Corporate Crime - Hardcover

Chapter 1

Corporations and Illegal Behavior

During his presidency, Theodore Roosevelt gained notoriety as a Trust Buster for his efforts to break up and to control the mammoth corporations of the early twentieth century. Actually, in 1909 only two industrial corporations, United States Steel and Standard Oil of New Jersey (now Exxon) had assets exceeding $500 million (in today's currency probably equivalent to $2 billion), and both of them were highly specialized. By 1971, the two largest U.S. corporations alone had combined sales of nearly $47 billion, about equal in constant dollars to the sales of more than 200,000 manufacturing establishments of 1899 (Mueller, 1973, p. 114). By 1977, 15 industrial corporations had sales of $13 billion or more; two had annual sales of $54 billion.

Of the world's 15 largest corporations in 1978, ranked by size of sales, all but four were American. The two largest, General Motors and Exxon, each had annual sales totaling over $60 billion, a sum that far exceeds the total revenues of any state in the United States and those of most countries in the world. In general, corporations retain the same positions from year to year, but some changes do occur. Between 1974 and 1978 for example, Mobil Oil Corporation moved from eighth to fifth place, and Standard Oil of California moved from fourteenth to eighth, thus making oil corporations in 1978 seven out of the 10 largest (National Iranian Oil has since declined). General Electric's position declined from sixth place in 1974 to eleventh in 1978 (see Table 1.1).

Large corporations have contributed enormously to the industrial and commercial development of the United States, as of most other Western countries. They have provided employment to millions of persons, and they have increased the wealth of the nation in many other ways, including the payment of dividends to millions of stockholders. By their very size they are able to organize and coordinate production and distribution and to develop a high degree of specialization. Given the contemporary requirement for the use of machines and complicated technology, only a large corporation can "deploy the requisite capital, it alone can mobilize the requisite skills" (Galbraith, 1971, p. 24). The capital resources of the large corporations enable them to develop, adopt, and change technology on a massive scale. The military defense capacity of a large percentage of these corporations is enormous. For example, in a relatively short time after the start of World War II, peacetime corporations were able to convert to the production of tremendous amounts of military equipment for our own use as well as that of our allies. All of this means that the high production and the financial returns that have resulted from modern technology and industrial expansion have removed a large part of the population from the pressures of physical want.

In his classic book on the corporation, Drucker has given what is perhaps the best explanation of the need for the large corporation in modern industrial society.

It has...become obvious that modern industrial technology requires some form of big-business organization -- that is large integrated plants using mass-production methods -- for its operation. Therefore Big Business is something that must be accepted in any modern industrial country. It also has become clear that the large industrial unit is not just a concomitant of modern industrial technology but the very center of modern industrial society. The large industrial unit has become our representative social actuality; and its social organization, the large corporation in this country, [has become] our representative social institution. In other words, Big Business is the general condition of modern industrial society irrespective of the forms of social organization or the political beliefs adopted in particular countries. Even to raise the question whether Big Business is desirable or not is therefore nothing but sentimental nostalgia. The central problem of all modern society is not whether we want Big Business but what we want of it, and what organization of Big Business and of the society it serves is best equipped to realize our wishes and demands. (Drucker, 1972, p. 18)

As a result of tremendous growth, the assets and sales of the largest corporate conglomerates often total billions of dollars, and their economic and political powers are enormous. In a strict legal sense there are some 2 million corporations in the United States today, inasmuch as any two persons can become incorporated in a business enterprise. Our concern here, however, is with the very large corporations, those 500 or so listed in Fortune and Business Week magazines. Some of these giants control wide areas of the American economy. The Campbell Soup Company, for example, controls 95 percent of all prepared soups; four food manufacturing corporations make 90 percent of all breakfast foods.

Corporate power, of course, operates most directly in "Economic terms, via decisions on investment, pricing, location, research, and product design, but it also has considerable social and political consequences in terms of employment opportunities, the operation of local community affairs, and the quality of people's lives generally" (Child, 1969, p. 35).

The giant corporations possess such awesome aggregates of wealth and such vast social and political powers that their operations vitally influence the lives of virtually everyone, from cradle to grave. The work lives, and hence the health and safety, of the large part of the population are controlled directly or indirectly by the major corporations. These giants greatly affect prices and thus inflationary trends, the quality of goods, and the rate of unemployment. They can and do manipulate public opinion through the increasingly effective use of the mass media, and they noticeably affect the environment. Their behavior influences, and often shapes, our foreign relations, and they can even jeopardize the democratic process through illegal political contributions, as disclosures of recent years suggest. In discussing the role of the states rather than the federal government in regulating large corporations, Nader noted in 1973, with only a touch of hyperbole, "Our states are no match for the resources and size of our great corporations; General Motors could buy Delaware...if DuPont were willing to sell it" (Nader, 1973, p. 79).

The very size and power of such large corporations, particularly the conglomerates and the dominant firms in industries such as steel, have raised a number of serious economic, political, and ethical questions. Hostility to big business has a history that extends back to the Populist movement of the late nineteenth century and the suspicion of Trusts that culminated in the 1890 Sherman Antitrust Act: "No other institution in American history -- not even slavery -- has ever been so consistently unpopular as has the large corporation with the American public. It was controversial from the outset, and it has remained controversial to this day" (Kristol, 1978, p. 5).

Increasingly questionable at present is whether or not the goods produced by these enormous corporations are necessarily of the highest possible quality or are marketed at the lowest possible prices. Since many of these corporations are virtual monopolies, their pricing is often not based on competition, as is ideologically claimed, but is actually "administered pricing," that is, pricing decided upon by the corporation itself regardless of competitive factors. The law of supply and demand notwithstanding, enormous economic power enables a few corporations to set excessive prices in areas where there is high market concentration (that is, where a few firms dominate an industry). Moreover, it has been demonstrated that the multinational corporations have exercised undue political influence in relation to both domestic and foreign governments. Even corporate ethical standards have been questioned in many areas, among them the misrepresentations made in their costly advertising.

In 1978 a survey concluded that business has dropped in public esteem rather dramatically over the past decade -- not only business in general but specific major industries and corporations (Lipset and Schneider, 1978). The authors added, however, that the national crises of the past few years have greatly diminished the public's faith in virtually every important institution; government and politicians are markedly less popular even than business: "Thus any conclusion that things are bad for business must be tempered by the realization that things are tough all over" (Lipset and Schneider, 1978, p. 41). Business has unique problems; the public perceives business as being motivated by self-interest rather than by the national interest. Various surveys have found widely held opinions that prices and profits often are excessively high, quality unreliable, and the corporate interest in individual well-being minimal (Wall Street Journal, August 31, 1978). Moreover, the planning operations of large corporations, in spite of their enormous size, product diversification, and economic power, have not necessarily afforded protection to the American public from periodic economic recessions, as, for example, the auto industry's continued emphasis on large rather than small cars.

The public today regards white-collar and corporate crime as serious offenses -- in fact, as equal to, and even more serious than, many "ordinary" crimes, such as burglary and robbery? This attitude was revealed in a 1978 national survey in which 204 offenses were ranked for seriousness (Wolfgang, 1979; also see National Survey of Crime Severity, 1978.)

The seriousness score for the offense of a legislator who takes a bribe of $10,000 from a company to vote for a law favoring the company was 370. By comparison, a score of 339 was assigned to the burglary of $100,000 from a bank; a robbery at gunpoint in which the victim needed medical treatment was given a score of 361. Even more surprising was the finding that illegal retail price-fixing by several large companies is considered more serious than a personal robbery in which the offender intimidates the victim with a lead pipe and steals $1,000 (201 to 197). Factory pollution of a city's water supply, resulting in only one person's illness, carries a seriousness score of 151 -- more than twice the score of 69 assigned to a burglary in which the offender breaks into a private home and steals $100. (Wolfgang, 1980)

The extent of law violations by corporations is unquestioned today: it has been widely revealed by many government investigative committees, both state and federal, which have inquired into banking institutions, stock exchange operations, railroads, and the large oil, food, and drug industries. More recently, investigations have exposed widespread corporate domestic and foreign payoffs and illegal political contributions. Throughout, the investigations have revealed the immense economic and political power of corporations.

Government inquiries have also shown that corporate violations are exceedingly difficult to discover, to investigate, or to develop successfully as legal cases because of their extreme complexity and intricacy. These characteristics distinguish corporate crime rather clearly both from ordinary crime and from other types of white-collar offenses. This is particularly true of antitrust cases, foreign payoffs, illegal political contributions, and computer fraud. One far-reaching case of corporate crime involving price fixing and bid rigging, for example, was the so-called electrical conspiracy, in which 29 companies, including General Electric and Westinghouse, and 45 company executives were convicted of illegalities in the sales of heavy electrical equipment totaling approximately $2 billion (Her-ling, 1962). In this case, both government and private purchasers were deceived since the bids had been previously set high rather than arrived at competitively. Leading pharmaceutical manufacturers like American Cyanamid, Charles Pfizer, and Bristol-Myers have been found guilty of participation in a long-term price-fixing scheme to monopolize a $100 million market in antibiotic "wonder drugs." Three major plumbing manufacturers (Borg-Warner, American Standard, and Kohler), along with 12 other corporations, which together produce about 98 percent of the enameled cast-iron plumbing fixtures sold in the United States, were convicted of fixing prices over a four-year period.

More sophisticated corporate violations have been carried out through the use of computers, as in the Equity Funding case, the largest single company fraud known (for details see Whiteside, 1977; Parker, 1976; Conklin, 1977, pp. 46-47). This fraud case, discovered in 1973, resulted in losses estimated at $2 billion to the company's insurance customers and other investors. Through fraudulent means, Equity Funding Corporation of America was made to appear to be one of the largest, most successful, and fastest growing financial institutions in the world. The scheme, which was carried out by corporation management, inflated reported company earnings, primarily by the use of computers and false bookkeeping. One operation, for example, involved the creation of 64,000 fictitious insurance policies out of 97,000 claimed to have been issued; the purpose of this operation was to secure funds to cover the fictitious policies and other fraudulent activities.

Computers were also involved in violations by Revco Drug Stores, one of the nation's largest discount drug chains. Revco was found guilty in 1977 of a computer generated double-billing scheme that resulted in the loss of more than $500,000 in Medicaid funds to the Ohio Department of Public Welfare (Vaughan, 1979). This was the largest case of Medicaid provider fraud in the history of Ohio?

The complexity of corporate crime cases is also exemplified in the U.S. Energy Department case against Sun Oil Company. The Energy Department accused Sun of violating federal pricing regulations by inflating the cost of crude oil purchased in 1973 by the sum of $3.5 million. According to the department, Sun switched a shipment of Iranian crude oil destined for its Canadian affiliate to a U.S. unit, Sun Oil Company of Pennsylvania, in November and December of 1973; the Canadian unit received a shipment of Algerian crude destined for the U.S. company. Although the Iranian crude actually received by the U.S. unit was about $4.50 per barrel less expensive than the Algerian oil it replaced, the Department of Energy stated that Sun of Pennsylvania had recorded its cost at the higher Algerian price. The department said that Sun, by recording a higher cost for the oil, was able to justify higher prices under the price control rules. (Wall Street Journal, January 4, 1979).

The Cost of Corporate Crime

Except in such crimes as fraud, the victim of ordinary crime knows that he or she has been victimized. Victims of corporate crimes, on the other hand, are often unaware that they have been taken. Examples are shareholders who receive a falsified balance sheet, consumers who have paid an inflated price for a pro...