1
00:00:00,040 --> 00:00:03,840
Speaker 1: Bloomberg Law with June Grosso on demand via our Bloomberg

2
00:00:03,920 --> 00:00:07,400
Speaker 1: Radio Plus app free for iPhone and Android devices. You've

3
00:00:07,400 --> 00:00:10,040
Speaker 1: seen the stories and the headlines and in the courts

4
00:00:10,240 --> 00:00:14,480
Speaker 1: over and over again. Corporate executives who already have wealth

5
00:00:14,520 --> 00:00:18,440
Speaker 1: and status committing financial crimes. Do they do it for

6
00:00:18,480 --> 00:00:21,600
Speaker 1: the money or just because their ego tells them they

7
00:00:21,680 --> 00:00:25,800
Speaker 1: can do they feel remorse about their victims. A new book,

8
00:00:26,120 --> 00:00:28,800
Speaker 1: Why They Do It Inside the Mind of the White

9
00:00:28,840 --> 00:00:34,520
Speaker 1: Collar Criminal explores what turns corporate executives into corporate criminals.

10
00:00:34,960 --> 00:00:38,239
Speaker 1: It's based on the author's interviews with close to fifty

11
00:00:38,280 --> 00:00:41,600
Speaker 1: well known white collar criminals, from Bernie made Off to

12
00:00:41,680 --> 00:00:45,919
Speaker 1: Dennis Kozlowski. The author, Eugene Saltis, is a professor at

13
00:00:45,920 --> 00:00:49,279
Speaker 1: Harvard Business School and joins me, now, how did you

14
00:00:49,320 --> 00:00:53,640
Speaker 1: get these close to fifty white collar criminals to talk

15
00:00:53,680 --> 00:00:56,760
Speaker 1: to you? Well, I think many of the individuals, as

16
00:00:56,800 --> 00:01:00,440
Speaker 1: they left their fields in finance and business, the lonely

17
00:01:00,600 --> 00:01:03,080
Speaker 1: and they don't have the people to engage in the

18
00:01:03,120 --> 00:01:06,200
Speaker 1: business community anymore. And being a financial economist, I was

19
00:01:06,240 --> 00:01:09,759
Speaker 1: able to develop a relationship with them by connecting by

20
00:01:09,800 --> 00:01:12,840
Speaker 1: talking about the world that they once loved and were

21
00:01:12,880 --> 00:01:16,080
Speaker 1: passionate about, but obviously have now left that community. So

22
00:01:16,160 --> 00:01:19,080
Speaker 1: I connected with them talking about the technical stuff that's

23
00:01:19,080 --> 00:01:20,959
Speaker 1: in the papers on a day to day basis. But

24
00:01:21,040 --> 00:01:23,840
Speaker 1: I was also fortunate being an academic, that I could

25
00:01:23,880 --> 00:01:27,440
Speaker 1: spend time with them, not just popping for one conversation,

26
00:01:27,480 --> 00:01:29,520
Speaker 1: but I committed that I would spend as long as

27
00:01:29,880 --> 00:01:32,240
Speaker 1: it took to really get to know them in their perspectives.

28
00:01:32,240 --> 00:01:34,600
Speaker 1: So some people this might be weeks, months, and in

29
00:01:34,640 --> 00:01:37,320
Speaker 1: some cases I actually spent years speaking with individuals over

30
00:01:37,360 --> 00:01:42,240
Speaker 1: the course of this project. These people were wealthy, privileged people.

31
00:01:43,080 --> 00:01:46,800
Speaker 1: Was it pure greed the need for more and more

32
00:01:46,840 --> 00:01:49,120
Speaker 1: that made them do it? I think it's a little

33
00:01:49,160 --> 00:01:52,280
Speaker 1: bit more complicated than that. We're all driven by incentives,

34
00:01:52,320 --> 00:01:55,040
Speaker 1: and to the extent that money can play some role

35
00:01:55,080 --> 00:01:59,640
Speaker 1: around incentence. But what I explore is trying to think

36
00:01:59,640 --> 00:02:03,800
Speaker 1: of why would these individuals who are really quite strategic

37
00:02:03,840 --> 00:02:06,080
Speaker 1: and smart, I mean it really are titans of industry.

38
00:02:06,440 --> 00:02:08,120
Speaker 1: To make sense, they could gain a little bit more

39
00:02:08,200 --> 00:02:11,560
Speaker 1: money or prestige, they wouldn't risk their freedom for that.

40
00:02:11,600 --> 00:02:14,760
Speaker 1: They wouldn't risk everything. And I think that's the humbling

41
00:02:14,840 --> 00:02:17,080
Speaker 1: question to ask, because why would someone that seems to

42
00:02:17,080 --> 00:02:18,679
Speaker 1: have it all seem to want to push it a

43
00:02:18,760 --> 00:02:21,080
Speaker 1: little bit farther, And so I explore in the book,

44
00:02:21,200 --> 00:02:23,840
Speaker 1: should we be thinking of this as a rational calculation

45
00:02:24,240 --> 00:02:27,720
Speaker 1: so many economists and regulators and prosecutors see it, or

46
00:02:27,720 --> 00:02:29,800
Speaker 1: should we think of this as maybe a different type

47
00:02:29,840 --> 00:02:32,560
Speaker 1: of failure, a different type of process that's causing these

48
00:02:32,600 --> 00:02:37,760
Speaker 1: executive failures? What type of failure? So, what I hypothesize

49
00:02:37,760 --> 00:02:40,280
Speaker 1: and argue in the book is that it doesn't look

50
00:02:40,320 --> 00:02:43,200
Speaker 1: so much like of a failure of that careful, analytical,

51
00:02:43,280 --> 00:02:47,680
Speaker 1: deliberative reasoning of comparing the expected benefits against the expected costs,

52
00:02:47,880 --> 00:02:50,520
Speaker 1: which is how people often type see this and and

53
00:02:50,560 --> 00:02:53,880
Speaker 1: think executives would make these kinds of consequential decisions. But

54
00:02:54,040 --> 00:02:55,840
Speaker 1: rather when one actually looks at some of the cases,

55
00:02:55,880 --> 00:02:58,120
Speaker 1: it looks I think it's much closer to a failure

56
00:02:58,120 --> 00:03:01,280
Speaker 1: of manual intuition. They don't act, we see the harm

57
00:03:01,440 --> 00:03:03,840
Speaker 1: associated with their actions at the time these decisions are

58
00:03:03,880 --> 00:03:06,600
Speaker 1: being made. So I can give an example, Sam Waxel,

59
00:03:07,000 --> 00:03:09,520
Speaker 1: the former CEO of m Clone Well no executive because

60
00:03:09,520 --> 00:03:12,040
Speaker 1: it's also the case that ended up in snaring Martha

61
00:03:12,120 --> 00:03:15,640
Speaker 1: Stewart and leading to her obstruction of justice charges. Sam

62
00:03:15,639 --> 00:03:20,200
Speaker 1: Waxel's brilliant, quite brilliant executive, but he also found out

63
00:03:20,240 --> 00:03:22,919
Speaker 1: about some adverse test results coming back from the FBA

64
00:03:23,000 --> 00:03:25,360
Speaker 1: that they weren't going to give the approval of his

65
00:03:25,480 --> 00:03:28,840
Speaker 1: drug as expected, and so that evening he called his

66
00:03:28,919 --> 00:03:30,959
Speaker 1: daughter and told her to dump her two million dollars

67
00:03:31,000 --> 00:03:34,679
Speaker 1: worth of shares. Now, this isn't a particularly good white

68
00:03:34,680 --> 00:03:37,000
Speaker 1: teller crime. I mean, this is actually about his stupid

69
00:03:37,040 --> 00:03:39,680
Speaker 1: as they come. I mean, this isn't hard for regulars

70
00:03:39,720 --> 00:03:42,360
Speaker 1: to pick up this kind of misconduct. So you're almost

71
00:03:42,400 --> 00:03:44,320
Speaker 1: certainly going to get caught. And so if you think

72
00:03:44,320 --> 00:03:46,840
Speaker 1: of well, why would Sam Waxel tell his daughter to

73
00:03:46,960 --> 00:03:49,320
Speaker 1: dump these shares, It's really hard to think of that

74
00:03:49,400 --> 00:03:52,880
Speaker 1: as a careful cost benefit calculation. You're almost certainly going

75
00:03:52,920 --> 00:03:55,280
Speaker 1: to get caught. But rather, at the time he was

76
00:03:55,320 --> 00:03:57,920
Speaker 1: thinking about calling his daughter and telling her this. I

77
00:03:58,000 --> 00:03:59,960
Speaker 1: see that as a failure of intuition. He didn't act.

78
00:04:00,040 --> 00:04:02,240
Speaker 1: We see the harm associate with that at the time.

79
00:04:02,960 --> 00:04:06,840
Speaker 1: So one about the victims. I remember interviewing victims of

80
00:04:06,840 --> 00:04:10,880
Speaker 1: the Enron scandal who were older and lost their retirements

81
00:04:10,960 --> 00:04:13,560
Speaker 1: and didn't know how they would cope did any of

82
00:04:13,600 --> 00:04:17,159
Speaker 1: these white color criminals that you spoke to think about

83
00:04:17,200 --> 00:04:20,920
Speaker 1: the victims and feel sorry about what they've done. One

84
00:04:20,920 --> 00:04:23,400
Speaker 1: of the parts that I was initially surprised but then

85
00:04:23,760 --> 00:04:26,719
Speaker 1: became quite used to over time is the lack of remorse,

86
00:04:27,200 --> 00:04:30,000
Speaker 1: and the remorse that I tend to see was around

87
00:04:30,360 --> 00:04:33,800
Speaker 1: the loss of their family, those privileges, they missed their

88
00:04:33,880 --> 00:04:37,520
Speaker 1: child's graduation, but not really for the victims. And I

89
00:04:37,520 --> 00:04:39,680
Speaker 1: think the reason why, going back to this notion that's

90
00:04:39,680 --> 00:04:42,200
Speaker 1: the failure of intuition, is that much of the harm

91
00:04:42,240 --> 00:04:46,520
Speaker 1: associated with white color misconduct, the victims aren't close. Their

92
00:04:46,520 --> 00:04:51,960
Speaker 1: psychologically distant, they're physically distant, and so it doesn't create

93
00:04:52,040 --> 00:04:56,160
Speaker 1: that same visceral feeling that you're actually harming someone specifically.

94
00:04:56,520 --> 00:05:00,599
Speaker 1: Take something like insider trading the easiest example. It's really hard,

95
00:05:00,680 --> 00:05:04,279
Speaker 1: if not impossible, in some circumstances, to actually identify who

96
00:05:04,400 --> 00:05:07,120
Speaker 1: the victims are in those cases, so it doesn't create

97
00:05:07,120 --> 00:05:11,880
Speaker 1: that natural, instinctive, visceral response that you're actually hurting someone specifically.

98
00:05:12,120 --> 00:05:14,120
Speaker 1: But even the case of financial fraud, as you point

99
00:05:14,120 --> 00:05:17,000
Speaker 1: out with Enron, I mean, at the time the executives

100
00:05:17,040 --> 00:05:19,760
Speaker 1: were actually engaged in the misconduct and the fraud that

101
00:05:19,760 --> 00:05:23,480
Speaker 1: would ultimately lead to the devastation for the people at

102
00:05:23,560 --> 00:05:27,200
Speaker 1: Enron's the time they were actually getting awards, Andy Fast

103
00:05:27,200 --> 00:05:29,599
Speaker 1: out one CF of the Year award, at the same

104
00:05:29,600 --> 00:05:32,240
Speaker 1: time he was actually engaged in and arguably the most

105
00:05:32,279 --> 00:05:35,880
Speaker 1: severe conduct that led to undermining the firm and leading

106
00:05:35,920 --> 00:05:39,560
Speaker 1: to its failure. So there isn't that connection the time

107
00:05:39,600 --> 00:05:42,360
Speaker 1: that you're actually hurting someone while you're actually doing it's

108
00:05:42,400 --> 00:05:44,839
Speaker 1: actually delayed in years away, so it doesn't have that

109
00:05:44,920 --> 00:05:48,719
Speaker 1: negative distance while you're actually engaged in the mouth season.

110
00:05:49,400 --> 00:05:52,640
Speaker 1: I've been talking to Harvard Business School professor Eugene solved

111
00:05:52,720 --> 00:05:55,680
Speaker 1: Us about his new book Why They Do It Inside

112
00:05:55,680 --> 00:05:58,880
Speaker 1: the Mind of the White Color Criminal. Bernie made Off

113
00:05:59,000 --> 00:06:03,919
Speaker 1: seems like one of the more unsympathetic of the people

114
00:06:03,960 --> 00:06:07,080
Speaker 1: that you spoke to. He stole from people he knew,

115
00:06:07,240 --> 00:06:10,479
Speaker 1: and he told you it's like a comedy of errors.

116
00:06:10,920 --> 00:06:14,120
Speaker 1: Did he have any remorse at all? Bernie made Off

117
00:06:14,200 --> 00:06:17,320
Speaker 1: is different than the other executives I spoke with and

118
00:06:17,480 --> 00:06:20,080
Speaker 1: find large different from the bath majority of people that

119
00:06:20,160 --> 00:06:23,320
Speaker 1: engage in white collar crime. That he knew his victims.

120
00:06:23,480 --> 00:06:26,720
Speaker 1: I mean, intimately, these were family, these were friends, These

121
00:06:26,720 --> 00:06:29,920
Speaker 1: are members of the Jewish community, and he doesn't express

122
00:06:30,000 --> 00:06:32,440
Speaker 1: remorse for this, even to those that he knew well.

123
00:06:32,920 --> 00:06:35,600
Speaker 1: And I think this is what raises some interesting and

124
00:06:35,680 --> 00:06:39,000
Speaker 1: I think difficult questions about him as an individual, and

125
00:06:39,000 --> 00:06:42,320
Speaker 1: that he's just simply not empathetic even when the evidence

126
00:06:42,360 --> 00:06:44,039
Speaker 1: has put directly in front of him, which is one

127
00:06:44,040 --> 00:06:45,800
Speaker 1: of the things I described and discussed in the books,

128
00:06:45,800 --> 00:06:48,240
Speaker 1: putting the evidence in front of him of some of

129
00:06:48,279 --> 00:06:51,000
Speaker 1: the people that were harmed. He sees ways much like

130
00:06:51,080 --> 00:06:53,599
Speaker 1: we all do, but just in a much greater extent

131
00:06:54,040 --> 00:06:57,880
Speaker 1: of rationalizing. For example, the family Foundations which many of

132
00:06:57,920 --> 00:07:01,080
Speaker 1: us have heard that lost just extraordinary mounts when the

133
00:07:01,120 --> 00:07:05,760
Speaker 1: Ponte scheme collapsed, he sees it as well. Many instances

134
00:07:05,880 --> 00:07:08,000
Speaker 1: these foundations wouldn't have ever been set up in the

135
00:07:08,080 --> 00:07:10,840
Speaker 1: first place had it not been for the gains that

136
00:07:11,080 --> 00:07:14,120
Speaker 1: the parents had ten or twenty years ago. And so

137
00:07:14,200 --> 00:07:16,840
Speaker 1: to the extent that the foundations ended up collapsing when

138
00:07:16,880 --> 00:07:19,240
Speaker 1: the Ponte scheme ended, he sees is that well, those

139
00:07:19,280 --> 00:07:21,520
Speaker 1: family foundations would have never existed had it not been

140
00:07:21,520 --> 00:07:24,480
Speaker 1: for the artificial gains ten or twenty years earlier. So

141
00:07:24,520 --> 00:07:27,120
Speaker 1: it's really kind of no harm, no foul, which I

142
00:07:27,160 --> 00:07:29,680
Speaker 1: think we can all step back and and find a

143
00:07:29,720 --> 00:07:34,480
Speaker 1: little bit terrifying. One of the more surprising stories was

144
00:07:34,560 --> 00:07:38,960
Speaker 1: Dennis Kozlowski, the former chief executive of Tycho. He said

145
00:07:38,960 --> 00:07:42,160
Speaker 1: the board would have given him anything he wanted, So

146
00:07:42,440 --> 00:07:46,040
Speaker 1: why did he arrange for tens of millions of dollars

147
00:07:46,080 --> 00:07:50,200
Speaker 1: in unauthorized bonuses? It's an important question. I mean he

148
00:07:50,320 --> 00:07:53,200
Speaker 1: at the time when he was actually engaged in, ultimately

149
00:07:53,200 --> 00:07:55,400
Speaker 1: what would be the embezzment that would lead to his conviction.

150
00:07:55,640 --> 00:07:57,560
Speaker 1: I mean, he was one of the highest paid CEOs

151
00:07:57,720 --> 00:08:00,680
Speaker 1: in the country and still in the last twenty years, still,

152
00:08:00,720 --> 00:08:02,280
Speaker 1: I mean it was over a hundred million dollars of

153
00:08:02,280 --> 00:08:05,560
Speaker 1: compensation per year. And I think the challenge in a

154
00:08:05,600 --> 00:08:08,240
Speaker 1: case like his is that whether the board, I mean

155
00:08:08,240 --> 00:08:11,200
Speaker 1: we talk a lot about corporate governance and independence of directors,

156
00:08:11,440 --> 00:08:14,880
Speaker 1: whether the board was providing the appropriate level of accountability

157
00:08:14,960 --> 00:08:17,840
Speaker 1: or not is almost even besides the point if an

158
00:08:17,840 --> 00:08:21,520
Speaker 1: executive in his position subjectively believes that they would give

159
00:08:21,560 --> 00:08:24,400
Speaker 1: him anything he wanted, and so to the extent that

160
00:08:24,440 --> 00:08:27,120
Speaker 1: there was, I mean, ultimately these loans were being forgiven

161
00:08:27,280 --> 00:08:30,200
Speaker 1: but not appropriately, and that's what he was convicted for. Basically,

162
00:08:30,280 --> 00:08:33,959
Speaker 1: forgiving himself and other executives hundreds of millions of dollars

163
00:08:34,000 --> 00:08:36,080
Speaker 1: and loans. Didn't feel you had to go through the

164
00:08:36,080 --> 00:08:39,800
Speaker 1: same checks and balances as ought have been done. And

165
00:08:39,840 --> 00:08:42,640
Speaker 1: I think it's that type of feeling of I'm in

166
00:08:42,640 --> 00:08:45,360
Speaker 1: the position of power and not going through the appropriate

167
00:08:45,440 --> 00:08:47,720
Speaker 1: channels that ultimately led to his failure because to the

168
00:08:47,720 --> 00:08:50,080
Speaker 1: extent that the board if they would have given him more,

169
00:08:50,080 --> 00:08:51,880
Speaker 1: which I think there's actually some evidence the board would

170
00:08:51,880 --> 00:08:54,720
Speaker 1: have actually given him more conversation had he actually asked

171
00:08:54,720 --> 00:08:56,480
Speaker 1: for it. I mean, he was a rock star CEO

172
00:08:56,600 --> 00:08:59,520
Speaker 1: at the time, actually doing very well, but that doesn't

173
00:08:59,559 --> 00:09:03,320
Speaker 1: excuse is not going through those those appropriate channels. Did

174
00:09:03,440 --> 00:09:05,600
Speaker 1: most of them think they would get away with it.

175
00:09:05,960 --> 00:09:09,520
Speaker 1: One of the things I did find really pretty extraordinary

176
00:09:09,640 --> 00:09:12,559
Speaker 1: is that no one thinks, even when you're doing the

177
00:09:12,559 --> 00:09:15,520
Speaker 1: most platent types of misconduct, that you're ever going to

178
00:09:15,600 --> 00:09:18,480
Speaker 1: face criminal sanctions. And I don't think this is because

179
00:09:18,800 --> 00:09:21,760
Speaker 1: some people have argued that regulators are not being effective

180
00:09:21,880 --> 00:09:24,760
Speaker 1: or not seeking to punish people. I think this is

181
00:09:24,800 --> 00:09:27,120
Speaker 1: just a matter of no one in a position of

182
00:09:27,200 --> 00:09:30,360
Speaker 1: privilege and power could ever really see themselves behind bars.

183
00:09:30,600 --> 00:09:33,120
Speaker 1: We all do things that are wrong, But no one

184
00:09:33,120 --> 00:09:35,360
Speaker 1: ever thinks that if you do something wrong like that,

185
00:09:35,360 --> 00:09:38,120
Speaker 1: that you ever faced criminal sanctions and be behind bars.

186
00:09:38,120 --> 00:09:40,960
Speaker 1: That's for other people. That's for other bad people, not

187
00:09:41,080 --> 00:09:43,240
Speaker 1: for me. And I think that's one of the real

188
00:09:43,480 --> 00:09:47,079
Speaker 1: challenges we face with regulation is that oftentimes what we're

189
00:09:47,120 --> 00:09:49,760
Speaker 1: doing is making the safety is harsher if you do

190
00:09:50,120 --> 00:09:52,480
Speaker 1: crime X, rather than giving someone a six months since

191
00:09:52,480 --> 00:09:54,320
Speaker 1: we're now going to give you a ten year sentence.

192
00:09:54,640 --> 00:09:57,599
Speaker 1: And to think people were doing a careful analytical calculation

193
00:09:57,679 --> 00:10:00,720
Speaker 1: doing this kind of deliver cost benefits calculation that actually

194
00:10:00,760 --> 00:10:03,360
Speaker 1: should have some grit because people see that the expected

195
00:10:03,400 --> 00:10:06,520
Speaker 1: costs are going up. The problem is that these executives

196
00:10:06,559 --> 00:10:08,560
Speaker 1: at the time they're actually making decisions, never think they're

197
00:10:08,559 --> 00:10:10,680
Speaker 1: ever going to face any sanction. It doesn't matter whether

198
00:10:10,679 --> 00:10:13,360
Speaker 1: it's one week in prison or ten years in prison.

199
00:10:13,440 --> 00:10:16,040
Speaker 1: That's just never going to happen. And I think that's

200
00:10:16,200 --> 00:10:19,160
Speaker 1: a deep challenge we face, both from a regulatory standpoint,

201
00:10:19,200 --> 00:10:23,680
Speaker 1: but also from ourselves in the executive community of actually

202
00:10:23,720 --> 00:10:26,960
Speaker 1: thinking about but the consequences for these types of actions.

203
00:10:26,960 --> 00:10:30,959
Speaker 1: So then is there any way to stop white color crime,

204
00:10:31,320 --> 00:10:33,800
Speaker 1: or at least to slow it down. So I think

205
00:10:33,840 --> 00:10:37,080
Speaker 1: this goes to back to changing norms and changing the

206
00:10:37,240 --> 00:10:41,439
Speaker 1: culture within instances, because I make the argument that because

207
00:10:41,760 --> 00:10:44,800
Speaker 1: this harm is very distant, it's very abstract, our intuitions

208
00:10:44,800 --> 00:10:47,480
Speaker 1: are not well designed to actually detect it. That's just

209
00:10:47,520 --> 00:10:50,400
Speaker 1: an evolutionary fact. We're not going to be hardwired to

210
00:10:50,400 --> 00:10:52,280
Speaker 1: see things that are so far away. But at the

211
00:10:52,320 --> 00:10:54,640
Speaker 1: same time, what we can do is layer on new

212
00:10:54,679 --> 00:10:58,480
Speaker 1: norms and new almost artificial intuitions, but create systems to

213
00:10:58,480 --> 00:11:01,760
Speaker 1: help protect us from mac really proceeding down this road.

214
00:11:02,160 --> 00:11:04,000
Speaker 1: One of the cases I talked about in the book

215
00:11:04,000 --> 00:11:06,480
Speaker 1: that's actually I think one of the more important ones.

216
00:11:06,679 --> 00:11:09,040
Speaker 1: Someone that wasn't actually convicted of white color crime actually

217
00:11:09,120 --> 00:11:12,720
Speaker 1: narrowly escaped it is Ben Horowitz, the well known venture capitalist,

218
00:11:13,120 --> 00:11:15,320
Speaker 1: and he actually hired a new CFO for one of

219
00:11:15,400 --> 00:11:18,400
Speaker 1: his firms, and the CFO came to an idea that

220
00:11:18,559 --> 00:11:21,600
Speaker 1: she used in her prior firm and others in Silicon

221
00:11:21,679 --> 00:11:24,560
Speaker 1: Valley were widely doing its option back dating. You moved

222
00:11:24,559 --> 00:11:27,280
Speaker 1: the option data round to make it more attractive for

223
00:11:27,320 --> 00:11:31,960
Speaker 1: the executive widely being practiced at the time fifteen years ago. Now,

224
00:11:32,200 --> 00:11:36,760
Speaker 1: Ben Horowitz is in one of these inspiring, innovative strategic minds.

225
00:11:36,800 --> 00:11:38,839
Speaker 1: But he's not a finance and accounting guy and actually

226
00:11:38,960 --> 00:11:42,000
Speaker 1: appreciates that that's where his weaknesses lie. His intuitions are

227
00:11:42,000 --> 00:11:44,160
Speaker 1: not well designed to figure out, well, what should you

228
00:11:44,200 --> 00:11:47,319
Speaker 1: do when you have a new financial accounting policy change,

229
00:11:47,720 --> 00:11:50,720
Speaker 1: And so he routinely put into places systems saying, anytime

230
00:11:50,720 --> 00:11:52,440
Speaker 1: I'm going to make one of these changes, I want

231
00:11:52,440 --> 00:11:56,000
Speaker 1: to get the insight in opinion of an outsider, someone

232
00:11:56,080 --> 00:11:58,960
Speaker 1: sitting outside by near a little bubble here. So he

233
00:11:59,080 --> 00:12:02,680
Speaker 1: called an outside attorney that he knew and respected, passed

234
00:12:02,679 --> 00:12:05,680
Speaker 1: this idea by him, and his attorney came back, there's

235
00:12:05,720 --> 00:12:07,640
Speaker 1: no way. I've looked over this six different ways and

236
00:12:07,679 --> 00:12:10,360
Speaker 1: there's no way that this is actually legal. I don't

237
00:12:10,360 --> 00:12:12,120
Speaker 1: know how the auditors signed off in the law firm

238
00:12:12,120 --> 00:12:14,000
Speaker 1: were actually comfortable with this, and all these other firms

239
00:12:14,040 --> 00:12:16,720
Speaker 1: were comfortable with this, but I advise against it. And

240
00:12:16,800 --> 00:12:19,840
Speaker 1: so because of this advice, Bend ended up turning this down.

241
00:12:20,280 --> 00:12:23,920
Speaker 1: Two years later, the government started investigating this. The CFO

242
00:12:24,080 --> 00:12:26,840
Speaker 1: actually end up going to prison for stock option backdating

243
00:12:26,880 --> 00:12:30,920
Speaker 1: the taxavation associated with that, and Ben describes it as

244
00:12:30,960 --> 00:12:33,240
Speaker 1: the only thing that kept me out of prison with

245
00:12:33,320 --> 00:12:36,680
Speaker 1: some luck and the right organizational design. This had nothing

246
00:12:36,720 --> 00:12:39,880
Speaker 1: to do with having a better moral compass, better values.

247
00:12:40,160 --> 00:12:43,559
Speaker 1: This simply had to do with understanding his weaknesses and

248
00:12:43,600 --> 00:12:47,600
Speaker 1: putting a system in place to intercede when he might

249
00:12:47,640 --> 00:12:51,280
Speaker 1: not see the consequences associated with a particular choice. Eugene,

250
00:12:51,480 --> 00:12:55,760
Speaker 1: is there one person you spoke to that stands out

251
00:12:55,800 --> 00:12:58,679
Speaker 1: in your mind for some reason? Either you felt more

252
00:12:58,800 --> 00:13:03,640
Speaker 1: sympathetic towards him, or he seemed more brilliant than the

253
00:13:03,720 --> 00:13:07,240
Speaker 1: others are more devious. I think each of those traits

254
00:13:07,280 --> 00:13:09,440
Speaker 1: I can think of an individual. I mean, one case

255
00:13:09,520 --> 00:13:13,000
Speaker 1: that did make me think and reflect upon myself a

256
00:13:13,040 --> 00:13:15,559
Speaker 1: lot more was the case of Scott Harkinnon. He was

257
00:13:15,600 --> 00:13:18,920
Speaker 1: a CEO of a biotech company and he ran a

258
00:13:18,960 --> 00:13:22,360
Speaker 1: test for a new drug for IPS, a fatal disease,

259
00:13:22,720 --> 00:13:25,480
Speaker 1: and the test actually missed its primary endpoint, its main goal.

260
00:13:25,880 --> 00:13:28,400
Speaker 1: But then in some subsequent data analysis they actually found

261
00:13:28,400 --> 00:13:31,160
Speaker 1: that maybe in this one subgroup there was actually some

262
00:13:31,160 --> 00:13:34,079
Speaker 1: promising results. So, as to be expected, you issue a

263
00:13:34,120 --> 00:13:36,600
Speaker 1: press release, and on this press release they said, after

264
00:13:36,640 --> 00:13:40,199
Speaker 1: this trial we found some results that demonstrated that there

265
00:13:40,200 --> 00:13:43,000
Speaker 1: could be some benefits associated with this treatment. And then

266
00:13:43,040 --> 00:13:45,079
Speaker 1: the rest of the press release described all the technical

267
00:13:45,160 --> 00:13:48,400
Speaker 1: nitty gritty. Couple years later, the government actually goes after

268
00:13:48,480 --> 00:13:52,280
Speaker 1: him and says that press release actually was misleading, at

269
00:13:52,360 --> 00:13:55,480
Speaker 1: was actually fraudulent because you put the word demonstrate and

270
00:13:55,559 --> 00:13:58,600
Speaker 1: ultimately this drug wasn't effective. And maybe you could have

271
00:13:58,640 --> 00:14:02,240
Speaker 1: put the word suggest, but demonstrate wasn't the appropriate word.

272
00:14:02,559 --> 00:14:04,960
Speaker 1: And when I look around and I think of the

273
00:14:05,040 --> 00:14:07,760
Speaker 1: kinds of things that we see corporate leaders often saying,

274
00:14:07,840 --> 00:14:11,280
Speaker 1: are political leaders often saying the choice between the word

275
00:14:11,320 --> 00:14:14,000
Speaker 1: demonstrate and suggest in a press release, not in the

276
00:14:14,040 --> 00:14:17,280
Speaker 1: scientific publication. We're talking about one single press release. He

277
00:14:17,360 --> 00:14:20,480
Speaker 1: faced up to ten years in prison. Ultimately quote only

278
00:14:20,680 --> 00:14:24,840
Speaker 1: received several years of probation. But it's pretty extraordinary that

279
00:14:25,160 --> 00:14:27,320
Speaker 1: an individual because of a choice of one word and

280
00:14:27,320 --> 00:14:29,920
Speaker 1: one press release, really lost everything in life. I mean,

281
00:14:29,960 --> 00:14:32,800
Speaker 1: spending millions of dollars on defense, losing his license not

282
00:14:32,920 --> 00:14:35,280
Speaker 1: able to run a publicly traded firm. And when I

283
00:14:35,320 --> 00:14:37,240
Speaker 1: think of his case, and I think of the kinds

284
00:14:37,240 --> 00:14:39,160
Speaker 1: of things that we all say in a public sphere,

285
00:14:39,320 --> 00:14:41,640
Speaker 1: in terms of how carefully we choose our words, I

286
00:14:41,640 --> 00:14:45,640
Speaker 1: think it's pretty humbling. The penalties for white collar crime

287
00:14:45,800 --> 00:14:48,600
Speaker 1: have gone up in recent years. Do you think that

288
00:14:48,680 --> 00:14:52,920
Speaker 1: they're too tough? The penalties they're they're generally around the

289
00:14:53,040 --> 00:14:57,840
Speaker 1: dollar loss, and the difference between whether your action lost

290
00:14:58,040 --> 00:15:02,560
Speaker 1: fifty million dollars or billion dollars in a fraud generally

291
00:15:02,600 --> 00:15:05,480
Speaker 1: doesn't come down to the act itself was actually different.

292
00:15:05,920 --> 00:15:07,680
Speaker 1: It comes down to that you happen to be a

293
00:15:07,760 --> 00:15:10,640
Speaker 1: larger firm, and so your action simply had a larger

294
00:15:10,880 --> 00:15:14,240
Speaker 1: market effect. And I think that's a little bit odd um,

295
00:15:14,280 --> 00:15:16,600
Speaker 1: and I think this is why some judges have started

296
00:15:16,640 --> 00:15:21,160
Speaker 1: pushing back on the sentencing guidelines, which escalate so dramatically

297
00:15:21,480 --> 00:15:24,720
Speaker 1: depending on the dollars that are perceived to have been lost.

298
00:15:25,400 --> 00:15:28,280
Speaker 1: I read that white collar crime was first defined by

299
00:15:28,400 --> 00:15:33,840
Speaker 1: sociologist Edwin Sutherland in as a crime committed by a

300
00:15:33,880 --> 00:15:37,640
Speaker 1: person of respectability and high social status in the course

301
00:15:37,680 --> 00:15:41,000
Speaker 1: of his occupation. Should we stop calling them white color

302
00:15:41,040 --> 00:15:44,560
Speaker 1: criminals and setting them apart from other criminals as if

303
00:15:44,600 --> 00:15:48,400
Speaker 1: what they're doing is not quite as bad. I think

304
00:15:48,400 --> 00:15:51,200
Speaker 1: that would go be a huge step forward. I think

305
00:15:51,240 --> 00:15:54,360
Speaker 1: the part that I find most frustrating, and certainly I

306
00:15:54,360 --> 00:15:57,480
Speaker 1: think we've seen some regulators express this, is that people

307
00:15:57,520 --> 00:16:00,200
Speaker 1: think of white color crime in many instances just not

308
00:16:00,360 --> 00:16:03,520
Speaker 1: as bad as street offenses. It doesn't seem as scary

309
00:16:04,000 --> 00:16:06,920
Speaker 1: because no one's wielding a knife in the nighttime. But

310
00:16:07,520 --> 00:16:10,720
Speaker 1: if we start thinking about the economic ramifications, the effects

311
00:16:10,720 --> 00:16:13,080
Speaker 1: that people on their livelihood. I mean, you can look

312
00:16:13,080 --> 00:16:16,400
Speaker 1: at the victims of Enron and World com Bernie made

313
00:16:16,440 --> 00:16:18,840
Speaker 1: up Ponzi scheme, and you see what this has done

314
00:16:18,880 --> 00:16:21,640
Speaker 1: to their retirement plan, to their life. This has been

315
00:16:21,720 --> 00:16:24,200
Speaker 1: in every way just has been in some sense is

316
00:16:24,480 --> 00:16:27,600
Speaker 1: much worse than many street offenses. But by setting it

317
00:16:27,640 --> 00:16:29,840
Speaker 1: apart is a white color offense that looks a little

318
00:16:29,840 --> 00:16:33,480
Speaker 1: bit more technical, it sometimes minimizes the effect. And this

319
00:16:33,520 --> 00:16:36,200
Speaker 1: is what Edwin Southerland tried to point out nineteen thirty nine,

320
00:16:36,600 --> 00:16:40,560
Speaker 1: and we've made some strides since. But in the idea

321
00:16:40,640 --> 00:16:44,000
Speaker 1: of an executive going to prison for something they did

322
00:16:44,040 --> 00:16:46,040
Speaker 1: in the course of business was really in a foreigner,

323
00:16:46,120 --> 00:16:49,800
Speaker 1: exotic concept that wasn't crime. Crime occurred only what was

324
00:16:49,840 --> 00:16:52,160
Speaker 1: on the street, not in the boardroom. And so we've

325
00:16:52,200 --> 00:16:54,160
Speaker 1: been trying to fight against that concept, I think ever

326
00:16:54,240 --> 00:16:56,480
Speaker 1: ever since, to change that notion. Thank you for being

327
00:16:56,480 --> 00:17:00,640
Speaker 1: on Bloomberg Law. That's Harvard Business School Professor Eugene Soltice.

328
00:17:01,080 --> 00:17:04,480
Speaker 1: That's it for this edition of Bloomberg Law. I'm June Graasso.

329
00:17:04,880 --> 00:17:06,080
Speaker 1: This is Bloomberg