The New York Times headline was dominated by a seemingly strong word: “G.M. Is Fined Over Safety and Called a Lawbreaker.”
As I will explain, however, the seeming strength of the label “lawbreaker” is undercut by the rest of the title, the text of the article, and the reality of the Justice Department’s refusal to apply the rule of law to powerful domestic corporations and their controlling officers.
The first discordant note is the word “safety.” The article reports that GM, for the purposes of avoiding the expense of repairing a design defect that endangered the lives of its customers, covered up the defect and caused the death and injury of a number of those customers. The article does not report the (minor) cost of GM fixing its design defect. The article does not report on the number of people who were injured and killed because GM designed a defective ignition system, knowingly hid the defect from its customers and the government, and once it knew that its defective design was injuring and killing its customers GM deliberately covered up the existence of the defect and the cause of the easily avoidable injuries and deaths. The article states that GM was finally required to recall 2.6 million vehicles due to the defective design of the ignition switches.
The second note of weakness in the title is the word “fine.” The only punishment is to the shareholders through a fine against GM. No officer was fined or sanctioned by the government. The article says that the paltry fine against GM was the largest the regulator could impose.
The third note of weakness is not by the NYT, but by the government. The title does not use any of the words used to describe criminal prosecutions against elite corporate officers and corporations. The article does not even ask why the Department of Justice failed to prosecute the GM officers that led this sometimes fatal fraud. Did the safety regulator even make a criminal referral against GM or its (ir)responsible executives?
The fourth note of weakness applies to both the paper and the government. There is not a word in the article about the unethical nature of the conduct. It’s horrific to fail to discuss GM’s crimes, but it is beyond obscene to fail to discuss its moral implications. The NYT ran a stronger story on GM’s lawyers, but it too avoided any discussion of GM’s crimes or ethics.
Reckless Vehicular Homicide
GM’s actions occurred nationwide, so GM and its officers could be prosecuted under many different state laws. When GM’s customers drive their cars they are subject to prosecution if they violate their state Reckless Vehicular Homicide laws. The common legal definition of “reckless” is: “willful or wanton disregard for the safety of others.” (The statutory name, legal standard, and punishment vary among the states). “Willful or wanton disregard for the safety of others” is what the government says GM and its officers and employees exhibited.
The case for calling GM’s behavior “reckless” is far stronger than the typical Reckless Vehicular Homicide case because such cases are typically the product of a single spontaneous act produced by a split second driving “decision” that may not have been consciously planned in any meaningful sense. In GM’s case, its reckless behavior was considered, deliberate, done for the purpose of financial gain for GM and the officers and senior employees involved, and covered up. Indeed, that last element may itself be a state and federal criminal act. GM’s cover up of the defects would allow an aggressive prosecutor to characterize the entire combined activity as aggravated recklessness under some state laws. (The cover up would also greatly increase that punitive damages would be awarded in civil suits against GM by the victims – which is why GM is gearing up ready the sordid American corporate tactic of “strategic bankruptcy” to try to minimize its victims’ recoveries even in the civil context.)
Would murder and maiming by any other name smell as fetid?
We label something a “crime” for important purposes. Crime is very different from tort even though the legal “elements” of the tort and crime are often the same. Often, the only difference is the degree of the burden of persuasion (“beyond a reasonable doubt” v. “the preponderance of the evidence”). Only public prosecutors can bring criminal actions and only criminal convictions can lead to incarceration (with the important exception of “contempt of court”). U.S. defendants in a serious criminal case have a constitutional right to counsel. We give the government the monopoly on bringing criminal cases because it is such a vital responsibility and because we know that vigilantes invariably degenerate into scourge of society. When we treat a wrong as a crime when make a societal declaration that the conduct is so harmful that it must be defined as illegitimate and subject to sanctions that typically include imprisonment.
Edwin Sutherland was right about elite white-collar crime; and he’s still right
This year is the 75th anniversary of Edwin Sutherland’s 1939 Presidential address to the annual meeting of sociologists in which he announced the concept of white-collar crime. My readers will see, in Sutherland’s first paragraph, why his work is so attractive to me.
Economists and most criminologists don’t understand financial crimes
“This paper is concerned with crime in relation to business. The economists are well acquainted with business methods but not accustomed to consider them from the point of view of crime; many sociologists are well acquainted with crime but not accustomed to consider it as expressed in business. This paper is an attempt to integrate these two bodies of knowledge. More accurately stated, it is a comparison of crime in the upper or white-collar class, composed of respectable or at least respected business and professional men, and crime in the lower class, composed of persons of low socioeconomic status.”
Sutherland’s doctorate combined the study of the economy and sociology. Note that Sutherland emphasized from the beginning the importance of elite white-collar crime by businessmen and professionals and what I refer to as “seemingly legitimate” entities – Sutherland archly calls them “respected” though they are not “respectable.”
Conflating “crime” with street crime
It is remarkable, and sad, how much today is like 75 years ago in terms of the behavior of criminologists. Sutherland made the point that the criminal justice system overwhelmingly arrests and convicts those that commit crime in the streets (v. suites) and that this means that the data criminologists use to formulate their theories excludes white-collar criminals.
“The criminologists have used the case histories and criminal statistics derived from these agencies of criminal justice as their principal data. From them, they have derived general theories of criminal behavior. These theories are that, since crime is concentrated in the lower class, it is caused by poverty or by personal and social characteristics believed to be associated statistically with poverty, including feeblemindedness, psychopathic deviations, slum neighborhoods, and ‘deteriorated’ families.”
In 2014, virtually all criminologists, the Department of Justice, and the FBI follow precisely the same grossly unscientific practice of generalizing from the copious data on street crimes and criminals to all crimes and criminals. This fits well with (opposing) liberal and conservative mindsets. Liberals tend to view poverty as generating crime and conservatives tend to view the poor as defective, and therefore also far more likely to be criminal. Charles Murray, the leading ultra-conservative scholar triumphs this latter view. Murray emphasizes the role of “slum neighborhoods” and “‘deteriorated’ families.” Murray also claims that U.S. blacks are intellectually inferior to whites due in part to genetics.
A group of ultra-conservative pseudo-criminologists then closed the loop by creating the myth of a coming “crime bomb” and “bloodbath” composed of juvenile “super-predators,” disproportionately black and supposedly super-charged by a purported epidemic of “crack cocaine” (highly associated with blacks – whites were much more likely to use powder cocaine). John DiIulio infamously described the juveniles as “fatherless, Godless, and jobless” and used the word “feral” to emphasize that they had degenerated to the point that they resembled wild animals. None of this proved true, but racist stereotypes were given the patina of respectability by junk science.
Thinking outside the “fraud triangle”
White-collar criminologists have made a similar grave mistake in over-generalizing research that studied non-elite white collar crimes and criminals to elite white-collar crimes and criminals. Donald Cressey’s “fraud triangle” is the classic example. He based his theory on his studies of minor embezzlers chosen because they had modest social status. Cressey’s blunder was to claim that his model explained all fraud. The “fraud triangle,” however, is not simply useless in describing elite frauds – it is outright misleading. Naturally, it is the only aspect of criminology adopted by the accounting literature and is taught as if it were gospel by the Association of Certified Fraud Examiners. Cressey was the intellectual godfather of the ACFE, so ACFE’s worship of the fraud triangle is at least understandable as a matter of anthropology even if it is terrible criminology.
Biased Data Produce Biased Theories and Popular Bias
Sutherland stressed the errors that arise from generalizing from biased data that excludes the crimes of the elites.
“The conventional explanations are invalid principally because they are derived from biased samples. The samples are biased in that they have not included vast areas of criminal behavior of persons not in the lower class. One of these neglected areas is the criminal behavior of business and professional men, which will be analyzed in this paper.”
The U.S. maintains two broad sets of data on “crime” – both exclude elite white-collar crime. The FBI compiles data from the states and localities on “index” crimes. DOJ does a national victim survey. We have known for 75 years that these biased data practices will produce terrible public policies and popular prejudices.
Sutherland’s Emphasis on what we now call “Control Fraud”
Sutherland listed the type of elite white-collar criminals he was studying – each of whom led a control fraud.
“The present-day white-collar criminals, who are more suave and deceptive than the ‘robber barons,’ are represented by Krueger, Stavisky, Whitney, Mitchell, Foshay, Insull, the Van Sweringens, Musica-Coster, Fall, Sinclair, and many other merchant princes and captains of finance and industry, and by a host of lesser followers.”
Sutherland explained how he had researched these elites’ frauds and corrupt public officials. Note that it was not through criminal cases.
“Their criminality has been demonstrated again and again in the investigations of land offices, railways, insurance, munitions, banking, public utilities, stock exchanges, the oil industry, real estate, reorganization committees, receiverships, bankruptcies, and politics. Individual cases of such criminality are reported frequently, and in many periods more important crime news may be found on the financial pages of newspapers than on the front pages.”
Sutherland explained the type of corporate crimes CEOs led.
“White-collar criminality in business is expressed most frequently in the form of misrepresentation in financial statements of corporations, manipulation in the stock exchange, commercial bribery, bribery of public officials directly or indirectly in order to secure favorable contracts and legislation, misrepresentation in advertising and salesmanship, embezzlement and misapplication of funds, short weights and measures and misgrading of commodities, tax frauds, misapplication of funds in receiverships and bankruptcies. These are what Al Capone called ‘the legitimate rackets.’ These and many others are found in abundance in the business world.”
How little has changed in 75 years – the first crime Sutherland listed was “accounting control fraud.” Accounting fraud was also the “weapon of choice” of most of the “present-day” elite fraudsters (meaning 75-100 years ago) who he listed by name. And, yes, that means that white-collar criminologists falsified the “efficient market hypothesis” (EMH) over 20 years before Fama began his errant formulation of EMH. I am not aware of any paper on EMH (other than by criminologists) that cited Sutherland and considered the implications of his findings for the “efficiency” of markets.
Sutherland expanded on the nature of the violations of trust inherent in accounting fraud and abuses of CEO power through exploiting conflicts of interest. His passage could have been written today.
“These varied types of white-collar crimes in business and the professions consist principally of violation of delegated or implied trust, and many of them can be reduced to two categories: misrepresentation of asset values and duplicity in the manipulation of power.”
Sutherland quoted a phrase from 98 years ago that will resonate with most Americans today.
“James M. Beck said, ‘Diogenes would have been hard put to it to find an honest man in the Wall Street which I knew as a corporation lawyer’ (in 1916).”
Sutherland came back repeatedly to the theme that white-collar crime was common by our most elite firms and professions and that the harm of elite crime was vastly greater.
“[T]he preceding statements refer in many cases to the leading corporations in America and are not restricted to the disreputable business and professional men who are called quacks, ambulance chasers, bucket-shop operators, dead-beats, and fly-by-night swindlers.”
Sutherland further emphasized this sentence’s thesis by adding a footnote emphasizing that he was talking about corporations and professions that were seemingly legitimate – but criminal.
Sutherland explains that elite financial frauds cause far greater losses
Sutherland made an observation about the costs of these elite white-collar crimes that is true today. “The financial cost of white-collar crime is probably several times as great as the financial cost of all the crimes which are customarily regarded as the ‘crime problem.’” In Sutherland’s era, the FBI’s “Most Wanted” list was called the “Public enemies” list.
“Public enemies numbered one to six secured $130,000 by burglary and robbery in 1938, while the sum stolen by Krueger is estimated at $250,000,000, or nearly two thousand times as much.”
Sutherland even managed to anticipate, and undermine, Cressey’s later work on minor embezzlers. Sutherland stressed that even the largest embezzlers are pikers compared to control frauds.
“The New York Times in 1931 reported four cases of embezzlement in the United States with a loss of more than a million dollars each and a combined loss of nine million dollars. Although a million-dollar burglar or robber is practically unheard of, these million-dollar embezzlers are small-fry among white-collar criminals. The estimated loss to investors in one investment trust from 1929 to 1935 was $580,000,000, due primarily to the fact that 75 percent of the values in the portfolio were in securities of affiliated companies, although it advertised the importance of diversification in investments and its expert services in selecting safe securities. In Chicago, the claim was made six years ago that householders had lost $54,000,000 in two years during the administration of a city sealer who granted immunity from inspection to stores which provided Christmas baskets for his constituents.”
Sutherland also championed the view that the effect of elite fraud in eroding “trust” was likely to cause even greater societal losses than these immense direct expenses of fraud.
“The financial loss from white-collar crime, great as it is, is less important than the damage to social relations. White-collar crimes violate trust and therefore create distrust, which lowers social morale and produces social disorganization on a large scale. Other crimes produce relatively little effect on social institutions or social organization.”
Sutherland: white-collar crime is real crime
Sutherland knew that elite white-collar criminals had huge advantages. The most fundamental advantage was that their crimes were not treated as crimes. Sutherland made it a priority to expose and refute this treatment. “White-collar crime is real crime. It is not ordinarily called crime….”
Frédéric Bastiat warned about this tendency to excuse, even celebrate, the crimes of the elites.
“When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that glorifies it.”
Sutherland: Elite crimes rarely prosecuted
“[W]hite-collar criminals are relatively immune [from prosecution] because of the class bias of the courts and the power of their class to influence the implementation and administration of the law. This class bias affects not merely present-day courts but to a much greater degree affected the earlier courts which established the precedents and rules of procedure of the present-day courts.”
Sutherland’s Explanation of why GM Faced Regulators Instead of Prosecutors
“The crimes of the lower class are handled by policemen, prosecutors, and judges, with penal sanctions in the form of fines, imprisonment, and death. The crimes of the upper class either result in no official action at all, or result in suits for damages in civil courts, or are handled by inspectors, and by administrative boards or commissions, with penal sanctions in the form of warnings, orders to cease and desist, occasionally the loss of a license, and only in extreme cases by fines or prison sentences. Thus, the white-collar criminals are segregated administratively from other criminals, and largely as a consequence of this are not regarded as real criminals by themselves, the general public, or the criminologists.”
Sutherland’s Explanation of Class, Power, and Impunity for Crime
“This difference in the implementation of the criminal law is due principally to the difference in the social position of the two types of offenders. Judge Woodward, when imposing sentence upon the officials of the H. 0. Stone and Company, bankrupt real estate firm in Chicago, who had been convicted in 1933 of the use of the mails to defraud, said to them, ‘You are men of affairs, of experience, of refinement and culture, of excellent reputation and standing in the business and social world.’ That statement might be used as a general characterization of white-collar criminals for they are oriented basically to legitimate and respectable careers.”
Creating Regulatory and Prosecutorial “Black Holes”
“Because of their social status they have a loud voice in determining what goes into the statutes and how the criminal law as it affects themselves is implemented and administered. This may be illustrated from the Pure Food and Drug Law. Between 1879 and 1906, 140 pure food and drug bills were presented in Congress and all failed because of the importance of the persons who would be affected. It took a highly dramatic performance by Dr. Wiley in 1906 to induce Congress to enact the law. Finally, the Administration has not been able to enforce the law as it has desired because of the pressures by the offenders against the law, sometimes brought to bear through the head of the Department of Agriculture, sometimes through congressmen who threaten cuts in the appropriation, and sometimes by others.”
Sutherland’s cites Drew’s Parable of the Bumblebees v. the Fable of the Bees
“The statement of Daniel Drew, a pious old fraud, describes the criminal law with some accuracy, ‘Law is like a cobweb; it’s made for flies and the smaller kinds of insects, so to speak, but lets the big bumblebees break through. When technicalities of the law stood in my way, I have always been able to brush them aside easy as anything.”
Sutherland: Powerful Criminals who Target the Powerless
“In contrast with the power of the white-collar criminals is the weakness of their victims. Consumers, investors, and stockholders are unorganized, lack technical knowledge, and cannot protect themselves. Daniel Drew, after taking a large sum of money by sharp practice from Vanderbilt in the Erie deal, concluded that it was a mistake to take money from a powerful man on the same level as himself and declared that in the future he would confine his efforts to outsiders, scattered all over the country, who wouldn’t be able to organize and fight back. White-collar criminality flourishes at points where powerful business and professional men come in contact with persons who are weak. In this respect, it is similar to stealing candy from a baby. Many of the crimes of the lower class, on the other hand, are committed against persons of wealth and power in the form of burglary and robbery. Because of this difference in the comparative power of the victims, the white-collar criminals enjoy relative immunity.”
The current financial crisis and GM’s decision to kill a portion of its customers illustrate the continuing accuracy of Sutherland’s observation that the officers running control frauds target the weak and use their power to maximize the three “de’s” – deregulation, desupervision, and de facto decriminalization – in order to grow even wealthier and more powerful through crimes they can commit with impunity.
In a doctoral program we give particular emphasis to teaching our students the critical importance of reading (and rereading) the foundational literature. Sutherland (1939/1940); Akerlof (1970); and Akerlof & Romer (1993) should be read by everyone who wishes to understand the economy. As Sutherland emphasized, the essential need is to integrate economic and white-collar criminological research and theory. The logic is inexorable: if something taught in economics is bad white-collar criminology it is also bad economics – and if something is good white-collar criminology is has to be good economics.
The opposite phraseology would also be true. The key fact that has emerged over the last 30 years is that the bad economics that was long ago falsified by good white-collar criminology did not simply continue to be taught to economic students. Bad economics was increasingly preached as gospel and the field doubled-down on its falsified dogmas and methodologies.