White Collar Criminals and Sending a Message to Deter Misconduct (Part II of III)

When Judge Denny Chin sentenced Bernie Madoff, perhaps the most notorious white-collar criminal, Judge Chin imposed a sentence of 150 years, the maximum possible under the law.  Madoff was 71 years old.  His Ponzi scheme resulted in the loss of $64.8 billion.

While Judge Chin may have imposed a lesser sentence without altering the fact that Madoff will die while incarcerated, Judge Chin specifically cited the need to send a message and deter future white-collar criminals. Judge Chin called Madoff’s fraud “extraordinary evil,” “unprecedented”, and  “staggering.” Judge Chin also noted that he had not received one letter from family or friends attesting to Madoff’s good deeds or positive contributions to society.

Judges face real challenges when sentencing white-collar criminals.  In most cases, there is some evidence of positive behavior by a white-collar defendant that may justify mercy.  As a general matter, however, deterrence has value in the sentencing process because it ensures that a judge does not give into a claim of rehabilitation or that the defendant “has seen the light,” and is contrite.

White collar criminals are typically older and better educated with a higher percentage of white males than the overall federal prison population.  While the offenses are non-violent, the impact on victims can be devastating.  For the offenders themselves, a criminal conviction can also have significant collateral consequences due to loss of employment and professional licenses.  In truth, however, white-collar offenses are nothing more than varieties of theft.  In many cases, the offenders understand they have violated the law (although they may rationalize their own intent and understanding of the law and their conduct) and the impact of their criminal conduct on victims.  Fraudsters, however, can easily repeat their criminal activities and carry out their crimes using different fraud schemes.  The old adage usually applies – “once a fraudster, always a fraudster.”

Some also claim that recidivism rates understate the actual rate at which white-collar criminals engage in fraud.  White collar crimes are hard to detect, investigate and prosecute because they involve analysis of financial records and regulatory schemes.

There is a common view that white-collar crime is increasing while the rate of prosecution is decreasing.  The number of federal fraud case has declined in recent years.  Moreover, there appears to be a real lack of prosecution of senior executives who may have been involved in serious criminal activity.

In this context, deterrence is an important objective to benefit law-abiding society by preventing future misconduct.  Economists often translate the world into a cost-benefit analysis to predict future decision-making and conduct.  From this perspective, deterrence occurs when the benefits of criminal conduct exceed the possible sanction – in other words, if the likelihood of detection and punishment increases, the amount of criminal conduct will decrease.  If there is a low probability of being caught, deterrence has little value.

An interesting question is whether stiff corporate punishment through large fines actually deters misconduct.  At a minimum, however, large fines probably incentivize companies to invest in corporate compliance programs as a means to avoid significant criminal and/or civil penalties.

In other words, companies that invest millions in corporate compliance may avoid multi-million dollar fines by implementing an effective ethics and compliance program.  Such a linkage depends on whether corporate leaders at one company take note of penalties imposed against other companies and view themselves as comparable to the offending company.  The connection is even more remote when one acknowledges that directors and officers do not pay criminal or civil penalties; rather current shareholders bear the brunt of the punishment, and such misconduct usually occurred years in the corporate past.

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