Crime Spree in Business: Why Now?

The mid-1980s may be remembered as a time when entrepreneurs were celebrated as heroes and business school enrollments soared. But it also may be recalled for the way business burst into the headlines for one white-collar crime after another.

Since the beginning of last year, a long list of prominent corporations have been touched by what some consider the most serious corporate crime wave since the foreign corporate bribery cases of the mid-1970s.

Defense contractors from General Electric to Litton Industries have been accused of fraudulent procurement practices, established lenders such as Bank of Boston have been convicted of money laundering, the E. F. Hutton brokerage has been caught in a massive check-kiting scheme and a widening investigation of insider trading has shaken Wall Street.

“These cases have hurt business’ reputation, and in the short run at least, they’ve hurt it badly,” says Robert F. Froehlke, chairman of Equitable Life Assurance Society in New York.

As these cases and others have blemished the image of corporate America, the scandals have also raised difficult questions: Why is this happening? And why now?

Some view the cases as more evidence of a general ethical decline. “There is now a different kind of people in business, and everywhere else, and they have more of a ‘me’ perspective,” says Alexander Horniman, business ethics professor at the University of Virginia.

But it is hard to prove that business ethics are on a general decline.

Indeed, many prosecutors, scholars and businessmen contend that closer public scrutiny and new business-regulating laws in the last 15 years have made U.S. corporations more attentive to the rules than ever. There is evidence, though, that the rash of cases may reflect a new effort at prosecuting white-collar crimes. Prosecutors have focused on procurement fraud, money laundering and insider trading offenses, and they are increasingly inclined to prosecute businessmen as individuals to strengthen their efforts at deterrence.

Their efforts come at a time when the courts are meting out stiffer sentences for white-collar offenders and when the public seems generally less tolerant of misdeeds committed by corporations and their executives.

But if there has been no general deterioration of business morality, the recent cases may point to ethical trouble spots on the corporate landscape. Many business executives and prosecutors worry that the two-year bull market and unprecedented merger wave have shaped a new class of Wall Street professionals who are less concerned about following the rules than their predecessors.

And the recent cases also illustrate the way that mounting economic pressures and advancing technology have simultaneously increased the pressures, and temptations, to break the rules.

While there is no statistical way to check whether the corporate crime rate is rising or falling, one recent study suggests that most of America’s biggest corporations have regular and serious brushes with the law.

The study, conducted last year by sociologist Amitai Etzioni of George Washington University, found that two-thirds of the nation’s 500 largest industrial corporations were convicted of such serious crimes as bribery (overseas bribery cases were excluded), falsifications of records, tax law violations and gross violations of workplace safety rules.

The findings might not surprise many Americans. A poll conducted last year by the Roper Organization concluded that 62% of American adults thought that white-collar crime was a “serious and growing problem that shows a real decline in business ethical behavior.”

Confidence Declining

The results seem to fit in with public opinion polls that have for years suggested declining public confidence in business, as well as in many other institutions, such as Congress, labor unions and the press.

Last year, only 32% of those queried in a Gallup Organization poll said they had a “great deal of confidence” or “quite a lot of confidence” in big business. Fifty-five percent of a sample said they had high confidence in big business in 1966, but the figure fell in the late 1960s and has hovered near the current level since then, a Gallup spokesman said.

Some business leaders argue that the public’s view is largely a reflection of the increasing coverage of corporate wrongdoing by the press. They contend, and some scholars and prosecutors agree, that businesses are now held to a higher standard by laws governing environmental protection, workplace and consumer product safety, overseas business practices and equal opportunity hiring.

“We expect much more of businesses, and I think corporate behavior is much better,” said David Vogel, a University of California, Berkeley, business school professor and co-author of a book on public attitudes toward business. “If there appears to be more lawbreaking by business, it may be just that there are more laws to break.”

Many large companies have recently begun formal ethics programs in an effort to avoid public relations problems, lift morale and productivity and simply to make their organizations more honest.

Fear of Being Caught

Corporations also want to follow the rules, of course, because they are afraid of being caught and penalized if they don’t.

While the Reagan Administration’s effort to battle corporate wrongdoing has not been without its critics, many would agree that the Justice Department has gained some momentum in its efforts to counter procurement fraud, insider trading and money laundering cases.

Those efforts arose from broader concerns. The Administration wanted to expose cheating by defense contractors to improve public confidence in the procurement process at a time when rising defense budgets faced mounting criticism.

The Justice Department has gone after banks that failed to report cash transactions as part of an effort to attack drug trafficking. And the greater focus on insider trading by the Securities and Exchange Commission and the Justice Department grew from concerns that the reputation of the markets be protected at a time when a merger frenzy has created numerous opportunities for quick profit by those with advance information.

“These kinds of white-collar crimes really affect the arteries of the American economy, and we have made them a priority,” said Assistant Atty. Gen. Stephen S. Trott, who was formerly U.S. attorney in Los Angeles and who now heads the Justice Department’s criminal division.

Cases on the Rise

There have clearly been more cases involving defense fraud and insider trading. The number of SEC actions alleging illegal use of stock market information grew almost steadily to 20 cases in 1985 from six cases in 1978, says the SEC; half of the 152 cases brought since 1949 have been filed in the past five years.

The Pentagon last year disclosed that it was investigating the procurement practices of 150 defense contractors. “That kind of scrutiny of the defense industry is obviously unprecedented,” said Griffin B. Bell, who was U.S. attorney general from 1977 to 1979.

While prosecutors have long brought cases against corporate executives as individuals, they recently have been more willing to devote more resources to such efforts, Trott says.

Among the examples of such prosecutions are the convictions last June of the president and vice president of Jalisco Mexican Products Inc. for their role in California’s largest food-poisoning case and the 1984 murder convictions of three officials of Film Recovery Systems, a suburban Chicago firm that reclaimed silver from used film, for workplace practices that caused the death of an employee.

Next January, federal prosecutors will go to court in Tampa, Fla., to prosecute eight present or former officials of Paradyne Corp. on grounds that they conspired to fraudulently win a $115-million computer contract from the Social Security Administration.

Trott asserts that the courts are also meting out stiffer sentences to those convicted of white-collar crimes, such as W. Paul Thayer, the former deputy defense secretary who received a five-year jail term last year in an insider trading case, and Tennessee financier Jake Butcher, who got a 20-year sentence for bank fraud.

“There’s a general feeling now that people who do these things shouldn’t be able to hide behind the corporation,” Trott said.

Speculation on Change

The interest of federal prosecutors and the SEC in insider trading has stirred much speculation about a changed ethical climate on Wall Street, particularly among the young market professionals who have been drawn by the glamour and quick financial rewards of the trade.

Merger specialist Dennis Levine and the so-called Yuppie Five--six Wall Street professionals implicated in recent insider trading scandals--risked their futures because they were sure they could make thousands on a quick run-up of a takeover stock, said Ira L. Sorkin, the SEC’s regional administrator in New York. “It’s the certainty of a big, quick reward that some of these people find so hard to resist,” he said.

Some observers contend their conduct reflects a get-rich-quick attitude that seems to prevail generally among recent business school graduates.

This attitude is reflected, they say, in the way graduates of some of the best business schools have stampeded to investment banking, where they may be able to amass a fortune by the time they are 35. Twenty-nine percent of the 685 graduates in Harvard Business School’s Class of 1986 went into investment banking, up from 13% five years ago; the share who went into all types of manufacturing during the same period, for example, declined to 23% from 31%.

“To some of these kids in business school, the guy who makes a million on insider trading is a hero,” said Andrew C. Sigler, chairman and chief executive of Champion International Corp., the paper-products maker. “I must say, I find the amoral attitudes of the young financial whiz pretty disturbing.”

Others say it’s unfair to single out the younger Wall Street practitioners, considering that older executives doubtless share some of the same attitudes and certainly reap a larger share of the million-dollar salaries and bonuses.

Operations Have Changed

Observers note, too, that the new attitudes have been fostered by rapid changes in the way that Wall Street investment banks operate. The old investment banks, clubby organizations where one formed personal loyalties and planned a lifelong career, have been replaced by much larger companies that must scramble harder to cultivate and keep clients.

In their recent years of rapid growth, these investment houses have quickly thrust huge responsibility on young people, and they haven’t always succeeded in teaching them all of the rules, senior executives acknowledge.

“We’ve had problems absorbing all these people into the industry so fast,” said James Balog, vice chairman of Drexel Burnham Lambert, an investment banking house. “If they’d been around longer, they would have had more chance to see that if you touch a hot stove, you get burned.”

Other recent white-collar crimes show that Wall Street is not the only place where economic changes have stepped up ethical pressures.

“I think people in business are pretty much the same these days, but they’re facing far different situations,” Equitable Chairman Froehlke said.

While international competition, deregulation and slower economic growth have forced many businesses to scramble harder for profits, the business world’s growing technological complexity increases temptations to cut corners by making many crimes harder to detect.

Regulators simply can’t keep thorough track of the huge volume of computerized business transactions that are conducted worldwide at lightning speed, says Diane Vaughan, a sociology professor at Boston College who has studied organizational crime.

Can’t Check Transactions

Regulators want to prevent money laundering, but there are simply too many cash transactions at banks for government officials to check all of them, Vaughan said. So they can make only spot checks of compliance.

In the Hutton case, managers who were under pressure to maximize cash flow manipulated an intricate check clearing system to secure what amounted to free loans worth hundreds of millions of dollars.

“There’s no way regulators can keep up with companies that conduct their business through these huge, compartmentalized data systems,” Vaughan said. “And more and more businesses do.”

Deregulation, which has increased profit pressures in some industries, has also spawned new business activities and products--such as stock index options--that create fresh opportunities for misconduct, Drexel Burnham’s Balog said.

The Drysdale Government Securities bankruptcy, which created a near disaster in the financial markets in 1982, centered around the fraudulent use of a relatively new financial instrument, the so-called reverse repurchase agreement, he said. “With the proliferation of new financial products instruments, you’re going to see new opportunities for abuse,” Balog said.