Do White-Collar Punishments Go Too Far or Not Far Enough?


Flipping through the channels on my television in the middle of the afternoon, I've often become enamored with a CNBC documentary, American Greed. On a weekly basis, the series highlights a convicted crook, scoundrel, or thief who has defrauded investors of thousands -- if not millions -- of dollars and goes through the step-by-step process of how their plot unfolded and how they were finally caught. Needless to say, I was staggered to find out on American Greed's homepage that there are 66 episodes! Sixty-six!!!

That figure seemed rather high at first, but the further I thought about it, the more it made sense. As I noted just last week when I highlighted the former CEO of Advanced Medical Optics, James Mazzo, as my CEO Gaffe of the Week for his alleged role in the insider-trading case that resulted in the conviction of two former baseball players, the sheer volume of white-collar crimes is rising dramatically -- at least those being prosecuted, that is!

Fraud: It's what's for dinner
In just the last two months, we've seen various employees at Nomura Financial (NYS: NMR) charged with insider trading, as well as its CEO resign; we've witnessed the prosecution of six traders from UBS (NYS: UBS) and JPMorgan Chase (NYS: JPM) who front-ran trading in the acquisition of six companies from 2006-2008; a Chinese billionaire's firm has been charged with insider trading in connection with CNOOC's (NYS: CEO) buyout of Nexen; and Barclays (NYS: BCS) only admitted that it helped rig the LIBOR, which is the benchmark from which $10 trillion worth of mortgage, auto, and credit card interest rates are set... that's all!

That has all happened within just the past two months! What the heck is going on here?!

My initial theory behind the recent influx in financial crimes was that regulators weren't prosecuting nearly enough of these white-collar criminals, and that their sentences must have been short enough to deem the risk of getting caught worth taking. Well, guess what... I was wrong!

Lock 'em up and throw away the key
According to The Wall Street Journal, between 1993 and 1999, only 23 cases of insider trading were brought before Southern and Eastern N.Y. District Courts. Of those 23, less than half ended with prison terms. For those who did go to prison, the average sentence was 12 months. Between 2000 and 2006, the number of cases rose to 34, with 65% of those individuals going to prison for an average duration of 27 months. Interestingly enough, in a shorter time period, from 2007 through September 2011, 51 prosecutions had been made with that same 65% conviction rate averaging a 36-month sentence.

Bloomberg reports an even more stunning figure of 71 allegations of insider trading from Manhattan prosecutors with 65 convictions (a 92% success rate) between Aug. 2009 and July 2012. In short, we're seeing more convictions and stiffer penalties -- and yet would-be white-collar thieves appear undeterred.

From a legal perspective, the Department of Justice went above and beyond its targeted goals in 2011 to catch white-collar criminals in the act. At the beginning of the year, the WCC division had a goal of dismantling 250 criminal enterprises engaging in white-collar crime -- it actually handled 340! So, if the DOJ is stepping up its game and these cases are becoming more visible (e.g., Bernard Madoff, Raj Rajaratnam), why are there more white-collar criminals willing to gamble on being caught?

The lifestyle and lack of punishment perpetuate the trend
Personally, I think it has a lot to do with the lifestyle perception behind the crime and the preemption to reduce fines and jail time based on cooperation and financial magnitude.

Let's face it -- in spite of an increase in convictions for white-collar crimes, the majority of DOJ and local law resources is spent on fighting violent crimes. With the law of smaller numbers on criminals' side, the temptation to live large is definitely present. Perhaps more damaging to prosecutors has been their willingness to reduce insider-trading cases down to mere fines in order to save time and money, which, I feel, sets a poor precedent for future white-collar criminal cases.

Nothing is more damaging, however, than the meager jail sentences handed down by the courts as determined by the "magnitude" of the crime. Historically, higher dollar amounts in terms of fraud commanded stiffer sentences. The way I see it, this is like trying to slap someone on the wrist for robbing one individual, but we'll send someone to jail for three years if they robbed seven people. A robbery is a robbery, and a white-collar act of fraud is a white-collar act of fraud, whether one or 100,000 people are affected.

As far as I'm concerned, the courts are doing the DOJ a disservice with their menial sentences and fines. These reduced sentences and slaps on the wrist are perpetuating the image that white-collar crimes will land you in "Club Fed" for a short time before returning you to your previous life. Until punishments become harsher and an effort is made to magnify the risks of breaking the law, this is unfortunately a trend that looks to remain on the rise.

What's your take on white-collar crime punishment? Are things too harsh, too lenient, or perfect as they are? Share your thoughts in the comments section below with your fellow Fools.

With banks being a common source of scandals in recent years, our analysts dug deep into the nation's biggest banks to come up with the one big bank built to last. Find out the identity of this bank, as well as their reasoning behind the pick, in our latest, free, special report. Click here to get your copy.

The article Do White-Collar Punishments Go Too Far or Not Far Enough? originally appeared on

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.