The Cheating Culture Weblog

Commentary from David Callahan

Thursday, April 01, 2004

The recent harsh sentence of former Dynergy executive Jamie Olis ignited a small storm of controversy. Olis was slammed with 24 years in prison for helping to concoct a scheme to inflate Dynergy's cash flow. It was the longest sentence to date for any corporate executive involved in the scandals. Olis has no chance of parole for at least 20 years.

James Glassman of the American Enterprise Institute summed up prevalent reactions: "The sentence -- the result of a recent stiffening of federal guidelines -- was out of all proportion. By comparison, the median term for murder is 13 years; for drug trafficking, four years; sexual abuse, three years." Glassman went on to fulminate that "The Olis sentence is just the latest manifestation of the hysterical reaction of politicians to the corporate scandals that broke in the fall of 2001. Olis is a tragic victim, but millions of Americans, many of them without jobs, are also suffering as the U.S. economy struggles under the weight of poorly conceived new rules -- with more on the way."

Glassman is only half right here. Draconian prison sentences for first-offenders convicted of non-violent offenses are barbaric and unnecessary. A few years of prison for Olis would have been plenty to send a strong message that helps to deter other white-collar criminals. The judge in the Olis case who handed out the punishment was appalled at his inability to use discretion and impose a more reasonable sentence.

Yet you have to wonder about the outcry over Olis's fate. Outrageous mandatory minimum sentences for non-violent crimes have been commonplace in the United States for quite some time. In New York state, for example, numerous drug offenders are enduring long mandatory sentences doled out under the Rockefeller drug laws passed during the 1970s. Harsh anti-drug laws passed by Congress in 1986 also featured mandatory minimum sentences. For years, these unforgiving and counterproductive laws have been the subject of protest -- most notably by Families Against Mandatory Minimums. These groups have highlighted the fate of people like Lance Marrow, who was sentenced to 15 years to life after the police arrested his housemate for cocaine and Marrow was implicated by association.

Unfortunately, most of the protest against mandatory minimums has been marginalized. Rarely has the cause elicited much support from the kinds of establishment figures who have lately expressed outrage about Olis's prison sentence. When nonviolent offenders who are disproportionately black and Latino get locked away for decades nobody pays much attention. When it's a white-collar offender there is a huge outcry.

Glassman is right that the the politicians in Washington have gone overboard with the new sentencing guidelines for white-collar offenses. Harsh mandatory minimums for non-violent offenses should be abolished across the board, and one can only hope that now that former executives have been ensnared in the madness of mandatory minimums, a broader coalition for fighting such sentences will emerge.

But Glassman is wrong to suggest that regulators have gone overboard as a result of the corporate scandals. Yes, some of the rules enacted or proposed may be clumsy or ill-conceived. The broader picture, though, is that we have not yet put in place strong enough safeguards to prevent future corporate scandals. In particular, the SEC still does not have the capacity to fully police financial markets and white-collar prosecutors remain under-staffed. Key areas of the financial world, such as derivatives trading, remain poorly regulated. Nor have enough of the many individuals and companies involved in the recent scandals received tough enough punishment. For example, despite the pervasive corruption of stock analysts during the boom -- and the systematic deception of millions of investors -- not a single analyst or firm admitted wrongdoing or faced criminal charges. Glassman himself was up in arms last year when WorldCom was given a ridiculously light punishment for the largest corporate fraud in American history.

Among seasoned observers, the question is not whether there will be major new corporate scandals in the next few years. The question is when and where. Inevitably, in the wake of future scandals, people will look back to this period and ask: "why didn't Washington do more to prevent history from repeating itself?"

posted by David at 1:24 PM

Thursday, March 04, 2004

It is no secret that the healthcare sector is now among the most corrupt sectors in all of American society. Forget the military-industrial-complex; the real nasty action these days is in the medical-industrial-complex. It seems that something unpleasant lurks beneath just about any stone you turn over in this realm. Many doctors violate the Hippocratic Oath (an oath they don't actually take) by putting their own financial well-being above patient interests. Politicians dole out corporate welfare to phamaceutical giants in exchange for campaign donations. HMOs play god to cut costs. And it seems like everyone in the game is trying to rip off the government healthcare entitlement programs.

At this point, none of the cheating that happens in the medical-industrial-complex really shocks me anymore. Still, occasionally stories come along that make me wonder anew just how low people will go. A case in point, this story yesterday:

"WASHINGTON (AP) -- Small businesses and individuals seeking relief from rising health insurance costs are increasingly falling prey to scams that resulted in $252 million in unpaid medical claims over three years, congressional auditors say. The General Accounting Office said Wednesday that federal and state investigators have identified 144 unlicensed companies that sold more than 200,000 health insurance policies, mostly to small businesses.

"'Lower-priced policies that appear to provide comprehensive coverage can be very attractive,' Kathryn Allen, a GAO health care analyst, said at a Senate Finance Committee hearing to discuss the findings of the GAO's new report.

"After paying their premiums, policyholders discovered their insurance was worthless only after they were they treated for serious, costly health problems, said the GAO, Congress' investigative office."

You gotta wonder: what kind of person would be out there selling worthless health insurance policies that saddle businesses and individuals with huge bills? A criminal, is the first answer that springs to mind. But in this case we're not talking about a few rogue operators involved in a scam. According to the GAO, we're talking about at least 144 companies with multiple employees engaged in a systematic effort to exploit America's healthcare crisis for nefarious gain.

Do the people in these companies see themselves as criminals? I wonder. While the people at the top of the companies no doubt know they are on the wrong side of the law, the same is probably not true of those lower down the food chain who actually sell the insurance policies and do the paperwork. Maybe they sense something is shady but don't ask too many questions. Or maybe they know the truth but rationalize their own complicity in various ways, like "I reallly need the job."

One thing is clear: this is yet another example of the way in which weak government costs us dearly. Insurance scams like this are hardly a new thing. Federal and state regulators have been onto these scams for years. But with limited resources available for investigation and prosecution, the problem has actually gotten worse in recent years, according to the GAO.

Why doesn't government have the resources to protect Americans from such naked exploitation? Ask the conservative activists in the states who have pursued a strategy of systematically trying to starve state governments of tax revenue, often using ballot initiatives funded by corporate money to achieve that goal. Or ask the conservative legislators in Washington who have sought over and over again to limit the ability of federal agencies to go after this kind of deviance.

It has now been twenty-three years since Ronald Reagan came into office saying that government is the problem, not the solution. It's been nearly a decade since the Gingrich Congress swept into power with the same message. The result? Well, just about anywhere you look these days, you'll find ordinary Americans -- investors, workers, consumers, patients, homeowners -- who are being badly hurt by a private sector that has turned ever more predatory in recent years. Again and again, nobody is there to protect them.

It is ironic, needless to say, that the same conservative movement that has had a virtual monopoly on such concepts as "values" and "personal responsibility" and "law-and-order" would create the conditions whereby so much wrongdoing goes undeterred and unpublished. Yet do not mistake this double standard for thoughtless hypocrisy. In fact it is ideological rigidity. Despite a mountain of evidence to the contrary, conservatives labor under the mistaken axiom that the market can police itself. They argue that crooks and bad businesses will inevitably lose out to competitors who are honest and deliver on their promises.

That sounds good in theory. But there are two problems: one, it assumes that ordinary Americans have perfect information about products and services, which they do not. And it neglects the problem of the quick buck -- namely, scam artists who don't need to stay in business very long to get their dark rewards.

Of course, conservatives don't deserve all the blame for the evisceration of government protections in so many areas. The public also is to blame for buying into conservative attacks on government and for electing people to the public sector who, in fact, wish to destroy that sector.

And, yes, liberals share blame here as well. They have not invested enough energy into finding alternatives to hamfisted regulatory approaches or in finding new ways to make the case for strong government.

If John Kerry is ever elected President, he'll have his work cut out for him on this one.

posted by David at 2:24 PM

Monday, February 23, 2004

I got a call the other day from a guy named "Dave." He contacted me because he heard me on the radio and he was sure that I'd be interested in some of his cutting edge ideas for beating the system. Dave shared with me his strategies for engineering discounts at stores of every kind through swapping price tags or by manufacturing his own bar code tickets. Dave said he never paid full price for anything because he hated being cheated by all the businesses charging extortionist prices and otherwise abusing the little guy. He described himself as a man on a personal crusade to level the playing field.

Dave's latest example of doing justice in the world was getting my book for next to nothing. How? He picked it up in the new non-fiction section and walked over to the discount books. There, he slipped my book out of its jacket and placed it in the jacket of a steeply discounted book. "It took a few seconds and you'd never know what I was doing," Dave chuckled. After that it was on to the checkout counter where the cashier, of course, never bothered to look inside and match up jacket and book. Pretty clever there, Dave.

Why the scam? Dave explained that the publishing industry was profiteering on books. It only costs a few dollars to print a book, he explained, as if he were a publishing veteran. "I don't think it's right to turn around and charge 27 bucks. I just won't pay it."

A lot of people out there think and act like Dave -- people who are downloading pirated music from the Internet, or hooking themselves up to cable TV for free, or filing false claims with the insurance company, or stealing from the office. They argue that things aren't fair and that they are just getting what they deserve after a lifetime of being ripped off by high Geico premiums, or paying Time-Warner out the nose for cable service, or forking over $18 to Sony for CDs, or getting stiffed by employers. These claims of unfairness often come on top of larger grievances -- like not being able to make ends meet while special interests run the show in America.

Sure, I understand these rationales. But I don't think they hold up. Nearly every defense of the sort of cheating described above collapses under scrutiny. The costs of such cheating get passed along to others, and often those who are honest effectively subsidize the cheaters. Tax evasion is the classic case. And the unintended consequences of music piracy are now well known: record companies cutting back on the money they can pay start-up bands and taking fewer risks. Ironically, the music pirates who hate corporate music have helped make it ever more generic and hurt the very artists they supposedly care about. As for publishing, well, let's just say that the industry is hardly known for high-profit margins.

If Dave actually reads my book -- which believe me, is worth more than a remainder title selling for $4.95 -- he'll get the point. While I attribute much cheating in America today to structural causes, and propose structural solutions, I come back to personal responsibility in the end. Two wrongs don't make a right, as the saying goes.

We all have some power to reduce the hold of the cheating culture. Use that power.

posted by David at 5:38 PM

Thursday, February 19, 2004

The trial and media circus that Martha Stewart is enduring seems a cruel fate for a brilliant businesswoman with no previous criminal record. But critics who complain that Martha Stewart is a scapegoat, and that her crimes are petty compared to other corporate wrongdoers, miss an essential point: Prosecutors have little choice but to make an example of Ms. Stewart, given the profound weakness of government watchdogs these days. Anyone concerned about the integrity of financial markets -- and, indeed, about the health of our democracy -- should be hoping for a conviction in this trial.

If Martha Stewart were an ordinary American, prosecutors almost certainly would have gone easier on her. But Ms. Stewart is no ordinary American. She is a famous member of a tiny class of citizens who seem to think that they are above the law. In the past few years, hundreds of respected corporate executives with much to lose from a criminal imbroglio -- money, status, freedom -- have been accused of committing felonies. Why would so many upper-crust Americans break the law? Surely a big reason is that they thought they could get with away it. In Martha Stewart's case, psychological theories abound as to why Ms. Stewart might have lied to investigators and obstructed justice, as prosecutors allege. None of these theories are as compelling as the simple notion that she did so because she thought she wouldn't be caught.

Feelings of invincibility among some wealthy Americans are far from delusional. Two decades of attacks on government have crippled government watchdogs. During the boom years of the late 1990s, officials from the Securities and Exchange Commission, the Internal Revenue Service, and other government enforcement agencies freely confessed their inability to police corporations and the nation's wealthiest taxpayers. In 2000, a top SEC official, Lynn Turner, admitted that the SEC only reviewed 10 to 15 percent of the filings that it received from publicly held companies. That same year, Charles O. Rossotti, the IRS commissioner under President Clinton, testified to Congress about how his impotent agency had little choice but to let many wealthy tax cheats off the hook.

With vast rewards on one side of the scale and a miniscule chance of prosecution on the other, it made sense to flout the law during the boom years. Not much is different today, despite more than two years of non-stop scandals. While both the SEC and the IRS have recently beefed up enforcement efforts, the thin ranks of ill-paid government lawyers remain overwhelmed by the vast scope of their responsibilities and badly outgunned by top-notch legal talent in the private sector. Notwithstanding the recent guilty plea of former Enron executive Andrew Fastow and the indictment of Enron CEO Jeffrey Skilling, the record of prosecutors in bringing corporate wrongdoers to justice has been poor. Scores of executives, accountants, and analysts involved in the scandals have yet to see the inside of a courtroom. Moreover, new laws passed to govern accountants and corporations contain significant loopholes -- for examples, companies can still keep large amounts of debt off their books through offshore holdings. Major new financial scandals in the not-so-distant future are a real possibility.

In this climate, prosecutors need every win that they can get -- the bigger the better. Martha Stewart's alleged crimes are minor compared to misdeeds at places like Enron and it is unfortunate that one of the most successful businesswomen in American history has become a fallen idol. No matter. Ms. Stewart is a big fish, and the charges against her are comparatively easy to prosecute. Thus the government has a good chance of winning a high-profile conviction with significant deterrence value. If they do, financial markets may be more secure as a result.

American democracy will also be better off. The past two decades has seen a growing clash between private power and the public interest. The troubling ways in which private power has been winning that battle are everywhere apparent, from tax giveaways to the super rich to the decimation of regulatory agencies to the dominant role that wealthy donors play in determining the outcome of elections. Sending Martha Stewart to prison would solve none of these problems. But it would be an important shot across the bow of a wealthy class that has become dangerously arrogant - and whose growing abuse of power now imperils the very foundations of our democracy.

In a nation built on the promise of equality, no one should feel untouchable by the law.

posted by David at 6:14 PM

Saturday, February 07, 2004

The other day, I heard from a New Yorker named Georgiann Diorio. She wrote with a familiar sort of complaint: "While I was attending the police academy I couldn't believe how many people cheated their way through it. In fact, several of us confronted a young women who was cheating on the exams and she said, 'it's not cheating unless you get caught.'. . . To make a long story short, she graduated and I didn't. If I had cheated I would have graduated."

Let's put aside the fact that Georgiann no doubt would have graduated if she had just done all the work required of her. I'm not buying the self-pity.

Still, there is an important point here. Many people who would rather not cheat feel they are putting themselves at a disadvantage by being honest in an environment where cheating is pervasive. Basically, they feel like chumps. Researchers on academic dishonesty call this "the cheating effect." To understand how this plays out, consider a competitive arena like Stuyvesant High School, which is the top public high school in New York City. Every year, Harvard and other top Ivy League colleges take only so many applicants from Stuyvesant. Students battle each other viciously for these coveted slots, as well as all-important class rankings. Not surprisingly, according to my research, some of the cheating that occurs at Stuyvesant is fueled by a fear among students otherwise inclined to be honest that they'll be beat out by cheaters. In this situation, cheating can seem like the only way to be competitive.

You can find a similar cheating effect in one area after the other. What associate at a law firm hoping to make partner wants to honestly bill the hours they worked -- if they know many other associates are padding their hours and appearing more productive? What pharmaceutical sales director pushing a new prescription drug will forgo showering doctors with expensive gifts -- when they know that such bribes are being doled out by competitors pushing rival drugs? What car salesman wants to admit to customers that the next shipment of the hot new model won’t be in for eight weeks -- when all the other salesmen are saying three weeks and making more sales? How many minor leaguers will stay away from steroids -- when teammates who are juiced are blasting more homers and ascending into the majors?

Many of us won't give in to pressures to cheat even when we perceive that everyone else does it. We'll study harder to outdo the cheating students, or train more fanatically to beat the athletes on drugs, or simply make a point of living our lives in more ethical arenas. But all this means playing by our own rules, rather than the prevailing rules, and making life harder in the process. It means being a hero. It's easier to just go along with the cheating culture.

I end my book by advising people to be a hero -- or even a chump -- to try to reverse the vicious cycle that occurs in a cheating culture. If you don't cheat and I don't cheat, than "everybody" doesn't actually cheat. There can be virtuous cycles as well as vicious cycles. Positive norms can spread as rapidly as negatives ones.

But I'm under no illusions about how hard it is for many people to make this kind of sacrifice. Which is why, again and again, I come back to the need for structural changes that can impose new incentives from the top down and make cheating less rational.

Personal responsibility can only get us far in dismantling the cheating culture.

posted by David at 5:15 PM

Wednesday, January 28, 2004

I received an email the other day from a guy named Rick Bishop who has started something call Integribuild. This is why he had to say:

"I have over fifteen years experience in the construction industry and about a year ago I started developing a business that focuses on ethics training and related support services specifically for the construction industry. To my surprise, but not evidently to others, there has been virtually no interest in supporting this initiative by the largest industry associations - even though they all claim 'integrity' to be a hallmark of their members. There is no industry-wide code of ethics, and continued industry-related scandals drag down the already poor image of the entire industry.

"I also attempted gaining support from larger, publicly-held contractors, and still no luck. I offered to provide the training at no charge to the largest association and they said, 'we don't have time to deal with it.'"

Bishop posed this question:

"Why are leaders of associations and large companies, ones that can move heavily influence their industries, so afraid of addressing ethics issues?"

That is a very good question. Given the abomidable reputation of contractors, it's amazing that this particular industry wouldn't be giving much more than lip service to ethics.

Unfortunately, there are other industries that do make ethics a priority and still fail miserably. I found in my research that a lot of professional groups that should be better policing their own ranks just are not doing the job. State bar associations go easy on dishonest lawyers, state medical societies go easy on corrupt doctors, the National Association of Securities Dealers, which polices stock brokers, has been joke, and everyone knows what a disaster self-policing by the accounting industry was during the 1990s.

Conservatives are often right when they complain that there is too much government regulation. In many areas, there sure is. But the reason, by and large, is that there are too many industries that don't ferret out the miscreants in their own ranks. Government is doing the work that professional watchdogs should be doing themselves to protect patients, clients, investors, consumers, and so on.

Conservatives who whine about too much red tape might be wise to focus their fire on the many associations that constantly drop the ball on ethics -- and compel government to pick it up. Some day, if there is ever effective self-policing by business and professional groups -- and yet an alphabet soup of agencies is still on their backs -- than there will be a reason to blast the feds for meddling to no good end.

Until that day, it is hard to argue that we don't need strong government watchdogs sniffing around one industry after another.

posted by David at 3:44 PM

Monday, January 26, 2004

John Edwards is not going to be the Democratic nominee this year. But his strong showing in Iowa was a big surprise, and raises the question of whether his populist message -- rich in talk of "values" -- has broader appeal. Pundits who have portrayed Edwards as a run-of-the-mill populist trading endlessly on his personal narrative miss the sophistication of the Edwards message. Unlike Gore in 2000, Edwards aggressively embraced the language of values in championing the cause of the little guy.

Edwards hasn't been the only Democrat talking about values on the campaign trail. Top Democrats apparently have internalized the lesson taught by Bill Clinton--that the party must overcome its crippling lag on values issues. A 2000 poll by the Democracy Corps, a liberal polling group, showed that voters had vastly more trust in Republicans than Democrats on such moral basics as personal responsibility, discipline and knowing right from wrong. A more recent poll, by the Pew Research Center for the People and the Press, shows a Democratic candidate getting slaughtered in the 2004 election among voters who regularly attend religious services.

The problem is that few Democrats--on the campaign trail or off--have done well at moving beyond the Clinton strategy of playing defense on values. Democrats tend to operate in a debate defined by the right. They are good at mentioning their long marriages or their belief in personal responsibility. They slip in references to God and the Bible. And more Democrats now frame issues such as healthcare through a "family" lens, reflecting advice from pollster Stanley Greenberg and others.

Joe Lieberman is the classic example of this defensive mindset. Lieberman, it seems, can't utter a sentence without mentioning values. But for the most part he has been playing the right's game, focusing on traditional moral concerns. That might get him nominated in a Republican primary; it hasn't gotten him very far in the Democratic primary.

Edwards has been the most aggressive of the Democrats in attempting to move the values debate onto home turf by couching the liberal ideals of fairness and opportunity in strong moral language. This is good stuff, and I think it points the way to the future of the Democratic party. Democrats need to sharpen their core values, and then hammer them home again and again.

The problem, though, is that a values-based message about fairness and opportunity only goes so far. It lacks the bite of the values discourse pioneered by the right. Some thirty years ago, conservatives moved aggressively to establish a moral monopoly amid what Francis Fukuyama has called "the Great Disruption," namely the breakdown of the traditional family and rise of feminism and individualism. The Great Disruption played out in very personal ways for Americans, and was experienced by many--especially white men--as a full-blown social crisis. Conservatives were brilliant at leveraging the crisis to entomb liberalism. They separated working-class voters with traditional values from a Democratic Party that, in Spiro Agnew's words, favored "acid, amnesty and abortion." And, in a broader assault, they convinced large swaths of the public that just about any government program was apt to spawn social pathology. The harsh discipline of the free market was offered by conservatives as more than just a path toward greater prosperity. It was presented as a savior of America's moral character.

Today, progressives have a chance to emulate the conservative success on values by highlighting a new moral crisis. This crisis infects nearly every part of American society, from education to sports to business to a myriad of professions. It often plays out in intensely personal ways and it deeply troubles Americans.

The crisis, of course, is the rise of a "cheating culture" in the United States. I have a new article in The Nation that this post draws from that explains in more detail how Democrats can exploit this moral crisis for maximum gain. Read it here.

posted by David at 1:40 PM