, minus one hour," at several federal prison
installations, and eventually was released on parole last October 3.
"No one aided me in what I did, and nobody put me in prison but myself," Wolfram says
in a telephone interview from his Las Vegas home. "Because of what I did, 7,000 clients
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were injured. I stole, and I defrauded my clients, my partners, my friends and my family."
He says the fraud amounted to less than $47 million-but he does not criticize the sentence
or the judge. "If it's $2, it's too much," he asserts.
Wolfram's 89-year-old father (Edward Sr.), as well as Wolfram's wife and four children,
stood by him during those years, actions that he says "speak of them, not me." ("The
chances of a family staying together if someone is in prison for three years are
minuscule," he points out.)
Wolfram began lecturing on white-collar crime to MBA students from Pepperdine
College who visited the jail as part of Professor James Martinoff's classes. Wolfram now
lectures organizations for Martinoff's Ethical Management Consultants group, providing
his listeners with a voice of experience and sometimes havng them in tears.
For each out-of-state lecture, Wolfrarn must get written permission from his probation
officer and must call in within 24 hours of his return. He also must file a monthly
financial report.
Wolfram pays no restitution to those he wronged; he voluntarily gave up his assets—
including his home, a collection of European racing cars and his wife's engagement ring
before he was sentenced, and the proceeds were distributed then. His monthly pay at the
consultancy is $1,500 (plus $289 for healthcare insurance), which is supplemented by his
wife's earnings.
Of his current career, Wolfram says, "This is not something I enjoy doing, but I'm
compelled. There are no reasons for ethical misconduct—just a lot of excuses. I loved
myself too much and others too little. There were consequences to people who really
matter."
A telling consequence was driven home to him while Wolfram was in a Tallahassee
prison. During a telephone conversation, his son told him that Wolfram's young grandson
(Edward IV) had burst into tears in class when his teacher asked students to talk about
their grandfather.. "He didn't want to say his grand dad was in jail," says Wolfram,
quietly. "How much time would a man have to spend in prison for the misery he's caused
his family?"
—QE.
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