ELIMINATING REPEAT OFFENDERS: PRICELESS
The collapse of Enron alone is estimated to have cost the public billions of dollars. Yet Enron was the tip of the iceberg in 2002’s rapid succession of corporate earnings “re-statements” and admissions that books had been cooked to boost the bottom line. The cost of these discoveries — $170 billion in direct losses from the top eight controversies, according to BusinessWeek — was (and continues to be) borne directly by employees, investors and retirees, as well as by the whole of the failing economy.
THE CORPORATE THREE STRIKES ACT
“[Fines are just] an operating cost for these companies: They pay the fine, which becomes just a cost of doing business.”
— Missouri Secretary of State, Matt Blunt, BusinessWeek, December 16, 2002
The recent spate of corporate scandals is but the latest chapter in a long and costly history of corporate crime.
FTCR’s Corporate Three Strikes Act will deny corporate repeat offenders the right to do business in California. The Corporate Three Strikes Act arms California with the nation’s strongest tool to deter egregious violations of law, including consumer, environmental, anti-trust, labor and financial safeguards.
Any corporation convicted of a felony crime arising from violation of federal or state fraud, consumer protection, tax, bribery, extortion, environmental protection, civil rights, labor, employment, anti-trust, political campaign or finance law within a ten-year period is guilty of a “strike” offense.
One or two “strikes” against a company and it must publicize its transgression with an advertisement in California’s largest newspaper.
After the third “strike” against a company, for an offense in California, the company loses the right to do business in California.
Corporations are required to report all criminal convictions to the Secretary of State, who will maintain this information on a publicly accessible website for ten years.
FINES ARE NOT ENOUGH
Current state and federal sanctions do not adequately deter corporations from breaking the law.
For example, the SEC announced a $1.4 billion settlement in 2002 with the nation’s top ten investment & securities firms. Yet the settlement amount, massive on the surface, was negligible to these multi-billion dollar conglomerates. As Harvard law professor, Lucian Bebchuk, noted in the New York Times when the settlement was reached, Citigroup made $4 billion from underwriting fees alone in 2000 and 2001 — an amount 10 times the $400 million it owes under the settlement. “Drop in the bucket” punishments give corporations no incentive to change bad behavior.
CORPORATE CRIME SHOULDN’T PAY
Rarely are fines even as substantive as those assessed against the investment firms. But no matter the price, a justice system which relies on fines as the ultimate punishment for corporations often leaves breaking the law as a profitable option. An infamous example is the case of the Ford Pinto. Ford deemed the replacement of the Pinto’s faulty gas tank prohibitively costly because a recall would have cost $137 million. The company decided it was cheaper to pay the medical and court costs associated with an average 180 deaths a year than to replace the defect that caused them.
Though some corporations repeatedly violate the law, even when caught they pay relatively insignificant amounts in fines or settlements. Even worse, businesses can frequently “write off” fines, legal fees, and other expenses attributable to criminal actions as “business expenses.” The majority of the amounts paid by Citibank and the top investment firms in 2002 are expected to be tax-deductible. In this way companies force the public — first as consumers and then as taxpayers — to pay twice for corporate misconduct. This practice does nothing to protect the public from future corporate crime and undermines a healthy economy.
Statutes in all 50 states give the Attorney General the power to ask a court to revoke a corporate charter. California law provides for corporate dissolution on several grounds, including if the corporation “has seriously offended against any provision of the statutes regulating corporations” or when it “has fraudulently abused or usurped corporate privileges or powers.”
Though this power is rarely invoked, it has been exercised. In 1976, the California Attorney General brought a charter revocation action against a private water company for delivering contaminated water to its customers. The action forced the corporation to sell itself to the public water district. More recently, in 1998, New York’s Attorney General used their charter revocation statute to help put out of business the Council for Tobacco Research, an industry front group accused of intentionally undermining research about tobacco and health.
The Corporate Three Strikes Act declares the intention of the people of California to require the Attorney General to exercise this power in the case of corporate repeat offenders.
*Tyranny Of The Bottom Line, Ralph Estes, 1996.