About the Author
Robert R. Faulkner is Professor of Sociology at the University of Massachusetts Amherst.
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Corporate Wrongdoing and the Art of the Accusation
By Robert R. Faulkner
Wimbledon Publishing CompanyCopyright © 2011 Robert R. Faulkner
All rights reserved.
Accusations: Between the Innuendo and the Illegal
C'est plus qu'un crime, c'est une faute.
Trust, honesty, and integrity are the principles upon which our financial markets function. Americans don't hate large corporations and rich executives, but they do despise those who behave as if the principles don't apply to them. The ferocity of this reaction should not surprise us.
Public accusations of misconduct are indications of how much antipathy there is towards miscreant manufacturers, bankers and other executives who don't play fair, and large, publicly traded corporations that violate the code of conduct that is supposed to guide economic behavior. The devious and underhanded violation of this code raises red flags of warning, throws an unwanted public spotlight on managers and management, leads to increased railing against bad corporate practices, reveals the negative sentiments of accusers about specific market exchanges in goods, services, and investments, and undermines the confidence of American citizens in the integrity of the market.
Accusations of wrongdoing and railing against bad corporate management and managers occur well before the law is invoked, before criminal indictments are handed down, and before people are sentenced. The techniques used by rating agencies, the fancy dressing up of quarterly financial statements by banks, bogus balance sheets, misappropriation of investor capital, and, generally, outright fraud and deception by top-level corporate management, normally relegated to the shadows of finance, can also include creative accounting techniques, which mislead rating agencies, dupe suppliers, buyers, and regulators, mask deteriorating finances — overall, artful combinations of lying, stealing, cheating, and concealing.
Outspoken critics of corporations, investment banks, hedge funds, and rating agencies spend years trying to get people to pay attention to potential fraud, investor rip-offs, and tax evasion of large firms. Not only did they try to get people to pay attention to the failures of rating agencies before the recent financial crisis became full-blown, but they called the staff at the agencies "jerks," "worthless," the investments "make-believe" and "utter garbage," and the crowd that relied on the agencies as not only "certified idiots" and "the brain dead," but the investors and adopter organizations who relied on the ratings as acting like "lemmings," or in an esoteric vein, as "agents without principles," and even more harsh, as "schmucks."
The blows always start with rebukes, accusations, finger pointing, and red-flag warnings. Railing against the regulators, the rating agencies, and the large corporations, along with finding those responsible for wrongdoing is an enduring feature of capitalist society. When economic action goes awry, and buyers or sellers or investors are wronged, harsh words help them hone their point. They are not afraid to use them. Such emotions are nothing new, but in socioeconomic affairs during the 1980s they seem to have started to boil over. What once played out beyond earshot of the trading floor, the buyer-supplier contract grievance hearing, the boardroom, or the law office has become very public: the tangled, uneasy, and often antagonistic relationship between a corporation and its suppliers, buyers, peers, analysts, rating agencies, and regulators.
This breach of the code of the market uncovers the taken-for-granted assumptions of socioeconomic behavior. Moreover, such public announcements as revelations of wrongdoing in economic life are not random. Nor are they the idiosyncratic behavior of a small group of wayward corporations and their executives. Rather, they are ordered. As such they help reveal the working constitution of the market as an institution.
For the past twenty years the media have reported about large, publicly traded industrial corporations, hedge funds, accounting firms, ratings agencies, and investment banks accused not only of mistaken assertions (or, if you prefer, lies) and misappropriations (or embezzling, looting, or stealing), but also misdirection of capital (through bribery, kickbacks, and payoffs). Corporations and their executives have also been accused of making promises they never intended to keep, while breaking the rules protecting free-market capitalism.
Breaking the rules undermines the trust upon which markets and their participants rely. In making purchasing decisions, for example, buyers rely on the truthfulness of representations made by sellers. In making pricing and production decisions, industry rivals vie for the business of buyers and rely on their competitors to play tough, but fair, and not engage in bribery or coercion of customers. In making financial decisions, investors rely heavily upon the integrity of corporate financial reports prepared in accordance with accepted accounting standards.
For connoisseurs of financial wrongdoing, fraud and blunders by corporations still hold a key place, with a focus on consumer- and investor-based cases that affect people's everyday financial lives — their stock portfolios, pension funds, mortgages, credit cards, and ultimately their confidence and trust in markets. Fraud is only one part of the story. Insider trading schemes, Ponzi schemes, and "perp walks" by Wall Street traders receive photo coverage in the New York Times, Washington Post, and Los Angeles Times. We've seen Lehman, Bear Stearns, Wachovia, Washington Mutual, Countrywide blow up along with banner headlines and television coverage of prominent financial companies accused of misleading and cheating their clients. Analysts and lawyers on Wall Street misused their privileged positions of fiduciary responsibility through lying and looting. There were suspicions and buzz about Henry Blodgett and other high-profile securities analysts potentially hyping stocks to curry favor with their banking firms' corporate clients.
The media's narrative of abuse and portrayals of corporate villains are red flags or early warning signals that something went wrong in market-based transactions between corporations and their customers or clients, suppliers, peers, analysts, and regulators. Enron lied to its employees, to federal regulators, and misused its so-called special purpose entities to create "virtual sales" and "off balance sheet liabilities" to inflate its assets, make accounting statements look prettier, hide costs, and cook its books.
Commercial and military aircraft manufacturer Boeing bribed its way to several multimillion-dollar contracts with public sector work and the Pentagon. Payoffs were a line item, a way of life, and a normal cost of doing business at Siemens, the giant German industrial firm. Since late 2006 the Munich-based firm was embroiled in allegations that it paid bribes to government officials in order to win contracts on numerous projects.
In late 2009 New York attorney general Andrew Cuomo garnered banner headlines for his accusations about pay-to-play practices in which financial brokers and other middlemen use kickbacks and campaign contributions to gain access to retirement funds. Warning signs also went up at the same time at the California Public Employees' Retirement System (CalPERS) when it revealed it was conducting an internal review of the amount of money paid to a former board member for marketing money managers to the giant pension fund. The review by CalPERS was part of growing scrutiny by funds and authorities in several states, along with the Securities and Exchange Commission (SEC), concerning potentially improper practices in the way public pension funds make decisions about which money managers will get the lucrative contracts to manager state retirees' money.
And in the mundane world of baking cookies, the company called Archway & Mother's was accused of booking nonexistent sales and systematically logging sham transactions allowing Archway, owned by a private equity firm, to get access to badly needed capital from its lender, Wachovia.
The same kinds of allegations were made public (1) before the last market downdraft in 2000 to 2002, (2) during the revelations of the accounting scandals involving Enron, WorldCom, Adelphia Communications and Tyco, (3) during the 1980s in the junk bond and insider trading debacles with Drexel Burnham Lambert, Michael Milken, and Dennis Levine, and (4) during the late 1980s and early 1990s in warning signals sounded about Lincoln Savings and Loan, American Continental and Vernon Savings in influence peddling and gambling with depositors' insured funds preceding the calamity in the Savings and Loan industry. Executives of those institutions were accused of being engaged in wide-scale fraudulent practices.
Even earlier there were alarm bells about a reinsurance scam at the highflying Equity Funding Life Insurance Corporation, suspicions of forgery and banking fraud at the successful leasing company called Other People's Money, the investment frauds by Richard Whitney (1938), Ivar Kreuger (1932), and Charles Ponzi (1920), and other scandals in a series stretching back to the Dutch tulip mania of the 1630s and probably beyond.
The viral signs ofWall Street's public scandals and investment swindles appear not just in the illegal trading of stocks (Whitney), matches (Kruger), or postal reply coupons (Ponzi), or even in civil and criminal cases in which breaking the law has been proven and the guilty await the disposition of the case in settlements and sentencing. Long before the perp walks and before the prosecutor wins (or loses), murmurings of lying, cheating, and stealing stir under the surface, in innuendo, euphemistic assertion, gossip, and hearsay. This occurred a couple of years before Bernard Madoff's walk down the East Side surrounded by photographers and reporters, before his Ponzi scheme came to light, but around the time that a suspicious Wall Street watcher sent a letter or two to the Securities and Exchange Commission, urging regulators to look into potentially phony annual returns of Bernard L. Madoff Investment Securities LLC. He claimed there was something funny about the so-called "fund of funds." At that time, regulators made no inquires. In 2009 Madoff admitted to running a sixty billion dollar Ponzi scheme for years. The SEC was criticized for missing opportunities to uncover Bernard Madoff's massive fraud. They were also criticized for their lax oversight of Wall Street investment banks and lack of attention paid to concerns about stock market manipulation. Ironically, as early as 1999 the SEC was accused of missing the warning signs or initial accusations aired by Harry Markopolos, a securities industry executive and specialist in forensic accounting. Markopolos smelled a rat and started warning regulators about Madoff in 1999 and met with an SEC official in 2001. The SEC investigated Madoff in 2007 and didn't find any evidence that he was engaged in fraud. "Markopolos points out no less than 29 red flags in his statement to the SEC" (Manuel 2009) — this was in a nineteen-page document that Makopolos submitted to the SEC in November of 2005, titled "The World's Largest Hedge Fund is a Fraud."
In Chapter 2 we shall look in more detail at these so-called "red flags." We begin by describing the thing to be explained and identify important elements of a unifying framework. "Red flags" are accusations. When they are classified across several meaningful dimensions (e.g., the type of accusation such as lying, cheating, and stealing; the reasons for the misconduct; the rules that apply to a particular situation), we see the assembly of the accusation as a social act.
We are particularly interested in the actual corporate targets of public accusations, the market-based exchange routes on which these occur, and the distinctive keywords and catchphrases used in making the accusation. From this discussion we formulate expectations regarding what corporations on which exchange routes are likely to be accused. It is the combination of words and market-based transaction routes that is critical.
There are four types of announcements of wrongdoing: (1) private, in-group murmuring, gossip or innuendo, (2) private, in-group reprimand, reproach, or admonition, (3) public allegation, rebuke, or accusation, and (4) public, official, formal charge of criminal or civil rule violation, or indictment. See Figure 1 for a typology.
Innuendo is a veiled, oblique, and privately expressed statement that reflects on the character, reputation, or social status of the target. Gossip and slander are confined to a specific social circle; they are nonpublic expressions of discontent with the conduct of a person and while socially supported within the confines of the "in" group, they are often officially deplored. For example, an executive of a corporation is suspected of violating company policy by embezzling company funds. Insults and sotto voce murmurings circulate about an employee's abuse of trust and misuse of official position.
Admonition is a privately expressed warning or disapproval that reflects on the potentially criminal behavior of the offender. It is an injunction to refrain from doing a specific behavior. The behavior is defined as illegal or rule breaking. The matter is handled "discreetly" and behind the scenes, even though there are potential criminal violations or civil rule infractions involved, such as embezzlement, trading on nonpublic confidential information, or bribery and kickback.
For example, a corporation discovers an executive whose behavior violates not only company policy, but also criminal statutes as well. The matter, however, is discreetly handled in-house. Companies also sometimes delay providing information to the authorities in breach cases, fearing lost customers. In several instances we learned about from our informants, the employee may be "outplaced" to another firm and positive letters of recommendation may even be drafted on the employee's behalf. The person is neither sued nor is any public statement about the misconduct aired.
Accusation is a publicly expressed and perspicuous statement of alleged wrongdoing that affixes blame on the supposed offender. It is a strong, clear signal designed to restore social order; in the case of business, it seeks to redress a violation of company policy and the formal and informal rules governing the conduct of business. Unlike the private admonition, there is a public allegation of misconduct; the finger of blame is pointed at the culprit. But unlike the indictment, the accusation does not involve formal charges of criminal conduct. In the accusation, a business is picked out and served up as the "unacceptable face of capitalism" — a term coined by the late British prime minister Edward Heath. It taps into today's accusations.
Indictment is a publicly expressed, formal charge of criminal behavior against the offender. The finger pointing and blame is public. In addition, there may be allegations of criminal negligence, crimes of omission and commission, and violations of rules and regulations governing business transactions. For example, an executive of a corporation is publicly charged with grand larceny and the embezzlement or misappropriation of company funds. Or a US attorney hands down a criminal indictment alleging that the executive had been running a Ponzi scheme, and the SEC and the Commodities and Futures Trading Commission file civil suits charging that the executive had defrauded investors of nearly a billion dollars.
The four forms or kinds of allegations are interconnected, but distinct, social processes. Innuendo, admonition and accusation are laced with barbs and recriminations, reflecting the acid tenor of relations among the accused and accuser. There's no denying that they often slander and exclude others, extinguish trust, and provide guilty pleasures for onlookers and audiences. The reprimand may have the same bitterness of a business relationship gone sour. There may have been, in the example in the previous paragraph, murmurings that the executive used the incoming money to cover payments due to other, earlier investors, and that he also moved money out of their accounts and into accounts that he used to make speculative trades. Investors may have quietly conducted inquiries into these speculative trades and the uses and misuses of their accounts.
The admonition is private and utilitarian. The accusation is public and demonstrative. The indictment is public and always involves criminal and civil charges.
A distinctive feature of the accusation is its in-betweenness. With innuendo and insult on the informal side of making allegations and criminal indictment on the formal, legal side, the accusation stands astride the scathing cavil and the neutrally worded lawsuit, between privately assailing someone as a scoundrel, or deftly (and quietly) managing a rule-violating employee or publicly (and loudly) charging the employee with a crime.
The accusation is critical to the institution of the market because it is the initial, public warning signal about the improper business conduct of capitalists while revealing the potential threats to the system of capitalism. Why is the accusation a critical event in a market? Markets are collections of economic information, translated through trading into prices. They are also collections of social information, translated through communication into accorded reputation and status.
Excerpted from Corporate Wrongdoing and the Art of the Accusation by Robert R. Faulkner. Copyright © 2011 Robert R. Faulkner. Excerpted by permission of Wimbledon Publishing Company.
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Table of Contents
Acknowledgements; Chapter 1. Accusations: Between the Innuendo and the Illegal; Chapter 2. Red Flags and Rebukes: How to Assemble an Accusation; Chapter 3. Fighting Words and Key Phrases; Chapter 4. Market Exchanges Gone Sour: Six Fields of Action; Chapter 5. Finger Pointing and Three Themes: Lying, Cheating, and Stealing; Chapter 6. The Ecology of Greed: Hot Spots for Accusations; Chapter 7. The Repertoires of Wrongdoing; Appendix A: Notes on Statistical Analysis and Coding Principle Themes, Keywords, Key Phrases in the Accusations; Appendix B: The Sample of United States Corporations and Counts of Public Announcements of Alleged Economic Crime; References; Index
What People are Saying About This
‘Robert Faulkner adds a new, fascinating, and persuasive dimension to our understanding of corporate law-breaking, by demonstrating that it is accusations rather than official actions against capitalist enterprises that hit the hardest. Accusations claim the infliction of grievous harm, assume guilt, and employ defamatory language and derogatory portraits of alleged perpetrators that are far severer than those which appear when the enforcement and adjudicatory agencies take over. This is a book that will enlighten readers seeking to comprehend the dynamics of the recent economic meltdown and earlier episodes of malfeasance in the corporate world.’ Professor Gilbert Geis, University of California, Irvine
‘This path-breaking book explores the cultural elements and practice of claims of normative violations in the operation of organizations and individuals in capitalist system, and vastly expands the agenda of what has previously been treated in the study of white collar crime. A remarkable contribution.’ Professor Mayer Zald, University of Michigan