Crime and Punishment: Sentencing in Financial Fraud Cases

While investigating fraud for more than a decade, I have consistently been amazed by the disparity among criminal sentences in financial fraud cases. Of course, there are many facts that go into a sentencing decision, and so it is difficult to make an apples-to-apples comparison of sentences between cases.

However, it’s clear to me that there is a wide range of sentences that are not necessarily fair to either the victims or the fraud perpetrators. We can’t discount the fact that determining a sentence is a complex process. There are many factors that come into play, so simply assessing the number of years at the end of the process is a little simplistic.

Yet the fact remains that disparities in sentencing should be examined closer. Lawmakers, judges, and prosecutors owe it to consumer and victims to work toward a system that is fair and equitable to all parties.

Prosecuting and Sentencing Financial Crimes
Although cases of corporate fraud and embezzlement have received a proportionately greater share of media coverage in the last five to seven years, only a fraction of all cases are actually investigated by law enforcement. With limited resources and a tendency to focus on violent crimes, white collar criminals are usually only prosecuted criminally for their deeds if the crimes are large enough or egregious enough to warrant scrutiny by law enforcement.

When plea deals are reached, or convictions are obtained, the sentencing begins. Often, executives who do not have significant direct involvement in the financial crimes receive lighter sentences. Those who choose to cooperate with prosecutors and testify against other defendants also tend to receive lighter sentences.

In general, sentences for financial crimes are much longer and harsher today than they were in the 1980s and 1990s. Michael Milken of junk bond fame pleaded guilty to securities fraud and conspiracy in 1990. He was given a 10-year sentence, but was let out of prison after only 22 months because of his cooperation with prosecutors and good behavior while in prison. Experts agree: His sentence for the same crimes today would have been much harsher.

Part of the change in sentences has to do with the publicity of fraud cases and the victims of fraud. In earlier years, stockholders and corporate victims were largely nameless and faceless to the general public. But as more ordinary consumers become involved in the stock market through their retirement accounts, they see a personal connection to fraud.

Investors are now real people, just like them.

Sarbanes-Oxley Impact
Following the now-famous corporate scandals of Enron, Tyco, and WorldCom, the Sarbanes-Oxley Act of 2002 sought to protect retail investors from financial statement fraud. Sentencing guidelines have changed dramatically because of Sarbanes-Oxley. For example, wire and mail fraud previously carried maximum five-year sentences, and that was increased to 20 years under the legislation.

The increase in the length of sentences for white-collar crimes now puts many of these crimes ahead of crimes such as drug trafficking and manslaughter. Some question the fairness of this. While financial crimes can cost millions or billions of dollars, to some it still seems irrational to make those prison sentences harsher than the sentences for violent crimes. Others recognize the widespread financial devastation even one white-collar crime can cause, and hope that lengthy sentences will serve as a powerful deterrent.

Sentencing in Practice

Consider just a few notable cases:

Paul Humphreys, the former CFO of Safety-Kleen hazardous waste disposal company, was sentenced to almost six years in prison after pleading guilty to securities and bank fraud charges. The $267 million fraud occurred between 1998 and 2000, and involved artificially inflating earnings to meet earnings targets and manipulate the stock price.

Bernard “Bernie” Ebbers, the former CEO of WorldCom, was convicted on nine criminal counts related to the company’s $11 billion accounting fraud. He received 25 years in prison.

Martha Stewart received a sentence of five months in prison, and almost six months of home confinement after her conviction on charges of conspiracy, obstruction of justice and making false statements related to a personal sale of ImClone Systems stock. Jeffrey Skilling, former Enron CEO, received a sentence of more than 24 years in prison following his conviction on 19 counts of fraud, conspiracy, insider trading, and lying to auditors.

The one thing that all of these sentences have in common is that they have a very wide range.

How do we decide what is really fair in white-collar crime cases? Of course the amount of money lost by innocent victims plays a part in sentencing. Naturally, mitigating factors play a part too, as defendants tout their charity work, clean criminal histories, and repentance.

It is common to hear of cases of embezzlement or other corporate fraud in which the perpetrators receive what appears to be unusually light sentences. Yet there is really no clear line between fair and unfair when discussing sentences for white-collar crimes.

The Goal of Sentencing

One big question remains: Does the threat of prison terms deter executives from committing wide-scale financial frauds? In my opinion, it does not.

An executive engaging in accounting fraud (or considering committing fraud) is typically not planning on getting caught. Therefore, stricter sentencing guidelines wouldn’t seem to have much of an impact on an executive’s propensity to commit fraud. If an executive isn’t planning on getting caught, a potential prison term of 10 years versus five years really is inconsequential.

If the goal of sentencing is really punishment over deterrence, I think the longer prison sentences are meeting that goal. In some ways, society needs protection from these criminal minds who cause widespread financial damage to so many.

No perfect answer exists when it comes to white-collar crimes and prison sentences. The system is still evolving and will likely continue to do so for a long time to come. What is important to recognize is that white-collar crimes can have many victims and can cause widespread damage. For that, stiff sentences to punish and possibly deter the fraud perpetrators are likely necessary, and lawmakers should work to make those sentences fair and equitable.

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