Just How Is a Year in Prison Fair for White-Collar Crime?
(Bloomberg Opinion) -- A few months ago, Jeffrey Skilling finally got out of jail, moving from a minimum security prison in Alabama to a halfway house in Houston.
If you’ve forgotten about Skilling, you can certainly be forgiven; it’s been a long time since he was one of the kingpins of corporate America. In the 1990s, as the president and then the chief executive of Enron, he was widely portrayed as the brains behind the energy-trading company that was one of the avatars of the new economy. Among many other accolades, Enron was named “America’s Most Innovative Company” by Fortune magazine for six years running.
Then, in 2001, it was exposed as a fraud. Ben Glisan, a top executive in the company’s finance division, quickly pleaded guilty to one count. He got five years in prison. Chief financial officer Andy Fastow got 10 years. Fastow’s wife, Lea, got two years (for signing off on her family’s false tax returns).
And Skilling? After a 2006 trial, U.S. District Judge Sim Lake threw the book at him: a 24-year prison sentence and a $45 million fine. After a U.S. Supreme Court decision negated some of the charges, Lake reduced the sentence to 14 years.
Soon after Enron collapsed, a rash of other corporate scandals came to light: Tyco, HealthSouth, WorldCom and others. They didn’t end well for those in charge. Dennis Kozlowski, Tyco’s former chief executive, served 10 years in prison. Richard Scrushy, the former CEO of HealthSouth Corp., spent six years behind bars. And Bernie Ebbers, the former CEO of WorldCom, was sentenced to 25 years in prison. He’s still there.
Those were the days, my friend.
If these seem like onerous sentences for white-collar crime, it’s not because they weren’t deserved. For many employees and investors, the Enron fraud was as damaging as any Ponzi scheme — people lost their jobs and often their life savings. The same is true of the other companies that turned out to be using fraudulent means to make their numbers. No, the reason those sentences seem so harsh is because they’ve largely disappeared.
What brings this to mind is the sentences handed out Tuesday to Gary Tanner and Andrew Davenport, two men who were deeply involved in the scandal that engulfed Valeant Pharmaceuticals International Inc. Davenport was the chief executive of the now-defunct Philidor Rx Services LLC, a so-called specialty pharmacy that Tanner, a Valeant executive, ran prescriptions through in order to sell Valeant drugs at the highest possible price. Philidor was so important to Valeant’s profits that Valeant eventually acquired an option to buy the company. Davenport got $50 million from that deal, of which $9.7 million wound up in Tanner’s pocket in a classic kickback scheme.
At sentencing time, the prosecutors recommended two and a half to ten years for Tanner, and two and a half to eight years for Davenport. The federal probation office also suggested two and a half years.
Instead, U.S. District Judge Loretta Preska concluded that one year was enough — and even agreed to postpone their prison time until after the holidays! Her reasoning included “the men’s long histories of good deeds, hard work and devoted family lives before they hatched their plan,” as Bloomberg News put it.
Plus the two men were really, really sorry.
Plus Davenport has a heart condition.
When asked about the sentence, Davenport’s lawyer called it “extremely fair” — a sure sign the men had gotten off lightly. But why? Why was it once routine to give white-collar criminals tough sentences — and is now just as routine to give slaps-on-the-wrist? I can think of at least two reasons.
The first is that, as Jesse Eisinger documented in his book, “The Chickenshit Club,” prosecutors largely lost their nerve as the financial crisis approached — and that in turn affected the way judges thought about sentencing. The Enron prosecution, Eisinger noted, had not come easily; it required the formation of a task force devoted solely to Enron — plus plenty of “resources, time, intelligence and patience.”
Yet after the task force had done its work, the Justice Department and the defense bar concluded that the prosecutors had been “reckless and abusive, rather than sufficiently aggressive to meet the prosecutorial challenge.” Not even the financial crisis could move the Justice Department to form another dedicated task force.
Indeed, the only white-collar prosecution during the financial crisis took place early on, after Bear Stearns collapsed, when the Department of Justice tried two of the firm’s hedge fund managers. They were found not guilty. From that point on, the government simply stopped charging executives criminally.
This also meant that judges got used to signing off on civil fines instead of criminal sentences, even for the most egregious crimes. Angelo Mozilo, the former chief executive of Countrywide Financial, was the classic example. As much as any single company, Countrywide helped bring on the financial crisis — by giving subprime mortgages to people they knew couldn’t afford the homes they were buying — yet no one from the company was ever prosecuted. Instead, a judge signed off on a $67.5 million settlement Mozilo reached with the Securities and Exchange Commission. He’s still a very rich man.
Judges also got used to the idea that prosecutors would charge companies but not the human beings who worked for those companies. In 2014, General Motors Co. acknowledged installing ignition switches that a number of employees knew were faulty, causing at least 124 deaths and 275 serious injuries.
GM paid a $900 million fine, and several billion dollars to settle lawsuits — but none of the employees who knew about the ignition switch were ever charged with a crime. At a news conference in 2015, Preet Bharara, then New York’s top federal prosecutor, said that putting “into the stream of commerce a defective automobile that might kill people” was not a crime. I have to believe that a more aggressive prosecutor — the kind that ruled the roost 15 years ago — might have felt differently. Can it really be surprising that with prosecutors viewing corporate crimes less harshly, judges would begin to view them less harshly too?
The second reason is that the judges, who are among society’s elites, tend to have more empathy for their fellow elites than for others who may stand before them for sentencing. This past spring, the Marshall Project, a website that reports on the criminal justice system, told the story of Bernard Noble, a black man who was sentenced to an astonishing 13 years for carrying two joints of marijuana. Although he was finally sprung after advocates fought for his release, he still spent seven long years in prison.
Contrast that with a case Peter J. Henning recently wrote about in the New York Times. In Santa Fe, New Mexico, a swindler named Matthew Sample was convicted of cheating clients out of $1 million. Prosecutor wanted him to be sentenced to six years in prison. Instead, U.S. District Judge Judith Herrera gave him five years of probation and ordered him to pay back the $1 million he stole.
“I want you to keep your job, because I want you to have a good job to pay these victims back,” she said. (An appeals court overturned the sentence, but it remains unclear whether Sample will spend any time in prison.)
I don’t doubt that Tanner and Davenport, the men found guilty in the Valeant case, are good fathers and husbands, or that they’re hard workers. But they are also criminals, every bit as much as someone who robs a liquor store. Worse criminals, really. Their actions drove up the price of drugs, defrauded insurance companies and masked Valeant’s true financial condition. They also engaged in a blatant kickback scheme.
Is a year in prison really enough given what they did? The answer seems obvious to me. As the old saw goes, “You do the crime, you do the time.”
At least that’s what the old saw used to say.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. He is co-author of “Indentured: The Inside Story of the Rebellion Against the NCAA.”
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