The Crackdown On Crime In The Suites

A federal commission is ready to read business the riot act

Evidence at his 1990 trial showed that John Borowski ordered his employees to dump toxic wastes down a sewer. A judge sentenced Borowski to two years in jail and fined him $400,000. The president of metal-finisher Borjohn Optical Technology Inc. in Burlington, Mass., thus became the first person ever convicted under the four-year-old "knowing endangerment" provision of the Clean Water Act.

When Internal Revenue Service agents uncovered a six-year scheme to hide cash deposits from the Treasury Dept., prosecutors indicted National Bank of Greece for money laundering. After the bank pleaded guilty, a judge imposed an $8 million fine--the largest penalty levied for money laundering not involving drugs.

Accused of overbilling the government for computers, General Electric Co. last September paid a $10 million criminal fine. But prosecutors also insisted that GE pay $20 million to settle civil charges.

Times are getting tougher for white-collar criminals. After years of hollow threats, prosecutors are making good on their promise to attack crime in the suites. Pin-striped felons are going to jail. Powerful new statutes and novel notions of what constitutes criminal behavior are bringing hefty fines for corporate abuses once attacked through civil suits. The efforts are bolstered by a 50% jump in federal prosecutors since 1988 and a judiciary willing to throw the book at business. (chart).

The result: The government is using criminal laws to punish not only Wall Streeters, such as Michael Milken, but also to police the environment, workplace safety, and defense contracting. "Five years ago, you could plead a corporation guilty to a felony such as submitting false statements to the government and maybe end up with a $10,000 to $50,000 fine," says Washington defense lawyer Raymond Banoun. "Now, it's $1 million to $5 million."

And the stakes are about to go even higher. The U. S. Sentencing Commission is scheduled to issue by May 1 stiff guidelines for punishing errant corporations. Tough mandatory guidelines for sentencing individuals already have boosted jail terms for convicted executives. The new rules will mandate fines that could exceed $150 million for companies--and even put them on probation. There's one big exception. The guidelines take a carrot-and-stick approach that will let judges slash fines if companies show certain "mitigating" factors, including the existence of compliance programs (box, page 104).

RUNNING SCARED. Drafts of the guidelines have business howling. "The proposed guidelines appear to be symptomatic of a rather distressing movement in this country to `criminalize' corporate operations," Charlton Dietz, 3M Co.'s general counsel, wrote the commission. Groups such as the National Association of Manufacturers and the Business Roundtable have been lobbying hard to get the guidelines watered down or made voluntary. Unless Congress intervenes, which is unlikely, the proposals will become law by yearend.

The feds' widening net has already nabbed a number of brand-name U. S. corporations. Just in the past year:

-- Eastern Air Lines Inc., now being liquidated, pleaded guilty to conspiring to block a federal safety probe and was fined $3.5 million.

-- Exxon Corp. pleaded guilty and agreed to pay $100 million for fouling Alaskan waters with oil.

-- Chrysler Corp., after pleading no contest to charges that it rolled back odometers in more than 60,000 vehicles, was fined $7.5 million.

Companies facing this onslaught mf prosecutorial power have few palatable options. Caving in quickly can lead to onerous penalties. But fighting charges in court exposes a corporation to negative publicity that can depress stock prices, turn off customers, trouble creditors, or spur shareholder suits. And three-quarters of all companies prosecuted are found guilty or plea bargain.

Some in the legal and corporate world say the government is going overboard. Consider the March trial of Houston asbestos-abatement contractor Paul Burns. Prosecutors had sought to indict Burns on charges of attempting to fix prices with a competitor. But under antitrust laws, there had to be a conspiracy, and the competitor hadn't gone along. Undaunted, the feds indicted Burns on wire-fraud charges, reasoning that he had used a phone for the alleged misdeed. A jury found Burns not guilty.

The crackdown is in many ways a reaction to the Reagan years. The military buildup set the stage for Pentagon procurement abuses, deregulation led to chicanery in thrifts, and an anything-goes atmosphere encouraged greed on Wall Street. "In the `80s we had a climate in which making it was more important than how you got there," says Amitai Etzioni, a George Washington University sociology professor. "There is a sense things went too far."

GREEN LIGHT. The backlash against business has been building since the mid-1980s. As Reagan eased federal regulation, state and local officials gradually stepped up their own oversight. New York and Illinois prosecutors, for example, brought assault and aggravated battery charges against executives of companies whose workers were exposed to toxic chemicals. Business groups petitioned the U. S. Supreme Court to dismiss the cases, arguing that the federal Occupational Safety & Health Act of 1979 barred the states from acting. But the court declined to hear their pleas, giving state authorities the green light to pursue companies criminally for workplace hazards.

Some federal prosecutors, meanwhile, found political mileage could be gained through high-profile assaults. Former U. S. Attorney Rudolph W. Giuliani in New York ran for mayor after making a name for himself chasing corrupt Wall Streeters. Boston U. S. Attorney William F. Weld used his image as a white-collar Eliot Ness to launch a winning campaign for governor. And as prosecutors and investigators master the complexities of financial fraud and environmental laws, they find more cases to bring.

Congress also has jumped in, creating new offenses and boosting penalties for insider trading, price-fixing, and other crimes (table). "Every time we have an election, we hike penalties and add criminal sanctions," says George Washington University criminal-law professor Stephen Saltzburg, a former prosecutor.

The crackdown has been most apparent in the Bush Administration's war on polluters. In the Reagan years, critics lambasted the Environmental Protection Agency for being soft on companies that treated the environment as a dump site. Now, Attorney General Richard L. Thornburgh and EPA Administrator William K. Reilly are using the environmental laws to bring novel criminal suits. "There were criminal provisions buried in many of these laws all along," says V. Rock Grundman, counsel for Dallas-based Dresser Industries Inc. "In the past, environmental matters were almost always treated as civil. Now, EPA likes to brag about the number of its criminal cases." Indeed, federal indictments for environmental offenses soared from 40 in 1983 to 134 last year. Fines surged from $341,000 in 1983 to nearly $30 million in 1990.

Prosecutors like the message that criminal prosecutions send. For years, regulations requiring banks to report cash transactions over $10,000 were neither enforced nor obeyed. But that changed after Bank of Boston Corp. was convicted in 1985 of violating the Bank Secrecy Act of 1970 and fined $500,000. "Until there were prosecutions, there was no compliance," says Robert S. Mueller III, head of the Justice Dept.'s Criminal Div.

The dangling threat of jail time for executives often pushes companies to settle. When three executives of New York advertising agency Young & Rubicam Inc. were indicted in 1989 on racketeering charges for allegedly bribing a Jamaican executive, "their whole sense of who they are and what they are became threatened," asserts general counsel R. John Cooper. The government dropped the charges against the executives. And in a plea bargain, it fined Y&R $500,000 for conspiring to violate a federal antibribery law. Adds Cooper: "You can't put your executives through the risk that a trial involves."

But companies are finding plea bargains more expensive and tougher to negotiate. In August, 1988, Miami-based Cordis Corp., two former officers, and two former employees were indicted on charges they sold defective pacemakers. The company quickly struck a deal with prosecutors to plead guilty and pay $123,000 in fines and $141,000 in court costs. But a judge rejected the plea as insufficient. In March, 1989, Cordis settled criminal and related civil claims by paying $5.8 million. Seven months later, the individuals were acquitted of all charges. Cordis officials say the ordeal cost them $20 million in legal expenses.

Despite some setbacks, Attorney General Thornburgh and his state counterparts stress that they will keep white-collar crime a top priority. The sentencing commission will give federal prosecutors even more ammunition--and give companies even more incentives to ensure that they stay within the law. The costs of failing to do so will simply be too high.


As prosecutors pursue corporations more aggressively, lawmakers create new enforcement tools and stiffen penalties. Here's a sampling:

ANTITRUST The Anti-Trust Amendments Act of 1990 increases the maximum penalties for price-fixing from $1 million to $10 million

BANKING The Financial Institutions Reform, Recovery & Enforcement Act of 1989 ups fines to $1 million and prison sentences to 20 years for 10 banking-related crimes such as lying to regulators and falsifying credit applications

ENVIRONMENT The Clean Air Act of 1990 authorizes 15-year prison terms for knowingly polluting and changes violations from misdemeanors to felonies

SECURITIES The Securities Law Enforcement Remedies Act of 1990 lets the Securities & Exchange Commission levy fines against companies and bar persons convicted of financial fraud from ever serving as officers and directors


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