In response came the inevitable question, ”Do you have insurance?… the cost is five hundred dollars a day.”
The point here is not that Andrade or Rummel or Terry are innocent victims. They committed crimes, and deserve to be punished. The issue is whether the punishments they received were fitting and just compared to how evil or harmful their acts were—and compared to the punishments that corporate crooks get for acts that are both more evil and more harmful. And, this comparison can’t ignore the differences in the criminals’ starting points. The recent corporate crooks committed their acts after receiving all the advantages that society has to offer. Andrade and company committed their acts in the face of need and of the absence of either viable alternatives or treatment for their problems.
Contrast Andrade with Fastow, who as chief financial officer (CFO) was at the heart of the command center of Enron’s financial fraud. Fastow was hired at Enron because of his expertise in structured finance, a legal device for taking financial risks off the balance sheet. For example, according to Fortune magazine, “companies often set up separate entities to finance construction projects and offload the risk of something going wrong.” Fastow came up with ‘creative’ ways to use structured finance in order to book loans from banks as sales to impress Wall Street with Enron’s revenue growth, and do so in a way that accountants at Arthur Andersen would approve in their audits. Under the law, the separate company – a ”special purpose entity” - is considered ”independent” if only 3% of outside capital is truly ”at risk.” Effectively, then, Enron would create a
"separate" firm mostly from their own money, then the ”separate”’ entity would borrow money and have the loan on its books. It would pass the money to Enron by pretending to buy something in return for Enron pretending to render a service to the separate firm: “The commodity trades in effect canceled one another out, leaving Enron with a promise to pay a fixed return on the money it received – exactly like a loan with interest!”
As Enron needed more and more money to appear to be growing (and pay interest on earlier deals), Fastow needed to create more and more “special purpose entities.” He became a partner in some of these separate companies himself, creating an obvious conflict of interest described by one skeptical Enron executive as "heads the partnership wins, tails Enron loses" – an accurate assessment given that Fastow reaped $50 million on his investment. Gradually, he included friends, family and co-workers as partners; people at Enron didn’t want to blow the whistle because they wanted to be in on these lucrative deals. Banks, too, knew they were questionable deals but wanted the fees generated by the transactions - $237.7 million in 1999. (Of course the fees and the payouts to the partners, along with the interest, all needed to be covered by the next round of borrowing. If this sounds like a
Ponzi scheme, you’re getting the point!)
Fastow was the strategist making all the deals happen. Even though the banks knew the reality of the situation and helped disguise the loans, Fastow used the large banking fees (paid by Enron) to play the banks off each other to get to even bigger deals. Thus, he multiplied the scams and the extent of the victimization. Fortune notes that Fastow was not a passive player here: “Fastow was ruthless at exploiting Wall Street’s greed and forcing the bankers to curry favor with him.” Cooperative banks got a ”Tier 1” rating and, among other rewards, those bankers would be invited “on an expensive jaunt to some fancy locale”: “At a Tier 1 outing to Las Vegas, Enron rented a fleet of 15 helicopters to fly the bankers over a mountain for dinner at a vineyard and later to the Grand Canyon for a picnic.”
Because banks like Chase, J.P Morgan (later J.P Morgan Chase) and Merrill Lynch were making so much in fees, Fastow leaned on them to ensure that their investment analysts wrote reports encouraging investors to purchase Enron shares; skeptical Enron analysts were sometimes fired, or at least moved to reporting on other companies. Accountants at Arthur Andersen had misgivings about the loans appearing as revenue, but also succumbed to the consultant fees. Enron paid one division of Arthur Andersen for ”consulting,” then Arthur Andersen’s auditing division would approve and certify Enron’s financial statements. On a recent cover, the mainstream business publication Fortune magazine summarized the situation: “Partners in Crime: The Untold Story of How Citi, J.P Morgan Chase and Merrill Lynch Helped Enron Pull Off One of the Greatest Scams Ever.” Fastow was the mastermind – commander of ”one of the greatest scams ever.”
Fastow was originally charged with 109 felony counts, including conspiracy, wire fraud, securities fraud, falsifying books, as well as obstruction of justice, money laundering, insider trading, and filing false income tax returns. Under his plea bargain, he will receive 10 years in prison, which is the same sentence Andrade received for his several residential burglaries back in the 1980s. Fastow is still free on a bond while he cooperates with authorities, and he will not start serving time until his wife is done serving her one-year sentence for involvement in some of the “special purpose entities” and filing false tax statements. This way, their children will always have one parent at home, a rational and humane arrangement, not likely to be available to street criminals.
How Bad is Bad?
You might think that Andrade’s penalty is fair because he did commit two new crimes after he had already committed some earlier ones, the burglaries for which he had done time. And, given the severity of Fastow’s sentence—ten years is a serious prison sentence!—the system has worked pretty fairly. But, think first of the harm that each did. No doubt Andrade’s burglaries were harmful crimes, but he already served prison time for them. He ended up with life in prison for the additional crime of shoplifting and, in upholding his sentence, the Supreme Court explicitly endorsed the Rummell case, where a life sentence was imposed for crimes of which Justice Powell said in dissent: “it is difficult to imagine felonies that pose less danger to the peace and good order of a civilized society than the three crimes committed by the petitioner”. Fastow cannot be described the same way, because of the number of victims and the amount of the loss in dollars he caused, as well as the lost in trust in our financial system.
In Chapter 2, Reiman presents a discussion with The Defender of the Present Legal Order – someone not ignorant or mean-spirited, but who believes that street crimes are worse than corporate crime. One of the Defender’s objections is that direct crime is worse than indirect crime because meeting face-to-face with the criminal is more terrifying. Reiman responds that what the law prohibits is people having what is rightfully taken by another through fraud, and while face-to-face victimization may be more scary, that is not enough to justify some of the dramatic differences in outcomes that are documented in
Chapter 3 of the Rich Get Richer. Fastow’s case is a good addition to this argument. Indirect crime – as Wanda Sykes notes in the opening quote – can take someone’s entire life savings and not just what was in their wallet the day they were victimized. So, while Fastow’s crime may not have caused fear in the way a face-to-face crime might, it caused enormously more loss to enormously more victims. Fear is only part of the equation when determining the gravity of a criminal act. The amount of loss as well as the number of victims must also be counted.
Fastow ended up with a ten-year sentence for bringing about the financial ruin of thousands of Enron employees and investors, including pension funds that held the retirement hopes of many. Moreover, while Andrade did commit the three felonies that qualified him for life in prison under a “three strikes and your out” law, Fastow was charged with 109 felonies! A poor guy ends up in jail for life for stealing less than $200 worth of goods, a rich guy ends up in jail for ten years for ruining thousands while making millions for himself, and Ken Lay has not even been charged! Can you deny that the rich get richer and the poor get prison? Is this fair?
Going Too Far? + Conclusion [Part III]
Return to Introduction
13. Lockyer v
Andrade, 538 U.S. ___ (2003) No. 01-1127. The full text of this case, along with briefs and a transcript of oral argument, is available through sites like
http://findlaw.com and http://www.law.cornell.edu/;
you can also listen
to the oral argument. In a companion case, Ewing v California, the court upheld another life for stealing several golf clubs valued at $1,200.
14. 445 U.S. 263. Read
the opinion in Rummell and listen
to oral argument.
15. Terry, Charles. 2003. The Fellas: Overcoming Prison and Addiction. Belmont: Wadsworth. P. 4.
16. McLean, Bethany and Peter Elkind. 2003. Partners in Crime. Fortune, October 27, p 82. This article is an excerpt from the authors’ book, The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron. New York: Portfolio, 2003.
17. “Partners in Crime” p 81; see note xvi.
18. Behr and Witt 2002. See note ix.
19. Partners in Crime, p 86; see note xvi.
21. Partners in Crime, p 88; see note xvi.
22. Florian, Ellen. 2003. Scandal Cheat Sheet. Fortune, 7 July, p 48-9.
23. 445 US 263, 295.
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