The Year (’97) in Corporate Crime

The Year (’97) in Corporate Crime

Research support provided by the Investigative Fund of the Nation Institute.


The Wall Street Journal is the main reporter in our country of corporate crime. The Wall Street Journal has so much information on corporate crime it should be named The Crime Street Journal.
–Ralph Nader

Taking Nader at his word, we decided the best way to survey the corporate crime wave in this country was to read a year’s supply of The Wall Street Journal. What follows is a representative sample of the reports of big-business malfeasance published in the WSJ during 1996. And keep in mind that the paper’s talented reporters could cover only a fraction of the misdeeds that occurred during the year. The stories, despite their relative restraint and sober factuality, display a panorama of civil and criminal corruption, sleaze, unhinged greed and other antisocial antics of some of the businesses that shape our lives.

Please note the punishments handed out to the malefactors. Although three executives were sentenced to spend a few months in prison (for fraud resulting in ten deaths) and a couple of others seem destined to land in jail eventually, the kindly manner in which most erring business chieftains were treated solidly underscores the fact that in the United States a prison sentence is rarely looked upon as the proper fate of corporate villains.

Frequently, where criminal charges could have been brought the offenders were tapped with lesser counts of civil misconduct, and they agreed to make a settlement before trial, precluding the possibility of much heavier financial punishment. Don’t be impressed by the seemingly hefty fines and restitution paid by some corporations; they were a minor inconvenience, for 1996 was a banner year for corporate profits.

Perhaps the best lesson to be drawn from this kind of survey was laid out years ago by Gilbert Geis, who frequently wrote on white-collar crime:

The social consciousness of the corporate offender often seems to resemble that of the small-town thief, portrayed by W.C. Fields, who was about to rob a sleeping cowboy. He changed his mind, however, when he discovered that the cowboy was wearing a revolver. “It would be dishonest,” he remarked virtuously as he tiptoed away. The moral is clear: since the public cannot be armed adequately to protect itself against corporate crime, those law enforcement agencies acting on its behalf should take measures sufficient to protect it. High on the list of such measures should be an insistence upon criminal definition and criminal prosecution for acts which seriously harm, deprive, or otherwise injure the public.

The trouble is, even if they wished to get tough–and the overriding trend is toward less toughness–most of the federal agencies with jurisdiction over the business world are woefully outmanned by the huge array of corporate lawyers. It isn’t a David and Goliath situation–it’s more like Shirley Temple versus King Kong.

Jim Lehrer’s Fallen Angel

The Archer Daniels Midland company, super-briber to the political world, was involved in the most publicized corporate crime of 1996. Caught in a sting by Justice Department investigators, A.D.M., the planet’s largest grain processor, pleaded guilty to charges of conspiring to fix prices for two products: lysine, a feed supplement for livestock, and citric acid, used in soft drinks and detergents. A.D.M., which was fined $100 million, and its Asian co-conspirators also agreed to pay more than $100 million to settle civil lawsuits brought by shareholders and customers. More lawsuits lie ahead.

Ironically, Archer Daniels’ stock price actually jumped, because Wall Street judged the settlements and fines to be bargains. And why not? After all, analysts figure that A.D.M. cheated its lysine customers alone out of more than $170 million. Although the $100 million fine is seven times larger than the largest antitrust penalty ever before levied by the Justice Department, it’s (you’ll pardon the expression) chicken feed for A.D.M., which in the last fiscal year had revenues of $13.6 billion from its agricultural products, most of which are heavily subsidized by the U.S. taxpayer.

Along with a bargain fine, Archer Daniels got a sweetheart deal: In exchange for pleading guilty and promising to help the Justice Department in its expanding investigation, A.D.M. was granted immunity against charges of price-fixing in the sale of high-fructose corn syrup, which, along with the corn-derived fuel ethanol, is A.D.M.’s leading product.

Also part of the deal was Justice’s promise that its investigators wouldn’t even bother to interview Dwayne Andreas, 78, who as chairman and chief executive has for decades treated A.D.M. as his personal fiefdom. His 47-year-old son, executive vice president and former heir apparent Michael Andreas, having been secretly taped in a price-fixing conversation with an Asian “competitor,” was indicted for conspiracy; at the very least, his career at A.D.M. is over. But old man Andreas once again proved himself to be a masterful escape artist. Could this talent possibly be explained by the more than $4 million he and his family and A.D.M. have given to Washington politicians since the seventies, most notably Kansas Republican Bob Dole (in return for billions of dollars in subsidies)? It also didn’t hurt the elder Andreas’s chances of getting special treatment that he personally donated $155,000 to the Democratic Party in 1993 and $100,000 in 1994, and was co-chairman of a dinner that raised $3.5 million for Clinton’s presidential campaign in 1992.

Over the years his generosity has sometimes been suspect. He was acquitted of giving Hubert Humphrey an illegal $100,000 contribution in 1968; he slipped a thousand $100 bills into the Nixon White House in 1972, the year in which the term “money-laundering” entered the nation’s vocabulary; and in that same season, a $25,000 check from Andreas somehow sneaked into the bank account of a Watergate burglar. But the old man has never tripped badly enough to earn a criminal record–except in 1993, when he and his wife paid an $8,000 fine for exceeding federal limits on political contributions.

Considering that it operates in one of the world’s most piratical industries, A.D.M. has, like Andreas himself, led a charmed life, suffering only a couple of legal wounds: a 1978 conviction for fixing prices on grain sold to the Food for Peace program and a no-contest plea in 1976 to the charge of short-weighting and misgrading corn for export.

Close Race for ‘Crookedest’

Among the insurance industry’s biggest companies, competition for the title of “crookedest” heated up in 1996. Three years ago, Metropolitan Life was fined $20 million for cheating its customers. Last year the nation’s largest insurance company, Prudential, easily outdistanced Metropolitan by being fined $35 million. Also, Prudential is paying more than $1 billion in restitution to fleeced policy-holders.

After an eighteen-month investigation, a task force of insurance regulators from thirty states concluded that for thirteen years Prudential salespeople coast to coast had practiced a deception called “churning,” often with the knowledge and sometimes approval of officials up to at least regional vice presidents. Indeed, some sleazy salespeople seem to have been promoted to managerial positions because of their success at duping customers.

“Churning” was a racket in which as many as 10 million customers were sweet-talked into using the cash value of their old insurance policies to pay the premiums on new, more expensive policies. They were not warned that the upgrading could be so costly that it would eat up their equity, leaving them with premiums they couldn’t afford–and therefore no coverage.

Arthur Ryan, Prudential’s chairman since late 1994, admitted that the charges were accurate and fired several salespeople and managers and a senior vice president. But some of the discarded employees transformed themselves from con artists into whistleblowers, providing investigators with sordid inside details about Prudential’s operations. Potentially most damaging–and certain to be used by the army of plaintiffs’ lawyers already assaulting the Rock–were sworn statements from some of the former employees claiming that Prudential officials had ordered them to destroy any documents that might reveal unsavory marketing practices.

As an embattled defendant, Prudential was far from lonely. Numerous other insurance companies were sued, or facing regulatory penalties, for identical or similar misconduct. When Mutual of New York paid $12.5 million to a mob of unhappy Alabama consumers, for example, The Wall Street Journal called the settlement “the latest in a series involving alleged deceptive sale practices at many of the nation’s biggest insurers.”

Piggish Banks and Laundromats

Money-laundering, a highly profitable crime, is routinely committed by U.S. banks, but the laws against it are vague; it is hard to prove and thus rarely prosecuted. Justice Department investigators floundered through 1996 in an effort to determine if Citibank had helped Raúl Salinas, brother of Mexico’s former president, Carlos Salinas, launder at least $100 million in dirty money by transferring it to bank accounts abroad.

Raúl Salinas is now in prison in Mexico on charges of “inexplicable enrichment.” But Citibank apparently found nothing inexplicable in the fact that Salinas, who never earned more than $190,000 per year working for the government, had the bank handle $100 million for him. Citibank officials say their internal investigation turned up no improprieties.

Some law-enforcement authorities thought it odd that Citibank refused to let its best and most experienced money-laundering compliance officer, Jane Wexton, a Citibank vice president and senior attorney, participate in the investigation. Allegedly Wexton was told she couldn’t even ask questions about the case, although up to that point, says the Journal, she had been “regularly consulted by bank officials and outside regulators when any suspicious activities came up” because she was considered “a ‘cop’s cop’…a straight shooter who would be likely to tell regulators about something she considered wrong.” Wexton, who had been at Citibank seven years, quit.

The Journal says “people inside Citibank” think the Justice Department is “developing an indictment against the bank.”

Drugs, Dogs and Quacks

Slowly, slowly, the Justice Department continues to try to catch up with the crooks who, according to the General Accounting Office, defraud the government out of $100 billion a year. There are reportedly 1,000 current investigations into health care fraud.

Like insurance companies, medical supply companies seemed to be competing for the title of crookedest. In September the Journal reported that SmithKline Beecham’s clinical laboratory unit was “close” to an agreement to pay more than $300 million to the government to settle charges that it had bilked Medicare for unneeded blood tests. That settlement would still be less than the record $379 million paid by National Medical Enterprises in 1994 for alleged fraud in psychiatric services.

Far back in the field, but closing fast, is Corning Inc., which paid $6.8 million to settle allegations that its Bioran Medical Laboratory in Cambridge, Massachusetts, regularly billed Medicare for blood tests that doctors hadn’t asked for. That was in February. Eight months later Corning was forced to pay up again, this time a whopping $119 million to settle charges of fraudulent billing by one of its subsidiaries, Damon Clinical Laboratories. That must have been a proud moment for Corning–the penalty pushed it past the $110 million in civil and criminal penalties paid for similar misconduct by a San Diego firm, National Health Laboratories. The WSJ indicates that Corning is an old hand in this game. It paid $39.8 million in 1993 and $8.6 million in 1995 to settle federal charges of Medicare fraud.

In 1996 the medical industry provided the Journal with plenty of misconduct to write about, some that was criminal and some that was just plain corporate sleaze–such as Eli Lilly & Co.’s use of homeless, often alcoholic, men to test the safety of experimental drugs, paying them the lowest rate per diem in the human guinea pig business. The Food and Drug Administration’s deputy director of drug evaluation told the Journal that using homeless drunks violates the agency’s rule that drugs can be tested only on people who are able to make a “truly voluntary and uncoerced decision” to participate. Other test experts told the newspaper that using alcoholics could distort the evaluation of an experimental drug’s safety. That may not worry Eli Lilly; after all, it’s the company that put Oraflex on the U.S. market without telling the F.D.A. that the same drug had already killed several people in Europe.

The Journal medical story that takes the prize for describing pure gutter-level greed and callousness is the one about the British drug maker Boots and its main product, Synthroid. About 8 million Americans spend $600 million a year on drugs to control hypothyroidism, and Synthroid gets 84 percent of their money. It has been around since 1958 and was the first synthetic thyroid drug. When it came on the market, the F.D.A. approved it without asking for trial data. That oversight has made it extremely difficult for rival thyroid drug manufacturers. Since there is no benchmark data on Synthroid, how could they persuade doctors that their products are just as good and are absorbed into the blood the same way Synthroid is?

In recent years the rivals began making some inroads in Boots’s virtual monopoly by getting on state drug-approved lists. To beat them back, Boots hired a University of California research team to perform extensive tests comparing Synthroid with three rival–and much cheaper–thyroid drugs. If Boots thought the $250,000 contract would persuade the scientists to tout the superiority of Synthroid, it was in for a big surprise. In fact, the researchers found that the four drugs were essentially interchangeable and that F.D.A. support of the cheaper drugs would save thyroid patients $356 million a year. Furthermore, the researchers were going to say so in a paper that the Journal of the American Medical Association was ready to publish.

Curses! At that very moment Boots was about to sell itself to Germany’s giant BASF, for $1.4 billion, and the research findings might queer the deal. But the solution was simple. The contract the university team had signed forbade publication of their findings without Boots’s approval. It didn’t approve, of course, and that was that. Synthroid still sits on top of the market, and millions of thyroid patients will pay for its being there.

Odds and Ends. Claiming that maybe as many as 25 million consumers were overcharged $600 million between 1989 and 1994, attorneys general in twenty-two states sued the biggest contact lens companies–Bausch & Lomb, Johnson & Johnson Vision Products and Ciba Vision Corporation–as well as several optometry trade organizations for price conspiracy…. The world’s largest drug companies paid $350 million to appease thousands of retail druggists who claimed they were being overcharged. But the feud isn’t over, and the Federal Trade Commission is investigating for signs of a conspiracy…. The Florida nursing home industry takes in $3.2 billion a year. But state inspectors give the lowest possible rating to one out of every twenty-six homes, and $2.5 million in fines have been levied for poor care. Trouble is, only one violator (poetically named Ambrosia Home) has paid up, a trifling $19,500. The big chains just appeal the fines and drag out the cases forever…. In one of the stiffest warnings issued in recent years, the F.D.A. told Pfizer that it must immediately stop making misleading promotional claims for Zoloft, a popular anti-depressant (worldwide sales of $1 billion a year)…. Sick or dead, you’re a good target for fraud. The F.T.C. requires the nation’s 20,000 funeral homes to give itemized price lists to prospective clients. But in a test run the commission found that as many as 8,000 undertakers are ignoring the rule. The F.T.C., timid as usual, has threatened only twenty of them.

Surprise! Arms Merchants Cheat

When one of the bolts holding a 500-pound Maverick missile to the wing of a military plane breaks, and the missile is left dangling, attached by only the remaining bolt–and when that sort of accident begins to happen rather often–you’d think the Pentagon’s sleuths would quickly find out what the hell was going on. But it took the military years to figure out that United Telecontrol Electronics was knowingly using defective bolts to hold the launchers in place. Phony computer-controlled measurements made it look like the parts had passed inspection. Some company officials pleaded guilty to fraud; although their crime disrupted operations at air bases around the world–costing taxpayers big bucks–and put lives at risk, the penalties were far less than, say, a marijuana dealer would get. A former U.T.E. vice president got the maximum, an easy twenty-one months in prison and a $40,000 fine.

The Navy blames defective gearboxes on Navy F-18 fighters for seventy-one emergency landings and several in-flight fires, as well as the loss of an F-18 during the Gulf War. (They came to that conclusion after inspecting 150 gearboxes and finding that all–100 percent–were defective.) The outfit that made the lousy gearboxes, Lucas Industries, pleaded guilty to falsifying quality records and was penalized $106 million (not so large if you consider that Lucas has estimated yearly revenues of $6.7 billion).

Tec-Air Services and two of its execs pleaded guilty to fraud for failure to service properly aircraft emergency gear such as the oxygen apparatus that is supposed to be activated in case of accidental cabin depressurization. A big deal? Some would think so, seeing as how these systems are supplied to (among other aircraft) the Boeing jets used by the President and Vice President.

Does the Pentagon get angry about that sort of dangerous cheating? Nah. Maybe because it has become so commonplace. As the Journal says, “In courtrooms across the country, similar scenarios are playing out. Huge and small defense contractors are facing charges of manufacturing faulty products.” Yes, and facing a host of other charges as well. Like fraud. And influence-peddling. And deceptive bookkeeping.

Alliant Techsystems was reportedly under investigation for overcharging the Pentagon by “tens of millions of dollars on various missile-production contracts.” Alliant bought its space-propulsion contracts from Hercules, which itself is the target of a massive privately filed False Claims Act suit seeking hundreds of millions of dollars in damages for falsifying quality-control records, doctoring the books, etc. At first, Hercules denied the charges; then it claimed the government had known about the “multiple, recurring errors and procedural deviations” in the production of rocket motors, and therefore, being aware, it couldn’t have been defrauded.

Arms merchants try to wear down accusers, and often succeed. But not always. In 1986 two women supervisors in a Hughes Aircraft plant alerted federal officials that the company was falsifying quality-control tests. Because of their whistleblowing, they say, they were harassed and were eventually hounded out. They sued Hughes under the False Claims Act–and a decade later they were finally victorious, winning $891,000 for themselves, $450,000 for their lawyers and $3.1 million for the government. This is nothing new for Hughes. Four years earlier it was convicted of criminal failure to test properly equipment vital to jet fighters, tanks and other U.S. weaponry and fined a piddling $3.5 million–and the Pentagon continued to do business with the company.

In this industry, it’s constantly “déjà vu all over again.” Journal reporter Andy Pasztor reminds us that “in the mid-1980s, Litton admitted that it had methodically defrauded the Pentagon for almost a decade by inflating prices, charging twice for some raw materials and failing to disclose rebates from vendors on dozens of Navy electronics contracts.” Litton is still very much in the military business, and apparently some suspect it’s still up to its old tricks, for federal agents raided its offices in Los Angeles to investigate alleged overcharges going back a decade.

If these rascals delay long enough, they are let off with cream-puff penalties. Lockheed Martin, the huge military contractor, closed the longest-running influence-peddling scandal–dating back to the eighties–by paying a mere $5.3 million on behalf of Martin Marietta Corporation, with which it merged in 1995. It was bad enough that such a trifling penalty could settle a suit accusing Martin Marietta of a $30 million overcharge. Worse, the cheap settlement wiped clean the slate of a company that had snagged its disputed contract with the help of an influence peddler and a crooked Navy department official. The contract was to build a supersonic low-altitude target to test the Navy’s missile defense. The project was finally junked. Cost overruns–coming to almost 100 percent and due mostly to the contractor’s faulty bid–helped kill it. But Martin Marietta walked away with $192 million.

McDonnell Douglas got off with a $500,000 fine for misleading the Pentagon on its $6.6 billion contract to build the C-17 cargo jet. The company kept telling the government it would break even, though its own estimates showed it would lose at least $1 billion–which it did. Guess who paid the difference.

Screwing the Workers

Of course, misdeeds of the sort mentioned screw the U.S. working class in a general way. But sometimes the screwing gets up close and personal, right in their own workplace. Three Kentucky coal executives were sentenced to prison in the deaths of ten workers, but it took seven years to get the villains behind bars. In 1989 methane gas exploded in a Pyro Mining Company shaft. In the resulting investigation, it was found that prior to the explosion the executives had lied to federal inspectors about the existence of the mine’s hazardous conditions. For helping to kill ten men, the executives drew sentences ranging from five months (and a fine of $375) to eighteen months (and a $3,000 fine–or $300 per victim).

Using data from the federal Mine Safety and Health Administration, the Journal reported that these sentences were among the longest ever handed down. “Most criminal complaints filed on behalf of the agency result in no prison time…. The agency estimates that only about 40 people have gone to jail since 1991 because of criminal safety violations at mines.” With such light penalties, who’s going to worry about obeying regulations?

Following up on a union complaint that Caterpillar’s parts factory in York, Pennsylvania, had workplace health hazards, the National Institute for Occupational Safety and Health tried to inspect the place. Caterpillar said no. So NIOSH got a warrant from a federal judge ordering the company to admit the inspectors. Caterpillar still said no–the first time in fifteen years that any company had defied a federal warrant–and it was held in civil contempt. The company finally gave in. It could have been fined heavily, but of course it wasn’t.

The minimum-wage law means nothing to many employers. They simply ignore it. The WSJ quotes Princeton labor economist Alan Krueger’s estimate that as many as 3 million workers are paid less than the minimum wage and adds, “Violating the minimum-wage law has a certain economic logic to it because an employer, if caught, usually has to pay only the back wages that were due. Penalties are generally levied only on repeat or extreme violators.”

A survey of garment makers, among the worst outlaws, found 43 percent paying illegally low wages. But trucking companies, eateries and construction firms are top criminals, too.

Here’s one place where the corporate whine about “big” government becomes an especially bad joke. The Labor Department’s team of inspectors has shrunk 15 percent in the past six years, and the remaining 500 inspectors are supposed to police 6 million workplaces for minimum-wage and overtime violations, child labor abuses and other corporate tackiness.

Failure to pay for overtime work is especially widespread. The Journal says, “Violations are so common that the Employer Policy Foundation, an employer-supported think tank in Washington, estimates that workers would get an additional $19 billion a year if the rules were observed.” [Emphasis in original.] In an analysis of more than 74,000 cases handled by the Labor Department over a four-year period, the paper concluded that one out of every fifty workers had been illegally denied overtime pay.

With Texaco leading the way, discrimination cases (involving age, disability, whistleblowing, race and sex) became boilerplate headlines in 1996. Texaco has had lots of company: Astra USA, WMXTechnologies, Monsanto and Mitsubishi Motors, among others. Discriminators paid out many millions of dollars in penalties, but the corporate world was not visibly repentant or shaken. It’s hard to make big corporations feel pain for their sins by merely fining them. Referring to one of Texaco’s offers–$176 million–to settle a race discrimination case, the Journal made the point: Yes, if Texaco’s offer were accepted, it would be the largest cash settlement ever to resolve such a case, but so what? After all, “it’s not a princely sum to dole out over five years for a corporation with revenue of more than $30 billion.”

The Antitrust Farce

When is a crime not officially a crime? Simple: When the laws against that activity are not enforced. Antitrust laws–those almost mythical beings so revered by populists–have been on the books for several generations and are supposed to be used to prevent the kind of concentration of market power that leads to price-fixing and the death of competition. That’s what the Archer Daniels Midland case was all about. That’s why the Federal Trade Commission used the antitrust laws to block Rite Aid’s proposed $1.8 billion purchase of Revco, a combination that would have created the nation’s largest drugstore chain. Antitrust laws were used (in addition to the instances previously cited in this article) to pry fines from Reader’s Digest ($40 million) and U.S. Healthcare ($1.2 million).

But don’t be misled. If the antitrust laws aren’t dead, they’re showing few vital signs. Concentrations of market power are coming on like a flood, and little is being done to stop the trend. In its yearly wrap-up, under the headline “Gorillas in Our Midst: Megadeals Smash Records as Firms Take Advantage of Favorable Climate,” the Journal noted happily that “mergers, acquisitions and spinoffs totalled $659 billion in 1996, up 27 percent from $519 billion in 1995.” The outlook was “as good as it gets,” because “looser regulation is changing the competitive landscapes in telecommunications, utilities and broadcast, among other industries”–meaning government cops at the Justice Department and the Federal Trade Commission have all but surrendered.

Nowhere was this clearer than in the aerospace and military industry, where, in one of the largest mergers in U.S. history, Boeing bought McDonnell Douglas to become the only–yes, only–manufacturer of commercial jets in the United States, catapulting it ahead of Lockheed Martin, the number-one military contractor, as the world’s largest aerospace company. This pairing-off received the same enthusiastic government support that a series of multibillion-dollar military industry mergers have received from the Clinton Administration over the past four years.

Other industries have been promised the same support. Last June the F.T.C. proposed that antitrust enforcers let cost savings justify mergers that would otherwise be considered illegal because they were anticompetitive. What’s more, the commission adopted new rules that would speed mergers and acquisitions by radically shortening the time the F.T.C. takes to consider cases alleging anticompetitive conduct or consumer fraud.

Among those benefiting from the new atmosphere, the Journal predicted, would be airlines. Their unauthorized meetings with foreign carriers to fix prices, which violates current antitrust laws, “will soon be routine–with the full approval of the U.S. government.”

Crime marches on.


Taking a Flier With Social Security

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