Swindling & Knavery, Inc.

One of the civil rights outrages of our century is the way the rich have been systematically--one almost believes deliberately--excluded from public institutions called prisons. Prisons are social necessities. They are built at taxpayer expense with the affluent sometimes contributing the larger share toward their construction and maintenance. Yet white-collar criminals are rarely allowed admittance and then only for the briefest of intervals.

No matter how well they have qualified as lawbreakers, the wealthy are discriminated against at every turn. They're even separated administratively from low-income criminals, who find their way to prison swiftly and routinely. Most violations of laws governing business never go to the criminal courts at all, even when detected. More often than not, they are dealt with by a far gentler disciplinary system composed of inspectors, hearing examiners, boards and commissions. Any corporation executive who actively wanted to go to jail would find his way blocked by red tape, confused jurisdictions and administrative tangles.

For the affluent, loopholes in the law are so abundant that it takes determination to avoid them. If stricter regulatory legislation is proposed, only inept and unreasonable lobbying will fail to dull its cutting edge. Big-business lawbreakers who do manage to ensure themselves of criminal convictions are confronted with a host of quiet settlement procedures that the Government never employs to keep a burglar out of the penitentiary. And even if the rich offender remains unyielding and gets the conviction, he is unlikely to see the inside of the penal institution that his dollars helped build. More likely, a discriminatory legal system will inflict only a fine--and probably a light one, at that.

But the rich are docile. While others have tried periodically to make the system more equitable, the wealthy have never really entered into the spirit of the thing. Worn down by centuries of status quo, they have become listless and apathetic about corporate crime, even though they themselves are often the victims of it. I don't want to sound paternalistic, but in many ways it's their own damn fault that the rich fail to share in tax-supported prison systems.

First of all, the rich are usually deep in dealings that involve large amounts of money. With one blow of his fist, a saloon debater can break the law and everyone will know it. But a businessman's opportunities are seldom that clear-cut. There are just too many loopholes. It's not uncommon to find some corporation that appears to be determinedly breaking the law, only to discover when you get up close that, technically, the firm has merely succeeded in being unethical.

Not all loopholes are deliberate. Many are accidental and remain harmles until discovered by a skilled, enterprising lawyer. After that, some astounding things can happen.

In this country, hundreds of drugs have been taken off the market by the Food and Drug Administration--either because they are found to have no effect on the ailment they are claimed to cure or because they carry side effects that can cause permanent injury or death.

But the law only prohibits the sale of the condemned drug in this country. It doesn't prohibit continued manufacture. As a consequence, Marsilid, a Roche Laboratories antidepressant that was banned in the United States after reports of 53 liver-damage fatalities, is freely available in Latin-American countries. And the Upjohn Company, which can no longer sell an antibiotic combination called Panalba in the U.S., still makes it and peddles it abroad as Albamycin-T.

The Parke-Davis drug Chloromycetin must be sold in the United States with a printed warning that it can cause a fatal blood disease in some patients. But Senate testimony indicates that the drug is sold abroad without any warning.

These practices are hardly calculated to convince people in less fortunate countries that America is concerned about their health and well-being. How can an Italian, Mexican or African be expected to greet the news that his country is the profitable dumping ground for drugs that are too dangerous for Americans? Doesn't this promote precisely the cynical, dollar-grubbing image that our opponents abroad must enjoy painting?

But even if an influential industry finds itself in clear violation of the law --with no loophole available--and the industry is indeed influential, forgiveness can come quickly. A deal that appears illegal one day might become legal the next.

In 1969, the Supreme Court upheld lower-court decisions that previously competing newspapers are in clear violation of the antitrust laws if they merge their business operations and fix prices on advertising rates.

In 1970, Congress passed a law that gives an exemption from the antitrust laws to previously competing newspapers that merge their business operations and fix prices on advertising rates. The bill passed the Senate 64 to 13 and the House 292 to 87.

It began with a joint operating agreement entered into by two Tucson papers, The Arizona Daily Star and the Tucson Daily Citizen. The courts said it was all right for the papers to share accountants, composing rooms and printing presses. But they objected to monopolistic price fixing that eliminated competition for advertisers.

The Newspaper Preservation Act was introduced in the Senate shortly after the legal troubles began. A number of important publishers appeared at the hearings to praise its merits--each courteously accompanied into the hearing room by one or both of his home-state Senators. The bill's supporters argued that newspapers--pressed by television and radio competition--needed the bill for financial survival.

But the publishers of small weeklies and suburban dailies generally opposed the bill. Bruce Brugmann, editor of The San Francisco Bay Guardian, testified: "If you plant a flower on the University of California property or loose an expletive on Vietnam, the cops are out of the chutes like broncos. But if you're a big publisher and you violate antitrust laws for years and you emasculate your competition with predatory practices and you drive hundreds of newspapers out of business, then you're treated as one of nature's noblemen."

There were, of course, sound arguments for the newspaper bill. (I voted against it in committee and on the floor, because it seemed to me that these arguments were greatly outbalanced by the case against it.) But even those who believe that the newspaper exemption is good for society should find this episode instructive. How many other classes of citizens, found guilty of legal transgressions by the courts, could hope to find an energetic Congress ready to reverse the decision within 16 months?

Swift Congressional rescue of the publishers must make fascinating reading for blacks, who, until the 1964 Civil Rights Act, had waited decades for relief from court convictions for eating in certain restaurants and hotels.

But any regulation that bottles up profit, whether it is a legal code or a professional one, is a likely object of tinkering. Until 1955, for example, the American Medical Association Code of Ethics forbade a physician from profiting from the sale of medication he prescribed; that is, he could charge for professional services, but he couldn't make money by retailing to his patients. The rule was a good one, because it discouraged overprescription and the prescription of unneeded drugs.

However, the rule was relaxed, almost coincidentally with the booming popularity of doctor-owned pharmacies and doctor-owned drug-repackaging plants. The doctor-owned pharmacy, of course, was a natural. Few sick people are likely to ignore their doctor's casual suggestion, "Just take this down to the drugstore in the lobby and they'll take care of you." It's still against the ethic to steer patients to a store in which the doctor has an interest, but there's no enforcement procedure and, even if there were, policing would be almost impossible.

One independent druggist testified that his business declined 90 percent after a group of doctors opened its own pharmacy. And the doctor-merchants have very little incentive to prescribe the low-profit brands.

The drug-repackaging plant is another ingenious device. Typically, a group of doctors become co-owners of a company that buys drugs in quantity at low generic prices and bottles them with its own trade names and higher prices. A common tranquilizer such as reserpine, for example, will be relabeled Carr-Serp, Deserpine, Anquil or almost anything that an imaginative doctor can dream up.

Druggists are required by law to fill a prescription with the trade name the doctor has written. They cannot substitute. So if a doctor owns stock in a company that sells reserpine as Carr-Serp, it's easy for him to guarantee his firm a sale--because the druggist must shake the pills out of a bottle labeled Carr-Serp, even though he has reserpine at half the price in other jars on his shelf.

The pressures are obvious. In 1961, the Carrtone Laboratories Company of Louisiana complained to its 1200 doctor stockholders of lagging sales. The report concluded: "Just imagine if each doctor stockholder would have written three 'scripts' each day--sales would have been a walloping $168,000--profits for November over $65,000."

And Dr. Boyce Griggs was writing his fellow Carrtone stockholders: "You have great influence with several colleagues and could interest them in both the stock and the use of the product.... Let's push the pen for Carrtone together and make it grow."

Meanwhile, the antitrust subcommittee, using once again the common drug reserpine as an example, tested prices from seven doctor-owned pharmaceutical companies. Carrtone sold it to the druggist for $30 per thousand pills. Prices listed by the other doctor-owned companies were $10, $17, $20.16, $27.20, $30 and $31.56. The drug was available to druggists from five national manufacturers for from 65 cents to $2.75 per thousand.

Doctor ownership in a repackaging plant, by the way, is still against the A. M. A. code of ethics, strictly speaking. But the repackagers simply mix up a few drug combinations of their own, thereby qualifying as manufacturers. And there is no ethic against owning stock in a drug-manufacturing firm.

Congress, of course, could replace the stove-in A. M. A. code with a statute, and two years ago I introduced the Medical Restraint of Trade Act, which would, in most cases, forbid physicians from profiting on the products they prescribe. The bill is having hard going. However, from all reports, Carrtone and the other repackagers are doing quite well.

But let's go a step further. Let's say your corporation has indeed been operating on the wrong side of the law. You've advertised fraudulently or rigged prices or otherwise conspired in restraint of trade. The Justice Department or the Federal Trade Commission has investigated thoroughly and they've got the goods on you. You've made it. You have gotten on justice's transmission belt by being apprehended.

Actually, justice has two transmission belts, one for the rich and one for the poor. The low-income transmission belt is easier to ride without falling off and it gets to prison in shorter order.

The transmission belt for the affluent is a little slower and it passes innumerable stations where exits are temptingly convenient. The first one is called the consent decree.

The consent decree is a negotiated instrument whereby a firm, in effect, says it has done nothing wrong and promises never to do it again. The agreement is filed in court and that's the end of it, unless the firm is caught doing it again.

Just as agreeably, the enforcing agency's investigative files are stamped confidential and locked away. Thus, they're not available to any victim of the conspiracy who might be contemplating a civil damage suit. He's on his own and he'll have to dig up all the evidence on his own--and he'd better have unlimited funds to do it.

One of the more controversial consent agreements of recent months was the one granted the major automobile companies after the Government charged they had illegally conspired to delay development and installation of air-pollution devices. The Justice Department had spent months collecting evidence that the manufacturers had agreed to eliminate competition among themselves in the production of the devices. It was preparing to prove an illegal agreement on patent purchases.

The consent decree that the Justice Department and the manufacturers worked out was court approved over the protests of New York City and seven states, which wanted the Justice Department to go to trial. They were eager to sue the manufacturers for the damages caused by smog during the delay in installation and, of course, wanted all the Justice Department evidence on record. It didn't happen that way.

And since consent-decree negotiations are conducted privately, big business has one more incentive for cozying up to the political leaders who make the judgments on out-of-court settlements. The I. T. & T. investigation, after all, erupted from a memo that suggested a link between an antitrust consent decree and a $400,000 gift to help finance the Republican National Convention. Despite all the subsequent denials that the Justice Department action and the convention donation were connected, the episode certainly has contributed nothing toward increased public confidence in Government.

Now, there is a case to be made in favor of the consent agreement. Price riggers and big-money conspirators are usually not lacking in cash for lengthy trials and appeals. The consent decree, its defenders argue, stops abuse of the consumer early and saves the Government time and money. But in any other area of jurisprudence, such an arrangement would be unthinkable. A consent agreement is roughly comparable to probation. And probation would be conceivable in the case of, say, a first-time burglar of a liquor store. But can you imagine the furor if the Government, by deliberate policy, refused to do anything to help the store owner recover his booze?

Anyone who neglected to get off the belt at consent decree needn't despair. Big tax violators riding the justice line will find opportunities for meeting and negotiating with Internal Revenue. And if you're a corporate lawbreaker whose victims are gathering with damage suits in their fists, you still have an escape hatch.

It's the nolo contendere plea, meaning simply that you don't contest the charges. It's very convenient, because the nolo plea creates no statutory presumption in favor of subsequent damage suits. All those people you cheated will have to start from scratch to prove that you violated the law--just as if the Justice Department had never spent all that time and money to catch you.

In 1964, the department caught up with six corporations that were rigging prices on 75 percent of all pressure pipe sold in the Western states. The rigged-bid sales amounted to hundreds of millions. Yet when the case went to court, all were allowed to plead nolo.

• • •

All the way to prison? Well, some have made it. Doubtlessly the most celebrated corporate criminals in recent American history were those executives who contrived the electrical conspiracies uncovered in 1960.

Twenty-nine corporations, the suppliers of almost all the nation's heavy-voltage electrical equipment, were indicted for illegally carving up markets and rigging prices. Fines totaled $1,857,000. Of the convicted executives, several were deacons of their churches, one a president of a local chamber of commerce, one a Community Chest fund raiser. Seven, including a $135,000-a-year General Electric vice-president, went to jail for 30 days.

Meetings among the "competitors" had gone on for years. The names of those attending were recorded as "Christmas-card lists" and the meetings were referred to as "choir practice." Calls were carefully made from pay phones. Contracts were rotated, with each firm having a prearranged share of the total market. When one company's turn came to capture an order, it would submit an inflated bid and the other conspirators would courteously submit bids that were even higher. The conspiracy cost electrical-equipment customers, and subsequently the paying public, some 1.2 billion dollars in inflated prices.

Following the convictions, outraged customers began filing civil suits for recovery of the money the conspiracy had cost. They included utility companies, states and even the Federal Government. Under the Sherman Antitrust Act, victims of illegal price fixing can collect treble damages. If you can successfully prove, for example, that a price-fixing scheme cost you $100,000 in extra charges, then you collect $300,000. It's a device that was calculated by Congress as an added deterrent.

Yet, even in their hour of defeat and disgrace, the electrical firms found an understanding agency willing to soften the blow. As the treble-damage suits piled up, the Internal Revenue Service in 1964 reversed its previous policy and ruled that treble-damage payments assessed to delinquent companies could be deducted from taxes as a legitimate business expense. The Government offered, in effect, to pick up part of the tab. Commodore Vanderbilt used to say, "You don't suppose you can run a railroad in accordance with the statutes, do you?" He was wrong. It's easy to stay within the statutes if they are subject to friendly interpretation.

The shock of the electrical-conspiracy convictions did have an efficacious effect, however. All those deacons in jail affected a wondrous new awareness of, and familiarity with, the antitrust laws.

Afterward, Gordon Spivack, the operations director for the Justice Department's Antitrust Division, wrote: "No one in direct contact with the living reality of business conduct in the United States is unaware of the effect the imprisonment of seven high officials in the electrical-machinery industry in 1960 had on the conspiratorial price fixing in many areas of our economy; similar sentences in a few cases each decade would almost completely cleanse our economy of the cancer of collusive price fixing, and the mere threat of such sentences is itself the strongest available deterrent to such activity."

Spivack's views were backed up by a task-force report issued by the National Crime Commission. "The imposition of jail sentences," the report said, "may be the only way adequately to symbolize society's condemnation of the behavior in question, particularly where it is not on its face brutal or repulsive."

But the report, issued six years after the electrical-conspiracy cases, also noted dryly: "Despite the apparent effect of the electrical-equipment cases... since [then] no antitrust defendant has been imprisoned."

Probably the reason the electrical-conspiracy convictions gave the nation such a jolt was that, in this case, white-collar criminals were not administratively separated from other criminal classes. As criminologist Edwin H. Sutherland has pointed out, in our society white-collar crime is not greeted with the kind of emotional revulsion that is accorded crimes of violence. Among the lower classes, crime is handled by policemen, prosecutors and judges armed with the power to fine, imprison or execute. Upper-class crimes generally result in civil damage suits or are handled by inspectors and commissions who issue warnings, cease-and-desist orders, license revocations and fines.

And the upper classes--simply because they have easy access to Government decision makers--can often influence the development of the very statutes that regulate upper-class business activity.

When the Auto Safety Act was before Congress, the auto makers were particularly upset by a section providing fines and imprisonment for any executive who knowingly sent out cars with safety defects. That provision unnecessarily maligned them, they maintained, by implying that they might be contemplating criminal action. Moreover, such sanctions would leave the impression that they would willingly obey the law only under threat of imprisonment. In any company depending on mass sales, it was argued, no deterrent need be added to the threat of bad publicity.

I remember acquiescing to that point of view. Now I think I was wrong--even though history has proved that the criminal sanctions, had they remained in the bill, would never have been employed. There has never been the slightest indication that the auto makers have not striven to observe the statute since its enactment. But the failure to provide criminal sanctions does have a symbolic importance in that it reinforces the notion that corporate violators are to be treated under a different system than are ordinary citizens.

Nowhere is that different system more evident than in the laws governing false advertising and merchandising. The agency with the principal policing powers in this area is the Federal Trade Commission, but its only weapons are cease-and-desist orders that can be easily held in abeyance by appeals while more damage is done.

A classic example is the Crowell Collier case, which was finally settled by a Federal circuit court in 1970--ten years after the FTC brought charges against the firm for conducting door-to-door flimflam sales of encyclopedias. During those ten years, the company's national sales organization remained free to go on cheating, lying and defrauding--and court testimony indicated that it did just that. Here's how the company worked it: In 1960, Crowell Collier and MacMillan was publishing encyclopedias of doubtful merit and selling them through a wholly owned subsidiary that it called P. F. Collier and Son Corporation. Collier and Son recruited a national sales organization that operated largely in working-class neighborhoods, where parents put a high premium on a good education for the kids.

The phony sales pitch went like this: The company is introducing a new product and needs testimonials from satisfied customers. It has selected a special list of people (you lucky guy!) who will get the set at a reduced price, provided they'll write an admiring letter about the product for use in ads and brochures. At this point, the salesman flutters a copy of a "national advertisement" putting the price of the set at $389, a generously inflated figure, in the FTC's opinion.

By this time, the salesman presumably has sensed how much of a "reduction" would be needed to close this particular sale. And he also mentions that the special deal includes updating supplements mailed every year at an additional low cost of only $3.95 a copy. Just sign this contract authorizing us to use your name and everything will be taken care of. Of course, the contract took care of a great deal, including commitments to make monthly payments over an extended period.

On January 18, 1960, the FTC ordered Collier and Son to stop all this fakery and a few months later--puff!--Collier and Son disappeared, dissolved as a corporation. Soon the sales operation, unchanged in technique, was assumed by a new corporation, also a subsidiary of the parent company, and called this time P. F. Collier, Inc. While sales proceeded smoothly under the "new" subsidiary, the parent firm solemnly requested that the FTC charges be dropped because the delinquent corporation had "gone out of business" and therefore could no longer be perpetrating fraud.

That generated a legal tangle that kept the cease-and-desist order hanging fire until three Federal judges ruled that the charges placed against P. F. Collier and Son were indeed transferable to P. F. Collier, Inc.

At the very end, Crowell Collier was still protesting the part of the FTC order that forbade its salesmen from "using any plan, scheme or ruse as a door opener to gain admission into a prospect's home, office or other establishment which misrepresents the true status of the person making the call."

This order, the company argued, would put it at a competitive disadvantage with other book peddlers who hadn't yet been caught. Happily, the court upheld the FTC all the way. But how many citizens were taken during the ten-year interim?

Crowell Collier isn't an isolated case. It took 16 years to get the makers of Carter's Little Liver Pills to stop selling their laxative as an effective treatment for sluggish liver function and an antidote for that "down-and-out" feeling. Back in 1943, the FTC filed its first case against Geritol. But it wasn't until 1965 that a final order came down prohibiting a long list of false-advertising claims, including statements that Geritol is an effective remedy for tiredness and "that run-down feeling"; implications that tiredness, loss of strength and nervousness are generally reliable indications of iron deficiency (they hardly ever are); suggestions that Geritol will promote convalescence from a fever, cold or other winter illness.

Probably as a consequence, Geritol--I note from my television set--has gone to a new technique: Find people who look younger than their age and get them to say oncamera that they take the product.

But the system is nutty. Why shouldn't unscrupulous manufacturers embark on fake advertising if the only sanction is an order to stop doing it--and a delayable order, at that?

Moreover, the cease-and-desist system does nothing to expose advertising's decision makers. They are not threatened with personal humiliation or punishment. Their names are not read on television and they face no out-of-pocket loss. If hearings are held, they send their lawyers. The corporation is the target of the charges and those behind the corporate wall are neatly insulated from serious discomfort.

That a corporation provides protection for those in charge of its affairs was amply demonstrated during Chevron Oil's 1970 well blowout in the Gulf of Mexico. The blowout spilled 20,000 barrels of oil in the Gulf because the will had no safety choke to cut off runaway flows automatically. The safety chokes are required by law, but oilmen are aware that the devices sometimes get clogged with sand and diminish production.

Violators are subject to a six-month jail term and to a $2000 fine for each day the well pumps without the safety valve. So Walter Hickel, then Secretary of Interior, got a lot of attention in the industry when he announced that he had "found the guy, the very guy" responsible for ordering the removal of chokes. At last it seemed that a face was going to emerge from those mysterious corporate depths. At last, maybe the public was going to have a look at the enemy.

But "the guy, the very guy" was never heard of again. Instead, only a fine was imposed--and against the corporation. The fine was $1,000,000. Sound impressive? Well, remember that Chevron is a division of Standard Oil of California, and Standard Oil of California has assets of ten billion dollars. The fine was far from crippling.

Most importantly, this episode shows how our legal and social systems provide some very special shields for lawbreakers with money and status.

The recognition that there are essentially two systems of justice in operation does nothing to generate a more law-abiding citizenry. The rich have little reason to fear the system and the poor have little reason to respect it.

Young blacks in prison, we read from their innumerable diaries, regard themselves as political captives and are convinced--not totally without justification--that they would still be on the outside if they had had the good luck to belong to a whiter race and a richer class. They find no corporate executives in the cell blocks but do not accept this as prima-facie evidence that there is no corporate crime.

Their suspicions are corroborated by a study undertaken in 1949 by Sutherland, the white-collar-crime expert. He examined the nation's 70 largest corporations and charted their compliance record under the antitrust, false-advertising, patent, copyright and labor laws. In a 45-year period, he found 980 adverse decisions by courts and regulatory bodies. Of the 980, 779 indicated that crimes had been committed.

Very few in the nation are aware of the pervasiveness of white-collar crime. Indictments and convictions rarely make page one. One reason is that corporate crime is complex and hard to explain. It's often difficult to trace the precise effect a corporate crime has on the consumer, so that is rarely part of the story.

Moreover, as we have seen, news organizations are often run by businessmen who would find it difficult to work themselves into an honest outrage about some antitrust violation. And a businessman's instincts are not likely to demand that he expose and defame real or potential advertisers.

Sutherland grows uncharacteristically harsh when he writes about the media. He charges that the communications agencies do not organize the community against white-collar crime because "those agencies are owned and controlled by businessmen who violate the laws and because those agencies are themselves frequently charged with violating the law. Public opinion in regard to picking pockets would not be well organized if most of the information regarding this crime came to the public directly from the pick pockets themselves."

One thing we can be sure of is that a jail term usually draws more attention than does a fine, especially if the offender is otherwise a pillar of the community.

There is much in what Spivack says about the deterrent effect of seeing a peer locked up. One businessman--or politician--can watch another get fined without feeling serious psychological discomfort. But to see your counterpart from across town or across the aisle marched away in blue denims with black stenciling is highly unnerving. Most white-collar criminals are first offenders, so sentences wouldn't be very long in most cases. But they wouldn't have to be. The crimes to which I'm referring almost always involve long deliberations, lengthy planning sessions, with time for reflection in between. They are undertaken by intelligent people who have standing in the community. Under these circumstances, the prospect of even 30 days in jail can have a remarkably sobering effect.

On the other hand, the threat of the same jail term would likely be wasted on an unemployed ghetto youth with an impulse to burglarize a record shop. So why not allocate some of our prison space to where it will do the most good? This might be the only way we can adequately illustrate society's condemnation of this behavior. And jail might be the only penalty available that would serve as an adequate deterrent. This is almost certainly true if we don't jack up the maximum fines that our courts are now allowed to impose for business violations.

The maximum fine for a violation of the Sherman Antitrust Act is $50,000--hardly a figure to strike terror in the board rooms of the nation's top corporations. Fines are usually passed on to the consumer, anyway. Moreover, there is a growing corporate practice of buying insurance against the possibility of criminal fines or damage suits.

Other remedies are obvious: Remove the veil from the nolo plea, make Government investigative files available to the public even after a consent decree is filed. Give the FTC power to shut down unfair and fraudulent business practices while appeals are being heard. And above all, let's start implementing those sections of our laws that authorize jail terms for corporate violators.

If we are to reduce white-collar crime, there are many doors to be closed. And among the more effective ones will be those that slam shut with a loud clang.