Published on Sunday, June 2, 2002 in the New York Times
Downturn and Shift in Population Feed Boom in White-Collar Crime
by Stephen Labaton
WASHINGTON The bursting of the stock market bubble, combined with the changing face of the American population, has led to a surge in business fraud and corruption prosecutions and investigations.
Even as the rate of murder, robbery, assault and other types of violent and property crimes has declined or flattened in the last decade, there has been a marked increase in accounting and corporate infractions, fraud in health care, government procurement and bankruptcy, identity theft, illegal corporate espionage and intellectual property piracy, federal and state officials say.
With increasing frequency, white-collar corruption seems to be the crime of choice of the baby boom generation.
A week does not go by without news of investigations of blue-chip and start-up companies, the most prominent recently include Adelphia, Enron, Global Crossing, Kmart, Qwest Communications International, Schering-Plough, WorldCom and Xerox. Many of those companies' accounting firms are also facing intense scrutiny, perhaps most notably Arthur Andersen, which is in the middle of a criminal trial in Houston.
Corporate corruption cases are inevitable during the trough of the boom-bust economic cycle, when disgruntled investors and company whistle-blowers work with prosecutors and the support of an outraged public to unveil the excesses of market euphoria. The phenomenon last occurred during the savings and loan crisis a decade ago, but it also happened after a wave of corporate scandals in the 1970's, and to a lesser extent during the Great Depression.
But this wave is different. Some statistics indicate that these fraud cases were actually on the rise during the boom cycle, and criminal law experts say that the nature and types of these crimes differ significantly from those of earlier periods.
And while the sociology of crime is imprecise, experts attribute that changing nature of crime to demographic shifts and economic forces.
"There have always been crooks, and Enron's chief executive hasn't gone to Sing Sing as the head of the New York Stock Exchange did in 1938," said Alfred D. Chandler Jr., the Pulitzer Prize-winning business historian at Harvard, referring to Richard Whitney, the patrician president of the exchange who went to prison wearing a three-piece suit for market abuses originated in the 1920's. "But there are critical differences between what we are seeing now and what we have seen earlier."
For one thing, technological advances like the Internet have contributed substantively to the rate of financial crime cases. Equally important, in the last decade demographic changes, like the aging and growing prosperity and education of the population, have played a role.
"What we are seeing in a variety of areas is fraud on the rise at the same time other crimes are going down," said Joseph T. Wells, a former F.B.I. agent and founder of the Association of Certified Fraud Examiners, which trains members of government, corporations and accounting firms in ferreting out fraud. "There are at least two reasons. Crime is largely a factor of age, and fraud is the crime of choice of the older perpetrator, so as the society ages, you have, and should continue to see, an increase in fraud cases.
"A second reason is that the education level of society has come up in the last 20 years, and the message is clear in the mind of the better-educated public that if you want to commit a crime, fraud is the way to go," he added. "The take is better, and the punishment generally is less."
Peter Goldmann, editor of White Collar Crime Reporter, a trade publication for lawyers and investigators, said, "White-collar crime is spinning through the roof. It's spinning new varieties daily and the incidence and amounts of money being stolen are incredible."
Some experts also point to changes in the way top executives are paid especially the proliferation of potentially valuable stock options that have created new and perverse incentives for senior executives to manipulate financial statements for their personal short-term gain.
"The temptations created by stock options are much greater for earnings manipulation," said Samuel L. Hayes III, an emeritus professor of investment banking at Harvard who sits on several corporate boards. "There are greater benefits that accrue to management." By contrast, Professor Hayes said, there were few prosecutions during the 1920's because few laws were available to prosecute the kinds of abuses that contributed to the Depression. "It was more of the Wild West," he said.
The government does not keep precise statistics on white-collar crime, primarily because there is a debate about what constitutes such crime, and general statutes prohibiting mail and wire fraud, perjury and obstruction of justice are used against corporate offenders as well as street criminals. Nonetheless, there are indicators of the trend beyond the daily drumbeat of headlines:
Because not every fraud is detected, it is hard to know whether there are more instances of fraud or the enforcement level is increasing, though experts say the heavier caseload is indicative of broader trends.
"While the statistics are hard to come by, we are seeing what appears to be bigger and more frequent frauds," said W. Steve Albrecht, associate dean at the Marriott School of Management at Brigham Young University.
"People commit fraud because of three factors: financial pressure, the perception of an opportunity, and rationalizing it as O.K. This is the fraud triangle," he said. "All three of these elements have been increasing. Being at the down part of an economic cycle exacerbates the problem, but we were seeing a lot of it in the good times as well."
Copyright 2002 The New York Times Company