By and large compliance with the law is voluntary. Every crime cannot be prosecuted. In an ethical business culture companies and individuals believe compliance is the right thing to do. For those who lack a moral compass, the fear factor of imprisonment, fines and social obloquy do the trick. But now companies display a disturbing cynicism toward legal compliance.
The notion of “Too Big to Fail” is no longer new. Unfortunately, we are creating a new concept: “Too Big to Jail.”
Pfizer
- CNN reports in Feds Find Pfizer too Big to Nail that Pfizer illegally marketed Bextra, a painkiller. The FBI conducted a criminal investigation and with much fanfare announced the appropriateness of a Pfizer indictment; i.e., fully prosecuting Pfizer would send a clear directive for tough law enforcement. But the government did not try Pfizer, and instead settled. The company agreed to pay a large fine, $1.2 billion dollars, and entered into a special reporting and compliance program. The government did not seek the ultimate penalty of prohibiting (debarring) Pfizer from participating in Medicare and Medicaid programs. Prosecutors reasoned:
that excluding Pfizer would most likely lead to Pfizer’s collapse, with collateral consequences: disrupting the flow of Pfizer products to Medicare and Medicaid recipients, causing the loss of jobs including those of Pfizer employees who were not involved in the fraud, and causing significant losses for Pfizer shareholders.
Thus, to avoid debarment, an agreement was reached between a shell subsidiary of Pfizer, which was created for the sole purpose of paying fines and the government. One federal prosecutor questioned whether even a $1.2b penalty was enough to punish Pfizer.
JP Morgan Chase
To finance a sewer upgrade project Jefferson County (Birmingham), Alabama, entered into a series of financial transactions with a division of JP Morgan Chase. JP Morgan advised the county to move from a fixed rate mortgage to a variable rate mortgage. JPMC then created complex synthetic derivative rate swaps to match cash flows between payments to bondholders and payments it was to receive from the bank for the interest rate swaps. In 2008, these deals blew up. The county was then required to pay a major part of the project in 4 years instead of 40 years, and a $647m one time penalty fee. The county’s annual payments jumped from $53m to $636m.
In addition to the poor financial advice which has nearly bankrupted the county, federal bribery convictions were obtained against twenty officials and businessmen. However, so far, JP Morgan Chase has not been indicted. Rather, it has faced an SEC action and been required to forgo collecting the $647m one time penalty. See Mike Taibbi’s excellent article and chronology Looting Main Street.
As with Pfizer, JPMC avoided indictment for reasons that are clearly expedient rather than ethical. Karl Denninger on Market Ticker explains:
JP Morgan is the firm that handles the Federal Government’s food stamp program – by creating debit accounts so that there is no “stigma” associated with public assistance. They issue what look like generic debit cards and of course collect a fee when they’re used, as well as a maintenance charge….
JP Morgan would have a hell of a time justifying the retention of their lucrative food stamp business were they to be charged and convicted of criminal fraud in the Jefferson County case. See Greenspan’s Delusions Deepen
Reeling in the Small Fish
The government seems to be allergic to indicting and fully prosecuting the worst perpetrators of financial fraud. For over two years Angelo Mozilo of Countrywide, the ground zero of shoddy mortgage practices, has been investigated without an indictment.
Instead we have been treated to insider trading cases involving Martha Stewart and Samuel Waksal in the Imclone insider trading case and Robert Moffat, an ex-IBM executive who fed inside information to the Galleon Group hedge fund. Bernie Madoff was convicted only because he confessed to the crimes. The SEC ignored evidence of his criminal fraud and indeed has been embarrassed by the revelations brought to light in the case.
The Unbalanced Criminal Justice System
A standard not written into the law is the preservation of a corporation deemed systemically important to the society as a whole. As a result, the criminal justice system has treated the large corporate offender with kid gloves. However, we now know that fraud was part and parcel of the current financial crisis. And as Karl Denninger has opined, the system will not recover until we clear it of corporate corruption. So, how to approach this ethical Catch 22 that may keep us in crisis for the foreseeable future?
President Obama is an attorney who is well aware of the disproportionate sentences meted out to accused and convicted minorities. He was also a constitutional law professor who understood the need for equality under the law. Yet more than two years into the financial crisis we have yet to indict, try and convict any “too big to jail” institutions. Continuing this inequity will only convince Americans that there are two sets of laws, one for favored institutions and individuals and another for the rest of us.
No one should be above the law.
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