Enron’s impressive collapse was followed by the implosion of WorldCom, which was the doing of CEO Bernard Ebbers. His plan to compensate for the downturn of the telecommunications industry in 2000 and WorldCom’s declining stock included the use of fraudulent accounting methods in order to deceive investors into thinking the company was in good health. The underreporting of line costs and inflation of revenues accumulated $3.8 billion in fraud and ended with the company’s bankruptcy, then the largest in U.
S. history. Ebbers, who resigned from WorldCom in April 2002, was sentenced to 25 years in prison for conspiracy and securities fraud and filing false statements with securities regulators.
Induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of securities laws.
Securities fraud can also include outright theft from investors (embezzlement by stockbrokers), stock manipulation, misstatements on a public company’s financial reports, and lying to corporate auditors. The term encompasses a wide range of other actions, including insider trading, front running and other illegal acts on the trading floor of a stock or commodity exchange.
Types of securities fraud
Another chapter in the white collar crime saga of the early 2000s, the InStock trading scandal made headlines because of the involvement of Martha Stewart, who sold about $230,000 of the company’s stock a day before an experimental cancer drug failed to gain FDA approval. Memorably, she was found guilty of obstruction of justice, conspiracy and lying about a stock sale, and served five months in prison.
Founder Samuel Waskal, who advised friends and family to sell stock and attempted to sell his own stock prior to the announcement, pled guilty to charges of bank fraud, securities fraud, obstruction of justice and perjury. He was sentenced to a seven-year, three-month prison sentence in 2009, but was released in 2009.
One of the most important responsibilities that a bank or financial institution has is to protect the integrity of the institution by working hard to protect the financial assets that it holds. In order to do so, the bank or financial institution must be certain to address the issue of bank fraud. Bank fraud can be defined as an unethical and/or criminal act by an individual or organization to illegally attempt to possess or receive money from a bank or financial institution. Let’s take a look at several types of bank fraud which exist, followed by how these types of activities can be prevented.
The word “Ponzi” was introduced into America’s lexicon in late 2008 when Madoff was arrested and charged with securities fraud. The former lifeguard, sprinkler installer and chairman of NASDAQ managed to build a multi-billion dollar investment firm with false trading reports and without assistance from the major derivatives firms, each of which refused to trade with him. Although he had been suspected of being a sham a decade before, it wasn’t until 2008 that he was arrested after his misdeeds were reported by one of his sons. In 2009, he pled guilty to 11 federal crimes including securities fraud, money laundering, and theft from an employee benefit plan. The penalty: 150 years in prison and $170 billion in restitution – investors lost billions of dollars due to the scandal, and three people involved with the business, including Bernie’s son Mark, committed suicide.
A Ponzi scheme is an investment scam that pays existing investors out of money invested by new investors, giving the appearance of earnings and profits where there are none. Ponzi schemes are also known as pyramid schemes.
Ponzi schemes lure investors by promising high returns on their investment. The schemes require the continual attraction of new investors; as soon as new investors fail to materialize, the operation runs out of money and fails.
At the time of its bankruptcy in 2002, Adelphia was the fifth-largest cable provider in the U.S., and in 2003, it generated more than $3.6 billion in revenue that’s just $1.3 billion more than the off-balance-sheet debt accumulated by the company, which led to its demise. John Rigas, the founder, and Timothy Rigas, his son who ran the company, are currently serving 15-and 20-year prison sentences respectively for embezzling the money from corporate investors and using corporate funds as their own. Adelphia’s run of more than 50 years officially ended in 2006 when the remainder of its revenue-generating assets were purchased by Comcast and Time Warner.
When a person embezzles, it usually means that he is stealing money from his employer. If he is caught embezzling, it probably also means that he will soon be unemployed.
The word embezzle implies more than simply “to steal.” When a person embezzles, he or she takes advantage of an employer’s trust for personal gain. Embezzling is a so-called “white-collar crime” which often involves some sort of cover-up, like falsifying financial records or stealing small amounts of money over a long period of time. The word embezzle comes from an Old French word meaning “maltreat or ravage,” be sillier, and an embezzler can be said to ravage someone else’s money.
One of the largest comprehensive rehabilitative services companies in the country, HealthSouth had been suspected of unethical financial practices since its emergence in the late 80s. Under the leadership of Richard Scrushy, it was discovered that it falsified at least $2.7 billion worth of profits between 1996 and 2002 and later agreed to pay $325 million for allegedly defrauding Medicare and other federal healthcare programs, according to the Department of Justice. Scrushy was acquitted of charged related to the matter, but later sentenced to a six-year, 10-month prison sentence for bribery in mail fraud in an unrelated case.
A bribe is a sum of money or something valuable that one person offers or gives to another in order to persuade him or her to do something.
The act of taking or receiving something with the intention of influencing the recipient in some way favorable to the party providing the bribe. Bribery is typically considered illegal and can be punishable by jail time or stiff fines if authorities find out about the bribe.
Marcus Schrenker fraud and attempted fake death
Although he didn’t wield the same kind of power as guys such as Lay, Ebbers or Kozlowski, Schrenker, who owned three financial companies, accumulated a bounty of wealth as an investment advisor responsible for multi-million dollar pension funds. But it all disappeared in an instant. His failure to inform seven investors of high fees for switching annuities, and the resulting loss of $250,000, brought forth a complaint from The Indiana Department of Insurance in 2008 that intensified suspicion of his unethical practices. Ultimately, the expiration of his Indiana state financial adviser’s license prompted an investigation. In 2009, instead of facing the consequences of his action, Schrenker attempted to fake his death by faking a plane crash, parachuting out before the damage was done. He was eventually captured and sentences to four years in prison for the fiasco. He still faces charges of securities fraud.
When someone provides false information to an insurance company in order to gain something of value that he or she would not have received if the truth had been told they have committed insurance fraud.
Insurance fraud is any act committed to defraud an insurance process. This occurs when a claimant attempts to obtain some benefit or advantage they are not entitled to, or when an insurer knowingly denies some benefit that is due. According to the United States Federal Bureau of Investigation, the most common schemes include premium diversion, fee churning, asset diversion, and workers compensation fraud. Perpetrators in these schemes can be insurance company employees or claimants. False insurance claims are insurance claims filed with the intent to defraud an insurance provider.
Insurance fraud has existed since the beginning of insurance as a commercial enterprise. Fraudulent claims account for a significant portion of all claims received by insurers, and cost billions of dollars annually. Types of insurance fraud are diverse, and occur in all areas of insurance. Insurance crimes also range in severity, from slightly exaggerating claims to deliberately causing accidents or damage.
This is directed at prosecutors who, under the guise of making the public aware, use high profile raids, leaks to the press and perp walks to celebrate white collar criminal cases. Madoff does more interviews these days than he ever did prior to his arrest! Sadly, the more renowned the case, the more prominent it becomes on the prosecutors’ resume when he/she goes into private practice.
Monitoring your employees helps to keep your business secure. Knowing they are being monitored could be an effective deterrent to criminal activities. Video cameras are an effective tool for monitoring areas of temptation, such as cash registers and supply cabinets. Consider a system that saves the recordings in case you need them for future evidence of white collar crimes
Inventorying equipment and supplies on a regular basis reduces the risk of theft. It is also a wise plan to check purchase orders against your inventory. Consider implementing an RFID tagging system and a regular survey of the equipment and supplies owned by your business
While President Obama has encouraged the hiring of former criminal offenders, most corporations steer away from it. Bringing someone into the organization who has paid their debt and knows the consequences of poor decisions will have a positive affect the organization
Bernard Madoff should have been caught years, decades, before he confessed to his massive Ponzi scheme. The first $1 billion of the scheme is on Madoff, the other $49 billion should be on regulators. Had the SEC been a corporation it would have been fined billions for its own lax controls failure to act. Start fining and jailing bad regulators … even felons would applaud this.
White collar crime often involves the internet. Be sure to use software in your business that closely monitors the websites, social media connections and activities conducted by your employees. If your business does not already have an internet usage policy in place, create one. You may also want to require that employees using their personal devices have monitoring software installed by your information technology department.
From your opinion, what factors to be considered when deciding on white collar crime sentencing?
Are white-collar defendants treated more favorably than other criminals when it comes to sentencing? A case involving the chief executive of a technology firm in Ohio that collapsed in 2003 after fraud allegations seems to indicate that perhaps there is such a thing as being too lenient, according to a Federal Appeals Court.
The recent case involves Michael E. Peppel, the former chairman and chief executive of MCSi, who pleaded guilty to conspiracy, money laundering and filing false documents with the Securities and Exchange Commission. Federal authorities said he inflated revenue and earnings to prop up MCSi’s stock price at a time when the company was failing after years of having grown through acquisitions.
Even though the firm collapsed after the fraud came to light, the judge overseeing the case took into account the letters of support and handed down just a seven-day prison sentence because the defendant was – a remarkably good man. An appeals court, however, recently concluded that the district judge abused her discretion by taking into account factors that were not permissible in imposing sentences in white-collar cases.
The recommended sentence was approximately eight to 10 years, based largely on the estimated loss to shareholders of $18 million when the company disclosed the fraud. By imposing only seven days in prison, the United States Court of Appeals for the Sixth Circuit in Cincinnati noted that this was “a 99.9975% reduction” from what the federal sentencing guidelines provide.
Mr. Peppel’s sentence also seems to buck the trend of recent cases in which white-collar defendants convicted of committing fraud had received long prison terms, far greater than what has been meted out in the past.
The appeals court decision reflects an underlying tension in white-collar cases involving defendants who present no real threat of physical harm to society and continue to lead productive lives after committing a crime. When there is little likelihood that the defendants convicted of fraud will ever be trusted enough to commit a similar violation, is it in societ’s best interest to send them to prison for a significant period of time?
At one time, the federal sentencing guidelines were applied quite rigidly, and such a minimal sentence would have been almost impossible unless the defendant provided extraordinary assistance to the government. Mr. Peppel did not force the government to go to trial by pleading guilty, but it does not appear that he provided any significant help in the investigation, largely because he was its main target.
The Supreme Court restored much of the judge’s discretion in determining the appropriate sentence to district court judges in 2005 in United States v. Booker, when it ruled that the sentencing guidelines were only advisory.
The punishment must still be reasonable and the judge is required to explain the reason for a variance from the recommended sentence. But there is now much greater flexibility to take into consideration the specific factors in a case, including the defendant’s personal background and the impact of the crime. One method frequently used in white-collar cases involves letter-writing campaigns to point out the many positive attributes of the defendants. The emphasis is usually on charitable contributions and close family ties to show that a reduced punishment reflects the sentencing factor to “provide just punishment for the offense.”
Letters in some recent high-profile insider trading cases appear to have had at least some effect on the sentence. More than 200 letters were sent on behalf of Raj Rajaratnam, who received an 11-year term that was well below the government’s recommendation of more than 24 years in prison.
Rajat Gupta, convicted of tipping off Mr. Rajaratnam, had more than 400 letters sent on his behalf, including ones from Bill Gates, the Microsoft billionaire and philanthropist, and Kofi Annan, the former United Nations secretary-general. Mr. Gupta received a two-year prison term rather than the eight to 10 years sought by prosecutors.
In contrast, Bernard L. Madoff received not a single letter of support when he received a 150-year prison term.
In Mr. Peppel’s case, the district judge noted that more than 100 letters had been sent attesting to his “humble beginnings and his many community and charitable activities both before and after the charges in this case.” Among the reasons for giving a short sentence was evidence of his strong community and family involvement, and business expertise that included starting a new company achieving growing success.
The appeals court rejected those grounds as insufficient for such a significant departure from the recommended guidelines. It was troubled by the district judge’s reference to his work as a reason for giving a lighter sentence, rejecting the position that a defendant “should be sentenced lightly on the asserted ground that they offer more to society than those who do not possess such knowledge and skill.”
There is no simple answer to what is the appropriate sentence for any defendant, and especially for those who commit business crimes. The impact of white-collar offenses is far broader than most street crimes, but also much more diffuse – it is unlikely the many investors in MCSi had a harder time rebuilding their lives than victims of murder or assault.
The judge’s sentence implied that a senior executive is somehow not as bad as an “ordinary” criminal, and perhaps more valuable to society living outside prison. The fact that there are significant collateral consequences from a conviction may just reflect that white-collar defendants have more to lose, and have a greater concern about their reputation and future employment prospects than others.
But a long prison sentence imposes significant costs on the public. According to the Bureau of Justice Statistics, the average annual cost to house a convicted felon in a state prison is approximately $28,000 a year. That amount does not take into account what a white-collar defendant could generate by being gainfully employed instead of working on the prison laundry.
Mr. Peppel’s case has been sent back to the same judge to reconsider the appropriate sentence. I expect he will receive more than the seven days imposed the first time he appeared, but given his background and strong support from family and friends it is unlikely that he will get anywhere near the eight to 10 years recommended by the sentencing guidelines.
List the sentences mentioned in the case. Do you think harsh sentences are justified for white-collar criminals?
I think it’s very fair. The fraudster must be deterred because, by this crime, society and the economic structure are more harmful than the same, the penalty must be tightened to prevent others from falling into this offense, even those with moderate and limited incomes must be severely punished, even if the community service is to They can pay fines or appropriate compensation for their guilt, as well as leniency to some, the law exposes a loophole through which the punishment of the perpetrators can be reduced widely.
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