Do White-Collar Punishments Go Too Far or Not Far Enough?

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Flipping through the channels on my television in the middle of the afternoon, I've often become enamored with a CNBC documentary, American Greed. On a weekly basis, the series highlights a convicted crook, scoundrel, or thief who has defrauded investors of thousands -- if not millions -- of dollars and goes through the step-by-step process of how their plot unfolded and how they were finally caught. Needless to say, I was staggered to find out on American Greed's homepage that there are 66 episodes! Sixty-six!!!

That figure seemed rather high at first, but the further I thought about it, the more it made sense. As I noted just last week when I highlighted the former CEO of Advanced Medical Optics, James Mazzo, as my CEO Gaffe of the Week for his alleged role in the insider-trading case that resulted in the conviction of two former baseball players, the sheer volume of white-collar crimes is rising dramatically -- at least those being prosecuted, that is!

Fraud: It's what's for dinner
In just the last two months, we've seen various employees at Nomura Financial (NYSE: NMR  ) charged with insider trading, as well as its CEO resign; we've witnessed the prosecution of six traders from UBS (NYSE: UBS  ) and JPMorgan Chase (NYSE: JPM  ) who front-ran trading in the acquisition of six companies from 2006-2008; a Chinese billionaire's firm has been charged with insider trading in connection with CNOOC's (NYSE: CEO  ) buyout of Nexen; and Barclays (NYSE: BCS  ) only admitted that it helped rig the LIBOR, which is the benchmark from which $10 trillion worth of mortgage, auto, and credit card interest rates are set... that's all!

That has all happened within just the past two months! What the heck is going on here?!

My initial theory behind the recent influx in financial crimes was that regulators weren't prosecuting nearly enough of these white-collar criminals, and that their sentences must have been short enough to deem the risk of getting caught worth taking. Well, guess what... I was wrong!

Lock 'em up and throw away the key
According to The Wall Street Journal, between 1993 and 1999, only 23 cases of insider trading were brought before Southern and Eastern N.Y. District Courts. Of those 23, less than half ended with prison terms. For those who did go to prison, the average sentence was 12 months. Between 2000 and 2006, the number of cases rose to 34, with 65% of those individuals going to prison for an average duration of 27 months. Interestingly enough, in a shorter time period, from 2007 through September 2011, 51 prosecutions had been made with that same 65% conviction rate averaging a 36-month sentence.

Bloomberg reports an even more stunning figure of 71 allegations of insider trading from Manhattan prosecutors with 65 convictions (a 92% success rate) between Aug. 2009 and July 2012. In short, we're seeing more convictions and stiffer penalties -- and yet would-be white-collar thieves appear undeterred.

From a legal perspective, the Department of Justice went above and beyond its targeted goals in 2011 to catch white-collar criminals in the act. At the beginning of the year, the WCC division had a goal of dismantling 250 criminal enterprises engaging in white-collar crime -- it actually handled 340! So, if the DOJ is stepping up its game and these cases are becoming more visible (e.g., Bernard Madoff, Raj Rajaratnam), why are there more white-collar criminals willing to gamble on being caught?

The lifestyle and lack of punishment perpetuate the trend
Personally, I think it has a lot to do with the lifestyle perception behind the crime and the preemption to reduce fines and jail time based on cooperation and financial magnitude.

Let's face it -- in spite of an increase in convictions for white-collar crimes, the majority of DOJ and local law resources is spent on fighting violent crimes. With the law of smaller numbers on criminals' side, the temptation to live large is definitely present. Perhaps more damaging to prosecutors has been their willingness to reduce insider-trading cases down to mere fines in order to save time and money, which, I feel, sets a poor precedent for future white-collar criminal cases.

Nothing is more damaging, however, than the meager jail sentences handed down by the courts as determined by the "magnitude" of the crime. Historically, higher dollar amounts in terms of fraud commanded stiffer sentences. The way I see it, this is like trying to slap someone on the wrist for robbing one individual, but we'll send someone to jail for three years if they robbed seven people. A robbery is a robbery, and a white-collar act of fraud is a white-collar act of fraud, whether one or 100,000 people are affected.

As far as I'm concerned, the courts are doing the DOJ a disservice with their menial sentences and fines. These reduced sentences and slaps on the wrist are perpetuating the image that white-collar crimes will land you in "Club Fed" for a short time before returning you to your previous life. Until punishments become harsher and an effort is made to magnify the risks of breaking the law, this is unfortunately a trend that looks to remain on the rise.

What's your take on white-collar crime punishment? Are things too harsh, too lenient, or perfect as they are? Share your thoughts in the comments section below with your fellow Fools.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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Read/Post Comments (9) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 29, 2012, at 2:33 PM, TMFDarwood11 wrote:

    What's most interesting is how many of the really big cases haven't gotten even noticed by the justice department, and so have not been prosecuted. MF Global anyone?

    How did they come to a name containing "MF?" Were they thinking of the ***ers or the **ees?

    I say "Bring back the Guillotine."

    Sure, a few of us will die unfairly, but in a planet overrun and overpopulated, that might not be a bad thing.

    After all, who decided I was the center of the universe?

    Oh, that's right and I forgot. Blankfein and his band of renown are doing "God's work." How silly of me. Certainly, these are the important people on the planet and the justice department should continue to chase petty crooks.

  • Report this Comment On August 29, 2012, at 2:46 PM, Johny205 wrote:

    Lock them up and throw away the key. It's pretty sad when a petty thief gets more time than these guys stealing millions of dollars.

  • Report this Comment On August 29, 2012, at 2:49 PM, JimmyZangwow wrote:

    How many articles have we seen on this site about the runaway pay of CEOs and upper-level management? LOTS.

    The odds of getting caught are too low, and the punishments too inconsequential to demand serious consideration from these narcissists. That's because they are prosecuted according to the Code of Punishment for Rich People (written by Rich People).

    Make penalties more ... intimidating (more like the punishments for crimes in which a weapon was used to steal money), and the people tasked with catching these criminals will have fewer to concern themselves with, because most of them would stop stealin'.

  • Report this Comment On August 29, 2012, at 6:46 PM, SJLATTY wrote:

    Let face the fact that the retail, individual investor, is screwed in this"market place".

    Dark Pools and high frequence trading eliminates an individual investor from doing their own due diligence and having a chance to make an investment with an expected result.

    Investments are not wanted, only "traders".

  • Report this Comment On August 29, 2012, at 9:40 PM, ershler wrote:


    How does high frequency trading significantly change the share price of a company with strong fundamentals over a long period of time?

  • Report this Comment On August 30, 2012, at 12:11 AM, lowmaple wrote:

    Throw away the key. Giving them more training means they can swindle society in numerous ways.

  • Report this Comment On August 30, 2012, at 7:12 AM, portillobw wrote:

    Lock 'em up and throw away the key! The harm they do to retail investors and others is irreparable and this market needs confidence not continuing disillusionment!

  • Report this Comment On August 30, 2012, at 2:24 PM, TMFDarwood11 wrote:

    I just saw Tom and David's interview over at Yahoo finance. I also read a few of the comments.

    I think and important part of having confidence in equities is knowing the system is regulated and there is oversight.

    When I see situations such as MF Global I am clear that this doesn't help. In fact, avoiding stocks is one way to do irreparable harm to one's retirement chances.

    We all complain today about the poor returns on our savings accounts. We hear talk about a "bond bubble." Anyone with a fundamental financial education has an awareness of what inflation means to one's retirement accounts over a span of 30 or more years.

    Yet, equities are avoided, and even dividends are ignored by "experts" when discussing the failures or the success of stocks.

    Anyone 30 years old, who expects to retire in 35 years should have a retirement plan, and should be concerned about how that plan is going to succeed in a world in which inflation is a fact of life.

    And yet, it seems, some think a better plan is to but it all in the mattress. A very few years ago "buy real estate" was promoted as the plan.

    I'd never promote equities as a "do all" one stop financial plan, nor would I suggest house flipping or treasuries. Not unless I was willing to save 25% of my income for 35 years. But I didn't save that amount and I won't. So I'm building a retirement nest egg with a bit of all of this, including equities, bonds and cash. Even having a smaller, paid off home and striving to be debt free does seem to make sense. At least it does after running the numbers.

    So what's stopping us? Education is a factor. Worrying about the wrong things is a factor. A lack of critical thinking skills is a factor.

    But even if we have all of these knowledge factors in place and our worries under control, it seems there is a serious foundation problem.

    A dysfunctional government and that includes a justice department that seems to ignore major problems is something that does far more damage to the fabric of this country than most of us can imagine.

    Living life in the USA can be a wonderful adventure or it can be dying a slow death. This is a choice as are so many other things.

    I wish our politicians would take a long, hard look in the mirror and ask themselves the difficult questions, instead of using their arrogance as a shield.

  • Report this Comment On September 02, 2012, at 11:40 AM, JoeAverageVoter wrote:

    Personally, I'd rather see jail cells used to house murderers, rapists, and child molesters than CEOs (who were paid by their BoDs). If a CEO or investment guy swindles people out of money, take his stuff and forbid him from participating in the market in any way possible.

    Besides, we, as a nation, get screwed out of billions, even trillions of tax dollars but no one seems to care about that.

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