Saturday essay: Be sure that the lines are clear in 'white collar' crime

8/3/2002

In the wake of the financial collapses of WorldCom, Enron, the Oakwood Bank, and a number of other corporate disasters, the lynch mob has been calling for the imprisonment of business executives involved in these failures, failures characterized as "white-collar" crimes. Like all mobs, this one thrives on false assumptions and imperfect analogies.

Begin with the nature of so-called "white collar crime." Its most important aspect is it is conduct not always clearly unlawful. Contrast an antitrust crime or a securities law violation with a person walking into a 7-11 carrying a gun and demanding money, or someone selling crack on the street corner. There is no ambiguity in street crime. We all know it is wrong to use force to take something that belongs to someone else or to distribute illegal substances. Categorizing that conduct as "criminal" is not difficult.

But what if you worked in an industry for 40 years? For decades, you and your competitors have avoided competing with each other. Over sandwiches and beer, fellow competitors agree that each had the right to serve certain customers and that the others would not compete for those customers. In turn you would honor their customer relationships. If there exists what economists call market power, such conduct can be a criminal violation of the federal antitrust laws.

But when it is nothing more than the continuation of conduct that began well before the 40-year veteran started in the business and is conduct that continued unchallenged during his 40 years, to make that person a felon and subject him to the risk of a period of incarceration seems at best perverse.

Consider also the case of a young employee of an environmental testing firm. He is called to perform air quality tests at a new steel facility. He cannot remove an access port through which he must make certain measurements. His testing must be accomplished within a matter of hours if it is to be completed as required by the applicable federal regulations.

Remembering that he had been at the facility two months earlier for testing, he uses the measurements taken from the blocked port during that earlier visit, assuming that the air pressure in the pipe to be measured would be essentially the same since the fan and the size of the piping through which the air was moving had not changed.

When the government discovers that he based his report on earlier measurements, not ones taken at that time, he is charged with and convicted of a felony. Since the conviction occurred in federal court, it will remain on his record forever. Is that fair? Is that justice?

These two situations are real. The individuals involved had their lives dramatically and permanently changed as a result of the charges. While their conduct may have been improper, would not civil suits brought by the government seeking money damages suffice to not only deter others but correct the situation as well? Asked another way, would sending these men to prison really serve anyone's interest beyond mere retribution?

The unfairness of criminalizing conduct is particularly apparent when the criminal charges arise from an individual's performance of his or her professional duties.

Recently a local pharmacist had his criminal conviction vacated by a Court of Appeals. His conviction stemmed from the operation of his pharmacy. Significantly the same Court of Appeals had a few years earlier reversed a trial judge's dismissal of the same case.

The trial judge had found then that the conduct in question, part of the regular performance of his professional duties, would not support criminal charges. The Court of Appeals found the trial judge wrong and sent the case back for trial. Following this reversal, the pharmacist was tried and convicted.

But then the same Court of Appeals reversed itself and found that the trial judge had it right the first time and dismissed the charges.

What is perhaps more regrettable is that two other pharmacists charged with similar conduct had their cases resolved on the basis of the first Court of Appeals decision. They are now saddled with convictions of crimes which, based on the second appellate decision, should not have occurred.

It is also true that while the pharmacist recently acquitted was ultimately found not guilty of any crime, he was subjected to those charges for many years and incurred thousands of dollars in expenses in defending against those now invalid charges.

When criminal law moves into the business arena, defining what is criminal conduct becomes problematic. Even the judges have a hard time deciding right and wrong. Consider the pharmacist. Two Courts of Appeals' decisions were necessary to decide if a crime occurred. That being so, what should a non-lawyer have understood about the nature of his conduct? Is it fair to suggest that the businessman should have known his conduct was criminal when it took three judges two tries to make a final decision?

Much is being made of the conduct of business executives with respect to the presentation of financial information. People are suggesting that the executives should go to jail for their misconduct. But these people took jobs that required them to make certain decisions.

Whether or not you think chief executives are overpaid, the fact is there has to be somebody upon whose desk the buck stops, as President Truman once noted.

The fact is that many accounting decisions are not clear-cut. Matters of judgment are involved and somebody has to make the decision.

It is also fair to say that as in the rest of human conduct, when someone has to make a decision, they can be wrong, and often are. That then raises the question of what you do about it? The fact that there were horrendous consequences from a bad decision does not mean that the decision was criminal.

Negligence can cause one car to roll into another in a parking lot, and no one would suggest that the driver who made the mistake should be jailed. It does not require significantly more negligence to wipe out a pension fund with a bad accounting decision, but the fact that that negligence caused financial trauma to thousands of people does not make the conduct criminal.

While it may seem to many that accounting rules should be clear and precise since they deal with numbers - two plus two will always equal four for example - the truth is they are sometimes ambiguous and vague. Were some people greedy? Of course, they were. Did they let their own self-interest affect their judgment? Undoubtedly some did.

Make changes in our system? Sure. Require the period of time it takes for stock options to vest to be a minimum of 15 years to reduce the pressure for short-term gain. Change the bankruptcy laws so executives cannot hide their fortunes in houses that cost more than many hotels.

The primary distinction between civil and criminal liability has been the area of intent, what was the mental state of the person to be charged. If he intentionally took actions that harmed another, that is criminal conduct. If he was simply wrong or negligent, that should not be criminal misconduct. Take away his house, his car, and his bank accounts, but do not criminalize the conduct because of the number of people injured.

Many changes could be made in the area of civil liability that would have strong deterrent effect.

Presently corporate executives can be indemnified by the corporation if they are sued. Let us modify that requirement so that the indemnification is limited and the individuals truly understand that if they negligently injure others, they will have personal liability up to a certain percentage of their net worth.

None of this is to suggest that there should be a different standard for "white collar" criminals. The criminal justice system that comes down full force on drug dealers and burglars on Auburn should not pull its punch because the criminal lives in Ottawa Hills. Indeed one can make the case that if a businessman engages in intentional misconduct, his penalty should be greater than that for an addict robbing a 7-11 since the businessman is more likely to be deterred.

What I am suggesting is that we need to be sure that there is a bright line, one evident to all without ambiguity, defining the boundaries of criminal conduct. Leave the close calls to civil suits, licensing authorities, or other governmental entities. Before we put people at risk of losing their freedom, we should be certain that they had ever reason to know that their conduct was criminal.

Richard M. Kerger is a partner in the Toledo law firm of Kerger & Kerger.