Crimes Without Criminals

Image for post
Image for post

The corporation is a most wonderful creation, capable of crypsis and metamorphosis depending on the situation. Over the years, the Supreme Court has endowed the corporation with some of the inalienable rights of an individual. Unsurprisingly, corporations were originally given the right to own property and to sue and be sued just like individuals. In the late 1800s, the Supreme Court ruled that corporations were also covered by the 14th Amendment’s equal protection clause, opening the door to endowing First Amendment rights of free speech to corporations. The current Roberts Supreme Court has expanded those corporate First Amendment rights even further, allowing them to engage in political speech in its Citizens United decision and offering them religious liberty protections in its Hobby Lobby decision. But when charged with criminal wrongdoing, the corporation miraculously transforms to an “artificial person”, incapable of malicious intent and incapable of receiving the same sanctions of actual individuals convicted of crimes. Instead, at most, criminal corporations receive the equivalent of civil penalties for individuals. We have all heard of “victimless crimes”, but when it comes to corporate criminal behavior, what we get is crimes without criminals.

This week, as part of the Republican effort to pay back their corporate overlords before they lose control of the DOJ, two of the most notorious corporate crimes of the last decade reached something approaching resolution. In both cases, the corporations involved admitted to criminal wrongdoing which, in one case, led to the unnecessary deaths of hundreds of thousands of people. That case involved Purdue Pharma, the maker of OxyContin. Purdue pleaded guilty to three felonies, including violating a federal anti-kickback statute over an 8-year period and agreed to pay over $8 billion in a combination of fines, forfeiture, and civil settlements. The chances that anyone will see much of that $8 billion seems remote, as Purdue has already declared bankruptcy, is also facing ongoing litigation involving multiple states and individuals, and only has about $1 billion in current assets. There is a reason why Purdue has so few assets and that is primarily because the Sackler family, which controlled Purdue Pharma and one of whom actually developed OxyContin, extracted nearly $11 billion from the company as it became clear that Purdue was going to face enormous legal consequences for its decades-long fraud.

Purdue Pharma’s success with OxyContin was built on a mountain of lies. From the beginning, the company knew that the drug’s effects did not last as long as the 12 hours that it claimed in its promotional material. It was marketed as having “less than 1%” chance of becoming addictive, a figure that was entirely fabricated. The company failed to report the abuse of the drug that it knew was occurring. The company’s executives continually blamed the victims of the addiction they knew their drug had created. In 2007, Purdue was finally forced to pay a $600 million fine for misrepresenting the dangers of OxyContin and three of its executives, none of them Sacklers, also pleaded guilty to a misdemeanor charge and agreed to pay $34.5 million in fines. At the time, the fine was the largest fine in US history for a pharmaceutical company. As part of that agreement, the company agreed to refrain from any future illegal activity.

Yet it was barely two year later, in 2009, when the company began paying doctors and an electronic health records company in the kickback scheme that resulted in these latest guilty pleas. The kickback scheme was created in response to a demand from the Sacklers to generate even more revenue despite slumping sales. The Sacklers signed off on a marketing plan in which “Purdue sales representatives intensified their marketing of OxyContin to extreme, high-volume prescribers who were already writing ’25 times as many OxyContin scripts’ as their peers”, according to the DOJ.

The settlement does not charge any of the Sacklers with a crime but it also does not preclude them from being criminally charged in the future. Similarly, most of Purdue’s co-conspirators in creating the opioid crisis are also walking free. The cartels of drug distributors (McKesson Corporation, Cardinal Health, and AmerisourceBergen Drug Company) and pharmacies (Walgreen’s, CVS, and Walmart) were all well aware of the rampant abuse of OxyContin and continued to facilitate it, even lobbying Congress to keep the DEA from fully investigating the suspicious sales of hundreds of millions of opioid pills that were padding their bottom lines. They have received nothing more than slap-on-the-wrist fines for being what one DEA investigator called “drug dealers in lab coats”.

Unless a Biden DOJ wants to revisit this agreement, it appears that the only chance that an actual human being will be held criminally responsible for the deaths of hundreds of thousands of people lies with states’ Attorneys General. Massachusetts AG Maura Healey has declared that she will continue to fight for justice that “requires exposing the truth and holding the perpetrators accountable, not rushing a settlement to beat an election. I am not done with Purdue and the Sacklers”. Let’s hope she can be true to her words.

The second major case that the DOJ settled involved Goldman Sachs and its part in the 1Malaysia Development Berhad (1MDB) fund scandal, perhaps the largest financial fraud in history. According to the New York Times, Goldman admitted in court that “Goldman employees…took part in a scheme to pay $1 billion in bribes to foreign officials. The bank, in turn, arranged the sale of bonds to raise $6.5 billion that was intended to benefit the people of Malaysia but was instead looted by the country’s leaders and their associates”…The bank itself will pay more than $5 billion in penalties to regulators around the world…And it has moved to recoup or withhold more than $100 million in executive compensation, a rare move for a Wall Street bank”. As you might expect from William Barr’s DOJ, the settlement is highly advantageous to Goldman, with one analyst calling the $2.3 billion fine for Goldman “virtually meaningless”, an amount slightly less than their 2nd quarter earnings this year.

Goldman’s involvement with 1MDB began with one of its partners, Tim Leissner, began discussing business ventures in 2009 with Jho Low, a shady but flamboyant businessman. Leissner’s initial efforts to work with Low were rebuffed by the bank’s compliance division who could never identify where Low made his money and who declared “To be clear, we have pretty much zero appetite for a relationship with this individual”. But Goldman, searching for new sources of revenue in the wake of the financial crisis, was desperate to increase its presence in Asia. Finally, in the summer of 2012, Goldman helped 1MDB to sell $3.5 billion in order to buy certain power assets. This initial deal also did not pass the smell test, with an independent evaluation of the deal sought by Goldman reporting that 1MDB was vastly overpaying for the assets in a potential corruption scheme. In addition, although apparently having no formal role at 1MDB, Low effectively controlled the fund. After the purchase, 1MDB immediately wrote down the value of the assets they had just paid for by $400 million and the prior owner of the power assets then donated $170 million to the Malaysian Prime Minister’s foundation.

Despite all these red flags, Goldman considered the deal an enormous success and helped 1MDB raise another $3 billion the next year in 2013. Altogether, Goldman charged 1MDB $600 million for its help, the equivalent of around a 10% fee. Not only were those fees unusually high but Goldman was also in the unique and ethically challenged position of being an adviser to and financer of the deals. Despite all this, the deal with 1MDB won Goldman’s highest internal award for “solving an important client’s problem through outstanding firmwide cooperation”. Low was able to meet with Goldman CEO Lloyd Blankfein on multiple occasions and Gary Cohn, president of Goldman at the time, was kept personally informed of the status of the deals by Mr. Leissner and personally signed off on them.

In 2014, 1MDB announced that it was $10 billion in debt and by 2016 the embezzlement scheme had totally unraveled. An investigation showed that the Malaysian Prime Minister, his cronies, and Mr. Low had stolen anywhere from $2.7 billion to $4.5 billion from the fund. Mr. Low disappeared and Mr. Leissner admitted to bribing Malaysian officials in order to ensure the deals closed. Leissner has also admitted to using Goldman stationery in order to help Mr. Low and the Malaysian Prime Minister open up overseas bank accounts used to stash some of the stolen 1MDB money. The DOJ investigation reports that Leissner misled others at Goldman about the 1MDB deals but faulted Goldman executives for taking Leissner’s statements at “face value”.

Goldman Sachs continually downplayed its role in the 1MDB even as the facts around this enormous financial scam began to pour out, especially in 2016. Perhaps coincidentally, lifelong Democrat and president of Goldman, Gary Cohn, surprisingly decided to join the Trump administration. His apparent goal was to shepherd through the enormous corporate tax cut for his institutional clients but one has to wonder whether he was also trying to ensure the investigation into 1MDB did not go too far up the Goldman executive chain. The case was originally being handled by US Attorneys in Los Angeles who were determined to try and flip Mr. Leissner and get his cooperation in prosecutions of others involved in the scheme. When those attorneys wanted to indict Mr. Leissner in order to pressure him, the DOJ in Washington stepped in and quashed that idea, supposedly under the theory that Leissner’s admission that he had misled Goldman officials would hurt potential prosecutions of the firm. Instead, Rod Rosenstein intervened and handed the entire criminal investigation into 1MDB to the US Attorneys in Brooklyn. It was that group of US Attorneys, now working for a Trump loyalist and Barr protege installed last July, who managed to negotiate this plea deal which benefits Goldman.

Around the same time that US Attorneys in LA were working on the 1MDB case, the mysterious Mr. Low was sending $9 million to Trump’s deputy campaign manager, Elliott Broidy, in order to get the Trump administration to drop the case against 1MDB. Broidy did manage to get the Malaysian Prime Minister a meeting with the President in 2017 but not the golf outing with Trump that Broidy had promised the Prime Minister. Broidy pleaded guilty to violating the Foreign Agents Registration Act on the same day the Goldman plea deal was announced.

It was not always this way. It seems hard to believe that less than 50 years ago the way we dealt with white collar crime was to actually throw the executives who committed the crimes in jail. The whole idea of charging the corporation instead of the individuals committing the crimes was a fluke. In 1975, the chairman of United Brands inexplicably committed suicide. An investigation into his death revealed that chairman had authorized United Brands to a $2.5 million bribe to the Honduran President. With the actual, living criminal already dead, two clever government lawyers decide to charge the company instead, winning a whopping $15,000 fine from the company.

After that, it soon became standard to charge both individuals and corporations when crimes occurred. In the 1980s, for example, both Michael Milken and Drexel Burnham Lambert were charged. Less than 20 years later, however, the problems with this approach of criminally charging the company became apparent. Arthur Andersen, the accounting firm complicit in Enron’s fraudulent business, was convicted of obstruction of justice. The conviction meant the firm lost its accounting license and thousands of Arthur Andersen employees around the world who had no connection to the fraud lost their jobs. The result is now negotiated deals where corporations pay fines while either admitting or not admitting guilt. In reality, those fines a paid by the corporate shareholders.

Meanwhile, prosecutions of the individuals actually committing these corporate crimes plummeted, because going to trial against an actual individual is a high-risk maneuver compared with negotiating a plea deal with an “artificial person” in the form of a corporation. Today, an executive’s chances of getting prosecuted are minimal unless his firm collapses entirely, in which case there is no corporation to charge and no jobs to be potentially lost. At least in the Goldman case, Leissner and one of his associates are being criminally charged. But in the grand scheme of the embezzlement, Leissner is probably a small fish. Similarly, there is a reason that only one top banker was ever convicted in the wake of the 2008 financial collapse.

These two cases, the Purdue Pharma and Goldman Sachs settlements, show just how badly our criminal justice system has failed in dealing with corporate crime. Hundreds of thousands of deaths and the largest embezzlement scheme in financial history result in a paltry two criminal cases against minor individuals. Until we go back to charging and convicting senior executives, this criminal activity will never stop. And if that means loosening up the incredibly high standards for conviction which now rely on the almost mystical ability to discern intent, then so be it.

Originally published at https://thesoundings.com on October 25, 2020.

Thoughtful discussions on politics and economics with some sidelights in photography and astronomy.

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store