Where White-Collar Criminals Belong: Jail

Crooks who defraud investors deserve the same punishment as the rest of the bad guys -- and the means exist to mete it out

By Howard Gleckman

The collapse of Enron is the nation's biggest financial scandal since the savings-and-loan failures of the late 1980s. What should be done about it? For one thing, we need to rethink the role of auditors. And some lawmakers and investor groups are calling for a new round of securities regulation. But they're missing the point. More rules aren't the answer.

What we really need is better enforcement of the regulations already on the books. If Enron's board, its top management, or its auditors did break any laws -- and it's important to remember that there's no hard evidence so far that they did -- the best response is a simple one: Put them in prison. It will, to borrow a phrase, discourage the others.

Securities & Exchange Commission Chairman Harvey Pitt has the right idea when he says the point of investor-protection laws isn't to bust crooks after they've ripped off their victims, but to stop them from trying. To do that, state and federal authorities need to send a tough message: Whether you're working out of teak boardrooms or basement boiler rooms, if you do fraud, you'll do time. Says Indiana Securities Commissioner Brad Skolnick: "The increased likelihood of jail time is the only thing that will deter investment scams."


  Unfortunately, this country has a long and sad history of letting hustlers, stock market manipulators, and other white-collar con artists off the hook. Unlike the lowlifes who smash windows and swipe CD players, crooks whose weapon of choice is an annual report rarely go to jail.

Indeed, most white-collar criminals are hardly ever even charged with criminal offenses. The SEC focuses nearly all of its enforcement efforts on civil actions. The penalty, even for the most outrageous rip-offs, is rarely more than a fine or an order to return money to the victims. Cases that are referred to prosecutors -- and most involve crimes such as embezzlement rather than securities fraud -- are usually dropped. More than 43% of those who are busted for fraud are never prosecuted, according to Justice Dept. statistics. Prosecutors say the cases are too complicated and a huge drain on their time and resources.

And law enforcers admit privately to another reason: Because those white-collar crooks who are convicted serve little or no jail time, prosecutors have little incentive to go through the effort required to get a conviction.


  Here are some more telling numbers from Justice. Overall, convictions for white-collar crime fell by 7% from fiscal 1999 to fiscal 2000. Some 70% of those convicted of felony burglary in 1996 (the last year for which data are available), went to jail, and the average stay was about 42 months -- or three and a half years. But just half of those convicted of fraud in 1996 went to prison. And if you did go, you'd get out, on average, in less than two years.

Even more striking is what happens to repeat offenders. In 1996, state courts were twice as likely to send three-time burglary offenders to jail as three-time con artists.

That's one reason why state courts actually see a higher percentage of repeat scamsters than they do repeat burglars. By their nature, folks who do scams are masters of risk analysis. And when you look at the cost/benefit ratio, it's clear: White-collar crime pays.


  Post September 11, odds are that these criminals will beat the system even more easily. The few big criminal securities-fraud cases that do go to court are brought by the Justice Dept. But Attorney General John Ashcroft is aggressively shifting resources to focus on terrorism. That means fewer prosecutors will be available to bring these complex cases before judges and juries. And that's going to send exactly the wrong message to those who would rip off unwary investors.

I don't know if the certainty of prison is going to stop a kid from robbing a 7-Eleven. But I'm willing to bet it will stop a guy in a suit from manipulating a financial statement.

Gleckman is a senior correspondent in BusinessWeek's Washington bureau. Follow his views every Tuesday in Washington Watch, only on BusinessWeek Online

Edited by Patricia O'Connell

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