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Chapter 2: Business Ethics and White-Collar Crime CHAPTER OVERVIEW Chapter Two explains the issues of right and wrong in business conduct and allows students to recognize when wrongful conduct has become criminal. This chapter begins with the fundamentals of business ethics and social responsibility and provides a framework that allows students to engage with ethics and social responsibility material. This framework is important because it takes away students’ tendency to believe questions of ethics are simply matters of opinion. Consider asking your students to use the “WPH framework” throughout the course. This chapter continues by explaining the elements of crime, criminal procedure, defenses to crimes, and the government's role in fighting business crimes. Because much of the book has and will focus on civil law, you might want to spend some time discussing the differences between civil and criminal law. These differences are highlighted throughout the chapter

LEARNING OBJECTIVES After reading this chapter, students will be able to answer the following questions: 1. What are business ethics and the social responsibility of business? 2. How are business law and business ethics related? 3. How can we use the WPH framework for ethical business decisions? 4. What are the basic elements of a crime? 5. What is white collar crime? 6. Who can be held responsible when a corporate crime is committed? 7. What are the basic steps of a criminal proceeding? 8. What laws attempt to prevent white collar crime?

LECTURE NOTES WITH DEFINITIONS In the news…

Teaching tip: For each chapter, consider asking students to relate current news items to material from the chapter. In addition to ideas students come up with on their own, consider weaving in news stories/videos provided by the textbook publisher. Videos are available via a McGraw-Hill DVD, and on the publisher’s web site. For Chapter Two, McGraw-Hill offers the following story: “Smoke & Mirrors: Tobacco Companies Have Been Steadily Adding More Nicotine to Cigarettes to Make Tem More Addictive, Especially to Teenagers.”  Apply the WPH framework to the decisions tobacco companies are making.  Is it “socially responsible” for tobacco companies to add nicotine to cigarettes?  Should legal rules provide additional protections to vulnerable consumers, such as teenagers?

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What are business ethics and the social responsibility of business?

Ethics is the study and practice of decisions about what is good or right. Business ethics is the application of ethics to special problems and opportunities experienced by businesspeople. An ethical dilemma is a problem about what a firm should do for which no clear, right direction is available. The social responsibility of business consists of the expectations that the community imposes on firms doing business inside its borders.

How are business law and business ethics related? How can we use the WPH framework for ethical business decisions?

Teaching tip: How are the concepts of ethics and social responsibility different? Do they overlap? The legality of the decision is the minimal standard that must be met. The law both affects and is affected by evolving ethical patterns. The WPH framework provides practical steps for responding to an ethical dilemma. 

W: Whom would the decision affect? o Stakeholders: assorted groups of people affected by the firm's decisions, e.g., owners or shareholders, employees, customers, management, general community, future generations. o Interests of stakeholders will sometimes be in common and will sometimes conflict. P: Purpose—What are the ultimate purposes of the decision? o Which values are being upheld by the decision? o Values are positive abstractions that capture our sense of what is good or desirable. o Four important values often influence business decisions: freedom (to act without restriction from rules imposed by others), security (to be safe from those wishing to interfere with your interests), justice (to receive the products of your labor), and efficiency (to get the most from a particular output). H: How do we make ethical decisions? o We use classical ethical guidelines, such as these: o The Golden Rule—“Do unto others as you would have done to you." o Public Disclosure Test—Suppose your decision would be published in the newspaper. (Our actions are in the open rather than hidden.) o Universalization Test—If I take action X, were others to follow my example, would the world be a better place?

Teaching tip: Choose a current ethical dilemma from the newspaper and ask students to apply the WPH framework to the dilemma.

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What are the basic elements of a crime?

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 What is white collar crime? Who can be held responsible when a corporate crime is committed?

The two elements of a crime are actus reus and mens rea. o Actus reus means wrongful behavior/guilty act. o Mens rea means wrongful state of mind/intent/guilty mind. Some crimes are strict liability crimes, which means liability without fault. One example is selling alcohol to a minor. Crimes are classified as felonies, misdemeanors, or petty offenses. o Felonies are serious crimes punishable by imprisonment for more than one year or death. o Misdemeanors are less serious crimes punishable by fines or imprisonment for less than one year. Petty offenses are minor misdemeanors punishable by small fines or short jail sentences.

White collar crime is a variety of nonviolent illegal acts against society that occur most frequently in the business context.

Corporations as legal entities can be held liable for crimes committed on behalf of the corporation. Corporate officers and managers can be held liable for crimes committed on behalf of the corporation.

United States v. Park (briefed below) considers whether the president of a national food chain corporation can be held legally responsible for violating the Federal Food, Drug, and Cosmetic Act. Teaching tip: How does United States v. Park relate to the Sarbanes-Oxley Act? Hint: Sarbanes-Oxley includes provisions that echo United States v. Park, but are more specific in terms of what officers and managers must do to avoid liability. What are the basic steps of a criminal proceeding?

What laws attempt to prevent white collar

Pre-trial procedure includes: o Arrest Miranda v. Arizona outlines what officers must tell individuals upon arrest. o Booking o First appearance o Indictment o Arraignment  Trial includes: o Jury selection o Trial—prosecution has the burden of proof o Jury deliberations o Jury verdict  Sentencing hearing (if defendant is found guilty)  Appeal  RICO—responds to racketeering. Remedy is treble damages and attorney fees in a civil action.

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crime?

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False Claims Act—allows employees to sue employers on behalf of the federal government for fraud against the government. The employee gets a share of the recovery as a reward for whistle blowing. The Sarbanes-Oxley Act—encourages accountability and transparency, and increases punishments for several white collar crimes.

Teaching tip: Ask students how specific theories of business ethics are integrated into the WPH framework. Teaching tip: For more information about theories of business ethics, go to these web sites: Philosophy and ethics on the web: http://www.epistemelinks.com/Main/EncyRefs.aspx?TopiCode=Ethi Santa Clara’s Markkula Center for Applied Ethics: http://www.scu.edu/ethics/practicing/decision/framework.html A PowerPoint presentation by Ernest A. Kallman and John P. Grillo. Click on “view graphic version.” http://www.ecs.csun.edu/~rlingard/COMP450/cs450edm/tsld001.htm Point/Counterpoint: Teaching tip: Here are some questions to help you tie the How severely should the Point/Counterpoint into class discussion: law punish individuals  How are street and white-collar crimes different? convicted of white collar  What different assumptions do the “point” and “counterargument” crime? make about different kinds of crime and different consequences from crime?  Which side makes the stronger argument? Justify your answer using specific reasons.

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CASE BRIEFS WITH ANSWERS TO THE QUESTIONS Case 2-1 United States of America v. Gerson Cohen, 171 F.3d 796 (1999) Case Brief Issue: Does a person commit mail fraud if he does not personally place the documents in question in the mail? Facts: The defendants, a salesperson for Butler Foods, offered supermarket meat managers illegal cash payments for buying their meat from Butler. A part owner of Butler gave the cash to salespeople who would then give it to the supermarket manager. Procedural History: The District Court found the defendant guilty of mail fraud. Holding: Affirmed. A person can commit mail fraud even if he is not the person who places the documents in the mail. Reasoning:  A person commits mail fraud when they know that the use of the mail ordinarily follows their action.  The defendant knew that the company's policy was to mail invoices to customers.  Butler employees testified that it was standard business practice to send and receive invoice information from customers in the mail.  These invoices were essential to supplying the illegal cash payments. Answers to the questions Critical Thinking I am not entirely persuaded that Cohen was committing a fraudulent act through the mail, particularly because of the evidence used to support this conclusion. The court's decision relied heavily on personal testimonies, which are not necessarily reliable evidence. Those testifying may have omitted information or spoken for personal interests. Ethical Decision Making The primary stakeholders affected by this decision are Cohen, Larry Lipoff, and the managers of Thriftway Food Stores. Other possible stakeholders include the employees and customers of Butler Foods and Thriftway Food Stores.

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Case 2-2 United States v. Park, 421 U.S. 658 (1975) Case Brief Issue: Can corporate executives be criminally liable for failing to ensure a company's compliance with the law? Facts: The defendant, Parks, was president of a food-chain corporation. Parks had received a warning from the Food and Drug Administration that a company warehouse had unsanitary conditions. While conceding that he was responsible for the entire company, Parks claimed he had delegated responsibility for the sanitary conditions to a subordinate employee. Procedural History: The District Court found Parks guilty. The Court of Appeals reversed. The United States Supreme Court reversed the appeals court—Parks was guilty. Holding: Corporate executives can be criminally liable for failing to ensure a company's compliance with the law. Reasoning:  The Supreme Court has noted that the only way corporations can act is through their individual employees  The Act in questions requires stringent, affirmative actions on the part of corporate executives, but these standards are justified by the public interest in food safety.  There is considerable evidence that the D had a duty to ensure sanitary conditions and that he violated that duty. Answers to the questions Critical Thinking There is no evidence that Park could have presented that would have led to a different decision because the rule laid down states that ignorance cannot be used as a defense. Therefore, even if Park provided evidence stating that he delegated the responsibility to his employees, Park is still held responsible because the company, as a whole, did not comply with the law Ethical Decision Making Since the public would be angry to learn that I had allegedly allowed rodent contamination in my company, if I were guided by the public disclosure test, would most likely take responsibility for the misconduct of my fellow employees, and attempt to save the company further embarrassment.

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TEACHING SKILLS: PRACTICE ASKING QUESTIONS THAT FACILITATE UNDERSTANDING Practice asking questions encourage the reader to: “Reduce” the document they are reading.

Use these questions as models:      

Evaluate reasoning.

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Why should I care about this issue? What is the author’s conclusion? What is the author's reasoning? How does the author's argument relate to the broader issue at hand? What terms in the author's argument should be clarified? Could this argument be a metaphor for a more abstract issue? What sort of reasons does the author use to prove her point? Are the reasons stated in an engaging manner? Is the author using statistics, surveys, logic, or an appeal to common sense? What does each of these methods fail to take into account? How important is that omission to the determination of whether you should accept the reasoning? Is the argument well-constructed? Is it well written? Does the author claim any absolute truths? If so, what? Does the author identify any deficiencies or flaws in her arguments, or does she present the reasoning as flawless? Does the author acknowledge the "other side"? How dedicated is the author to her conclusion? Does the author present the possibility that she is wrong or misguided? Does the author justify her assumptions? What assumptions (related to the particular discipline) does the argument support and/or call into question?

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Consider an unfamiliar idea.

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What are the major tenets of this belief system? That is, what aspects of other belief philosophies does this philosophy accept? Is this system of beliefs an extension of another system? A reaction to another system? What are the key "terms" involved with this idea? How are these terms defined? What are the various perspectives or approaches within the system? What are the goals of the perspective/approach? What is the appeal of the argument/ perspective? What kind of assumptions does the belief system make about human nature? Are we responsible? Lazy? In control? Out of control? Reasonable? Ignorant? Good? Evil? Self-centered? Other- centered? What evidence supports this perspective? What kinds of relationships exist between concepts? Is there a major conflict between two dominant perspectives, or do many perspectives disagree? Is there a common thread among the perspectives? Can we come to a conclusion about the issue based on various perspectives? What factors confound the issue and prevent a concrete answer?

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Investigate the author/expert.

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             Probe our individual understanding or knowledge.

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Who is the author, and where is she "coming from"? Has she had sufficient experience and expertise in the subject? What (if anything) has the author stated in the past that may confirm or contradict his current argument? If the latter is the case, what factor(s) warrant this contradiction (i.e. change in ideology, pursuit of material self-interest, etc)? What is the author's intent for writing this piece? How does the author intend to persuade her audience? Do I agree with her rhetorical devices? Is the author trying to be ambiguous or non-linear for a purpose? Does the author acknowledge the "other side"? How dedicated is the author to her conclusion? What stakes do the participants have in the possible outcomes of the discussion? What value assumptions do those participating bring to the discourse? What are the dominant paradigms the writer subscribes to? What do other reasonable scholars have to say about the idea? Who are the experts on this particular issue and why? Are the experts’ opinions based on a particular belief system or is it an independent opinion that deals with evidence that the expert feels is relevant? Is the expert defending a particular belief or making an honest attempt to come to an appropriate conclusion? What do I already know about this issue? How can I connect this information to new knowledge? Where am I "coming from"? How do I fit into the author's view of the world? How do I feel reading this? Angry? Amused? Ambivalent? Why do I feel this way? What is the best possible argument you could construct against the author's conclusion? Do I understand this idea well enough to teach it?

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Offer closure, e.g., where does this idea take us?

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Can we accept the author's conclusion? To what degree? With what stipulations? What should we do afterwards? Would another epistemological approach yield a drastically different conclusion? Have we kept reasons and conclusions separate? In other words, have we acknowledged that we could agree with the author's reasoning, but nevertheless, could not endorse her conclusion? Have we admitted that we might agree with the author's conclusion but are not satisfied with her reasoning?

TEACHING IDEAS FOR BUSINESS ETHICS Connecting to the Core

One way to connect to the core expands the chapter’s discussion of ethics and accounting. You may want to obtain and show your class a PBS videotape called “Bigger than Enron,” available at: http://www.pbs.org/wgbh/pages/frontline/shows/regulation/

Teaching Basics

This videotape explores the collapse of Arthur Andersen, the accounting firm Enron used to help it hide its fraud. The tape asks, “What went wrong?” After showing “Bigger Than Enron,” ask the class questions that facilitate understanding. Here are some questions to get you started:  What argument did Hedrick Smith present in the videotape?  Why should business students care about the argument and facts in the videotape?  Is there “another side” to the story?  How did the videotape make you feel, as an American citizen?

TEACHING IDEAS FOR WHITE COLLAR CRIMES Connecting to the Core

In management, students learn about how to create a strong corporate culture, from an ethics perspective. Ask students to investigate how flawed corporate cultures were created by the CEOs accused of engaging in white collar crime. This would be a good paper topic, e.g., have each student explore just one corporate culture (not all five).

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Teaching Basics

Advanced Teaching

For each white collar criminal, students should consider “their” CEO and:  Find the definitions of the crimes “their” white collar criminal allegedly committed.  Look in Chapters Seven and Forty-One to find out the definitions of alleged crimes, e.g., use these chapters as research tools.  Explain the ultimately sanctions imposed on “their” CEO. Which crimes was their criminal found guilty of committing? Where is their CEO today? Why were some accused of federal crimes, while at least one was accused of crimes defined by state law? Students should consider their assigned white collar criminal and answer these two questions:  How does United States v. Park inform the student of the extent of their CEO’s possible liability, assuming the principle in the case extends beyond food safety?  Would the Sarbanes-Oxley Act have prevented the acts of individual CEO’s, e.g., If Sarbanes-Oxley would have been enacted ten years ago, would each CEO have known better than to commit the crimes they committed?

CASE OPENER WRAP-UP: Untenable Trading Cooper ended up being convicted of commercial bribery, based on the jury’s finding that he had caused approximately $4,000 in cash to be mailed to John Freeman as payment for information Freeman was misappropriating from his employment. If you were asked by a friend for privileged information regarding stocks, how would you respond? If you do pass on the information and your friend uses it to trade in stocks, you may both be liable for insider trading.

ANSWERS TO QUESTIONS AND PROBLEMS 1. 2. 3.

Business law provides a floor of acceptable behavior. Business ethics builds on business law. It often has higher aims for acceptable behavior. The WPH approach provides a practical set of rules for thinkers to follow as they sort out how to respond to an ethical dilemma. Defenses to crimes include: Infancy—individuals who have not reached the age of majority/adulthood may be able to partially defuse the guilty-mind requirement of a crime. Mistake—the defendant made an honest and reasonable mistake. Intoxication—involuntarily ingesting an intoxicating substance can be used as a defense. Insanity—relevant when a person’s mental condition at the time a crime was committed was so impaired that the person could not understand the wrongful nature of the specific act, or could not distinguish between right and wrong. Duress—relevant when a person is threatened with serious bodily hard or loss of life, the threat of harm must be more serious than the harm the crime caused, and the threat of harm must be immediate and inescapable. Entrapment—relevant when the idea for the crime originated with a government official who suggested it. Necessity—relevant when the harm or evil sought to be avoided is greater than sought to be prevented. Justifiable use of force—e.g., self-defense used to protect your own life.

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4.

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6. 7.

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Federal laws that strive to prevent white collar crime are: RICO—responds to racketeering. Remedy is treble damages and attorney fees in a civil action. The False Claims Act—allows employees to sue employers on behalf of the federal government for fraud against the government. The employee gets a share of the recovery as a reward for whistle blowing. The Sarbanes-Oxley Act—encourages accountability and transparency, and increases punishments for several white collar crimes. Employers to have a duty to respect the religious beliefs of their employees. They do not have to respect employees’ non-religious beliefs. So, the question here is whether Friedman’s veganism was a religious belief. Friedman argued that his belief that it is immoral and unethical for humans to kill or exploit animals is a religious belief. The court disagreed. Veganism does not “address fundamental or ultimate questions such as the meaning of human existence and the purpose of life, the beliefs were not comprehensive, because they did not derive from a power or being or faith to which all else was subordinate, and no formal or external signs of a religion were present.” The court viewed veganism as a secular philosophy and would not protect it. The legal conclusion in the case was that Yania should have known better than to put himself in peril, and that Bigan did not have a duty to rescue him. The value of individual responsibility underlies this decision. Erickson won the suit. The value of justice applies here, e.g., people must be treated equally. Their gender should not matter. The court ruled that, “[a]lthough Title VII does not require employers to offer any particular type or category of benefit, when an employer decides to offer a prescription plan covering everything except a few specifically excluded drugs and devices, it has a legal obligation to make sure that the resulting plan does not discriminate based on sex-based characteristics and that it provides equally comprehensive coverage for both sexes.” The court ruled that the First Amendment does not give media agencies the right to record or broadcast an execution from within a prison. If ENI had applied the Golden Rule, it might have demonstrated more sensitivity to Timothy McVeigh’s family. It is unlikely his family would have wanted the world to watch the execution. With regards to the "wrongful discharge" and intentional infliction of emotional distress, the court ruled in favor of the defendant. The court stated that the statutory remedy given by the FMLA preempted the former employee's state wrongful discharge claim, and therefore ruled for the defendant discharging this claim. The intentional infliction of emotional distress claim was thrown out because the Federal Employees' Compensation Act provided the sole remedy for compensation against the postal service. Therefore, the court dismissed these two claims made by the plaintiff. However, the court did not grant summary judgment to the defendant, as they moved, with regards to the FMLA. It is the opinion of the court that there is a material issue of fact concerning whether the former employee's migraines constituted a serious health condition within the protection of the FMLA, and concerning whether she gave the required notice to the former employer to qualify for FMLA protection. For this reason the court allowed the plaintiff to continue with their claim under the FMLA.

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10 .

The court found that this distinction between trainee and employee was not appropriate in this situation. The court ruled that the program, although offering benefits to the plaintiffs, was structured in a manner that required the plaintiffs to do work for the economical gain of the defendant, and accordingly gave the plaintiffs status as employees and not trainees. Following case law and regulatory interpretations, the program was not training, rather, it was actual work. Accordingly, as employees, the plaintiffs were guaranteed the minimum hourly wage, and therefore are still entitled to the back pay lost from being paid a salary under the minimum wage. The ethical issues to be considered revolve mostly around the status of the plaintiffs. Being homeless, the defendants assumed they could pay them less than minimum wage because these people need the job, and the defendants need cheap labor. However, the defendants failed to take into consideration the fact that, homeless or not, these are still people who deserve the same rights as other people, including the right to be paid fairly for work performed.

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Morris was charged and convicted of violating a federal statue called the Computer Fraud and Abuse Act of 1986. Basically, the statute outlines a specific kind of fraud in which a federal interest computer is used to cause damage. Here, Morris intentionally accessed without authorization a federal interest computer and caused significant damage. The U.S. Supreme Court affirmed the courts below—the Pasquantinos and Hilts did not succeed. The Court held that Canada's right to collect excise taxes on imported liquor was “property” within meaning of wire fraud statute, and that prosecution was not barred by common law revenue rule. It was clear to the Court that the defendants’ routine concealment of imported liquor from Canadian officials and failure to declare those goods on customs forms constituted “scheme or artifice to defraud” Canada of import tax revenues, within meaning of federal wire fraud statute. The court of appeals ruled that the computer fraud statute did not require government to prove that the defendant intentionally damaged computer files. Sablan lost.

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