Professor John Poulos has been a faculty member at UC Davis School of law since 1969. He has published numerous articles in the area of criminal law and introduced the law school's course in white collar crime in 1995. In addition to teaching at King Hall, Professor Poulos functions as a consultant for California firms defending white collar criminals. Prior to joining the faculty at King Hall, Professor Poulos was a general trial lawyer in California for seven years. During that time, he tried four to five fraud cases.
Q. From the time that you began practicing to the present time, what major changes have you seen in terms of what types of white collar crimes are being committed?
A: For some period of time, we have been seeing more white collar crime being committed by corporations, I am not sure if it is because the justice department, for example, is prosecuting more or whether there is an indeed an increase. I do think with the advent of technology, however, the opportunities for white collar crime have increased manifold. For example, a lot of computer crime, which we loosely categorize as white collar crime, is one such area of increased opportunity. Internationalization of the economy has led to more opportunities for white collar crime. Until the federal government changed the sentencing of white collar criminals, the draconian sentences for what one would call regular or street crime drove many people from street crime to white collar crime because it gave them more rewards for less risk.
Q. What major changes have you seen in terms of who is committing white collar crimes (company leaders, manager, employees, consultants)?
A: Today, we are uncovering a lot from the high echelons of the corporate structure. One thinks of Enron or Arthur Andersen as exemplifying that phenomenon. Certainly, one sees a lot of it and this has had tremendous impact on investing and the way people regard corporate governance.
Q. What major changes have you seen in terms of the social harm or impact caused by such crime?
A: While violent crime frequently has terrific impact on the victims of that crime, it is usually fairly limited. But when you have a savings and loans scandal as we have seen in the past or an Enron or an Arthur Andersen, those crimes affect millions of people. Enron impacted large, large numbers of people. These people were impacted either directly or indirectly by the corporate malfeasance in the Enron case. Many retirement funds were gravely damaged by investing in Enron. In a way, white collar crime, in terms of the number of its victims and the devastating impact on its victims, ranks right up there among even the most heinous violent street crimes imaginable.
Q. So, if you were to define the most socially harmful category of white collar crime, would it be corporate crime like you described above, or something else?
A: I have two thoughts on this. One of the most devastating forms of white collar crime that I see is fraud on the elderly. It occurs with alarming frequency against our elder citizens who are not very well equipped to handle the kind of 'sells' that go on with these white collar fraudulent schemes. Criminal law really needs to focus on protecting the most vulnerable among us from losing money that they can ill afford to lose.
The other is the sheer mass of injuries inflicted on investors in cases like Enron and Arthur Andersen which adversely impacts the system of investing in the US. Part of the slow recovery of the economy is the effect of white collar crime on the investment environment.
Q. Do you have any particular suggestions about how crime against the elderly could be reduced such as changes in government policies, consumer awareness, or stricter punishment?
A: A multi-level approach is most effective. I do not think that one can pass a law against a particular type of conduct and assume that conduct will therefore be eliminated or reduced. Passing a law about something has very limited effect. It has very important effect in certain respects, but certainly it would be very naïve for someone to believe that you could eliminate a crime by passing a statute making that kind of conduct illegal. It has to be approached from a variety of different angles. There are environment issues, there are learning issues, there are opportunity issues, etc.
We certainly have sufficient laws in place to protect senior citizens from fraud. Fraud is outlawed at both the federal and state levels and I seriously doubt that we need any changes in the law. Changing the law certainly wouldn't be my first suggestion. My first suggestion is to educate seniors insofar as possible. I suggest helping businesses understand that this is a concern and elicit their cooperation. We should also make prosecutors more available to prosecute these kinds of crimes. During tough budget times, many of the white collar crimes such as those against elders are not vigorously prosecuted. Our society's paradigm of criminal law is violent crime and given the choice, enforcement dollars are usually spent on violent crime rather than white collar crime. I think that is a mistake.
Q. To what do you attribute the disproportionate focus put on violent criminal prosecution and punishment?
A: We live in culture that almost admires violent crime. It is hard to avoid violent crime or its aftermath on TV. When I do occasionally channel surf I turn from one police show or lawyer show or doctor show to another, all of which have criminal violence as their underlying theme. We have a steady need, apparently, to talk about police, lawyers, and pathologists. Now there is a spate of criminal investigation television programs talking about what kind of information you can extract or extrapolate from a corpse. Apparently these programs are doing pretty well because they continue to be shown on television.
Q. So you think our prosecution of crime mirrors a set of social priorities?
A: I think it mirrors a set of social priorities about violence. We are fascinated and repulsed by it at the same time. That is not an uncommon reaction to have. If the focus of a society is on violence, then nonviolent crime seems to have lesser importance to us and is therefore given lesser enforcement when tough choices have to be made. We are in a time when there is a lot of competition for the tax dollars in any government agency. It is not surprising to learn that those tax dollars get spent on violent crime over white collar crime. I think this has been true from the beginning.
Q. In your earlier answer, you focused on the economic harm caused by white collar crime. Do you think it also has impact on entrepreneurial activities? Put differently, do you think white collar crime serves as a disincentive for people to act in entrepreneurial ways like starting new businesses?
A: If I were starting a large business enterprise, given the existing rules about corporate criminal responsibility laws, I would be very concerned with white collar crime issues. I would want to make sure that we had good corporate compliance and that the corporation was good citizen. Corporations that engage in legally questionable behavior damage themselves fiscally. I am not sure that white collar crime is a deterrent to entrepreneurial activity, but it does increase the costs of doing business and makes companies' services and products more expensive. It is better for the corporation, the consumer, and society in general to ensure that corporations are good citizens.
Q. Do you think that criminal activity such as the large scale corporate crime is motivated by a special set of incentives that people in such situations face? Asked differently, is the amount of white collar crime occurring in this area the product of rational decision making or some other factor?
A: I think part of it is cultural. When salaries for high corporate officials get extraordinarily high, I doubt that anybody, no matter how good they are, is worth that much. I think that it is wrong for a corporation to pay people those amounts of money. I think it is tantamount to mismanaging the corporation from a stockholder's perspective and something that should be moderated.
When you get into a situation in which you have corporate executives earning millions and millions of dollars, I think it connotes the message that they are really above the law. Their job is to make money, to make the value of the company's stock go up, etc. and I think that was part of the motivation behind such entities as Enron and Arthur Andersen. It's making the value of the stock go up even though they do so with means that are fraudulent. They don't see it as crime. They begin to see it as part of business strategy.
I am going to say something that sounds a bit ludicrous, but I think that Enron was run by a bunch of incompetents. The CFO, for example, was a genius in creating transactions that made debt look like cash flow, but he was absolutely incompetent in running a corporation in a way that would result in the value of the stock being increased over the long term. In a business sense, they were incompetent but as flim-flam artists they were geniuses. But that is what white collar crime is all about.
Q. Do you think that individuals involved in these crimes accurately assessed the risk of getting caught and punished?
A: I cannot imagine that they reflected much on the criminality of their behavior as they were doing it. The way those schemes were constructed necessarily meant that there were a lot of people involved. Generally, the more people that know of conduct, the more likely it is that the conduct will be disclosed. I don't think that they thought that they were going to be caught. Furthermore, I think that some of them didn't think it was wrong. There are very fine lines between creative financing and white collar crime. It is not our purpose here to talk about those lines, but I am guessing that many of the people involved in some of the more recent white collar crime operations didn't actually think of themselves as committing criminal behavior.
Q. What more do you think businesses could be doing to better protect themselves from this type of criminal activity?
A: I absolutely think they could do more. One of the shifts that occurred that permitted a lot of white collar crime was the shift away from the board of directors to corporate officers. In my period of dealing with white collar crime, there was a dramatic shift away from boards of directors to the all-knowing CEO. The effect was that there were no real brakes or checks or counterbalances to the CEO's power. The board of directors became rubber stampers. The CEO got what she wanted and the board of directors simply went along with it.
I fault the boards of directors of many corporations for that. There became a culture of rubber stamping of what the high corporate officers were doing. As long as it looked good on paper it was fine. Businesses should make sure that we have corporate boards that are again looking after the interests of the shareholders. At one point, I think we had that. I think it is somewhat attenuated now and it should be renewed and reinforced and supported.
Q. White collar crime is currently the subject of both criminal and civil prosecutions. Who are the most important Plaintiffs in the civil cases?
A: The retirement funds, beyond all doubt. Something like the California State Retirement System is one of the largest stockholders in the nation. They have so much financial power that they can actually affect markets. Other large retirement funds wield immense power in financial markets and that also suggests that there may be a change. In other words, it is institutional investors. You and I, no matter how much money we have, as ordinary individuals cannot affect markets. I don't think it is possible for even the wealthiest man or woman, acting individually, to affect markets like institutional investors can.
I am singling out retirement funds because they can be a very important power in terms of restructuring corporate governance and corporate behavior. They are beginning to talk about corporations meeting certain requirements before they will invest in them. If somebody like one of these funds decides not to invest in a particular corporation, it can damage the corporation's financial health. Maybe there is countervailing power here - the institutional investors are probably more powerful than all the US attorneys combined if that is worked wisely and well.
Q. So is it almost a free market solution to the problem of white collar crime?
A: I believe in free market solutions and think they work best when augmented by criminal law, but free market systems, in my way of thinking, are the most efficacious.
Q. Following that chain of logic, would you say that civil prosecutions and damages from those cases are actually a greater form of deterrence than criminal prosecutions?
A: That is a very interesting question and my answer is 'both.' I see no purpose in emphasizing one over the other. Many white collar crimes have a civil analogue. For example, RICO prosecutions can be criminal or civil. One of the theoretically interesting things about this is that when you do have a certain conduct which can be both criminal and civil, you do tend to see a blurring of lines ultimately in the law that is applicable, for example, to criminal cases. There becomes a blurring of the distinction between criminal and civil law. I think that has to be sensitively handled and given considerable thought, but by and large I think that the more remedies that are out there, the better. And certainly, the free market system does make civil remedies attractive in certain circumstances.
Q. The blurring of the lines refers to what?
A: I am talking about the law. The law blurs. For example, in RICO cases you see in case law that a civil RICO case can be direct precedent for a criminal RICO case and vice versa. In some instances there would be a reason to draw sharp distinctions between those two lines, and that sharp distinction is not being drawn, and therefore the line is being blurred between civil RICO and criminal RICO. There are certain costs to that.
Q. What kind of costs?
A: Criminal law has as its purpose punishment - a statement about the moral conduct of a defendant whereas I think civil law is not so concerned. If we lessen the burden of the prosecution, we begin to punish people where it may be questionably appropriate. In a civil case, the civil law has its deterrent effect undoubtedly, but the purpose there is recompense for losses inflicted. For example, the UC Retirement System filed a lawsuit against Enron which is still pending.
Q. How would you change the current punishment scheme to align more effectively with the drivers of criminal behavior discussed above?
A: I will focus on federal criminal law. The interesting phenomenon that has occurred in federal criminal law has been drastic change in the punishment of white collar crime in the courts. When I was first practicing in early 1960's, white collar crimes were not punished in a very vigorous way. The punishments were modest and reflected a cultural belief that the kind of injury inflicted was moderate. In a sense, stockholders were thought of as being remiss if they invested in a corporation that engaged in questionable conduct. It was a whole culture that supported the kind of robber baron view of the corporate entity.
That has changed. The adoption of the federal guideline sentencing system has, in effect, increased the punishment for white collar crime dramatically. No longer can one engage in white collar crime and be treated as the rogue uncle in a family. Now white collar criminals are treated essentially equivalently to violent criminals because there is a recognition that the harm they inflict on society and on the victims is every bit as worthy of our attention as street crime. In fact, some of the sentencing guidelines are getting to the point where they may be draconian.
Marla Pleyte is a student at U.C. Davis Law School.