Instructor Manual & Test Bank Profit Without Honor White Collar Crime and the Looting of America 7th

Type:

Instructor Manual and Test Bank

Profit Without Honor White Resource: Collar Crime and the Looting of America Edition:

7th Edition

Author(s):

Stephen Rosoff Henry Pontell Robert Tillman

Online Instructor’s Manual for

Profit Without Honor White-Collar Crime and the Looting of America Seventh Edition Stephen Rosoff Henry Pontell Robert Tillman

1

CONTENTS Chapter 1 Introduction

1

Chapter 2 Crimes against Consumers

11

Chapter 3 Unsafe Products

19

Chapter 4 Environmental Crime

27

Chapter 5 Institutional Corruption: Mass Media and Religion

38

Chapter 6 Securities Fraud

44

Chapter 7 Corporate Fraud

54

Chapter 8 Fiduciary Fraud

63

Chapter 9 Crimes by the Government

72

Chapter 10 Corruption of Public Officials

81

Chapter 11 Medical Crime

89

Chapter 12 Computer Crime

97

Chapter 13 Conclusions

105

2

Chapter 1

Introduction CHAPTER SUMMARY On April 25, 2008, a group of mostly wealthy men gathered at Greenwich Village restaurant for an evening of food, fun and wine – lots of high quality wine. The occasion was an auction of fine and rare wines, some of the best in the world, sold at prices that reached as high as $42,000 a bottle.

The seller of the wines was a mysterious young man named Rudy Kurniawan who lived in California but who was thought to be from a wealthy family in Indonesia. He was a young entrepreneur who had burst onto the wine scene in the early 2000s and quickly became a major player in the rapidly growing market for fine wines.

Everything began to change for Kurniawan after a 2008 auction when his wines were pulled. One of the major clues of the fraud? The adhesive used to label an 1857 bottle of French wine was Elmer’s glue, which was first produced in 1947. The FBI raided his home and found thousands of fake labels, hundreds of old and new corks, and rubber stamps with vintages and chateaux names of old wines. Kurniawan was eventually convicted in a Manhattan criminal court and in 2014 he was sentenced to 10 years in prison. Rudy was clearly a fraudster for our times and it seems as if we live in a world of “fakes”.

This book surveys the forms, causes, and consequences of white-collar crime.

THE HISTORY OF A CONCEPT The term “white-collar crime” was first used by Edwin Sutherland in 1939. Sutherland argued that this type of crime differed from other crimes in the administrative procedures used in dealing with offenders. He defined white-collar crimes as those committed by persons of respectability and high social status in the course of their occupation. Sutherland went on to state that, because of the political and financial power of white-collar criminals and the use of alternate response mechanisms, information on these crimes was lacking. The data that was available suggested that white-collar crime was far more costly than street crime.

Sutherland’s recognition of the extent of white-collar crime forced a reexamination of the common theories for crime commission. Sutherland’s remarks came at a time when the United States had moved from a rural, agrarian society to an urban, industrial one dominated by powerful corporations. Journalists referred to as “muckrakers” were beginning to examine abusive corporate practices, and Congress had legislated against monopolistic practices.

The Sherman Antitrust Act of 1890 was enacted to stop companies from fixing prices or pooling their operations under a single administration in order to eliminate competition. The corporation that came to symbolize the strategic use of mergers and trusts was the Standard Oil Company, headed by John D. Rockefeller. He ruthlessly destroyed competition and created an empire that controlled virtually the entire American petroleum industry.

3

The Roaring Twenties were a bonanza for white-collar crime. The feeding frenzy unleashed aby an exploding economy attracted bold predators.

Ponzis Charles Ponzi had been an inept petty thief in his native Italy. His parents shipped him across the Atlantic to be rid of him and he settled in Boston in 1911. In 1919 he announced that his Financial Exchange Company of Boston would guarantee an incredible 50 percent return to investors within 45 days. He persuaded 20,000 investors to give him nearly $10 million. The secret of Ponzi’s smoke screen was that he paid off early investors with new investors’ money, thereby attracting more and more investors.

“Ponzi” or pyramid schemes emerged. These schemes involved the payment of early investors with money from later investors. Ponzi schemes are still alive and well in the 21st century as evidenced by the proliferation of spam offerings on the Internet. The case study of R. Allen Stanford presents a modern example of the Ponzi scheme. Stanford was the founder of the Antigua-based Stanford International Bank, which in a relatively short period of time had sold over $8 billion in CDs to investors from all over the world. Stanford was a Texas native, owned a cricket team in Antigua, sponsored an international cricket tournament with a grand prize of $20 million, and was made a knight by Queen Elizabeth for all of his good deeds. Then federal agents raided his Houston home in February 2009 and sealed it off as a crime scene. The same day, the SEC filed suit against him alleging that he had “executed a massive Ponzi scheme” that resulted in losses of $7 billion to clients. Stanford was convicted on criminal charges. In June 2012 he was sentenced to 110 years in prison and his victims claimed the disgraced banker was guilty of “financial terrorism.”

In October 2011, Nicholas Cosmo, of Long Island, New York, was sentenced to 25 years in prison for operating his firm, Agape Inc., as a Ponzi scheme. Prosecutors claimed he stole over $400 million from investors from all over the world who believed his promises of double-digit returns on their investments The Great Depression The Great Depression and its populist antiauthoritarian sentiment gave way to two decades of conformity and public confidence in the guidance of corporate America. The faith in corporate America was misplaced. Events in the late 1960s and early 1970s would make Americans suspicious and skeptical of private and governmental organizations. Scholarly focus on white-collar crime also increased.

The 1980s spawned white-collar crimes of epic proportions. The case study of Barry Minkow, a 16-year old Los Angeles high school student who came to be known as “The $80 Million Kid,” describes the poster child of the greed decade. Minkow used a variety of criminal techniques to create a false impression of a successful company called ZZZZ Best. Shortly after his 21st birthday, Minkow met with Drexel Burnham Lambert, a Wall Street firm that agreed to promote an $80 million junk bond sale. Fortunately for investors, not long after that a Los Angeles Times article exposed Minkow. He was found guilty on 57 counts of criminal wrongdoing and sentenced to 25 years in federal prison.

4

Tax Fraud Tax fraud and embezzlement were problems made public during the 1980s and 1990s. The imprisonment of U.S. Treasurer Catalina Vasquez Villalpando on tax fraud charges is symbolic of the white-collar crimes during these decades.

In 2005, KPMG, the nation’s fourth largest accounting firm, admitted to criminal wrongdoing and agreed to pay a $456 million fine for selling fraudulent tax shelters that helped wealthy clients evaide $2.5 billion in taxes in the 1990s.

CASE STUDY “Prell for Ponies” A memorable scam in the 1990s involved horse-hair products. In the case study “Prell for Ponies,” Roger Dunavant sells his horse shampoo to people for human use. His partner Devon Katzev would eventually take exception to Dunavants tactics and use of company funds and sue him. “Breaking the Bank” is an illustration of bank officers’ and owners’ willingness to cheat friends, neighbors, and other bank customers. In the case study “Russian Roulette,” the tragic events of September 11 made public another tragedy—investors in First Equity Enterprises had nothing to show for their money.

Measuring White-Collar Crime This is very difficult; definition is a problem, and so is the fact that most white-collar crime is never reported. Official recordkeeping was lacking because of the belief that white-collar crime was not as serious as street crime. Researchers have been forced to develop their own data collections.

Researchers such as Sutherland (1949), and Clinard and Yeager (1970s), put together crosssectional studies reflecting white-collar crime that involved many sectors of the economy. Industryspecific studies confirmed concentration of white-collar crime in certain industries. Defense industry, securities industry, and savings-and-loan industry statistics verified these findings.

The Cost of White-Collar Crime Information from victimization surveys, Chamber of Commerce studies, and Congressional committees estimate damages from white-collar crime to be in excess of $40 billion in the mid1970s. If anti-trust violations and fraud against the federal government is included, this figure rises to $100 billion. With inflation, the cost today would be closer to $250 billion. The monetary cost of street crime is a small fraction of this figure. In addition to the monetary cost there are social, political, environmental, and human danger costs.

Public concern over white-collar crime is not as high as concern over street crime. White-collar crime is more difficult to understand, and there are no clear-cut victims and villains. Is the public’s concern starting to change in America today?

5

LECTURE OUTLINE Chapter Preview Use the story of the wine auctioneer, Rudy Kurniawan, and explain how this type of white-collar crime is allowed to exist in American society.

I. THE HISTORY OF A CONCEPT A. Sutherland’s Definition Review the origin of the phrase “white-collar crime.”

B. Events Leading to Problem Recognition Analyze the historical context for the focus on white-collar crime.

C. Ponzis Explain pyramid schemes and their variations.

1. R. Allen Stanford—Stanford International Bank 2. E-mail scams investigated by the U.S. Postal Inspection Service E. The Great Depression Discuss the effect of the Great Depression and its aftermath.

F. Populist Antiauthority Distrust Explore how American perception of business evolved in the years preceding and during the Great Depression. There was a populist spirit of defiance of big business and big government; the public was openly hostile to the economic elite.

G. Conformity and Public Confidence in Corporations Examine the transition from distrust in business to two decades of belief in the positive aspects of corporate America. The dominant theoretical position was functionalism.

H. 1970s Cynicism Formulate an explanation for the diminishing faith in business and the legitimacy of those holding power.

I. 1980s Greed Describe the reasons for the 1980s being called the “greed decade.” The excesses of this era were often attributed to a cultural shift in which Americans became dominated by unbridled material ambition.

J. Case Study: The $80 Million Kid Somehow a 21-year-old kid managed to convince a major Wall Street firm to float an $80 million junk bond offering.

6

K. 1990s Betrayal The public opinion pendulum swings back to distrust of business in the 1990s.

1. Tax Fraud a. Catalina Vasquex Villalpando b. Stew Leonard, Sr. c. Paul Bekins d. KPMG/Presidio Advisory Services 2. Embezzlement L. Case Study: Prell for Ponies?

Roger Dunavant convinced retailers to sell his horse products for human use and employed this use to promote a company he didn’t own.

M. Case Study: Breaking the Bank A small-town West Virginia bank can’t seem to locate millions of dollars in assets.

N. Case Study: Russian Roulette The tragedy of September 11, 2001, exposes another human tragedy—a business in one of the Twin Towers used the attack to try to conceal theft of $105 million.

II. MEASURING WHITE-COLLAR CRIME A. Difficulties with the Definition Explore how definitional problems affect the ability to quantify the extent of white-collar crime.

B. Data Availability Unlike street crime, for which there are numerous data sources, there is little readily available data on white-collar crime. Examine the reasons for the paucity of data.

C. Cross-Sectional Studies Studies confirm that numerous sectors of the economy are plagued by white-collar crime.

D. Industry-Specific Studies Certain industries, such as defense contractors, securities firms, and savings-and-loan operations, may have a more serious problem than other business sectors.

E. Victimization Surveys Only recently has this data-collection method been used to gather information. One-third of respondents had been fraud victims.

7

III. THE COSTS OF WHITE-COLLAR CRIME A. Victimization, Chamber of Commerce and Congressional Estimates Surveys done by various organizations examining only the monetary cost of white-collar crime show that white-collar crime is financially far more costly than street crime.

B. Physical, Social, and Political Costs In addition to the monetary costs, the bill for white-collar crime gets higher when the additional negative aspects of white-collar crime are tabulated. The failure of Lincoln Savings and Loan and Enron are just two examples.

IV. PUBLIC PERCEPTION OF WHITE-COLLAR CRIME A. The Eye of the Beholder Public perception and reaction varies depending on nature of the offense and the identity of the offender. The public views crimes they can relate to and understand as the more serious threat. It is difficult for many to understand how to “cook the books” of a billion-dollar corporation, but they can understand how to bounce a check at their local bank branch.

V. ABOUT THIS BOOK A. Overview of Chapters Chapter 2 Crimes against Consumers Chapter 3 Unsafe Products Chapter 4 Environmental Crime Chapter 5 Institutional Corruption: Mass Media and Religion Chapter 6 Securities Fraud Chapter 7 Corporate Fraud Chapter 8 Fiduciary Fraud Chapter 9 Crimes by the Government Chapter 10 Corruption of Public Officials Chapter 11 Medical Crime Chapter 12 Computer Crime Chapter 13 Conclusions

MEDIA RESOURCES Greed (1924) Wall Street (1987) Money Never Sleeps (2010) Minkow (2011) 8

STUDENT ACTIVITIES AND DISCUSSION The following items are designed to be used by students for small-group or class discussion. Some are suitable for research-paper assignments or essay questions. Students may also use them for oral presentations to the class.

1. Debate the harmfulness of white-collar crime versus street crime. Consider what it means to live in a civil society and the proper role of government in society. reference to Greek, Roman, English, and American political philosophers may provide enlightenment in this discussion.

2. Consider Sutherland’s definition of white-collar crime. Break down its components and analyze the correctness of the definition.

3. Explore the cyclical nature of public opinion in regard to corporate activity. How does public opinion in this area relate to public opinion in regard to other institutions?

4. In addition to The Jungle, review books or newspaper/magazine exposés of industry practices from the early 1900s. How did these pieces lay the foundation for a more critical examination of business practices? Do writings/activities by Vance Packard and Ralph Nader help explain government focus or negative public opinion in later decades?

5. Examine the history of Amway. Why would its activities be pertinent to topics covered in this chapter? Why are they not?

6. Research the Church of Scientology. Have there been other activities of the church or its members that have drawn the scrutiny of government regulators?

7. How is it that some white-collar-crime victims never know that they have been victimized? Provide examples from personal experience or other sources.

8. Why is white-collar crime concentrated in some economic sectors? What theories of street crime causation are also applicable to white-collar crime?

9. Do statistics suggest that there is now a greater incidence of child abuse than there was in decades past. Other social scientists argue that it looks that way because of governmental and media focus. Can this same argument be used to counter the proposition that white-collar crime is concentrated in certain sectors? Why or why not?

10. What is social capital? Does white-collar crime affect the amount of social capital in a society or culture?

11. What is the cause of the disconnect between the costs of white-collar crime and the disinterested attitude of much of the public?

9

Chapter 2

Crimes Against Consumers CHAPTER SUMMARY The beginning of the chapter illustrates the unfortunate results of combining elderly, gullible senior citizens and aggressive, deceptive sweepstakes promoters. The case study “’Family’ Values” profiles the very well-known Ed McMahon Publishers Clearing House sweepstakes and magazine-subscription promotion operated by American Family Publishers. Winner notification language in big bold letters and disclaimers in lighter tiny letters in obscure locations were combined to induce senior citizens to spend thousands of dollars in magazine subscriptions and travel fares to win prizes that never materialized.

When government officials and private citizens eventually took the company to task, it filed for bankruptcy protection and eventually reached a class-action settlement.

“Dial F for Fraud” outlines the use of 900 or international numbers to cheat consumers.

Though many legitimate companies use 900 numbers to serve customers, alleged psychics, sex talk lines, travel scams, and fake bill collectors have used 900 numbers to bilk people. Live “sex lines” now account for an estimated 5 to 10 percent of all “900” minutes logged. A particularly devious form of predation involves the unauthorized use of these “phone sex” service by minors, which reportedly is now an epidemic.

The myth of the free market, and caveat emptor or “buyer beware,” work in tandem to make consumers vulnerable to unscrupulous vendors. It has become apparent that some government regulation is necessary. Crimes against consumers carry a heavy social cost. It is worth recalling that to the tiny Lilliputians of Gulliver’s Travels, fraud was considered a far more serious crime than theft and was usually punished by death.

Consumer fraud, false advertising, price-fixing, unsafe products, and quackery are all categories of crimes against consumers. The category of consumer fraud includes all the schemes used to separate consumers and their money using misrepresentations or outright lies. It is a general term used to describe consumer scams that do not fit neatly into other categories. Fake adoption services, phony finance companies, worthless land-sales schemes, and disaster scams are examples of consumer fraud—all with a core of meanness to them. The number-one offenders, according to a Harris poll of consumers, were auto repair facilities. While many of the facilities were independent shops, major companies were also included such as Sears, K-mart, Goodyear, and Firestone.

The recent collapse of the home mortgage market, leaving millions of homes in foreclosure, has fueled a wave of rescue scams. Crooked companies agree to help pay the mortgage but get the owners to sign a hidden deed-transfer clause. This allows the company to borrow against the equity in the home while collecting rent from the owner. Thus, the property still goes into foreclosure and the homeowner has no equity left.

10

Auto repair was the landslide “winner” in a Harris poll when it came to people believing they were deceived or ripped off. However incredible it may seem, every day of the year in auto repair shops cheat Americans out of $57 million.

Telemarketing fraud is widespread and is characterized by use of the telephone to get consumers to send money to the promoter for worthless or overvalued products or services. Once again the elderly, who represent 30% of all fraud victims, are a favorite target of telemarketing scams. The elderly population has money, is too polite, and is often lonely. By using the front, the drive, and the close, the mark or victim is evaluated for monetary resources, literature is delivered, the victim gets the hard sell, and finally, the sale is closed.

Reload schemes are the ultimate example of repeat victimization—the perpetrators even go so far as posing as law-enforcement officers who are going to “help” fraud victims. In “The Attack of the Toner Phoner,” Mark Suckman used a telemarketing scheme to convince a public-school office manager to send him checks totaling $2 million for nothing, forcing her to embezzle funds when threatened for accepting a gift. Invoices for nonexistent office supplies were sent to the office manager, and she was then threatened with disclosure of wrongdoing if the invoices were not paid.

Those who are already suffering financially are especially vulnerable to financial telemarketing schemes where the consumer is promised credit cards, second mortgages, or home loans.

Disreputable vocational schools also use telemarketing to induce potential students to take out federal student loans when in fact the school and/or training is nonexistent.

Higher education in the United States has seen an increase in the last 20 years. An increase in the number of veterans with educational benefits, deregulation of online education, and technical innovations that make online instruction feasible and economical, all contributed to the dramatic growth in for-profit higher education. One of the most significant “hidden” factors was the notable increased involvement of Wall Street in the for-profit education industry.

The success of Phoenix University, in particular, caught the eye of Wall Street investors. In 1994, Phoenix, owned by parent company the Apollo Group, was one of the first for-profits to “go public,” or to sell shares in the company. Within five years enrollments at Phoenix campuses went from 10,000 to 100,000. The fundamental problem, the committee concluded, was that the financial interests of the owners of for-profit colleges did not align with the educational and career interests of the students. The owners made money whether the students succeeded or not.

There is nothing new about false advertising. The Federal Trade Commission has classified ads as informative, puffing, and deceptive. Deceptive advertisements make misleading or untrue claims.

Manufacturers and marketers of gasoline, over-the-counter medicines, foods, pantyhose, and diet programs have been the target of criminal prosecutions for false advertising. The nutrition-product sector has been increasingly aggressive in its claims of benefits; some of these companies have been ordered to pay fines and change advertising. Consumer advocates are also very critical of ads that target children. Bait and switch is a false-advertising technique used to lure customers into an establishment using ads for products that are never intended to be sold where the customer is then urged to buy a more expensive or profitable product.

11

Case Study: Robbed By A Stagecoach: Between 2011 and 2016, Wells Fargo employees created more than 1.5 million accounts, as well as issuing more than 500,000 credit card applications without the consent of customers, which resulted in $2.6 million in additional fees to the bank. In December 2013, the L.A. Times investigated actions of Wells Fargo employees and found that they faced “ethical problems” in meeting the bank’s “performance standards.” These problems involved opening “ghost accounts” unbeknownst to customers.

Federal legislation such as the Sherman Antitrust Act of 1890, the Clayton Act, and the Federal Trade Commission Act, and state antitrust legislation, has been used to control monopolistic activity by American companies. Monopolies and price-fixing activity deprive consumers of a keystone of capitalism—competition. Enforcement of antimonopoly statutes has been erratic, depending on political regime and economic climate. The Clinton years were a good example of enforcement schizophrenia. Merger mania was in full swing, and yet the country saw stiff sanctions and record-breaking fines. The biggest companies in the United States and in the world have paid fines for monopolistic practices and have continued to do business.

As we learn in the case entitled “Microsoft - Macro Monopoly?,” Microsoft Corporation is one of the large companies that has faced federal prosecution for practices that harm consumers. The company is described as brutally competitive and as having employed all the robber-baron methods except dynamite. Microsoft was taken to task for “bundling” its Internet browser with its operating system. It was alleged by prosecutors that this was an effort to eliminate Netscape as a competitor.

The Justice Department argued that the browser could be uninstalled and had been sold as a standalone product. Bill Gates testified by deposition, and some say he became the prosecution’s star witness. Judge Jackson, the presiding judge, found that Microsoft was a monopoly and suggested the antitrust version of the death penalty—breakup of the company. Judge Jackson would go on to describe Microsoft as untrustworthy, unrepentant, and a lawbreaker. Microsoft hoped for a better result on appeal, and its hopes were realized. First the United States Supreme Court refused to fast track the case, leaving the litigation to proceed through the D.C. Court of Appeals. The D.C. appellate court discarded the option of splitting the company; however, it unanimously agreed that Microsoft was an illegal monopoly.

The appeal proceeded to the Supreme Court. There is an old saying about it being better to be lucky than good. A Republican administration was now in place in Washington and in charge of the Justice Department. In a 2001 proposed settlement, parties were amenable to Microsoft being prevented from restrictive license agreements with personal computer manufacturers. Microsoft would agree to provide access to application programming interfaces (APIs) to make it easier for other software manufacturers to design products that would work with Windows and, finally, an independent expert group would monitor Microsoft compliance. When the settlement was finally approved, there was no independent group but a committee of Microsoft board members. An antitrust expert described the settlement agreement as an embarrassment for the Justice Department.

In the case study “Wal-Mart: Everyday Low Prices—and Practices,” the seemingly benevolent happy-faced retail giant is portrayed as anything but. Consumers may be surprised to learn that Wal-Mart does more business than Target, Sears, K-Mart, J.C. Penney, Safeway, and Kroger combined and is the largest corporation in America. With sales of $250 billion, which exceeds the 12

gross domestic product of 161 countries, and annual profits of $8 billion, it is a giant indeed. WalMart sells more in one month than Home Depot, the second-largest retailer, sells in a year. WalMart’s low prices come at the cost of profit, killing concessions from suppliers, some of whom are forced to close factories with the attendant job loss. Domestic manufacturers are squeezed out in favor of foreign companies. Vlasic Pickles’ bankruptcy and Levi Strauss Jeans’ closing of its last two United States plants can arguably be laid at the feet of Wal-Mart demands. Kathie Lee handbags sold at Wal-Mart are made at a Chinese factory that exhibits horrific (using American standards) living and working conditions. Some employers affected by Hurricane Katrina gave employees 90 days’ pay—Wal-Mart offered 3 days’ pay.

One Wal-Mart store manager gave new meaning to the word “grinch”—he removed toys that were donated by customers from a donation box outside the store and said the toys would be returned when receipts were produced, the likelihood of which was nonexistent. The 2001 average annual salary of a Wal-Mart employee was $800 below the poverty level, leaving taxpayers to foot the bill for health care and other living expenses to which employees were entitled to because of their low salaries. Employees were instructed in company documents on how to apply for public benefits.

Wal-Mart is second only to the federal government in the number of lawsuits filed against it. There have been more than 50 class-action suits by employees alleging that they were required to work off the clock, subjected to humiliating reprimands, locked in to work, discriminated against if they were disabled persons and/or females, and subjected to violations of the youth employment provisions of the Fair Labor Standards Act. Undocumented workers were locked in the store and afforded no overtime or injury compensation. The company has also been accused of aggressive antiunion activities and has made a practice of taking out life-insurance policies on low-level employees. This “dead peasant” insurance allegedly funded executive retirement plans.

The airline industry and the oil industry have been favorite targets of antitrust action. In some settlement agreements, only large corporations benefited. Corporate fines and administrative sanctions have been the favored method of resolution. Bid-rigging, however, has yielded criminal sanctions. This occurs most often when governments suffer as a result of bid-rigging. An example of the foregoing is profiled in “The Great Electrical Conspiracy.” When price wars ate into profits, electric companies resorted to conspiracy and cooperation to fix prices. A major target was the Tennessee Valley Authority (TVA), when General Electric, Westinghouse, and others decided that they could make more money as winning-bid contractors for lucrative government contracts.

Describing their conduct as illegal but not criminal, executives got the proverbial slap on the wrist and made self-serving justifications for their actions. Fines levied were the equivalent of a $175,000 executive being given a $3 parking ticket. No matter what the color of the collar, actions, intent, and rationalization appeared the same. The dairy industry has also been tempted to cheat the government in supplying milk to schoolchildren. The insurance industry was not immune from temptation. American International Group (AIG) allegedly conspired to fix the excess casualty insurance market.

Price-gouging occurs when entities take advantage of laws, monopolies, and real or contrived shortages to demand excessive payments. This may be opportunism at its most ruthless. Cereal manufacturers have also been accused of price-fixing. The United States is the only Western nation that does not control the cost of prescription drugs. This circumstance gave Mylan Pharmaceutical Corporation the ability to charge prices ranging from $6.20 for generic to $14 for the name-brand version of the same drug. When human usage for a sheep wormer was discovered, its price 13

increased by 10,000 percent. Since 1980 the price for prescription drugs has risen three times faster than prices for other products. The average Fortune 500 company has a 4.6-% profit margin; drug companies have a 15.5 % profit margin. Nineteen drug companies agreed to pay $176 million to settle allegations of price-fixing. Drug companies argue that research-and- development costs warrant the high prices; others say that marketing expenses are included in R&D to inflate those figures. Poor people are victimized by higher prices for insurance, redlining pawnshops and the rent-to-own industry. Knockoffs of brand-name products also serve to victimize consumers.

Knock Offs and Rip-Offs: A special type of price gouging involves the covert substitution of low-quality counterfeit versions of brand-name consumer products—known as knockoffs. The MGM Grand Hotel in Reno, for example, once refilled 16,000 bottles with cheaper liquor over a 14-month period between 1978 and 1979. Worse still, any unmixed liquor left untouched by customers leaving the hotel’s Ziegfeld Showroom was “recycled”—that is, poured back into the bottle for the next customer. “Some of the drinks wound up with more mileage on them than the hoofers in the chorus line.”

LECTURE OUTLINE Chapter Preview Introduce students to the variety of ways consumers can be cheated.

Case Study: “Family” Values Publishers Clearing House, magazine subscriptions, misleading winner notifications Dial F for Fraud 900 numbers and their potential for abuse of consumers The Myth of the Free Market Government regulation necessary to prevent cheating of consumers I. CONSUMER FRAUD A. Misleading the Public to Make Money B. Targeting Vulnerable Consumers C. Case Study: Bad “Car”ma Discuss the auto repair centers of Sears Roebuck & Company, one of the country’s biggest retailers, and why it became the target of state investigations.

D. Telemarketing Fraud Review with students how the telephone is used to target the poor and elderly; worthless land, nonexistent prizes, disaster victims, fake schools.

E. Case Study: The Attack of the Toner-Phoner Explain how a phony office-supply salesman convinces an office manager to pay $2 million for fake invoices and to embezzle from a school district.

14

F. …And the Poor Get Poorer Explore how consumers already in financial difficulty are promised credit cards, home-equity loans, mortgages, and worthless trade-school training for a better job.

G. Case Study: Broken by Brokers Explain how scammers acquire the phone numbers of elderly people and steal money from them.

H. Case Study: Chased by Chase Explain how a $3,200 credit card bill can wind up costing $10,700.

II. FALSE ADVERTISING A. FTC Regulates Ads Which Predate the Advent of Network Television a. Three categories of advertisement: informative, puffing, and deceptive. b. Deceptive ad examples: Anancin pain reliever, Beech-Nut Nutrition Corporation, Carrington Foods. c. False labeling on products such as “lite,” “low sodium,” or “natural.” d. Advertising toward children has generated public outrage.

B. Bait and Switch Merchants offer products they never intend to sell and lure customers to buy more expensive or more profitable items.

III. PRICE-FIXING A. Sherman Antitrust Act of 1890, Clayton Act, Federal Trade Commission Act, State Antitrust Legislation B. Big Companies Fined and Continue Business as Usual Pursuit of enforcement of companies involved in price-fixing and monopolies can be determined by the political party in power. Studies report that price-fixing is most apt to occur during Republican administrations.

C. Case Study: Microsoft = Macro-Monopoly?

Microsoft demonstrates why free isn’t really free.

D. Case Study: Wal-Mart: Everyday Low Prices—and Practices Discuss with students Wal-Mart’s fame for underpricing its competitors, and how the case study illustrates some of the tactics that makes it possible for the retail giant to do so.

E. Major Industries in All Sectors of the Economy Have Been Accused of Price-Fixing

15

F. Case Study: The Great Electrical Conspiracy Show how companies manage to cheat consumers and the government by using the “join them” rather than “fight them” philosophy.

G. Price-Gouging Demonstrate how natural disasters and other circumstances enable companies to take advantage of vulnerable populations.

H. Knockoff Rip-Offs Look-alike products can fool consumers if they ignore the very low price.

MEDIA RESOURCES The Billion Dollar Bubble (1978) Tucker: The Man and His Dream (1988) Chinatown (1974) STUDENT ACTIVITIES AND DISCUSSION The following items are designed to be used by students for small-group or class discussion. Some are suitable for research-paper assignments or essay questions. Students may also use them for oral presentations to the class.

1. Are there examples of prize scams in your own e-mails? Print the e-mail. DO NOT OPEN ANY ATTACHMENTS TO THE E-MAIL. DO NOT CLICK ON ANY OF THE WEB ADDRESSES IN THE E-MAIL. DO NOT GO TO ANY OF THE WEB ADDRESSES IN THE E-MAIL. PRINT THE E-MAIL ONLY. (See how careful we have to be.)

2. Bring three examples to class of offers that sound too good to be true. Think about direct mail, telephone, e-mail, road signs, television, and classified ads. Why do you believe the offers are too good to be true?

3. Bring examples to class of the legitimate use of 900 numbers. What can these companies do to combat criminal use?

4. Research examples of con artists taking advantage of hurricane victims. Consult the newspapers that cover the areas affected by the 2005 and 2012hurricanes.

5. Provide examples of current telemarketing scams or abuses. What can legitimate companies do to combat this?

6. Outline examples of financial or debt-service advertisements on television. Which ones do you believe to be questionable? Why? What are the costs of the public being exposed to these techniques?

16

7. List celebrity endorsements you have seen that you believe to be false. Why do you feel this way?

8. Examine one of the companies discussed under the price-fixing section. Where is this company today? Has it experienced any ill effects from its legal troubles?

9. Prepare to debate the Wal-Mart or Microsoft allegations. One side will take the position of the company and the other the position of the government or consumers.

What are the pros and cons?

10. Discuss for-profit education and some of the problems found during the investigation. What impact has Wall-Street had on for-profit education?

11. Investigate the political contribution connection to big-company wrongdoing and the lack of criminal punishment. Use the Web site opensecrets.org to do this assignment.

12. The year is 2006. Did the oil industry conspire to keep oil prices at the $3 level so it could earn record profits? What do the experts say?

13. Identify historical examples of action generated by the government being cheated by corporations.

14. The excess casualty market was identified as the subject of a price-fixing scam. Are there other obscure, niche markets that have been subject to this?

15. Provide examples of natural disasters other than those in the text that have given rise to consumer abuse.

16. Why did PC makers not testify in the Microsoft case?

17. Why isn’t “free” good for the consumer?

18. Discuss the “lady and the tiger” analogy in regard to Wal-Mart.

19. Does Wal-Mart have a competitor? Why or why not?

20. Is the United States losing manufacturing jobs? Examine historical data, taking into account inflation, population growth, and employment in other sectors. Explain how data can be compared over time.

21. Is the Qin Shi factory an aberration or the norm for factories in China? Provide examples and explain your answer. Are there other factories that produce goods for distribution by American companies? Provide examples and details.

17

Chapter 3

Unsafe Products CHAPTER SUMMARY The chapter begins by laying out the case against cigarette manufacturers. To paraphrase an old joke, if it walks like a duck, talks like a duck, and looks like a duck. . . According to a government pharmacologist, tobacco “is a drug, pure and simple.” Not only did “big tobacco” aggressively market a habit-forming drug, it used techniques to make it more addictive. It didn’t stop there; tobacco companies also ignored and in some instances concealed research that confirmed the harmful nature of nicotine.

Testimony before Congress demonstrated that the tobacco companies were not done with the big lie—whistleblower testimony conflicted with tobacco-executive testimony that nothing had been done to manipulate the level of nicotine. This testimony by tobacco executives also conflicted with statements made during a plea bargain with a California company that had illegally shipped altered seeds to Brazil, where one of the tobacco companies grew tobacco that contained twice the amount of nicotine as naturally cured tobacco.

In efforts to extricate themselves from accusations, tobacco companies argued that people would lose jobs and stockholders would be hurt. They also used economic pressure against companies marketing antismoking items. Though there had been a number of product-liability lawsuits, no plaintiff had prevailed until 1996. One of the smallest tobacco companies, perhaps as a result of the 1996 Florida verdict, agreed to settle a massive class-action lawsuit. Eventually state governments would sue tobacco companies and reach settlements. It was disclosed that tobacco companies had marketing plans targeting specific demographic groups, including young people. (It is not too big a leap to say the companies needed new customers to replace the ones they had killed.) Class-action suits provided the biggest threat for tobacco when it came to individual consumers.

In “Lots of Zeros,” in a Florida class action lawsuit, a jury found that that smokers were misled about addictive properties and the deadly nature of the product, and that the tobacco industry acted with reckless disregard and engaged in extreme and outrageous conduct. The jury awarded $12.7 million in compensatory damages—the final award was $145 billion after punitive damages were included. The circuit judge upheld the verdict, but the damages were never paid. The appellate court reversed the jury’s verdict because it would bankrupt the companies in violation of Florida law and because the plaintiffs were improperly included in a class-action lawsuit. A pro-business and anti-litigation Congress, with its interest in tort reform and limiting damages in product liability suits, makes it unlikely that future suits would be favored. The tobacco industry is the poster child for the “postponed violence” aspect of white-collar crime.

The National Commission on Product Safety estimates that unsafe products have injured 20 million Americans, 110,000 have been permanently disabled and 30,000 have died. The automobile industry can be used as an example of two elements of disregard for consumer safety—resistance to safety devices and defects in design. General Motors thought safety glass was too costly. When confronted with the tests that showed the rear gas tank ruptured easily in rear-end collisions, Ford

18

made the decision that $11 per car was too much too spend. Confronted with fiery crashes and exploding gas tanks, the Department of Transportation ordered a recall. The great paradox of whitecollar crime is that people who would not harm you on an individual, face-to-face basis will wound or kill you from behind the corporate shield. Ford was acquitted in a criminal prosecution, but automobile manufacturers, as a result, seem less willing to ignore post facto design defects. The same cannot be said for pre-facto situations. A federal judge had to force a recall of vehicles that stalled in traffic. Ford had already settled many suits involving the defect. The rollover accidents involving Ford and Firestone continued to illustrate companies’ disregard for danger signals.

Though Ford knew of foreign problems with Firestone tires and began replacing them, it continued to sell automobiles in the United States with the tires and failed to notify the National Highway Traffic Safety Administration.

Most of the blame fell on Firestone, which had received more than 1,500 legal claims about the tires in question. As will be seen in other cases of white-collar crime, Firestone blamed problems on “operator” error. Not only automobile makers and tire makers have ignored safety concerns to cut costs. Blowers, sprays, furnaces, food processors, worm shockers, car seats, pacifiers, doll parts, and strollers have all been the subject of recalls, lawsuits, maiming, deaths, and other consequences of defective products.

What about protecting children? A 2000 investigation offered disturbing news. In the previous three years, 75 percent of the most dangerous problems that led to recalls of products used by children were never voluntarily reported to the government. Cosco, for example, did not even recall a defective stroller until a year after the company had received 3,000 complaints of lock failure that resulted in more than 200 reports of injuries to infants.128 The mother of one of those 200 children states: “It’s scary that parents can have children that have been injured after the company knew it was a problem . . . . It’s scary that companies can get away with it.”

On August 19, 2016, Samsung introduced its latest telephone model, the Galaxy Note 7. By September, the company was notified of 92 incidents where the devices had exploded, due to faulty lithium batteries included with the new model. Unwary consumers were seriously burned and their property damaged according to testimony before the Consumer Product Safety Commission. Shortly after reports became public, airports were advised not to allow passengers aboard aircraft either carrying the device or in checked luggage as a safety precaution.

In 1905 Upton Sinclair caught the attention of the American public with the publication of The Jungle and its story of abuses in the meatpacking industry. The Food and Drug and the Meat Inspection Acts of 1906 focused only on products being transported in interstate commerce.

Twenty-five percent of meat products sold in the United States do not move in interstate commerce.

The Wholesome Meat Act passed in 1967 was supposed to correct this loophole, but major companies continued to evade the law. As recently as 1998, meatpacking plants were only inspected every 10 years, and the abuses continue. Five thousand deaths and 76 million cases of food poisoning are associated with tainted food. The poultry industry is especially pathogenic because of the danger in poultry disseminating bacteria. Use of growth hormones in food products has turned the American consumer into the equivalent of food tasters for the medieval sovereign.

In addition to meat and poultry, the Food and Drug Act granted the federal government broad regulatory powers over the entire food industry. For instance, concerns have been raised about the seafood industry, which has generated a number of health and safety problems related to natural viral and bacterial

19

pathogens,167 as well as toxic and chemical contamination from a marine environment polluted with sewage, pesticides, and industrial chemicals. In 1993, seafood accounted for 20 percent of all reported incidents of food illnesses in the United States. The FDA estimates that 114,000 Americans suffer seafood poisoning each year. In the biggest documented case of food poisoning ever, 224,000 persons got sick in 1994 from eating bacteria-tainted ice cream made at a Minnesota plant. It took two years for officials to trace the source.

Regulation was even slower to develop with pharmaceuticals than with food. Fen-phen and Bendectin illustrate the rush to get products to market without adequate testing or with deliberate disregard of negative test results. The story of thalidomide is an example of the pressure on the Food and Drug Administration to release drugs for human consumption and deliberate ignore the risks. The FDA did Richardson-Merrell a big favor by resisting pressure to release thalidomide, thus avoiding a legion of lawsuits and possible bankruptcy.

MER/29, a cholesterol inhibitor, also involved Richardson-Merrell; the company was ordered to pay an $80,000 fine and made an $18 million profit that year. Eli Lilly, in connection with Oraflex, an arthritis drug believed to have killed 40 people and injured 916, was fined $25,000 and its executive $15,000. Testing firms have also been involved in harming the consumer by falsifying drug-test results.

The case study “Halcion Daze” points out the difficulty in legally connecting a drug with serious side effects and actions caused by the drug. President George Bush, who vomited and fainted at a state dinner in Japan, took Halcion. Other individuals attacked friends, attempted and committed suicide, suffered extreme personality changes, and all were taking Halcion at the time the conduct occurred. A noted prosecution psychiatrist broke his own tradition and offered testimony that Halcion caused the defendant’s legal insanity. The FDA in 1996 finally acknowledged that Upjohn minimized and misrepresented the dangers of Halcion.

Medical products provide another opportunity for companies to mislead and/or harm the public.

Companies have sold used pacemakers, marketed virtually untested birth-control devices, implanted silicone breast devices, and promoted super-absorbent tampons with little regard for the danger to consumers. The Dalkon Shield intrauterine device was aggressively marketed with little testing. H.R. Robins, the manufacturer, eventually declared bankruptcy.

Dow Corning, one of the manufacturers of silicone breast implants, ignored expert advice concerning risks and the experimental nature of the item. Millions of dollars would eventually be awarded in breast implant litigation.

In the case study “Rely Tampons,” Proctor and Gamble, though it received 100 complaints a month for a product not widely available, went forward with the new tampon in an effort to dominate the feminine hygiene market. P & G didn’t withdraw the product until threatened by the FDA, and the FDA didn’t act until women died. Experts were dissuaded from testifying against P & G after P & G offered them substantial financial grant money. Since Rely tampons were removed from the market, toxic shock deaths dropped dramatically.

Quackery is the marketing of worthless products to persons in search of miraculous cures.

Teenagers and the elderly are favorite targets of quacks. Especially vulnerable are those 20

seeking remedies for afflictions with no known cures. The three basic forms of quackery are nutrition claims, miracle drugs, and magic devices (one of which is used by one of the authors of this text). In “The King of Quacks” case study, Dudley LeBlanc sold a tonic that he said could cure a multitude of problems. When asked in an interview what the drug was good for, he replied that last year it was good for five and a half million dollars.

The manufacture and sale of counterfeit medicines is a worldwide problem. The consequences of taking substandard or counterfeit medicine range from reducing the drug’s effectiveness to death.

The proportion of the global medicine supply that is counterfeit varies tremendously from developed to less developed countries, although the figure is estimated to be about 1% in the U.S. and Europe. The deadly consequences of counterfeit medicines belies the common assumption that white-collar crimes result only in financial losses.

LECTURE OUTLINE Chapter Preview Demonstrate the insidious nature of unsafe products and their release to an unsuspecting public.

Big Tobacco Review the history of tobacco use, sales, and marketing, and why it is appropriately included in this chapter on unsafe products.

Case Study: “Lots of Zeros” The case study about a Florida tobacco case illustrates the role of personal injury litigation in exposing unsafe products. It also highlights the more aggressive nature of governmental action when governments are affected rather than just individuals. Discuss with students reactions to tobacco litigation and whether the industry should be accountable.

Automobile Industry Explain the reluctance of certain industries to employ the measures that would protect consumers.

Resistance to Safety Devices Manufacturers show resistance to even relatively low-cost safety devices until forced to install them by government action or lawsuit judgments.

Defects in Design Companies will also ignore data that is indicative of design problems. Explore with students what motivates a company to do this. Demonstrate for students that it is not only the automobile industry that can be faulted for such behavior.

Children’s products such as pajamas, strollers, car seats, and toys have been the cause of injury or death.

21

I. ADULTERATED FOOD A. Legislation Review acts such as The Food and Drug and the Meat Inspection Acts of 1906; The Wholesome Meat Act of 1967; Food, Drug and Cosmetic Act of 1938; and the Medical Device Amendments Act of 1976.

B. Meat-Packing and Poultry Examine the history of meat inspection and how much progress has been made in the last 100 years. Investigate with students why the poultry industry is especially problematic, and review problems seen in the poultry industry.

C. Other Food Products Discuss with students other food products that present hazards for consumers, even for the very youngest consumers. Growth hormones have been introduced into food and tainted food released to the public even after testing showed it was infected; peanut butter, granola bars, baby food, and ice cream are a few examples.

II. DANGEROUS DRUGS AND DEVICES A. Drugs Though effective regulation was even slower in the area of drugs than in foods, drugs such as Fen-phen, Bendectin, and Thalidiomide have been regulated or removed from the market. Fenfluramine, marketed as Podimin, was removed from the market as was Bendectin, but Thalidiomide has been allowed to remain on the market under a different FDA approved use in 1998. Unfortunately, human beings had to suffer serious health effects before that happened. The potential for drug company products is at constant odds with regulation. Only the drug industry has a worse safety record than the automobile industry. Discuss with students possible reasons for the poor safety record.

B. Case Study: Halcion Daze The drug Halcion has allegedly been associated with severe psychological side effects, though its manufacturer Upjohn denies it. Review with students the drug approval process and whether Upjohn’s actions should be characterized as aggressive, unethical, or criminal.

C. Devices Sellers and manufacturers of pacemakers, catheters, intrauterine devices (specifically the Dalkon shield), and saline-filled and silicone-gel breast implants have been accused of hurting the public. In the case of the Dalkon shield, almost nonexistent testing was the culprit. Other manufacturers were accused of withholding negative test studies. Examine with students the facts on these studies and encourage them to identify other medical devices that have been shown to be dangerous to the public.

22

D. Case Study: Rely Tampons Proctor & Gamble manufactured and marketed the Rely tampon, which caused women to develop toxic shock syndrome and, in some cases, the product caused death. Even when the product was not widely available, an unusual number of complaints were reported. Proctor & Gamble continued to push the product with free samples. When the FDA threatened action, the company withdrew the product from the market. Proctor & Gamble used grant money to doctors to encourage favorable testimony when lawsuits began. Debate with students what could have prevented the tragedy of 38 deaths associated with use of the tampon.

E. Quackery Quackery involves the sale of medical devices or cures that are worthless or don’t do what they promise to do. Young people and the elderly are especially vulnerable to the claims of quackery. Talk with students about effective techniques to combat quackery. Use of these phony cures may also delay effective appropriate medical treatment.

1. Nutrition Sellers of products make nutrition claims that are untrue or exaggerated.

2. Drugs Selling substances that don’t perform as promised is bad enough, but many of the quack substances are dangerous to the health of the consumer.

3. Devices Magnetic bracelets, copper bracelets, breast enlargers, and weight loss earrings have all been sold to eager consumers looking to cure what ails them. What is lacking is medical evidence to support the claims made by sellers of these devices. Ask students if they, family members, or close friends have used nutritional products, drugs, or devices that might fit into one of these categories. Why did they do it? What were the results?

F. Case Study: The King of Quacks I: John Romulus Brinkley John Romulus Brinkley turned a bizarre and dangerous medical procedure into a fortune, a radio station, and a nearly successful governorship. Explain how this virtual serial killer served as a model for contemporary media and politics.

G. Case Study: The King of Quacks II: Dudley LeBlanc Dudley LeBlanc, selling a concoction called Hadacol, may best have characterized the quacks and the white-collar criminal’s motivation. He was asked what Hadacol was good for, and in so many words he told his audience that it was good for making money. Explore with students how far governments can go in protecting consumers from themselves.

H. Counterfeit Medicines are only a part of the worldwide market in counterfeit products.

The problem is particularly acute for critical drugs necessary for survival in many poor 23

countries. The criminals who sell these fake drugs show a remarkably callous disregard for the lives of the desperate individuals who are forced to buy them. Many of those consumers know there is a high likelihood that they are not getting the real thing, but are faced with a choice between fakes or nothing.

MEDIA RESOURCES The Insider (1999) I Love Lucy, "Vitameatavegamin girl" (1952) To Live and Die in L.A. (1985)

STUDENT ACTIVITIES AND DISCUSSION The following items are designed to be used by students for small-group or class discussion. Some are suitable for research-paper assignments or essay questions. Students may also use them for oral presentations to the class.

1. Where is Big Tobacco today? Look at advertising and rise or decline in tobacco use. Is there still litigation or legislation attempting to control tobacco use? Should consumers be able to sue for voluntary use of a substance?

2. Make an in-depth analysis of the Ford Pinto case. What did Ford do or not do?

3. Examine the life of Ralph Nader, specifically his work in regard to the automobile industry.

4. Take a look at the Ford Explorer/Firestone Tire litigation and the history of the accidents. How could the companies have prevented the accidents? What could the government have done?

5. Research other cases of “dumping.” What other products have made their way to third-world countries after being banned here?

6. Find recent cases of people becoming ill from adulterated food. Who was responsible? Were they accidents or negligence?

7. What role does federal and state budgeting play in the control of unsafe products?

Does the concept of a “captured” executive agency play a part in this discussion?

8. How do you feel about being a food taster for the king? Who or what is the king or sovereign?

9. The case of Daubert v. Merrell Dow Pharmaceuticals changed federal law on the testimony of scientific experts. It involved the drug Bendectin. Examine the case and address the question of whether or not the drug is dangerous. How does the case help 24

explain the difficulty in regulating the drug companies and their products?

10. What are the current statistics on toxic shock syndrome? Take a look at CDC information and National Institute of Health data. Does the information you found support the government’s position on the Rely tampon?

11. Provide examples of products that are currently being marketed that you believe are examples of quackery. Why do you believe these products fit the definition? Could some stores or restaurants be accused of quackery tactics or selling quack products?

(Hint: You might start with so-called “diet” aids or “energy” drinks. Is might also be interesting to see how many of them are manufactured by the same company.)

12. Take a look at the life of Kevin Trudeau. Is what you find relevant to items in this chapter? Why or why not?

25

Chapter 4

Environmental Crime CHAPTER SUMMARY Ralph Nader argued that the harm done to health and safety by business crime removes the allegedly distinguishing characteristic of white-collar crime as the absence of physical threat. Is it possible more people have been fatally injured by corporate conduct than traditional kinds of murder? Environmental crime is a further example of postponed violence. The Environmental Protection Agency has urged that environmental crime be regarded as a crime of violence and a serious departure from responsible citizenship. The Exxon Valdez Alaskan oil spill illustrates the additional damage to emotional health.

With the careless and often criminal disposal of hazardous waste, the connection between harm to the environment and harm to human beings is readily apparent.

The “Love Canal” case study makes this point in no uncertain terms. Twenty million pounds of chemical waste were dumped by the Hooker Chemical Corporation (a subsidiary of Occidental Petroleum) from 1942 to 1953 in a waterway near Niagara Falls. The land was then sold to the school district for one dollar—an elementary school followed and then a housing development. In 1977, melting snow caused water contaminated with dioxin and benzene to seep into basements.

Residents’ serious health problems came to light—health problems that existed far in excess of statistical averages. The company had knowledge of the problem as early as 1958 and did nothing in hopes of avoiding the $50 million cleanup cost. The area was finally evacuated, but it was too late for many. Occidental paid the $129 million cleanup cost.

According the World Health Organization, 75 percent of human disease is waterborne.

While efforts have been somewhat successful in resuscitating Boston Harbor, it is the exception rather than the rule. Illegally dumped medical waste such as needles, IV tubing, catheter bags, and vials of AIDS-positive blood makes its way to public beaches.

Drinking water is contaminated by underground storage tanks containing fuels. The three major kinds of contamination are organic linked to cancer, inorganic such as metals linked to developmental problems, and radioactivity causing prenatal damage.

In order to avoid the $2,000 to $4,000 price tag for properly disposing a truckload of waste, Other methods are used that endanger the environment and human life. The cause of most poisoned water, however, is not illegal dumping by waste haulers but criminal negligence by industry. Rockwell International, working for the Department of Energy, contaminated rivers with nuclear waste and, despite paying an $18.5 million fine, still made a profit of $4.1 million. Tannery waste containing chromium and Vesicol waste containing chloroform both caused serious harm. One of the most serious harms of water contamination is cancer in children.

The case study “The Woburn Leukemia Cluster” concerned the contamination of the water supply

by W.R. Grace Corporation and high levels of childhood leukemia. The movie Erin Brockovich made famous the pollution of groundwater wells by Pacific Gas and Electric. Unlike its product Teflon, DuPont discovered that allegations of environmental crime do stick in the case study “Out of the Frying Pan, into the Fire.” The chemical used to make Teflon is alleged to cause cancer 26

and other serious medical problems. The substance in question, perfluorooctanoic acid PFOA, contaminated drinking water and posed a danger to female workers. DuPont concealed this information from the public, employees, and the EPA. Harmful substances not only pollute the water but also contaminate the air. Respiratory disease has become the most rapidly increasing form of death in America. Asbestos was used in insulation, paint, tiles, plaster, cement, and other products used in construction.

Breathing it also causes asbestosis and lung-scarring, stifles breathing, and interferes with oxygen getting to the brain.

The manufacture and use of asbestos discloses a 50-year history of denial and cover-up by manufacturers. In the case study “The Hemlock Horrors,” a small town in Michigan is contaminated by dioxin (the Love Canal chemical) in the air. Dow Chemical maintained that dioxin experiments did not support a cancer connection. EPA soil tests at the Dow complex found levels six times higher than those at the Love Canal. Computers and other electronic devices have created new threats to the environment in the form of what is known as e-waste. The problem is that these electronic devices, which might seem to be clean extensions of the cyber world, are in fact filled with toxic chemicals. In contrast to other countries around the world, the U.S., whose citizens are the world’s largest consumers of electronic products, has relatively weak laws regulating the export of e-waste. Most electronic devices are deemed to be “commodities” rather than “waste” and are not subject to the Resource Conservation and Recovery Act. The 1980s and the Reagan presidency ushered in an era of anti-regulation and little attention to environmental pollution. The EPA estimates 90 percent of chemical wastes were disposed of illegally in the early 1980s. The Reagan approach to environmental concerns was one of public relations rather than scientific investigation, regulation, and enforcement. Insidious by-products of Reagan administration indifference are environmental racism and toxic terrorism. Under the idea of environmental racism, a disproportionate amount of environmental wrongdoing occurs in minority, disadvantaged communities. Toxic terrorism involves the exportation of environmental problems to the third world. Waste is exported, as are unsafe workplace conditions, polluting factories, and food and drug products not fit for consumption here.

In 1980, Congress passed the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), also known as Superfund. Parties responsible for contamination can either clean up the site or reimburse the government for the cleanup. A substantial amount of money was to be thrown at the property—the net effect being the moving of waste from one location to another. Lawyers and waste-disposal firms would make a lot of money. The Brio site in Houston, Texas, was identified as a Superfund site in 1984. By 1995 all but 9 of 687 families had been relocated, and no one wanted to assume responsibility for the $40 million cleanup.

Pearland, Texas, in the shadow of Brio, developed the highest cancer rate in the nation.

General Motors has been linked to 200 Superfund sites. Five categories of sanctions exist for environmental crime. They may be imposed individually or in combination.

27

Fines based on whether the pollution was negligent or willful have been levied against Texaco; Ocean Spray; Ashland Oil; Chevron; Koch Industries; PQ Corporation; Menard, Inc.; and our old friend Wal-Mart. More than once Wal-Mart has paid in excess of $1 million for environmental violations.

Restitution is another option to correct behavior, as is the corporate form of probation.

This imposes environmental audits on companies. Nontraditional sanctions involve companies being ordered to provide money for community betterment efforts. Incarceration has more recently been used to enforce compliance. Falsifying reports can also result in prosecution, as in the case of Fujicolor Processing, whose environmental reporting officer cherry-picked results to report to the EPA. The workplace environment also poses a danger to American citizens. Canaries used to be employed to test air quality in mines; humans have now become the canaries. The “Kepone” and “Scotia Coal Mine Disaster” case studies exemplify the danger to workers in mining operations. Kepone is a highly toxic pesticide that had significant effects on a community in Virginia. Velsicol and leptophos, another pesticide, debilitated Texas workers. Explosions were the problem at the Scotia Mine in Kentucky.

Not only do substances harm consumers, but the employees who have to work with the substances on a daily basis also suffer from the dangers posed by hazardous substances.

Asbestos manufacturers, knowing of the danger, declined to warn workers. Family members who came in contact with asbestos were also affected. Cotton dust is also a problem for employees, since inhalation leads to brown lung disease. Local doctors in the employ of the company help shield corporations from liability. Even OSHA, in an effort to avoid being blamed for an economic downturn, has underplayed environmental problems.

Radioactivity has affected disadvantaged populations and military personnel. Whistleblowers’ clothing has been sabotaged, and company officials have threatened them. In 1979 a worker at the Rockwell Flats Nuclear Weapons Complex began developing symptoms of radiation sickness. When she brought it to the attention of management, she was told it was from the solution the uniforms were washed in. She later announced that she would be testifying before a grand jury in response to an FBI investigation and was warned she would be dealt with and she was then left unattended to when her exposure alarm sounded.

As is common with many accusations of corporate misconduct, the company does not hesitate to claim user error—that the consumer or the worker brought the injury on himself or herself.

Beryllium, a lightweight metal used in nuclear weapons, also produces a dust that leads to lung inflammation and ulceration. The associated disease may not appear for 15 to 20 years.

Industrial accidents also claim workers. Tyson Foods is the largest United States poultry processing company. Tyson was fined almost $200,000 for the deaths of workers; its profits were $403 million. Steel making is another industry where worker safety may be a problem. In the Texas City Disaster I case study 567 people were killed and over 5000 were injured because the government had failed to properly regulate and label ammonium nitrate. British Petroleum (BP) is cited in two 28

case studies: The Texas City Disaster II and The Deepwater Horizon Oil Spill, both involving negligence on the part of BP. Case study “Combustible Dust” explains several ways that dust created during manufacturing can ignite in different industries. A tempting area of cost-cutting seemed to be maintenance. In the McWane Way, the danger of cast-iron water and sewer manufacturing was examined. McWane foundries have been cited for safety violations four times more often than the foundries of the company’s six major competitors.

Missing safety guards, flammable material mishandling, lack of respirators, and untrained employees are just some of the problem areas. Amputations and burns were routine, and turnover was so high that workers were recruited from local prisons. Workers urinate in their pants because they are not permitted to leave the manufacturing line. In defiance of minimal safety standards, workers were trained to work on machinery while it was running, resulting in crushed limbs, torn-off skin, and a split skull.

Moving hazardous manufacturing plants to foreign locations has become more and more attractive. This is especially true for asbestos manufacturing. Mexican border towns, Taiwan, South Korea, Venezuela, and Brazil have been the “lucky” recipients of runaway plants. In Brazil, for example, workers make more money because the work is hazardous; if the hazard is fixed, the pay is lowered. Mining and refining of mineral ore is another fugitive industry.

The Reagan administration, Reagan’s Secretary of Labor, and OSHA during the Reagan years tended to interpret violations as good-faith mistakes absent compelling evidence to the contrary. Carter safety rules and regulations were rescinded almost immediately. In a letter from Office of Management and Budget (OMB) to the Department of Labor, OMB urged labor to reduce regulations requiring safety measures because compliance would cause businesses to lower wages. The theory was that absent compliance costs, wages would be higher, and better-paid workers are safer workers. Once again, this blamed the worker for safety problems. In the 1990s, OSHA again began taking a more aggressive stance against safety violators with the use of the egregious multiplier policy and the repeated policy, both of which had demonstrable effectiveness.

OSHA has no power to bring criminal charges—only the Justice Department has that authority, and from 1980 to 1992, the prevailing motivation seemed to be to get government off the back of business. The individual states then had to assume the responsibility of protecting workers. The Los Angeles District Attorney’s Office went so far as to go after its cash cow—the movie industry— when people were killed on a movie set. Others were indicted for farm accidents. The theory behind criminal prosecution of management and owners is that these individuals will be less likely to cut safety corners if the end result might be criminal convictions and incarceration. From a retribution, just desserts perspective, it seems appropriate to criminally punish those who commit acts that are morally intolerable to the community.

In certain notable cases around the country, real-live human beings were prosecuted for endangering workers through inattention or deliberate indifference to safety measures.

Commonwealth v. Godin (1977) involved the deaths of workers at a fireworks plant. People v.

Pymm (1989) saw owners and managers at a thermometer plant charged with assault and reckless endangerment. North Carolina v. Roe (1992) came about as a result of grease fires that killed 25 29

people. Fire exits had been blocked to prevent stealing of chickens. Illinois v. O’Neil (1985) saw the President of Film Recovery Systems, the plant manager, and plant foremen indicted for murder as the result of the death of a worker who had been exposed to cyanide with little or no safety measures in place, no warnings, and no training. Though the convictions were eventually overturned, cases such as these can have an incapacitation effect by forcing companies out of business. There is still some question left as to whether safety-measure violations come under the jurisdiction of the national government or state government under the United States federalist system. Some would also argue that the necessary criminal mens rea is not present in these corporate activities.

LECTURE OUTLINE Chapter Preview Discuss with students the possibility that part of the perception of white-collar crime may be incorrect—that it lacks a physical threat.

I. THE NATURAL ENVIRONMENT A. The Exxon Valdez Incident B. Hazardous Waste Disposal C. Case Study: Love Canal Outline the facts pertinent to chemical waste being introduced into the waterway. The chemical waste included dioxin and benzene. An inordinate number of miscarriages, stillbirths, birth deformities, seizures, learning problems, and other physical problems appeared. The company was aware of the problem as early as 1958. The company wanted to avoid the $50 million cleanup cost but eventually the company paid the government $129 million for cleanup.

D. Water Pollution Review the pollution of United States harbors. Discuss the waste found on beaches such as vials of blood containing the AIDS virus. Some of the pollution occurs as a result of attempts to avoid cost of proper disposal.

Underground storage tanks for fuels pollute drinking water when they deteriorate and leak. Three-fourths of human disease is waterborne. There are three kinds of contamination—organic, causing cancer; inorganic/metals, causing developmental problems; and radioactivity, causing prenatal damage. Transport firms do some of the illegal dumping, but most of the pollution comes from industrial corporations themselves.

There were profits to be made even after fines. Children are an especially vulnerable population, perhaps because their immune systems aren’t fully developed.

E. Case Study: The Woburn Leukemia Cluster 30

Comment on the case of a community 12 miles north of Boston and the presence of lead, arsenic, and chromium occurring as a result of the Cryovac Division of W.R. Grace’s negligent waste disposal and subsequent water contamination. Grace personnel lied to the EPA, and seven more children would be diagnosed with leukemia. The rate was four times the state average.

F. Anderson v. PG&E and Erin Brockovich Pacific Gas and Electric was accused in another example of contamination.

G. Case Study: Out of the Frying Pan, into the Fire DuPont’s popular Teflon coating is alleged to cause cancer and birth defects. The contamination was discovered in 1981 and immediately concealed, enabling the company to make billions in profits in the 20 years after the health dangers were exposed.

H. Air Pollution Discuss the emergence of respiratory disease as the most rapidly increasing cause of death. The risk is often perceived as coming from outdoor air, but the greater threat comes from indoor air pollutants such asbestos. Inhalation of asbestos leads to asbestosis, which scars the lungs, stifles breathing, and impedes the flow of oxygen to the blood.

I. E-Waste The computer revolution was supposed help society become paperless and therefore cause less damage to forests, but it has caused a contamination problem instead.

Electronic devices are manufactured with many toxic substances that need to be disposed of properly, but many are simply being discarded or salvaged using unsafe techniques.

J. Case Study: The Hemlock Horrors Review the odd occurrence of animal defects in Midland, Michigan, home to a Dow Chemical plant. Dow denied involvement, though the dioxin levels were six times those at Love Canal.

K. Regulation and Enforcement Explore the relationship between politics, political regimes, and environmental regulation. During the Reagan/Bush years, 90 percent of chemical wastes were disposed of illegally.

L. Environmental Racism Encourage students to examine the idea that harmful industrial activity is more likely to occur in poor, minority communities.

M. Toxic Terrorism Present the evidence that the United States exports hazardous substances, hazardous waste, and unsafe manufacturing plants to third-world 31

countries.

1. The Sale of Dangerous Chemicals America sells substances in other countries it can’t sell in the United States.

2. The Export of Hazardous Waste If the United States can’t dispose of waste in this country, perhaps there is an alternate international disposal site.

3. The Construction of Polluting Factories When it became economically uncomfortable to comply with United States environmental regulations, manufacturing plants were moved to foreign locations.

N. The Superfund A federal program under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) was established in 1980 for hazardous waste cleanup. In effect, waste was simply moved from one place to another. It meant huge profits for waste disposal firms. In 1984 Brio in Texas was designated as a Superfund site and, by 1995, the cleanup was still not done. Near the Brio site, Pearland, Texas, was home to the highest cancer rate in the nation. General Motors is associated with 200 Superfund sites.

O. Sanctions Five categories of sanctions exist for environmental crime. They may be imposed individually or in combination with one another.

1. Fines Fines are ordered, but how do they compare with company profits or the cost of cleanup? Texaco; Ocean Spray; Ashland Oil; Chevron; Koch Industries; PQ Corporation; Menard, Inc.; and Wal-Mart have all been fined.

2. Restitution Sherwin-Williams was ordered to the community back for its activities.

3. Probation Environmental audits provide continued supervision of offending firms.

4. Nontraditional Sanctions Judges can get creative, for example, by having corporations support environmental programs or publicly apologize for their actions.

5. Incarceration The EPA now recognizes criminal sanctions as its most powerful tool, and its use has increased.

II. THE WORKPLACE ENVIRONMENT Explore why the American worker is now the mineshaft canary.

A. Case Study: Kepone

32

This highly toxic pesticide was developed in the 1950s and was a known danger by the early 1960s. Allied Chemical did nothing to reduce exposure and was cited with 1096 violations.

B. Case Study: The Scotia Coal Mine Disaster Within a two-day period, two explosions killed 26 miners due to negligence.

C. Employee Health: Hazardous Substances 1. Asbestos Johns-Manville workers were not informed of dangers, no dust control systems were in place, and some took the toxin home.

2. Cotton Dust Brown lung, local doctors employed by textile manufacturers, OSHA afraid to act.

3. Radioactivity Workers exposed include mine workers, dentists, and plant workers at nuclear-weapons facilities. Whistleblowers were threatened.

4. Beryllium This metal, used in nuclear weapons, causes berylliosis.

D. Employee Safety: Industrial Accidents In 2004 Tyson Foods, a mega poultry producer plagued by numerous accidents, paid a fine of $184,515 and made profits of $403 million. The construction industry and steel-making also have high accident rates.

E. Case Study: Texas City Disaster I The improper regulation of ammonium nitrate led to a tremendous catastrophe. Ask students to explain the accident and describe how it led to current regulations.

F. Case Study: The Texas City Disaster II Equipment failure, lax maintenance and inspection, and faulty management were found the cause of a deadly explosion at a British Petroleum (BP) refinery.

G. Case Study: The Deepwater Horizon Oil Spill BP is found responsible for the explosion on its oil drilling rig resulting in the deaths of 11 crew members and the release of approximately 4.9 billion barrels of oil into the Gulf of Mexico.

H. Case Study: Combustible Dust Several instances of combustible dust are demonstrated. Sugar dust caused by the manufacturing process causes a plant explosion, killing 13 and injuring 42; polyethylene dust caused a massive plant explosion was felt over 25 miles away; and 7 were killed and 30 injured when phenolic resin powder ignited.

I. Case Study: The McWane Way

33

This manufacturer of cast iron water and sewer pipes has four times more safety violations than its six major competitors combined. There were no guards on machines, materials were mishandled, there were no respirators and no training, and workers were told to work on machines while running, leading to amputations, burns, and deaths. Convicts from local prisons had to be recruited to fill jobs, and men urinated on themselves because no bathroom breaks were allowed.

J. Exporting Occupational Disease Plants are moved to another country to avoid United States safety regulations.

Mexico, Taiwan, South Korea, Venezuela, and Brazil have all “benefited” from this practice.

K. Regulation and Enforcement Reagan and OSHA reverse Carter’s midnight rules and interpret violations as “good faith mistakes.” In the 1990s OSHA, like the EPA, appeared to begin moving from its unaggressive posture of the 1980s back to its more traditional adversarial stance.

1. Civil/Administrative Sanctions After the deregulation of the 1980s, the 1990s saw the use of the aggressive enforcement tactics; i.e., the egregious multiplier policy and the repeated policy.

2. Criminal Sanctions OSHA has no criminal enforcement powers; it is up to the Justice Department to bring criminal charges. During the deregulatory years from 1980 to 1992, it was left to the states to pursue criminal cases against environmental wrongdoers. The states’ actions could be justified on the traditional criminal justice punishment goals of deterrence and retribution.

3. Commonwealth v. Godin (1977) An explosion at a fireworks company led to criminal charges.

4. People v. Pymm (1989) At a thermometer plant, 42 people were injured, including one with permanent brain damage.

5. North Carolina v. Roe (1992) Fire at a poultry plant killed 25 and injured 56. There were no fire alarms or sprinkler systems, and the exits were padlocked.

6. Illinois v. O’Neil (1985) The company in this case was in the business of recovering silver from X-ray plates, and cyanide was used in this process. The plant employed many non-English-speaking workers to whom the cyanide signs meant nothing. Workers were provided almost no protections from the poison. When a worker died, murder charges were filed—the murder conviction was later reversed.

L. Common Law for Uncommon Crimes?

34

The Supremacy Clause of the Constitution has caused some confusion as to whether the individually affected state or the federal government should prosecute these cases. The mindset of illegal but not criminal is particularly apparent in environmental crime. The perpetrators are not viewed or treated as “common” criminals. The equation is a simple one: “Since the days of the common law . . . certain actions, while not taken with intent to kill, have been deemed equivalent to murder when they caused a death.” The consequent “accidents” were not really accidents at all. They were crimes.

MEDIA RESOURCES Erin Brockovich (2000) Silkwood (1983) Lois Gibbs and the Love Canal (1982)

STUDENT ACTIVITIES AND DISCUSSION The following items are designed to be used by students for small-group or class discussion. Some are suitable for research-paper assignments or essay questions. Students may also use them for oral presentations to the class.

1. Examine one of the following substances in depth—its origin, associated industries, substances that could be substituted for it, history of regulation, and health effects: dioxin, benzene, asbestos, trichloroethylene, chromium, lead, solvents, perfluorooctanoic acid, methane gas, polychlorinated biphenyls, pesticides, leptophos, copper cyanide, methylene chloride, methyl isocyanate gas, fuel oil residues, styrene tars, heavy metals, volatile organic compounds, vinyl chloride, diesel fuel, kepone, EPN, cotton dust, radioactive waste, and beryllium.

2. How bad is the harbor pollution problem in the United States? Now that we know more about the dangers, has the situation improved or is it worse?

3. Select one of the companies mentioned in the chapter and examine its environmental record in depth. Also review the company’s financial situation. Using the economic concept of externalities, discuss whether this company is properly bearing the cost of the negative externality of pollution.

4. Watch either Erin Brockovich or Silkwood. Review newspaper articles or other factual materials about the environmental hazards presented in the film. Comment on the accuracy of the movie.

5. Examine accounts of mine disasters occurring in the last two years. Can you make a case for industry carelessness or deliberate indifference to worker safety?

35

6. Review the Smoking Gun Web site. What additional environmental concerns are raised by the Web site that were not discussed in the chapter? What is your perception of the accuracy of the information presented?

7. What happened as a result of “The Hemlock Horrors”? Was Dow fined or otherwise punished for its activity?

8. The Brio plant cleanup is examined in the Superfund section. The story leaves off in 1995. Where are we with Brio today?

9. Koch Industries is one of the companies that paid a seemingly enormous fine of $30 million in 2000. How much did this fine hurt the company? Has Koch been targeted for wrongdoing since then?

10. Investigate whether other polluting or dangerous companies have relocated to foreign countries. What do these companies produce, why did they move, and what kind of dangers do they present to the environment or to workers?

11. OSHA effectiveness and morale took a nose dive during the 1980s. How and why did this happen? Who were the “communists” in the agency, and why did administrators say they had to go?

12. Discuss the five purposes of sentencing/punishment and how they relate to environmental or industrial crime and to white-collar crime in general.

13. What is the preemption doctrine? Are there different kinds of preemption? Is this concept really applicable to white-collar crime? Why or why not?

14. The airline industry was deregulated in the 1980s. What effect did this have on the safety of workers and the public? Which companies benefited from deregulation?

15. Review the murder statutes in your state. Using one of the cases reviewed in the chapter where death resulted, make a case for the filing of murder charges in your jurisdiction. Consider the company hierarchy and how high up the responsibility could go with criminal charges—board of directors, company officers, stockholders, plant managers, supervisors, co-workers.

16. Research air pollution. What industries or companies or practices contribute to this problem? Do weather and climate patterns cause pollution from one location to adversely affect a totally different place, or in some instances other continents?

36

Chapter 5

Institutional Corruption: Mass Media and Religion CHAPTER SUMMARY Corruption in institutions such as the mass media and religion emphasizes the social cost of white-collar crime. The violation of trust lowers social morale and promotes social disorganization. Social organization is seen as a combination of culture and institutional structure. When it comes to white-collar crime, culture may be related to cause and institutions to effect. Merton, in discussing a link between crime and culture, described money as the measuring stick for achievement. Cultural elements in other words can be more or less conducive to crime. The social costs or effects of white-collar crime are more visible in society’s institutions. When institutions become corrupted, the backbone of society is injured.

Mass media defines reality for most of society. Corruption in this institution can dramatically alter our view of the world. Case studies The Quiz Show Scandal and Payola are examples of white-collar crime in the television and radio industries. In The Quiz Show Scandal, contestants were provided answers to questions, and it was contestants who were punished, not the owners who reaped the profits. The television medium has gone on to see fraudulent advertising, dissembled news reports, dramatized documentaries, and hypocritical televangelists. Payola involved the payment of bribes to radio personnel to get play time for records. Alan Freed denied receiving payola but was still fired. Dick Clark denied receiving payola and was probably telling the truth. Artists working for companies in which Clark had a financial interest were, however, more likely to receive attention. Clark received copyrights as gifts and, coincidentally, play time increased for some of those tunes. Despite changes to federal law, CBS executives were indicted in 1976 and Sony BMG agreed to a settlement and to discontinue certain practices in 2005. Four months later, Warner reached a similar settlement.

Journalists writing for prestigious publications were not immune from fabricating stories, and in 1971 Clifford Irving fabricated an autobiography of Howard Hughes. In 1999 Lawrence X. Cusack III was sentenced for forging love letters between Marilyn Monroe and JFK. In 2005, James Frey’s account of his struggles with substance abuse, touted on the Oprah Winfrey Show, was demonstrated to be more than a little exaggerated, if not fabricated.

The greatest erosion in public trust in institutions has probably been in religion. Durkheim might have described this phenomenon as a crippling injury to the conscience of society. Embezzlement is a widely reported problem within religious institutions. Whatever the reason for the embezzlement scandals, the solution undoubtedly rests in better financial controls, as it affects almost all nonprofit organizations, given their typically lax accounting practices.

“Lyin’” Henry Lyons tried to argue that personal use of church money was the way things were done in black churches. In this case study, Lyons also sold nonexistent membership lists to companies. The beginning of the end for Lyons came when his wife set fire to the home Lyons 37

owned with his mistress. Randall Radic is profiled in the case study “The Devil Made Him Do It,” which tells how he posed as a pastor, forged ownership documents, and was able to not only embezzle from his church, but was able to steal and sell the church building.

Two Irish-born priests from a church in Delray Beach, Florida, embezzled $8.6 million from their parishioners over a 42-year period ending in 2006. One of the priests, 79-year-old Father John Skehan, admitted that he had never deposited one cent from the church collection plate into a church bank account.

The cash was all pocketed and put into slush funds. The priests spent the money on vacation homes, luxury travel, gambling in Las Vegas casinos (where they were treated as “high rollers”), and on secret girlfriends.

Skehan told police that he saw himself as the CEO of a multimillion dollar company who wasn’t properly compensated. In March 2009, Skehan was sentenced to 14 months in prison. After serving 12 months, Skehan was released and put on probation. Though actively barred from serving the ministry, he will still receive a pension from the diocese.

Phony faith healers have plagued the religious institution. The case study of “Peter Popoff” is an example of how far individuals were willing to go in promoting faith healing schemes. With the use of technology and family members, Popoff was able to identify likely victims and design “cures” accordingly. Popoff was exposed when his cure for a woman with uterine cancer was brought to light, and the woman was in fact a man planted by James Randi, a veteran magician and debunker of paranormal claims. Randi brought his information to Johnny Carson and The Tonight Show, and Popoff eventually declared bankruptcy.

Though most of the modern televangelists, including Falwell, Robertson, Schuller, and Swaggart, earn modest salaries, their opulent lifestyles seemed in excess of these incomes. Successful televangelists have been ordered to pay significant fines to the IRS and have lost tax-exempt status.

Swaggart, who preached against sexual immorality, finally admitted to obsessions with prostitutes, voyeurism, and pornography.

Jim and Tammy Faye Bakker and the PTL club are the subject of the case study “The PTL Club— Praise the Lord and Pass the Loot.” (Jessica Hahn made accusations of sexual misconduct against Bakker and his inner circle. There were also accusations of excessive pay and tax evasion. In 1988 Bakker was indicted for fraud and conspiracy. Bakker was originally sentenced to 45 years in prison, which was later reduced to 18 years. The effects of these scandals include a decline in teleministries, damage to other teleministries, and weakening of organized religion. Billy Graham and his Crusade have managed to avoid all three problems, perhaps because there is no overt appeal for money.

Religious affinity scams constitute another problem entangling religion and crime. These schemes use association with religion to run a variety of fraudulent scams involving real estate, investment, insurance, and plain-old Ponzi/pyramid schemes.

Early in 2004, a federal grand jury returned a 91-count indictment against 45-year-old Abraham Kennard, charging him with scamming more than 1,600 African-American churches and hundreds of individuals out of nearly $9 million. According to prosecutors, Kennard had run a Ponzi that had targeted a tight national network of black preachers. He had launched the alleged scheme in 2001 when he began promising poor black churches a forgivable loan or nonrefundable grant of $50,000 for every $3,000 in fees a church paid his company, Network International Investment Corporation.

38

Taking the Lord’s name in “gain” proved very profitable for some, in large part because the federal government feared trampling on First Amendment rights. Private lawsuits against people like Paul Crouch, Robert Tilton, and Tony Alamo were somewhat more successful. A board of directors composed of respected business leaders is one way to avoid the debacle and has been used by Billy Graham for some years.

Another consequence of the scams run in the name of religion is the spread of scam think to other charitable enterprises. The secular fund-raising charitable community has also been hit by opportunists—those affected include the United Way and the American Cancer Society. Overall, donations will decrease to all charities as scandals emerge in any charitable organization, and it can takes years for a recovery to take place.

Finally, there may be another less direct but very troubling consequence of religious fraud warranting consideration. This is the possibility of a contagion effect upon the secular fund-raising community. In 1992, the United Way, one of America’s foremost charitable organizations, was rocked by a series of revelations strikingly reminiscent of the gross excesses of the televangelists. The United Way president, William Aramony, was forced to resign when stories were reported in the press concerning his annual salary of nearly a half million dollars and his placement of numerous friends and relatives on the United Way payroll.

Another organization, based in Pompano Beach, Florida, solicits donations for more than 75 actual charities, including the Virginia Firefighters Foundation and the Texas Fraternal Order of Police. According to the FTC, however, the company’s telemarketers falsely claim to be members of law enforcement or firefighting agencies. The company keeps to 90 percent of the donations it collects.

LECTURE OUTLINE Chapter Preview Institutions—Key to Social Organization Discuss with students the social cost of loss of trust in institutions. Explore the role of values in promoting situational ethics.

I. THE MASS MEDIA A. Case Study: The Quiz Show Scandal Relate the history of game shows and how show promoters fooled the public. Questions can be raised whether this early scandal set the stage for present-day questionable practices by broadcast media.

B. Case Study: Payola Radio personnel accepted gifts and gratuities to play certain records. A well-known personality like Dick Clark escaped the taint but was gifted with copyrights on records. Today media conglomerates own the radio stations and the record companies. Talk with students about their reactions 39

to these events, and ask them how they decide which records to download or buy. If this were occurring now, either directly or indirectly, would it reduce their faith in radio disc-jockey objectivity? Payola scandals continue to this day.

C. Print Media Writers have not been immune to the temptation of pulling one over on the public. Fake autobiographies, fake biographies, and fake memorabilia have been foisted on unsuspecting consumers. Review the facts of these cases with students and pose the question of the criminality of the conduct.

II. RELIGION B. Case Study: “Lyin’” Henry Lyons Lyons, president of the National Baptist Convention, was convicted of swindling companies that wanted to do business with members of African-American congregations. He used the money to support an opulent life style. Lyons’ defense attorneys argued that black pastors were permitted to use church money for personal expenses. Discuss with students whether church leaders should be able to sell congregation lists.

C. Case Study: The Devil Made Him Do It Randal Radic, pastor of a small town church made up of mostly senior citizens, used church assets as collateral for a $200,000 loan and eventually sold the actual church building out from under its congregation.

D. Phony Faith Healers Miraculous cures being offered by religious leaders have a long history in the United States. Included in this category are those who promise healing and sell items designed to bring about the healing.

E. Case Study: Peter Popoff An industrious journalist brought down Popoff when Popoff sought to cure a man of uterine cancer. Delve into the idea of how far governments need to go in protecting gullible consumers, even very-ill consumers.

F. The Televangelists Some of the most famous television ministries have crossed the line between religious freedom, free speech, and breaking the law. Others have undermined the faith placed in them by personal predilections. Tease out ideas from students as to where the line should be drawn.

G. Case Study: The PTL Club—Praise the Lord and Pass the Loot Who can forget Jim and Tammy Faye Bakker, much as we might like to?

Jim Bakker used his television ministry to collect millions and then use them to live a very expensive lifestyle. Large creditors recouped $40 million from PTL; the thousands of small contributors got nothing. Bakker 40

did go to prison. Discuss with students whether the result of governmental actions was sufficient to deter future wrongdoers.

H. Damage from the Scandals Teleministries declined, other ministries not associated with scandal suffered, and organized religion lost credibility. It may be interesting to see if students think organized religion and, specifically, teleministries have recovered from the scandals of the 1980s.

I. Religious Affinity Scams In these scenarios, it is not the church leaders who take advantage of church members but fellow church members. What do students think of the idea that those who consider themselves religious are more vulnerable than members of other groups?

J. Case Study: Abraham Kennard—Preying on the Praying Kennard used a Ponzi scheme targeting black preachers. His methods resembled those promising credit cards to those with financial troubles— he promised grants to the churches for fees.

K. Taking the Lord’s Name in GAIN Governments have been more hesitant to get involved in policing religious-based wrongdoing. Attempts at self-policing have proved less than successful. Explore with students what would be effective in discouraging people from using the Lord’s name in gain.

L. Helping the Needy…or the Greedy?

Charities have also been victims of unscrupulous employees or those seeking to take advantage of the public’s charitable instincts. Talk about the direct and indirect effects when the public loses faith in charities and the good they can do.

MEDIA RESOURCES Quiz Show (1994) Telling Lies in America (1997)

STUDENT ACTIVITIES AND DISCUSSION The following items are designed to be used by students for small-group or class discussion. Some are suitable for research-paper assignments or essay questions. Students may also use them for oral presentations to the class.

1. Review the second paragraph at the beginning of the chapter in regard to social 41

organization and disorganization. Explore the concept of the cause and effect relationship.

2. Watch the movie Quiz Show and comment on how realistic the movie version of events is compared with the reality.

3. Media companies in the 21st century are conglomerates composed of record companies, newspapers, radio stations, television stations, and movie studios.

Investigate the possibility that the star appearing on Letterman or Leno to promote a movie is employed by a media conglomerate that also owns The Tonight Show or The Late Show. How is this any different than payola?

4. Where is televangelism today?

5. Joel and Victoria Osteen have taken over where John Osteen left off in his Houston ministry. Review broadcasts and newspaper accounts. Is there a difference between their approach and that of televangelists that have gotten into trouble?

6. Why have some been so successful in using religion to accomplish massive fraud?

Why are the devoutly religious so susceptible?

7. Identify the twenty-first century individuals and organizations that are most successful at the money and religion connection. What are the similarities and differences between them? How are they different from those profiled in the text? Or are they?

8. Identify the institutional barriers to enforcing criminal sanctions against those who wrap themselves in the mantle of religion.

42

Chapter 6

Securities Fraud CHAPTER SUMMARY As a freckle-faced 13-year-old, Darlene Gillespie was one of the nine original Mouseketeers on television’s Mickey Mouse Club. So popular was young Darlene that, while dozens of mouse-eared moppets came and went, she was kept on for the show’s entire 1955–1959 run. She was even featured in her own serial: Corky and White Shadow. The Disney publicity department proclaimed she had “more bounce to the ounce than a bottle of soda pop.” In 1998, she bounced right into federal court.

As an unfreckled 56-year-old, Darlene Gillespie was convicted on 12 counts of conspiracy, securities fraud, mail fraud, obstruction of justice, and perjury. Gillespie and her boyfriend, who was also convicted, operated a scheme to make money in the stock market without paying for any stock. The couple had bought more than 194,000 shares valued at $827,000 by writing checks on closed and overdrawn accounts. They also had created a fictional person to make their transactions; then lied about this nonexistent agent to the Securities and Exchange Commission. In 1999, Gillespie was sentenced to two years in prison.

Darlene Gillespie’s transition from Mouseketeer to racketeer is only one example of the pervasive attacks on the American securities markets. The economy composed of activities associated with production and distribution of goods and services may be the most dominant of our social institutions.

The public perception of the economy has shifted from industrial production to deal making, from investing to trading. Instead of generating real economic growth, paper entrepreneurs generate paper profits for themselves. Securities companies have lied to investors about the financial condition of companies; expected returns have used large overdrafts to take advantage of the float. The criminal name for this activity is check kiting.

The two major categories of securities violations are insider trading and stock manipulation. If non-public information is used to buy or sell stock, the crime of insider trading has been committed. The Securities Exchange Act of 1934 made it a crime. Paul Thayer, a Deputy Secretary of Defense and former CEO of LTV Corporation, furnished information to his stockbroker friends, and they furnished it to others. Thayer was sentenced to four years in prison. The other big scandal of the early 80s involved F. Foster Winans, who co-wrote the “Heard on the Street” column for the Wall Street Journal and provided advance information to a stockbroker in return for a portion of the profits. One of the persistent questions about white-collar crime is the motivation for crime commission for people who often have a comfortable or even wealthy lifestyle.

From humble beginnings, Dennis Levine worked his way up through the mergers and acquisitions departments of leading brokerage houses. Almost immediately, Levine began using inside information to make money he then sent to foreign bank accounts.

Four illegal trades in 1985 would net him $6 million. Levine’s banking transactions came under scrutiny, and he plea-bargained for a two-year sentence and a $11.6 million fine.

43

Information he furnished would lead to the prosecution of Ivan Boesky.

Ivan Boesky’s lackluster performance in finance took a dramatic turn when he was put in charge of an arbitrage department. Arbitrage involves “deal stocks”—two companies are negotiating a merger that would, when completed, mean the exchange of the higher-priced stock of one company for the lower-priced stock of the other company. The arbitrager must assess the likelihood of deal completion. If the arbitrager feels the deal will happen, he will offer to buy the lower-priced stock at a value between that of the lower-priced stock and the higher-priced stock. The owners of the lower-priced stock must decide whether to take a lower guaranteed profit now or wait for the uncertain higher profit. The arbitrager buys the lower-priced stock and then sells the higher-priced stock short, which locks in his profit if the deal goes through. When the deal happens, the lower-priced stock is exchanged for the higher-priced stock, and after settling the short sales, the arbitrager can realize substantial profits. At first Boesky’s deals outperformed the market, but eventually the wheels came off and he began working more deals with Levine, and Boesky agreed to pay Levine a portion of his profits. When Levine came under scrutiny, Boesky knew the end was near; he also made a deal with the government for a $100 million fine and a three-year sentence. He was, however, permitted to liquidate $1 billion of his deal stocks. In effect he traded on advance knowledge of his arrest. Boesky left prison a rich man, but his testimony helped the government with Martin Siegel.

Martin Siegel’s firm Kidder Peabody had no arbitrage department, so Siegel used Boesky’s valuations. Siegel agreed to provide inside information to Boesky. Siegel also made a deal with the government for a two-month sentence and giving up most of his assets. Siegel’s information helped the prosecution of Robert Freeman at Goldman Sachs.

Freeman, who, unlike others, did not cooperate with the government, spent four months in prison and paid fines totaling $1.2 million.

Boesky was invaluable to the government in its pursuit of Michael Milken and his junk bond deals. After graduating Phi Beta Kappa and attending the Wharton School of Business, Milken went to work in the bond department of the company that would become Drexel Burnham Lambert. Milken had become fascinated by the high yield–low grade bond market. His specialty was the sub-investment, low grade (BB++ or lower) bonds. Junk bonds enabled corporate raiders to make acquisitions with few assets.

Raiders would then strip assets from the acquisitions to service debt. Lack of regulation in this area permitted these deals to happen and allowed Drexel to charge high commissions.

Milken moved his operation to the West Coast and helped generate the capital that enabled Steve Wynn, owner of Golden Nugget in Las Vegas, to open a Golden Nugget in Atlantic City. Boesky and Milken engaged in mutually beneficial parking arrangements. Boesky would park stocks with Milken to avoid five percent ownership disclosure requirements, and Milken would park stocks with Boesky that involved Drexel clients. Parking is, of course, illegal. Boesky and Milken put together an $880 million arbitrage organization that would enable Boesky to raid any company. Wickes Corporation, a Los Angeles home-building company, wanted to buy National Gypsum; Milken and Drexel raised the funds using junk bonds and preferred stock. If the stock of Wickes reached a certain price, the preferred stock could be 44

exchanged for common stock, which paid no dividend. Boesky manipulated the market by purchasing 2.8 million shares, the stock price went up, and the preferred stock was exchanged.

Milken co-workers would eventually cooperate with the government, and he was ordered to pay a $600 million fine and given a 10-year sentence (later reduced to two years).

Greed, egomania, and male bonding have all been used to explain white-collar crime. Using the Ockham Razor approach, the simplest explanation may be the best. These criminals commit their crimes because they can. Some economists have argued that expecting a level playing field or criticisms of fixed races is naïve, and a more laissez-faire atmosphere leads to greater efficiency.

Others argue that the economy as a social institution should be efficient and fair and engender trust.

Leveraged buyouts using junk bonds forced companies to use corporate assets to divert raiders instead of using assets to increase productivity. This can lead to downsizing and layoffs.

The same mechanism that bankrupted Bloomingdale’s also created MCI and Turner Broadcasting.

Junk bonds also played a role in the savings and loan debacle—many of the most-costly failures were Milken clients. Proposals to counter insider trading range from decreasing the profit to increasing the risk. Warren Buffett is a proponent of a 100 percent tax on all profits earned from the sale of any stocks owned less than a year. Others argue the need for liquidity. There are numerous examples that increasing the risk has not worked particularly well either. Insider trading continued even as Boesky, Milken, et al., were being prosecuted. A recent variation on insider trading called “front-running” has come under scrutiny in the 90s. Front-running refers to managers buying stock for themselves before buying it for their funds, or one broker tipping off another trader of an impending transaction in return for some kind of kickback. In either case, a quick profit is usually made, since stocks almost always rise following a large institutional purchase. 180 The practice is, of course, unethical and completely illegal.

In 2000 the largest insider trading case came to light when 19 people were indicted. In the case study “The Great ‘Chat Room’ Conspiracy” we learn that a graphic designer at two investment banks used his access to pilfer documents and then to share them with potential investors via the Internet.

The risk/reward ratio of white-collar crime has severely limited the deterrent value of criminal punishments. Many of the high-profile figures prosecuted in the 1980s have emerged with fortunes intact. Sometimes, apparently, it’s okay for some investors to get advance information that relates to stock value.

A more recent case provides further evidence that insider trading can make strange bedfellows.

Thomas Davis, the former chairman of the board of Dean Foods, the largest processor and distributor of fresh milk in the country; William “Billy” Walters, a professional gambler from Las Vegas; and Phil Mickelson, a top ranked professional golfer conspired to commit securities fraud.

These individuals had two main things in common: gambling and greed. The scheme that united the three was laid out in a civil suit filed by the Securities and Exchange Commission in 2016.

The professional golfer’s involvement in these insider deals raises a fundamental question about

45

the motives of white-collar offenders, many of whom are already quite wealthy when they engage in illegal acts. According to a Forbes magazine ranking, in 2016, Mickelson was the eighth highest paid athlete in the world with total earnings of $52.9 million.

It was not a good thing for Martha Stewart when she decided to sell Imclone stock after receiving information from her broker that Imclone insiders, members of the Waksal family, were selling their interests in the company. In the case study “Martha Stewart Living—in a Cell,” Stewart is found guilty and sentenced to five months in prison, not for insider trading but rather for obstruction of justice. Successful prosecution of an investor for insider trading was problematic, though Stewart was a former stockbroker and sat on the New York Stock Exchange’s board of directors. Her profit was also insignificant, some $200,000. There were allegations of political motivation for the prosecution.

Likewise, Republicans still tread lightly around George W. Bush’s years at Harkin Oil and Gas. Harkin bought Bush’s failed oil company in 1986, gave him a bunch of stock, and put him on their board. As the son of the sitting vice president, he was supposed to add some “star power” to the company’s image. He sold his stock in 1990 for an $835,000 profit. Eight days later, the board’s audit committee disclosed that the company had suffered huge losses, and the value of Harkin stock immediately sank like a rock

Not only can stock prices be manipulated but investors can as well. In 2003 major brokerage houses were ordered to pay $1.4 billion in fines and disgorged profits for touting false research reports. Citibank’s Salomon Smith Barney paid $400 million; Merrill Lynch, $200 million; and Credit Suisse First Boston, $200 million. Morgan Stanley, Goldman Sachs, Bear Stearns, Deutsche Bank, JP Morgan Chase, Lehman Brothers, and UBS paid lesser amounts. Analysts would promote dot.com stocks to investors while privately criticizing them. There was no possibility of prison and none of the money went to investors.

In the 1990s, the Internet was used to drive up the price of a stock with false claims and then to sell before the public catches on. Called “pump and dump,” investors find out too late that they have been manipulated. It didn’t take long for organized crime to get involved in the largely unregulated micro-cap funds. All five of the New York crime families were a part of DMN Capital Investments and the Uptick operation that brought it down.

A 15-year-old New Jersey high school student is profiled in “I Was a Teenage WheelerDealer.” He used the Internet to promote certain stocks and then sold them before the true value of the stocks was known. He neither admitted nor denied the accusation and was ordered to pay $285,000, clearing a profit of about half a million dollars. The boy’s father said he was proud of his son—or perhaps he was proud of the new car the son purchased for the family.

With huge amounts of money being invested in securities during the biggest and longest bull market in American history, it was only a matter of time before the sharks of organized crime joined the feeding frenzy. According to a U.S. attorney: “Mobsters go wherever the money is, 46

and obviously the stock market is one of those places.” Another federal prosecutor echoes this claim: “Stock manipulation is seen by the mob as an easy way to make money without much effort or risk.” In March 2000, 19 people were indicted for running a large-scale operation over a nearly three-year period that cheated unsuspecting investors out of nearly $40 million. Raids were conducted by 100 federal agents who managed to arrest 11 of them. One of them was the brotherin-law of Salvatore Gravano.

Ponzi schemes have made a recent comeback in white-collar crime with the cases of the Bayou Management hedge fund and Bernie Madoff. Each of these cases involved schemes where new investments were used to pay existing investors while no actual money was being made by the firm.

On December 11, 2008, the FBI arrested 70-year-old Bernie Madoff, former chairman of the NASDAQ stock exchange and a quiet but highly regarded force on Wall Street for decades.

Madoff had confessed to running a massive investment fraud believed to have lost at least $65 billion. According to the FBI, Madoff had informed three senior employees that Bernard L. Madoff Investment Securities, ranked in the top one percent of American securities firms, had been insolvent for years. “Madoff told the employees he was ‘finished,’ that he had ‘absolutely nothing,’ that ‘it’s all just one big lie.’

LECTURE OUTLINE Chapter Preview Consider the varied backgrounds of people who commit securities fraud and the fact that the economy is the dominant of American social institutions.

I. PAPER ENTREPRENEURISM Question with students whether businessmen have become wheeler dealers that generate enormous paper profits but don’t produce anything of value. Is the stock market simply a skill-based game that investors play with real money?

II. INSIDER TRADING A. Early 1980s Insider trading was made illegal under the Securities Exchange Act of 1904. It involves using non-public knowledge to trade stock. In the early 1980s, the owner of a brokerage house, a CEO who would eventually become secretary of defense, and a financial columnist all engaged in sharing inside information. Some made little or no profit. Discuss with students the commonalities of the crimes and the individuals. What were the differences?

B. Case Study: Dennis Levine Levine began experimenting with insider trading almost as soon as he went to work on Wall Street. He made $12.6 million in illegal trades 47

during his career, involving some of the nation’s largest corporations. He was fined $11.6 million and served 17 months in prison and, perhaps most significantly, helped bring down Ivan Boesky. Query students as to how the crimes could have been prevented and whether the punishment was appropriate.

C. Case Study: Ivan Boesky Boesky used his reputation for success in arbitrage, or buying and selling deal stocks, and his information from Levine to make a fortune. Discuss with students Boesky’s use of the “inside” information that he was going to be indicted to dump his stock before the public became aware of his criminal trouble, done with the permission of the government. Boesky helped build the government’s case against Martin Siegel. Though Boesky was fined $100 million, he left prison a rich man. Ask students what is wrong with this picture.

D. Case Study: Martin Siegel Siegel used Boesky for takeover valuations, and Boesky saw the opportunity to make use of Siegel. When Boesky began cooperating, Siegel quickly made a deal with the government and received a two-month sentence, and he got to keep two homes and his retirement account.

Evaluate with students whether deal-making by the government prevents appropriate punishment of the bad guys and encourages the questionable character trait of being a snitch.

E. Case Study: Michael Milken Milken and his junk bonds are a classic example of paper entrepreneurism.

Milken also engaged in “parking” with Boesky to evade SEC regulations.

His activities brought down Drexel Burnham Lambert. Based on his statements after a two-year prison term, it is difficult to see whether Milken or anyone else learned a lesson. Explore with students the idea that an armed robber who threatens someone but who inflicts no physical injury and gets less than a $100 receives a five-year sentence, and these men who steal millions get sentences numbered in months, not years. Did Milken pay the $600 million fine? How much money did he have left?

F. Explanations and Repercussions Discuss with students the possible explanations for men with six-figure incomes becoming criminals. What plausible explanations are there for blatant disregard of federal securities laws? How was society harmed by the conduct of these individuals?

G. Punishment How are the sentencing goals of incapacitation, deterrence, rehabilitation, retribution, and restoration served by the punishments inflicted on the foregoing individuals? The investing public lost millions of dollars. What 48

are the other losses caused by these activities?

H. Case Study: The Great “Chat Room” Conspiracy Before reviewing the facts of this case study, present a similar fictional scenario to students and ask them to role-play what they would do with the information; encourage them to justify their actions and reactions.

Compare student input with the facts of the case study. What do students think of the idea that the information provider did not want to risk his own money?

I. Case Study: Martha Stewart Living—in a Cell Stewart, a former stockbroker, should have known better, said government prosecutors. Others argued she was being targeted because of her celebrity status and that she was a woman. Raise the question with students of why Martha was not charged with insider training. How did Stewart cross the line and, more importantly, why did she do it?

J. Case Study: Raj Rajaratnam and his Sinking Galleon Rajaratnam was accused of insider trading and it was described as the largest case in U.S. history. He was receiving information from his college friends but he claimed his employees were using the “mosaic theory of investing” by scouring the internet to get relevant information for trading. He was found guilty and given a sentence of 11 years in prison.

III. STOCK MANIPULATION A. Case Study: A Piece of WHAT? In 2003 the SEC announced fines and disgorged profits totaling $1.4 billion against the country’s most prestigious brokerage houses for misleading research reports and recommendations. Included in these actions were Citibank’s Salomon Smith Barney ($400 million), Merrill Lynch ($200 million), and Credit Suisse First Boston ($200 million). Many brokerage firms hyping stocks were then paid huge fees for investment-banking services. The amount sounded huge but was only a fraction of 1990s profits, and there was no mention of prison. More importantly, not a single investor would get a dime out of the settlement.

Question students about the justifications for what appears to be a light Punishment. There is an old joke that goes something like this—if you owe the bank $5,000 and can’t pay, you have a problem, and if you owe the bank $5 million and can’t pay, the bank has a problem. Can this old joke be analogized to the situation with these brokerage firms?

B. Use of the Internet The perceived anonymity of cyberspace holds a great deal of appeal for the bad guys. All manner of schemes and scams can be found on the Internet and, as it turns out, it becomes very easy to post fraudulent information on the value of a stock or a

49

company’s assets. Schemers will pump up a stock and then, when the investing public bites, the schemer dumps his stock.

C. Pump and Dump Microcap stock swindlers post messages on “investors” bulletin boards and chat rooms, which abound on the Internet, about supposedly major developments at small companies. The object is to build interest in and increase the buying of the stock so that the price will shoot up. The people behind the fabricated messages then sell their shares on the run-up at an inflated profit and leave other stockholders with near-worthless paper when the stock inevitably plummets.

Discuss some examples of this with the class.

D. Case Study: Golman Sachs and Abacus 2007-AC1 Goldman Sachs was accused of taking part in fraudulent deals that caused many European banks to lose billions of dollars. The SEC focused on the collateralized debt obligation deals, known as Abacus 2007-AC1, which intended to entice foreign investors to put their money into the U.S. housing market. Goldman Sachs paid $500 million to settle the charges, the largest penalty ever paid by a Wall Street firm.

D. The Mob Moves In In operation Uptick, in addition to the usual cast of Wall Street characters, 11 indictees were members of the five New York crime families. Organized crime added an element of violence that had not been there before. Explore with students the reasons why we don’t see more involvement by organized crime in white-collar crime.

E. Case Study: I Was a Teenage Wheeler-Dealer A 15 year old from New Jersey, after being fined $285,000 for civil fraud, still made a profit of half a million dollars from touting stocks on the Internet and then selling his shares. He used aliases to post false information on the stocks. Was Lebed a crook or a boy genius? What does the class think?

F. Ponzi Schemes: What’s Old Is New The Bayou hedge fund started out with $300,000 in start-up investments and promised investors that it would grow to a value of 7 billion dollars within ten years.

The fund never made any actual money and paid out large sums to its managers while using new investments to cover its losses. Ask the class to discuss how the personal dynamics between the key actors helped to drive and uncover this scam.

G. Case Study: Madoff Made off with Billions Bernie Madoff was an investment banker who cost his investors between $50-65 billion dollars. With very little provocation, Madoff confessed that his securities firm was essentially a ponzi scheme. The recent economic downturn made his scam more visible and eventually he was sentenced to 150 years in prison.

50

MEDIA RESOURCES The Hudsucker Proxy (1994) The Billion Dollar Bubble (1978) Trading Places (1983) Boiler Room (2000)

STUDENT ACTIVITIES AND DISCUSSION The following items are designed to be used by students for small-group or class discussion. Some are suitable for research-paper assignments or essay questions. Students may also use them for oral presentations to the class.

1. Why is the rational choice cost/benefit approach more useful in determining motivation for white-collar crime than it is for street crime?

2. How can investors avoid the traps outlined in this chapter? What advice do experts give?

3. Design a more effective deterrence program for white-collar criminals. What needs to be done that is not being done at present?

4. Investigate the white-collar criminals identified in the chapter and what they have given as explanations for their actions.

5. Trace the history of arbitrage and outline the use of this arrangement today.

6. What are hedge funds and how can unscrupulous businessmen use them to cheat the public?

7. Examine the federal statute on insider trading. Does the language of the statute itself help explain why Martha Stewart was not charged with insider trading?

8. Identify and discuss corporate raiders that have taken advantage of leveraged buyouts and explain the effect on companies they targeted.

9. View the movie Wall Street and discuss the crimes committed by the characters in the movie. Based on the information in this chapter, how realistic is the movie?

10. Explore Warren Buffett’s idea for a 100 percent tax on stocks owned a year or less. Is the liquidity argument valid?

11. What were the sentences for those involved in the Great Chat Room Conspiracy?

51

12. What do governmental entities do with the money they receive in fines? How much of this money is uncollected? Why don’t investors get a part of the money?

52

Chapter 7

Corporate Fraud CHAPTER SUMMARY Janice, a 64-year-old office manager for an Enron Corp subsidiary, retired in 2000. For 16 years she had made numerous sacrifices in order to contribute the maximum-allowed 15 percent of her paycheck each month into her 401k-retirement plan. She had watched her fund mushroom to nearly $700,000 as Enron built its reputation as one of the fastest growing and most profitable corporations in the world. But when Enron stock began to decline in late 2001, Janice said she “begged and pleaded” with the administrators of her 401k plan to let her withdraw her hard-earned money. They refused.1 When she finally was allowed to sell her stock, it was like alchemy in reverse: gold had turned to lead. Her $700,000 had become $20,000. Today, Janice has been forced to abort her retirement and return to work; she now struggles to make ends meet. In her words: “I haven’t had any heat or air conditioning on since October.”

Office managers, pipefitters, and sheet metal workers are just a few who accumulated and then lost millions in retirement accounts at Enron and show the very personal side of the Enron scandal. What began as merger of two pipeline companies in the 1950s grew into a multinational company in the next five decades. The deregulation of the energy market in the mid-1990s provided a golden opportunity for Enron. The company created the concept of commoditization; control the assets that produce the commodities, establish a trading network, and you control the world. Ken Lay, Enron’s first CEO, was the son of a minister and had a Ph.D. in Economics, wanted to be world-class rich and also acquired a reputation as a philanthropist. When he turned over the reins to Jeff Skilling in 2000, many thought politics was the next logical step for Lay. Jeff Skilling joined Enron in 1990 and became Lay’s trusted lieutenant. With a Harvard MBA, Skilling was very competitive and a risk taker. As he was preparing to take control at Enron, Arthur Andersen, the company’s auditing/accounting firm, was trying to decide what to do about the $52 million it was being paid and the financial success it was being asked to verify. The company continued to represent Enron, so it is probably fair to say the company liked the money more than they disliked the very questionable accounting practices. Skilling used limited partnerships named after movie characters to accomplish three things—raise capital, hide massive debt, and facilitate insiders getting rich.

Andy Fastow, with an MBA from the University of Chicago, joined Enron in 1990 and would be its chief financial officer by 1998. He was less outspoken than his compatriots but had little patience with those he considered less intelligent. Fastow was widely regarded as Jeff Skilling’s protégé. In his new position, he set up and operated the limited partnerships that were used to fund Enron projects and help Enron maintain its impressive balance sheet and lofty stock price.

In 2001, when the state of California aggressively criticized Enron for allegedly manipulating energy costs, Skilling abruptly resigned after only five months and Lay took back control of the company. Distracted by Enron’s bottom line, the financial press failed to investigate this very 53

curious event. Within four months, despite Lay’s effort to reassure stockholders, employees, regulators, and the world, the company collapsed. During this time period Lay was taking millions in cash advances and repaying with Enron stock—in hindsight perhaps a not-so-clever way for an insider to divest himself of stock, avoid the immediate reporting requirements, and avoid throwing the financial markets into a panic.

It was alleged that Enron executives and insiders unloaded $1.1 billion in stock—Fastow $23 million, Skilling $67 million, and Lay $146 million in options. At the same time, employees were urged to get more stock. Congressional committees began hearings, and with the exception of Skilling, insiders claimed Fifth Amendment protection and declined to testify. The vice chairman of Enron, J. Clifford Baxter, committed suicide And was reportedly tormented by the company’s collapse and his shattered reputation. Baxter had been one of the few members of the inner circle to express serious concern about the LJM partnerships. Sherron Watkins, Enron’s former vice president for corporate development, did testify about her communication with Lay. Watkins raised concerns about the limited partnerships and Vinson & Elkins’s conflict of interest. She seemed to believe that Skilling and Fastow had duped Lay. Slowly but surely Enron executives began entering into plea agreements and providing evidence for the government. Even Fastow folded when faced with the possible lengthy imprisonment of his wife, Lea, a former assistant treasurer at Enron. Individuals acknowledged that Enron had manipulated the California energy market. Eventually Skilling and Lay would be indicted and convicted.

Enron seemed primarily interested in pushing its own stock rather than providing a product or service. The debacle can be construed as a pump-and-dump operation and also as an insider trading scandal. Or maybe, in the spirit of The Sting, it was simply a big con game. The Enron Board of Directors, though better paid than most corporate board members, did nothing to control company officers or hold them accountable, and on some occasions approved risky accounting practices and approved management arrangements that were rife with conflict of interest. Some of the directors also had lucrative contracts with the company, removing any hint of objectivity.

Auditors failed to audit, stock analysts failed to analyze, and the financial press behaved more like cheerleaders than investigative journalists. Some even say that greedy shareholders should assume some responsibility.

Companies whose stock is publicly traded are required to publish independently audited financial statements. This SEC requirement is designed to prevent corporate insiders from lying to the public about the value of assets and the extent of liabilities. The case study “Arthur Andersen—Accounting and Accountability” demonstrates what happens when the independent audit firm becomes more enamored of the millions in consulting fees than telling the truth to the public and criticizing the client’s financial information. Attorneys and accountants all have document-retention policies—most are somewhat lax in following those policies. In 2001, upper management at Arthur Andersen sent e-mails to personnel who had possession of Enron documents and instructed them that the document-retention policy was to be strictly observed. In another e-mail audit managers were reminded of the policy, and workers were told to work overtime to comply with the policy. Translation—incriminating Enron documents needed to be shredded immediately.

54

Congressmen in 2002 were understandably skeptical when the accounting firm tried to minimize its involvement. Eventually David Duncan, the Houston partner in Arthur Andersen, would enter into a plea agreement. This was not the first problem for Arthur Andersen. The company had already been chastised for its work for Sunbeam and Waste Management. Nor would the Enron case be the final time Arthur Andersen was called to task for accounting/auditing irregularities. Arthur Andersen was convicted, but the convictions were overturned. By that time the company had been destroyed.

In 1983, four people got together in a Mississippi coffee shop, and from this meeting came WorldCom Inc., a telecommunications giant that would eventually merge with its rival MCI to grow even bigger. Thirty billion dollars of debt would destroy the company. There were also serious questions about Bernie Ebbers, one of the four founders and the first CEO, and his borrowing from the company and what he had done with the money borrowed. WorldCom had misled the public and regulators by classifying expenditures improperly and had drawn excessively on reserves. Executives had earned $104 million on the phony numbers. And yes, Arthur Andersen was the accounting firm in charge. Ebbers and the CFO Scott Sullivan would be indicted. Sullivan cooperated with the government and received a five-year sentence. Ebbers went to trial and was sentenced to 25 years.

Global Crossing, another telecom company that did business with both WorldCom and Enron and whose auditor was, of course, Arthur Andersen, was the first casualty in 2002. Investors lost millions and regulators had questions, but eventually the investigation was dropped. Many of the companies studied in this text have Republican connections, but this one had strong Democratic ties. Terry McAuliffe, Chairman of the Democratic National Committee, invested $100,000 and, just before the stock crashed, walked away with $18 million.

Accounting irregularities also were at the core of Qwest Communications’ troubles, and the reader can probably guess the name of the accounting firm involved. The company was fined, and corporate officers were indicted. One important Republican made $1.5 billion before the stock tanked.

Adelphia Communications was targeted by regulators for (what a surprise) accounting irregularities—specifically loans. Chairman John Rigas, like Charles Keating was a vocal opponent of pornography, and after purchasing Southern California’s largest cable provider, pulled all adult-oriented TV channels off the system. However, he seemed to see nothing wrong with concealing company liabilities. Adelphia was not a family-owned company but a publicly traded entity. The Rigas family lifestyle was being funded by stockholders, which constitutes theft.

Adelphia executives were indicted; some became government witnesses. John Rigas and his son Timothy would be sentenced to 15 and 20 years, respectively.

Tyco’s CEO Dennis Kozlowski allegedly spent $135 million of the company’s money on a very lavish lifestyle. Kozlowski, the company’s CFO, the general counsel, and an outside director would all face criminal charges for their activities. Rite Aid and some of its corporate officers misstated earnings to the tune of $1.6 billion. KPMG, Rite Aid’s accounting firm, was fined for its wrongdoing. HealthSouth Corporation is one of the nation’s largest health-care service providers,

55

with a reported revenue of nearly $4.4 billion. CEO and founder Richard Scrushy was accused of wrongdoing by the SEC and was their accounting firm, Ernst & Young.

Halliburton, the company headed by Dick Cheney before he became vice-president, has also been accused of creative accounting, and some have raised questions about its ability to get no-bid contracts from the federal government. Computer Associates, Refco, Fannie Mae, AIG, and Sunbeam are a few additional cases reviewed in the chapter. The Sarbanes-Oxley Act of 2002 was passed by Congress, presumably in response to the wrongdoing outlined in this chapter and specifically in response to Enron. It requires greater accountability on the part of company officers and gives the SEC increased supervisory powers. It appears that the Sarbanes-Oxley Act has had a deterrent effect on financial reporting fraud.

By 2004, Fannie Mae was the fourth-largest company in the United States, in terms of assets. In September of that year, the Office of Federal Housing Enterprises Oversight (OFHEO) released a report alleging widespread accounting irregularities. The OFHEO raised serious questions about the validity of Fannie Mae’s financial statements. The report cited one instance when the company inappropriately deferred $200 million of estimated expenses, which enabled management to receive full annual bonuses. Had the expenses been recorded properly, there would have been no bonuses.471 The report also detailed numerous transactions over a period of several years, in which Fannie Mae management deliberately smoothed out its earnings to show investors that it was a lowrisk company.472 By the end of the year, Fannie Mae’s CEO and CFO were forced out by the board of directors. KPMG, the large auditing firm that approved the company’s accounting, was also fired.

LECTURE OUTLINE I. ENRON A. Lay Profile the CEO and what he did and didn’t do at Enron. Have students examine articles about the trial and bring to class examples of Lay’s activities not mentioned in the text. How do the students feel about Lay’s culpability?

B. Skilling By all accounts Lay groomed Skilling as his successor. Outline Skilling’s background. Have students investigate Skilling and see what they come up with as an explanation for his behavior. Explore with students why Skilling’s tenure as CEO was so brief. Have students take a look at what the financial press was saying about the Skilling resignation.

C. Fastow Students need to evaluate whether Fastow was the linchpin of the government’s case against Enron and against Skilling and Lay. Talk with students about the responsibilities of a chief financial officer. How culpable was Lea Fastow?

56

D. Government Investigation The government used the domino theory to construct its criminal case against the company and its officers. While Congress was holding highly publicized hearings, the investigation continued. Arthur Andersen’s shredding of documents was a clear indicator that something was amiss.

Because a substantial portion of Arthur Andersen’s activities was a matter of public record, in filings with the SEC it made sense to target Arthur Andersen as the weakest link.

E. Dominoes Start Falling Some Arthur Andersen personnel entered into plea agreements, as did low-level Enron personnel. Finally Fastow, in an effort to protect his wife, agreed to a plea, as did his wife. Sherron Watkins’s inside information also helped the government’s case.

F. Who Killed Enron?

Just like Murder on the Orient Express, in hindsight it appears everyone had a hand in Enron’s demise. Insiders put together risky schemes, the accounting firm didn’t call them to account, the law firm said they were legal, the board wasn’t paying attention or didn’t care, the financial press was blinded by bling, and employees and stockholders just liked the money. Moral to this story—if it sounds too good to be true, it probably is.

Explore with the class the degrees of culpability of those involved—see what percentage of 100 percent should be assigned to the entities.

G. Case Study: Arthur Andersen—Accounting and Accountability The bottom line with Arthur Andersen is that if the firm had done its job of oversight and audited Enron not as a consultant insider but as a watchdog for stockholders of a public company, the damage done by Enron would have been substantially minimized. Unfortunately, the real money for an accounting firm is not in the yearly audit but in the monthly accounting and consulting fees. Take the discussion in the text one step further and see what students’ ideas are for preventing Arthur-Andersen-like activities in the future.

II. WORLDCOM A. The Rise Four guys in Mississippi put together a giant telecommunications company and, instead of following sound business practices, some of them enrich themselves at stockholders’ expense. Once again Arthur Andersen was the accounting firm, and the public was uninformed as to the amount of the company’s debt.

B. The Fall

57

CEO Ebbers and CFO Sullivan are both indicted and, as so often happens in whitecollar cases, the person who cooperates with the government gets a much lighter sentence than the ones who don’t. Sullivan gets five years and Ebbers 25.

III. “…IT WAS A VERY BAD YEAR” A. Global Crossing Stockholders lost millions, except for Terry McAuliffe of the DNC, and the government investigated, but the investigation was eventually dropped. The company had ties to Enron and WorldCom and Arthur Anderson was their accounting firm.

B. Qwest Communications Another communications company bites the dust, and Arthur Andersen was the accounting firm. This time a high-profile company board member and Republican Party donor made $1.5 billion before the fall.

C. Adelphia A family-run but publicly traded company provided the opportunity for the family to get rich at stockholder expense. They were charged under the RICO statute, and its auditors, Deloitte & Touch, were named in shareholder lawsuits. As the company foundered, Chairman John Rigas and son spent money like it grew on trees—investor trees, that is.

D. Tyco CEO Dennis Koslowski was another big spender, and he continued spending while the company ship went down. Ask students if they are seeing a pattern yet. Unique to this case was the indictment of an outside director.

E. Rite Aid Rite Aid is the third largest pharmacy chain in the U.S. The company’s CEO, Martin Grass, was charged by the SEC with manipulating earnings and illegal compensation agreements. The company overstated earnings and its accountant, KPMG, was fined.

F. Health South When the CEO and founder of one of the nation’s largest healthcare providers sells off $75 billion in stock days before the company posts a big loss it is likely to draw the attention of the SEC. Eventually it was discovered that the company had been falsifying its earning reports for a number of years.

G. Halliburton Halliburton is multibillion-dollar energy exploration company that has demonstrated an amazing ability to get no-bid contracts from the federal government and was formerly headed by Vice President Dick Cheney and has also been investigated for creative accounting. Cheney resigned as CEO in 2000 when he ran 58

for the vice presidency and sold his stock options for $35 million. After audits were performed it was found that the company had overcharged the government by $61 million dollars for gasoline delivered into Iraq from Kuwait.

H. Computer Associates CEO Sanjay Kumar used a variety of accounting tricks and manipulations in order to inflate the value of his software company. Kumar also bribed a customer who was going to report him and tampered with a computer to conceal incriminating evidence.

I. Refco This case has its origins in Ray E. Friedman’s conviction for selling substandard poultry to the army in 1952. After his release from prison, he formed Refco (a company trading in cattle futures) with the help of his stepson Thomas Dittmer.

Under the stewardship of these men the company was highly profitable and subjected to frequent fines and investigations. Under pressure, the founders turned the company over to Philip Bennett who began turning it into a global empire.

When he decided to take the company public a number of fraudulent practices were exposed and Bennett was sentenced to 16 years in prison.

J. Fannie Mae and Freddie Mac Both companies are government sponsored with government charters, and are responsible for ensuring that funds remain consistently available, for the purchase of homes. Both used questionable accounting methods and doctored earnings in order to pay out large sums of money to its executives. Fannie Mae’s business model, which benefitted mortgage brokers, politicians, homeowners—and, above all, its own arrogant executives—was a fragile illusion. KPMG approved the company’s accounting.

K. AIG American Insurance Group is an insurance company whose two top executives had inflated its estimated value by 100 million dollars. Another corporation, General Reinsurance, was involved in the fraud.

L. Chainsaw Al Al Dunlap was a corporate executive legendary for his ruthless use of layoffs, plant closings and the elimination of charitable giving in order to turn struggling companies around. When unable to work his usual magic with the Sunbeam corporation he turned to questionable accounting (Arthur Anderson) practices in order to inflate the company’s value. He was eventually fired and sued by shareholders and the SEC. M. Coca-Cola The company’s fountain division had improperly overvalued $9 million in equipment and had rigged a marketing test of Frozen Coke by Burger King. The rigged testing led to a $65 million investment by Burger King.

59

The Sarbanes-Oxley Act of 2002 was passed as the toughest piece of corporate governance legislation ever enacted. The law imposes new duties on public corporations and their executives, directors, auditors, and attorneys, as well as securities analysts. The Act created the PCAOB and expanded rule-making by the SEC. Many well-known business leaders were opposed to and have tried to have the act repealed.

MEDIA RESOURCES Enron: The Smartest Guys in the Room (2005) Rogue Trader (1999) Fun with Dick and Jane (2005) Syriana (2005)

STUDENT ACTIVITIES AND DISCUSSION The following items are designed to be used by students for small-group or class discussion. Some are suitable for research-paper assignments or essay questions. Students may also use them for oral presentations to the class.

1. How much does the typical office manager, pipefitter, or sheet metal worker make in a year?

Assuming that they contribute the maximum 15 percent of their paycheck into a retirement account and it earns 10 percent per year, how much would be in the individual’s retirement account after 16 years? (Don’t forget compound interest.) Were the amounts that Enron employees accumulated unusual? How much were the Enron insiders or their families/spouses left with after fines, etc.?

2. What are costless collars, multiple triggers, and weather derivatives? What is their relevance to Enron?

3. What were Ken Lay and Jeff Skilling’s responses to the California criticism?

4. How much did Sherron Watkins have when she left Enron? Did she get hurt as badly as other employees? If she was not satisfied with Lay’s response, why did she not go to the authorities or to regulators or to the Enron board?

5. Compile information on the involvement of Vinson & Elkins. Does the information indicate that the law firm could have been implicated in criminal activity? Why or why not?

6. Research Sarbanes-Oxley. How has it changed the responsibility of people involved in companies whose stock is publicly traded? Can accounting firms still audit and accept consulting fees? How about directors and company officers—are their duties different now?

60

7. Look into the big accounting firms. Way back when, they were known as Big 8 accounting firms. How many are there now? Have any of the major firms besides Arthur Andersen faced criminal indictments where principals could go to jail?

8. There is nothing wrong with being rich. Bill Gates, Warren Buffett, Richard Branson, Malcolm Forbes, Steve Forbes—for other names look at Forbes magazine’s list of rich Americans. Many of these people had to be very aggressive to get where they are today. How are the individuals profiled in this chapter different from other people who have accumulated wealth? The Rockefellers, the Kennedys, and the Gettys might also be useful for this comparison.

9. Do a follow-up on one of the companies mentioned in the chapter. What has happened to the company or its officers since the book was written?

10. What is the track record for collection by the federal government of the massive fines ordered in white-collar crime cases?

61

Chapter 8

Fiduciary Fraud

CHAPTER SUMMARY In the classic 1946 movie, It’s a Wonderful Life1, a young man named George Bailey (portrayed by James Stewart) inherits the leadership of a small savings and loan institution from his father. Honest and selfless, George barely makes a living from the family business; indeed, he seems to be the lowest-paid bank president in the country. The Bailey Bros.

Building & Loan Association is conspicuously unobsessed with extravagant salaries and escalating profits. Its funds are reserved to help the working-class families of Bedford Falls obtain mortgages for the modest little homes of their dreams. But through an unfortunate set of circumstances, culminating in the theft of a large deposit by a villainous slumlord, the Building and Loan becomes insolvent—just as a state bank examiner unexpectedly arrives to audit its books. Believing that his business and personal reputation are about to crumble and that he will probably go to prison, Bailey jumps off an icy bridge on Christmas Eve in a desperate suicide attempt and is rescued by a guardian angel dispatched from heaven to restore his shattered idealism. Ultimately, the Building and Loan is saved by the loyalty of its depositors, and George Bailey lives to lend another day.

Someone asked Willie Sutton why he robbed banks. He replied, “That’s where the money is.” It is not surprising that financial institutions are the targets of criminals. What is unfortunate is that financial institutions can also be used to commit crimes. When we put our money in the hands of a bank, a savings and loan, a pension fund, or an insurance company, we expect them to keep our money safe and to give it back to us when requested. The whirlwind tour of crimes committed by upper management in financial institutions indicates that the trust placed in said institutions may be misplaced.

Before 401Ks became the retirement vehicle of choice by employers, most employees depended on a pension from the employer to survive retirement. Theoretically, the employee was paid a lower salary than he or she might otherwise have earned and, after serving a certain number of years, the employee became entitled to a pension. The company placed money in a pension fund that would then be used to pay retirees. Alas, some of the pension fund managers got rich while depleting the fund. In “First Pension = ‘Worst’ Pension,” William Cooper, Robert Lindley, and Valerie Jensen used an elaborate scheme of fake mortgage trust deeds, and a real Ponzi scheme cost investors $124 million. An actress was even employed to impersonate a state auditor.

Steve Wymer and Institutional Trust Management used an investment Ponzi scheme to loot municipalities and government agencies. When called to account by regulators, Wymer fell back on the economic argument that his actions were precipitated by bad investments and the need to try and make the money back. His excuse fails to take into account his lavish spending on himself as the investments lost money. Broker-dealers were complicit in Wymer’s lack of accountability. Taxpayers lost millions, and the public 62

was reminded once again that you don’t get something for nothing.

When it comes to insurance fraud, the media is fond of focusing on the false claims submitted by insurance consumers, when the reality is that unscrupulous insurance companies are in far-better position to make money illegally. The federal government leaves most insurance company regulation to the states. Despite state regulations and requirements for financial solvency, insurance companies still manage to collect premiums and not pay claims because they have diverted the funds to risky ventures or to insider pockets. Some resort to misleading state regulators about the existence or value of assets. The Multiple Employer Welfare Arrangement (MEWA) was a federal statute designed to make it possible for small companies to provide health insurance to employees. MEWAs were exempted from state regulation, and federal oversight has been somewhat lacking, enabling individuals and companies to cheat policy holders.

The financial downfall of Transit Casualty Company illustrates yet another way that the guise of insurance can be used to separate victims from their money. Reinsurance is a legitimate industry practice that enables insurance companies to, in essence, purchase insurance for themselves by reselling policies. This enables insurance companies to write more policies and avoid disaster if there is a deluge of claims in a certain sector. This all works out well unless the reinsurer is insolvent or a fraud.

Offshore insurance scams are often used when individuals and companies want to avoid or delay scrutiny. Fake countries, companies, and policies are created to fleece customers. Countries issuing passports, corporate charters, and bonds have been formed by sandbars in the Rio Grande River or by two rocks off the coast of Columbia. Reality may in fact be stranger than fiction—Belize, Dominica, and Grenada all offer so-called “economic” citizenship. In some states, insurance department personnel have been convicted of taking bribes. Alan Teale, in his varied insurance schemes, sold disability policies to professional athletes and liability policies to high-school athletic programs. The nonpayment of claims left severely injured individuals with no financial safety net.

Teale used offshore reinsurers like one located on the aforementioned sandbar in the Rio Grande River to accomplish his devious mission.

The Savings and Loan loss in the 1980s has been estimated to have cost somewhere between $200 billion to $1.4 trillion. Experts disagree as to the role criminal activity played in the industry collapse. The General Accounting Office, however, in looking at the 26 most costly S&L failures, states that criminal activity was present in all 26. High interest rates and slow economic growth in the 1970s, and eventually deregulation in the 1980s, set the stage for the S&L disaster. Hustler entrepreneurs viewed S&Ls as a way to get rich quick with someone else’s money. These were not conservative bankers seeking to rebuild an industry but real estate developers wanting to make a quick buck.

Insider thrift frauds took three primary forms—desperation dealing, collective embezzlement, and covering up. Desperation dealing highlights the value placed by society on economic success and the willingness of individuals to cover up failure. The need to maximize profits and intense competition creates an atmosphere conducive to illegal activity. In collective embezzlement, the savings and loan is used to make the insider rich at the expense of investors, depositors, and the 63

tax-paying public. The institution is both victim and perpetrator. A cover up ensues when there is an effort to hide the insolvency and the fraud leading to the insolvency. In many instances the S&L was used to fund outside business interests of insiders.

Savings and loan fraud was not confined to insiders. “Outsiders” from various occupations and professional groups often joined thrift officers in the largest scams. Industry regulators and FBI investigators have reported that appraisers, lawyers, and accountants were among the most frequent co-conspirators; indeed, their compromised services made many of the S&L scams possible. Perhaps foremost in this regard were accountants, whose audits allowed many fraudulent transactions to go unnoticed. Professional accounting firms were highly paid for their services, and thus could easily turn a blind eye when evidence of wrongdoing surfaced. One study conducted by the General Accounting Office reports that, of 11 failed thrifts in Texas, six involved such laxity on the part of auditors that investigators referred them to professional and regulatory agencies for formal action.

Appraisers, lawyers, and accountants helped S&L insiders cheat the public. Fraudulent mutual support or criminal networks also played a part in S& L crimes. The mechanics of using an S&L fraudulently included land flips, nominee loans, reciprocal lending, and linked financing. A too-chummy relationship between government policy makers and regulators and S&L insiders facilitated the criminal enterprise.

GAO Director Harold Valentine called thrift fraud and the financial collapse to which it contributed, “perhaps the most significant financial crisis in this nation’s history.” The Department of Justice referred to it as “the unconscionable plundering of America’s financial institutions.” A senior staff member of the Senate Banking Committee explained the attention being given to thrift fraud, in that it was very close to the heart of the economy and had brought the system to the brink of collapse.

The federally funded study on the S&L collapse outlined all of the foregoing as reasons for and characteristics of the savings and loan industry downfall. Charles Keating’s Lincoln Savings and Loan was the most expensive thrift failure at $3 billion and it also encapsulates all of the excesses and failings of the industry and the lack of government regulation. The savings and loan scandal reminds us once again that the criminal justice system is more likely to react to wrongdoing than to prevent it. Keating attempted to use his political connections to avoid regulator attention, and when his political clout wasn’t enough, he would pay respected financiers or economists to vouch for his operations.

Keating was convicted but both his state and federal convictions were eventually overturned, and the government chose not to retry him.

One of the most callous forms of white-collar predation entails the looting of money from retirees and workers who have deposited their savings in pension funds. For example, Alan Bond, former CEO of Albriond Capital Management, was sentenced to 12 years in prison in 2002 for cheating pension funds out of millions of dollars. Bond was convicted of defrauding clients by sending unprofitable securities trades to their accounts while directing most of the profitable ones to himself. In investment fraud parlance, this scheme

64

is known as “cherry picking.” Bond took more than $6 million dollars in kickbacks from brokerage firms while his clients lost more than $56 million.

Insurance is one of the most pervasive businesses in America; almost everyone comes into contact with this industry at some point in their lives. Insurance companies sell over $400 billion of new policies every year to businesses and individuals.177 Although the major insurers are generally conservative and reputable, a smaller number of rogue companies have the potential to wreak havoc on the entire industry. Insolvencies have increased dramatically since the early 1980s.

One of the strangest aspects of offshore insurance company scams is their preposterous ties to fictitious countries. At first glance, it seems hard to believe that swindlers could ever get away with registering their fraudulent companies in make-believe nations, complete with phony currency and bogus passports. One would like to think that investors, customers—and especially regulators—would catch on quickly. But perhaps in a “geography challenged” age, when a large percentage of American high school students reportedly can’t find the Pacific Ocean on a map, it really isn’t too surprising.

In 2008, Rabbi Leib Pinter, co-principal of the defunct Olympia Mortgage Company of Brooklyn, pleaded guilty to engineering a $44 million mortgage scam.205 The money Pinter misappropriated had been dispersed by the Federal National Mortgage Association (“Fannie Mae”), the government-sponsored pool of home mortgages, to refinance 257 home mortgages.

When Olympia refinanced a Fannie Mae mortgage loan, Fannie Mae wired the money to an Olympia account. Olympia was then required to pay off the underlying mortgage loan by remitting the outstanding balance to Fannie Mae.206 Instead of using the funds to pay off the original loans, Pinter stole the money, leaving $44 million in unpaid mortgages that had been refinanced through Olympia.207 Olympia gave up its mortgage lender license in 2004 after an FBI investigation of mortgage fraud. As part of his plea, Pinter agreed to a 10-year prison sentence.208 Rabbi Pinter had a criminal record going back to 1978, when he was sentenced to two years in prison for bribing Congressman Daniel Flood (see Chapter 10) to obtain favorable treatment for some social services programs he was operating.

LECTURE OUTLINE Chapter Preview Explain that in today’s modern world individuals do not handle their own money but entrust others with the responsibility of taking care of their funds—insurance companies, pension fund managers, and savings and loan companies are examples of entities in a fiduciary position, a position of trust.

Take students on a tour of the myriad ways in which those in a position of trust violate that trust.

IV. THE S&L IMPLOSION A. Origins of a Financial Disaster Deregulation, economic conditions, and increased competition combined to make the collapse of the savings and loan industry not a possibility but 65

a probability. Examine with students these elements, and debate which of the elements was most significant. Unsavory entrepreneurs and incompetents alike were attracted to the “new” S&L. B. “Insider” Thrift Frauds There were three basic categories of logic behind insider activity in the S&L downfall.

1. Desperation Dealing When ill-advised business practices resulted in losses, insiders compounded the problem by engaging in even more speculative or illegal maneuvers to try and save the institution. Examples include violations of loans-to-oneborrower limits, inadequate underwriting, and other unsafe practices. Ask students whether this minimizes the culpability of the individuals involved.

2. Collective Embezzlement Sometimes the insiders set out to deliberately cheat the public. This was the most costly and frequent of the S&L frauds. Have students examine why this is deviance in the organization and by the organization.

3. Covering Up When insiders wanted to disguise ineptitude or wrongdoing, the books and records of the institution were altered. Every one of the 26 most expensive thrift failures, according to the GAO, involved accounting deficiencies.

Capital to assets ratios were “adjusted,” reserve accounts created, and development loans made to make loans look current and to cover up illegal investment activity. Phony escrows and fake invoices were also employed to cover up. Even money laundering for other criminals was utilized to make the institution appear healthy. Question students as to whether there was any legitimate explanation for these activities.

C. “Outsider” Thrift Frauds Appraisers, lawyers, and accountants helped S&L insiders defraud the public.

1. Criminal Networks Ask students to decide if S&L institution officials could have perpetrated their frauds without appraisers signing off on inflated real estate, lawyers putting fraudulent documents together, accountants cooking the books, and policy-makers looking the other way. These players used four primary methods to accomplish their frauds. a. Land Flips Land would be transferred back and forth between partners, and the value would keep going up. The last loan ends up in default, and the partners keep the money they made from the flip and earlier loans. b. Nominee Loans These loans go to straw borrowers to cover up excess loans to insiders. Nominee loans are used to circumvent regulations limiting the permissible level of unsecured commercial loans made to thrift insiders.

66

c. Reciprocal Lending Insiders, again, to avoid regulations on number and amount of loans, would loan money to each other in like amounts. d. Linked Financing Loans would be conditioned on deposits and then, of course, you withdraw the deposit and default on the loan. This network of insiders and outsiders was essential to S&L frauds. Inquire as to whether a weakness in even one leak in the daisy chain would have been sufficient to prevent much of the wrongdoing. The S&Ls also wooed enticed regulators and examiners with higher salaries and “perks;” even elected officials were induced to take actions favorable to the S&Ls. D. Reflecting on Fraud The federally funded study on the savings and loan debacle identified all of the foregoing as elements in the demise of the industry. Additionally, the study noted high conviction rates for those indicted, short prison sentences, and that a large amount of fraud would go undetected.

E. Case Study: Charles Keating—“A Not-So-Wonderful Life” Review with students the foregoing characteristics of S&L problem institutions, and discuss how many are present in the Keating/Lincoln Savings and Loan collapse.

II. PENSION FUND FRAUD A. Case Study: First Pension = “Worst” Pension Keoghs and IRAs are private retirement vehicles permitted by the tax code where the individual or an agent can select investments for the money. Since most of us are busy working at our job that enables us to accumulate retirement money, First Pension and William E. Cooper are ready to step in and make investment decisions for clients. Unfortunately for First Pension customers, Cooper et al. decided to invest in themselves. They were helped by Valerie Jensen and Robert Lindley in convincing customers that investment mortgages actually existed. They went so far as to employ an actress to impersonate a regulator.

III. INVESTMENT AND FINANCIAL SERVICES FRAUD A. Wymer and Institutional Treasury Management As Wymer’s clients lost money, Wymer acquired houses and cars. He asserted that broker-dealers had made his wrongdoing possible. Could any of these crimes have been committed without the help of others? Discuss with students.

IV. INSURANCE COMPANY FRAUDS A. Mechanics of This Kind of Fraud

67

Federal oversight is virtually nonexistent in the insurance industry—it is up to the states to police the insurance companies that sell insurance in their states. Ideally, insurance companies have the assets to pay legitimate claims when presented and have a system in place for fairly evaluating claims. In rogue companies, premiums can be diverted to personal uses, and then there is no money to pay claims or companies can mislead regulators as to the presence or value of assets. Explore with students better ways for insurance regulators to prevent these abuses. Talk with students about why MEWAs were especially prone to abuse. The combination of incompetence and excessive reinsurance was a very expensive failure in the insurance industry—$3 billion. Explain the concept of reinsurance—its advantages and disadvantages.

B. Offshore Insurance Scams Insurers or reinsurers located in real or mythical other countries are problematic for regulators. It can be very difficult to verify assets or financial stability. This can be especially true when the regulators themselves are being bribed to look the other way.

C. Case Study: Fantasy Islands Herbert Williams created the Sovereign Cherokee Nation Tejas out of a sandbar in the middle of the Rio Grande River. Mark Logan Pedley created the Dominion of Melchizedek which was located on 2 rocks in the middle of the Atlantic Ocean.

Several other fake nations have been created, some offering everything from fake college degrees to visas. Ask students how people and, more importantly, governments, could be fooled by individuals who make up countries based on sandbars or rocks in the ocean. Should real countries be permitted to offer economic citizenships?

D. Case Study: Teale—As in “Steal” Teale set up fraudulent insurance companies, which is easy to do in light of the crazy quilt of insurance laws and regulations that limit regulators’ ability to pursue financial pirates. Teale set up several insurance and re-insurance companies, which, among other things, offered policies to professional and high school athletes. No athletes received the payout from their very expensive policies. Discuss with students the human cost of insurance fraud when someone like Alan Teale sets out to fleece the public. Ask again how he was able to do what he did for so long without getting caught.

V. MORTGAGE FRAUD A. Bear Stearns In 2007 it was the 7th largest securities firm with $66 billion in capital and over $350 billion in total assets. This major global investment bank and securities broker leveraged (i.e., borrowed money against risky investments) to the point of relative worthlessness. The Federal Reserve negotiated the sale of Bear Stearns to JP Morgan Chase for the price of $2 dollars a share when the stock had been traded at 68

$30 share that previous Friday. Two executives were arrested and charged with fraud but both were found not guilty even after costing $1.6 billion to 300 investors.

Discuss the mechanics of its collapse and the role of the government.

B. Merrill Lynch Merrill Lynch was a key player in the subprime mortgage collapse. They were the world’s largest brokerage house, with client assets exceeding $1.8 trillion. It had been securitizing subprime loans and then sell them to investors who had borrowed the money to purchase them from Merrill Lynch itself. In this instance it was collecting a fee on both ends of the deal and helping to escalate the subprime problem. Since they lacked their own mortgage origination company, they purchased subprime lender First Franklin, and after year were forced to close it due to losses.

C. Lehman Brothers This major global financial services company was working hand in hand with some of the most ruthless subprime lenders in the country. Even as it was facing financial ruin top executives refused to give up their lavish bonuses. They filed for Chapter 11 protection in 2008 and it was the largest failure of an investment bank since Drexel Burnham Lambert 18 years earlier. Ask students to compare and contrast all three of these cases.

D. Case Study: LIBOR-Money from Nowhere LIBOR is the daily average of estimated interest rates top London banks expect to be charged by other banks and is used a benchmark for interest rates worldwide.

Banks reporting incorrect numbers may have manipulated the rates and could net large profits. An investigation was launched and it was found that manipulation may have been occurring as far back as 1991.

MEDIA RESOURCES The Thomas Crown Affair (1999) Collapse (2009) Margin Call (2011) Inside Job (2010)

STUDENT ACTIVITIES AND DISCUSSION The following items are designed to be used by students for small-group or class discussion. Some are suitable for research-paper assignments or essay questions. Students may also use them for oral presentations to the class.

1. Research bank fraud incidents in your state for the last decade. Have there been any incidents in your jurisdiction? If there have been occurrences what are the details?

69

Are they different from those described in the text? If there have not been any such events, why do you suppose this crime has been eliminated?

2. Have pension funds in your community or state been victimized by white-collar criminals? What were the effects of the fraud? What happened to the perpetrators?

3. Look into the savings and loan scandal in Arkansas and the involvement of friends/associates/acquaintances of the Clintons. How were the perpetrators in these situations treated? How did the punishment compare with cases in the text?

4. Read the book The Daisy Chain. Did you learn anything new about the savings and loan scandal?

5. Investigate the reinsurance industry. Is it still a common practice in the United States?

Have there been any recent insurance scandals that involved the practice of reinsurance?

6. Has the insurance department in your state been involved in investigating or sanctioning insurance companies in your state? How does the insurance department in your state police the companies that sell insurance in your state?

7. What are economic citizenships? Why do individuals obtain these items? Why do countries issue them? What is the negative side of economic citizenships?

8. Why did so many former good citizens get caught up in savings and loan fraud? (You may get a better feel for this by reading passages from books rather than newspaper or magazine articles.)

9. Why were many of the sentences for those involved in savings and loan fraud reduced?

10. What roles did the FDIC and RTC play in trying to resolve the savings and loan problem? How successful were they?

70

Chapter 9

Crimes by the Government

CHAPTER SUMMARY Perhaps no area of white-collar crime is more dangerous to social organization than crimes committed by the government. Three major categories of this type of malfeasance are use of human guinea pigs, violation of sovereignty, and abuse of power.

Most people are familiar with the Nazi concentration camp practice of experimenting on human beings, but the United States has a nasty history in regard to this as well. Eugenics is based on the premise that it is possible and advisable to improve the human race by improving the gene pool. One way to do this is to sterilize the mentally or morally infirm, and by the time Germany legalized this practice in 1935, 20,000 Americans had been sterilized for those reasons. The United States Supreme Court even gave its approval to the practice. Recent court decisions and books indicate that this practice may become favored again.

The total number of Americans sterilized under eugenics statutes has been estimated at 63,000.

Although many of these laws have been repealed, sterilization without a subject’s consent still was permitted in 14 states as recently as 1985.

In a more modern variation on this theme, a mother, charged in 1991 with beating her children after she caught them smoking, was sentenced by a California court to a year in prison. A condition of her release on probation at the end of that period was that she be given the contraceptive drug Norplant, which must be implanted surgically in a woman’s forearm.10 Civil libertarians have expressed concern that such compulsory contraception violates medical ethics by involving doctors in operations that have nothing to do with medicine per se and abrogates women’s rights to control their procreative capacity. As one observer has noted: “Far from being part of a new trend, these cases hark back to old-fashioned eugenics plans to ‘improve’ society by ensuring that ‘undesirables’ do not reproduce.”

The Tuskegee Syphilis Experiment (1932-1972) was another low point in human experimentation without the knowledge of those being used as guinea pigs. All of the subjects were poor black males. Racist beliefs in the medical community supported the idea that syphilis was a black disease—blacks were viewed as more sexually promiscuous. No therapy was provided to the subjects, the wives who contracted syphilis, or the children with congenital syphilis. However, 161 burial stipends were paid. Treatment was still withheld even when the very positive results from penicillin were discovered.

For 40 years, from 1938 to 1978, agencies of the federal government pursued experiments in psycho-politics and mind control with human subjects, many of whom had not given permission for this experimentation. The CIA has a long history of medical abuse taking the form of using drugs to alter behavior. LSD was even administered to soldiers—one of whom allegedly committed suicide.

71

One study involved the use of brainwashing experiments between 1957 and 1963. The methods studied were depatterning and psychic driving. Under the guise of cancer research, terminal patients at Georgetown University were administered knockout and incapacitating substances by the CIA. The military has also conducted tests where yellow fever could be contracted and the hepatitis virus was given to retarded infants—and then there were the Army’s germ warfare experiments on the unsuspecting public. The Air Force has also engaged in drug experimentation, but the Navy gets the award for most gruesome. It built and used gas chambers in Washington, D.C. and Maryland and between 1943-1945 experimented on young sailors under the threat of court martial. The sailors were exposed to mustard gas until “broken.” You would think we would learn, but in 1990 Gulf War soldiers were given an unapproved nerve gas remedy without their consent, and the negative after-effects have begun to appear.

Radiation experiments have been conducted by many branches of the military, and government agencies and subjects have been ordinary citizens, soldiers, nuclear facility personnel, the poor, and most commonly, retarded children. No one has ever been convicted for medical experimentation.

Prison populations have also been used for medical experimentation. They are “cheaper than chimpanzees,” and if there are bad results, no one will notice—or if they do, care.

Another controversial form of human experimentation is the use of American prisoners as subjects for medical research. In a 1950 memorandum to the Atomic Energy Commission, Dr. Joseph Hamilton of Livermore National Laboratory in California expressed his concern that “tests aimed at discovering at what level radiation would injure soldiers would conjure up images of Nazi concentration camp experiments if performed on humans.”97 Indeed, after World War II, the issue of experimentation on prisoners was stressed at the Nuremberg War Crimes trials.

Violation of Sovereignty: Bribery of government officials commonly is used to obtain business contracts in many foreign countries. This practice is often concealed in company books under such euphemistic entries as “facilitating payments.”108 Although bribery violates both American and international law, it has continued for many decades, because the penalties seldom exceed the gains.109 During the 1970s, nearly 400 American corporations admitted making payments totaling $750 million to foreign officials.110 Among the more notorious examples were the following: Mobil Oil contributed nearly $2 million to Italian political parties, concealing this information from its own stockholders. Exxon later admitted to a Senate subcommittee that it had given over $50 to Italian politicians, including some communists.

The Northrup Corporation passed on cash “gifts” of $450,000 to two Saudi Air Force generals, who in Watergate straddles the definitional line between Lowi’s “little corruption” (bribery and individual malfeasance) and “big corruption” (governmental deviance is normalized by governmental authority). Examples of “little corruption” include violation of election laws, donations to political figures for personal use, quid pro quo action by the administration for campaign contributions, and probably income tax evasion by the President.

The tale of Iran-Contra begins with the taking of United States embassy personnel by followers

72

of the Ayatollah Khomeini in Iran. Jimmy Carter was unable to secure their release, and a rescue attempt was a dismal failure. When Reagan was elected, however, the hostages were miraculously released. Reagan then vowed that he would not pay terrorists for release of hostages. Islamic terrorists under Khomeini control in Lebanon kidnapped another group of Americans. Reagan’s foreign policy favoring the Contra rebels in Nicaragua over the Sandinista government provided the other piece of the puzzle. Congress was reluctant to provide funds to intelligence agencies to bring down the Sandinista government. The National Security Agency, since it was technically not an intelligence agency, could theoretically assist the Contras. Robert McFarlane, Reagan’s national security advisor, gave Oliver North, a Marine lieutenant colonel, the responsibility of taking action on aid to the Contras. Through a convoluted series of events, weapons made their way to Iran, the Contras got funded, and the Beirut hostages were released. Most of the players received very light sentences, and eventually convictions were overturned. President Reagan could not seem to remember whether he did or did not know about the operation.

As for Oliver North, he worked out an agreement under which he pleaded guilty to 3 of 12 felony counts, thus avoiding the ignominy of a prison sentence. He was, however, fined $178,785 and ordered to perform 1,200 hours of community service. Many observers considered this a surprisingly light sentence. Not only had North participated in the Iran-Contra cover-up by lying to Congress and shredding key documents, he also had acknowledged using $13,000 of Iran-Contra proceeds to purchase a security system for his home.

The Northrup Corporation passed on cash “gifts” of $450,000 to two Saudi Air Force generals, who in Watergate straddles the definitional line between Lowi’s “little corruption” (bribery and individual malfeasance) and “big corruption” (governmental deviance is normalized by governmental authority). Examples of “little corruption” include violation of election laws, donations to political figures for personal use, quid pro quo action by the administration for campaign contributions, and probably income tax evasion by the President. What make Watergate so terrible, however, are the aspects of “big corruption.” A shadow government that thought of itself as exempt from accountability to the public and other branches of government came as close to despotism as the country has ever seen.

Watergate: A break-in at Democratic National Headquarters at the Watergate office/hotel complex in Washington, D.C. by Cuban burglars was the ignominious beginning to what was to become the biggest political scandal ever. As events unfolded it becomes apparent that a concerted effort to spy, disrupt lives, and collect illegal funds has been conducted from the Oval Office. In a classic moment of reality television, Alexander Butterfield casually mentioned the tapes Nixon made concerning Watergate and other activities.

Nixon strenuously resisted turning over information, but the government ultimately prevailed.

During this process Nixon, in an effort to get rid of Watergate prosecutor Archibald Cox, fired his attorney general, his assistant attorney general, and may have cost Robert Bork a seat on the Supreme Court when Bork agreed to fire Cox. Nixon was forced to resign when it became apparent he would be impeached. Jerry Ford, his handpicked successor, pardons him. Nixon’s minions go to prison, and Nixon retires in splendor in California. What make Watergate so terrible, however, are the aspects of “big corruption.” A shadow government that thought of itself as exempt from

73

accountability to the public and other branches of government came as close to despotism as the country has ever seen.

As of the writing of this edition, there is unprecedented chaos surrounding the current president, his administration, and former campaign activities and staff stemming from the investigation by a special prosecutor of potential connections to Russian hacking activities in the 2016 national election. Criminal charges may include, but are not limited to, lying to investigators, filing false documents, money laundering, conspiracy, and covering up and colluding with a foreign government. Two persons close to the administration, including former National Security Advisor Michael Flynn, have already pleaded guilty and are cooperating with the special prosecutor. Watergate places these current events into historical focus Governments over time have attempted to justify illegal conduct on the basis of service to a higher cause. Internment of Japanese Americans during World War II is an example of this sort of rationalization. From 1953 to 1973 the CIA intercepted mail, spied on American citizens abroad, and spied on suspected radicals in the United States. The Defense Department collected information on American citizens promoting “political unrest”—in other words, who disagreed with government policy. The National Security Agency has compiled files on hundreds of thousands of American citizens. The FBI, under the leadership of J. Edgar Hoover, conducted extensive surveillance of American citizens beginning during World War II under a secret directive from FDR. Hoover spied on such notables as Helen Keller and Justice Felix Frankfurter. Not only did the FBI collect information, but also it anonymously would plant stories in the media or send anonymous information to spouses. The actress Jean Seberg was the target of one of these campaigns, and she eventually committed suicide. The FBI went after civil rights leaders and conducted a relentless campaign against Martin Luther King, Jr. The IRS, at the behest of the FBI and presidents, has used its power to target individuals or groups associated with dissent.

The National Security Agency (NSA) is the most secretive of all U.S. intelligence agencies and has been monitoring citizens for decades, some say unlawfully. Using wiretaps, internet searches, email intercepts, and all manner of surveillance, the NSA has been collecting information—all in violation of the First, Fourth, and Fifth Amendments, as there had been no probable cause. In waging the “war on terror” the United States government has made use of torture in the interrogation of suspects. Though the American Medical and Psychiatric Associations have prohibited their members from participating in torture the American Psychological Association has allowed their members some discretion in this decision.

The most blatant examples of physical and psychological torture are codified in the example of Abu Ghraib, where prisoners were subjected to pain and humiliation on a regular basis. Similar techniques were also used at the Guantanamo Bay detention facility. One of the most egregious practices utilized at this facility was simulated drowning or waterboarding. At the core of the torture debate is the basic question of effectiveness; does it even work?

After the Iraqi government fell, Brigadier General Janis Karpinski, an Army reservist, was named commander of the 800th Military Police Brigade and was put in charge of military

74

prisons in Iraq. Karpinski was an experienced intelligence officer, who had served in the Special Forces and in the 1991 Gulf War, but, like most of the 3,400 reservists under her command, she had no training in handling prisoners.

In 2006, former General Janis Karpinski, who had been in charge of Abu Ghraib until being relieved of her command soon after the scandal broke, told a Spanish newspaper that she had seen a letter signed by Secretary of Defense Donald Rumsfeld authorizing the mistreatment of detainees and the use of harsh interrogation techniques. According to Karpinski: “The methods consisted of making prisoners stand for long periods, sleep deprivation . . . playing music at full volume, having to sit in uncomfortably [sic] . . . Rumsfeld authorized these things.” Karpinski added that a notation in the margin of the letter, in the same handwriting as Rumsfeld’s apparent signature, said, “Make sure this is accomplished.

The most ironic casualty of Abu Ghraib was General Antonio Taguba, whose frank report was the catalyst of the scandal. In 2007, civilian Pentagon officials forced him into retirement because he had been too “zealous.”398 Taguba’s assignment to investigate Abu Ghraib was a classic nowin predicament. He noted that “he lost” whether or not he lied or told the truth.

LECTURE OUTLINE I. USE OF HUMAN GUINEA PIGS A. Sterilization Review with students the avowed logic behind sterilization, actual use of the procedure, the moral implications, and the choice of subjects for the procedure. This practice been used in many countries, including the U.S. It was viewed a way to keep inferior persons from breeding and creating another generation of persons with hereditary defects. In 1994, The Bell Curve was published, written with pseudoscientific information on the affirmation of racially based theories of intellectual inferiority.

B. The Tuskegee Syphilis Experiment Explain the alleged medical need for the experiment; detail the specifics of the experiment and, finally, the damage caused. Discuss the ethical implications of the experiment.

C. Mind Control, Drug Experiments, and Other Medical Experiments Explore how mind-altering drugs have been used on unsuspecting American citizens. Soldiers were also exposed to disease and put in gas chambers. These practices were often attributed the CIA, but many branches of the military also utilized experiments on soldiers. The government also conducted mass exposures in San Francisco and the New York City subway system.

D. Radiation Experiments

75

Agencies of the federal government exposed to radiation their workers, cancer patients, soldiers, the poor, children, and the developmentally delayed, to name a few, by use of injection, airborne contamination, food, and swallowed drugs. What did scientists learn from these experiments, and was it worth it?

E. Prison Experiments: Who Gives a Damn?

Question students about the argument that it is okay to use prisoners for medical experiments since they are criminals and don’t deserve the same consideration as others. In the U.S. they are required to sign waivers and consent forms, however, because they are captive; they are truly not able to give a voluntary consent.

II. VIOLATION OF SOVEREIGNTY A. Political Bribery Companies argue that it is appropriate to bribe foreign government officials—it is after all the accepted way of things and the cost of doing business in foreign locales. This is a self-serving argument and ignores the considerable damage that corporate bribery inflicts on our national image abroad. Is this argument valid? Agencies of the American government have disregarded the sovereignty of other nations even more recklessly than corporations.

B. CIA Operations The CIA has conducted operations in many countries in South America, the Middle East, and Africa. Its efforts were designed to undermine governments, disrupt Army operations, and promote labor disputes. It is alleged the Agency has gone so far as to procure assassinations of foreign leaders. Ask students to debate whether the United States Government is justified in disrupting foreign governments. Students may want to consider the United States’ actions most recently in Afghanistan, Iraq, and Iran.

C. The Iran-Contra Affair Students may find it hard to believe that the United States Government would reward terrorists and religious zealots who took American hostages by selling them weapons in contravention of American law, but in essence that is what happened in Iran-Contra. The noble cause rationalization for this activity included freeing hostages and funding Contra rebel activities in Nicaragua. Explore with students why members of the Reagan administration felt they were above the law.

III. ABUSE OF POWER A. History of Abuse Though this section of the text begins with mention of the internment of Japanese Americans, there is a history of abuse of power in the form of deprivation of civil liberties and civil rights going back to the formative years of the United States. Students may want to research and discuss 76

other historical examples of governmental abuse in the name of some political objective.

B. Watergate Try to acquaint students with exactly what Nixon did that was wrong, who was involved, and why Nixon considered these activities an appropriate, legitimate course of action. Educate students on the political atmosphere at the time and historical events that may have led to Nixon’s actions. Explore with students how the actions of this case demonstrated a true Constitutional crisis and how it created a “shadow government” and attempted to replace a traditional “rule of law” morality with a kind of “new Machiavellianism.” Ask students for their reactions to the Watergate events and how the people involved were punished.

1. The FBI FBI spying on American citizens has been the most far-reaching and most vindictive. Targets have included the ACLU, the NAACP, Martin Luther King, Jr., and Supreme Court Justices. The FBI has not stopped at spying but has conducted active smear campaigns.

2. The IRS Presidents have used the Internal Revenue Service to harass American citizens with audits and threatened prosecutions. Ask students if any potential danger justifies the kinds of tactics outlined above—especially when the spying is done on legitimate organizations and law-abiding citizens.

3. The Defense Department Military intelligence during the turbulent 1960s collected enormous amounts of data on individuals associated with domestic unrest (anyone seeking to change government policy). What method should be used to decide who or what gets targeted for investigation? Who gets to decide? What is subversive activity?

4. The NSA The National Security Agency, arguably the most secretive of all intelligence agencies, has compiled files on thousands of Americans, intercepted all cables leaving the United States, and monitored international phone calls of people on a “watch list,” which includes the names of the peaceful, the nonviolent, and the totally legal.

5. The CIA Over time the CIA has conducted clandestine spying operations on American political dissidents, collected police reports on homosexuals, and spied on radicals in the United States. How do students feel about government snooping and data collection?

IV. TORTURE, AMERICAN STYLE The use of torture has a long history, from ancient Rome to the present. Organizations like Amnesty International and Human Rights Watch lead anti-torture campaigns. The use of torture has

77

been primarily stopped in democratic societies but it is still a popular method of repression and punishment in totalitarian regimes and terrorist organizations.

A. Psychological Controversy The military is one of the largest employers of psychologists in the country and has made use of them in developing interrogation techniques. Ask your students to consider why the American Psychological Association was reluctant to bar its members from taking part in torture.

B. Abu Ghraib and Guantanamo Bay Abu Ghraib and Guantanamo Bay have come to stand as the symbols for American excesses in the “war on terror.” Have students list the pros and cons of the extreme methods used in these facilities. . Question them as to whether they believe these to be isolated incidents or symptoms of a larger problem in our treatment of prisoners.

C. Waterboarding Waterboarding is a torture technique that dates back to the Spanish Inquisition.

While there was some argument to the contrary on the part of Bush administration officials, it is widely considered to be torture by most experts. The practice was condemned by the U.S. in 1901 during the Spanish-American War and was designated as illegal during the Vietnam War in 1965. It is an effective means of torture because it does not leave any marks on its victim. Have students discuss their opinions on the practice.

MEDIA RESOURCES Conspiracy Theory (1997) All the President’s Men (1976) Men Who Stare at Goats (2009)

STUDENT ACTIVITIES AND DISCUSSION The following items are designed to be used by students for small-group or class discussion. Some are suitable for research-paper assignments or essay questions. Students may also use them for oral presentations to the class.

1. Investigate the stories about CIA drug distribution in South America and the United States. What is your assessment of the validity of these stories?

2. Why was no one punished for the radiation experiments?

3. Was the invasion of Afghanistan or Iraq a violation of sovereignty? Why or why not?

4. Is the United States’ position on nuclear capability of Iran a violation of sovereignty? Why or why not?

78

5. Look into American oil companies with Pemex in Mexico. Is there evidence of illegal activities?

6. Read the book Guerilla Warfare, authored by the CIA. Does information in the book support the idea that the CIA has exceeded its legal mission? Why or why not?

7. Research the Bush pardons in regard to Iran-Contra. What effect do these kinds of pardons have on this form of white-collar crime?

8. Why did Oliver North become a hero after violating United States law? Track his career and his present activity in the United States.

9. Review the many players in the Watergate affair. Where are they now? Take a look at both Nixon-affiliated people and those charged with investigating or prosecuting, including Congressmen and legal staff.

10. What effect have scandals had on federal intelligence agencies, both short term and long term?

11. Profile J. Edgar Hoover after reading a biography. What effect did his leadership of the FBI have on the agency and on wrongdoing by gatherers of intelligence data?

12. It appears that the American public was misled about weapons of mass destruction in Iraq. Was there ethical or criminal wrongdoing by parties responsible for informing the public? Why or why not?

13. Was the Red Scare of the 1950s an example of government misdeeds? Why or why not?

14. Research the history of the NSA. Should it be more forthcoming with the American public?

15. Review the section on the FBI and its aggressive tactics toward those people it considered dangerous. Were these actions justified? Why or why not? For instance, why did the agency target the actress Seberg? Why was she dangerous?

16. Why is consideration of Machiavelli appropriate in reviewing this chapter?

17. Research Daniel Ellsberg. What happened with the Pentagon Papers? What did Ellsberg do, and what happened to him? How does this compare with what happened to the Nixon conspirators?

18. Did Nixon subvert the 1972 elections? Did his actions have any effect on the 1972 presidential or congressional elections?

79

Chapter 10

Corruption of Public Officials CHAPTER SUMMARY At the beginning of the 18th century, the governor-general of colonial New York was Edward Hyde (Lord Cornbury), a first cousin of the Queen of England. Among other things, Governor Hyde was a drunkard and an unabashed transvestite, with a penchant for addressing the New York Assembly while wearing one of his wife’s hooped gowns. Hyde was also a crook. He was as thoroughly dishonest in his public role as he was outlandish in his private life. He routinely accepted kickbacks and bribes, and gave large, illegal land grants to his friends in exchange for cash. In 1707, he claimed to have received secret information that the French were preparing to invade New York by sea. He taxed the citizenry 1,500 pounds, ostensibly for the construction of protective batteries around the harbor. The French invasion was, of course, a fabrication, and Hyde used the funds to build a lavish new home for himself. Hyde’s behavior prompted so many complaints from the Assembly that he was removed from office and briefly imprisoned.

This may have been the first major political corruption scandal in American history. It would not be the last. Indeed, the misuse of public authority for private gain has been a persistent phenomenon throughout American history. If the abuses of power described in the previous chapter conform to Lowi’s notion of “Big Corruption,” bribery and misappropriation represent “Little Corruption.” In this context, the “Little” sobriquet does not mean trivial or uncostly; it merely distinguishes the crimes of renegade individuals from organizational deviance.

The financial and social costs can be devastating to both. Political corruption can be blamed on lack of attention to norms, powerful wealthy individuals who don’t have direct access to policy makers, and flaws in the procedures of organizations. Behavior is corrupt when a public office is used for personal gain. Since there are only two elected members of the executive branch and there have been less than 50 presidents, there are few instances of little corruption. Spiro Agnew is the notable exception. Is this true, or has corruption existed in various forms the last 240 years throughout the executive branch?

Clinton fund-raising activities may also fit the definition and may illustrate that money, rather than power, has become the goal even in D.C.. Within the Department of Agriculture, bureaucrats have been bribed to look the other way while misgrading and short-weighting happened and when adulterated food was allowed in the country. In the Defense Department, bid-rigging was the corruption of choice. Two agencies from the Department of Homeland Security have had widespread problems of corruption: U.S. Customs and Border Protection and U.S. Citizenship and Immigration Services. Both have had problems with bribery, and issues within the hiring process of agents have been noted.

THE DEPARTMENT OF DEFENSE: Corruption can be found among government purchase agents who are able to handpick product and service suppliers for the government. In 1776, the Continental Congress granted a gunpowder contract to the firm of Willing, Morris & Company.

Both Willing and Morris were members of the Congressional committee that had issued the 80

contract. They cleared a profit of 12,000 pounds. Today, since government purchases total hundreds of billions of dollars annually and make up nearly one-quarter of our gross national product, the incentives for corruption are obvious. Pentagon bid-rigging scandals involving $700 toilet seats and platinum-coated hammers have underscored the great potential for abuse within the military-industrial complex.

U.S. CUSTOMS AND BORDER PROTECTION: Bribery of federal officials by Mexican drug smugglers and human traffickers has risen sharply along the 2,000-mile border from San Diego, California, to Brownsville, Texas. Since 2004, hundreds of public employees have been charged with helping to move narcotics or illegal immigrants across the U.S.–Mexican border. Thousands more are reportedly under investigation.

U.S. CITIZENSHIP AND IMMIGRATION SERVICES Selling green cards and approving visas without background checks was a nagging problem when the INS was part of the Justice Department. Now, in the post-9/11 era, corruption at the U.S. Citizenship and Immigration Services (ICE) is an even more serious cause for concern. An ICE employee has warned: “Terrorists need immigration documents to embed in our society and work here without raising alarm bells. . . . They are always looking for that documentation to live among us.” The former head of internal affairs at ICE echoes that warning in a more ominous tone: “After the next attack when they find out that an employee was bribed by a terrorist or bribed by a spy, it’s going to be too late.”

LEGISLATIVE BRANCH: Paying for favors in the legislative branch has a time-honored quality.

The cost of getting elected to office has paved the way for special interest payments being made to ensure elected officials voted the “right” way. Corruption of public officials has taken one of three forms: violation of election laws, payroll fraud, and bribery. Violation of election laws typically involved concealment of contribution sources or amounts. Payroll fraud is committed when personal expenses appear on the public tab or personal employees are paid with public funds. James Traficant was indicted for taking bribes, evading taxes, and extorting money from his own staff.

Bribery is the most likely cause for criminal prosecution of a legislator.

Campaign contributions are one thing, but payment for quid pro quo is another. Operation ABSCAM started with the arrest of Melvin Weinberg, an international con artist—in return for leniency, Weinberg agreed to make criminal cases against public figures. A mayor, congressmen, a senator, and a judge all got caught in the net. A question remains whether law enforcement resources should be used to entrap political figures. State and local jurists have also been caught up in corruption. Even federal judges have been accused of wrongdoing—one was acquitted and still faced impeachment.

Randy “Duke” Cunningham was an eight-term Republican Congressman from San Diego. A former fighter pilot and decorated Vietnam War hero, he was one of the most blustery and belligerent lawmakers, who once challenged a Democratic member to a fist fight on the House floor. He was also known for occasional racial slurs and nasty homophobic remarks. And when it came to corruption, Duke was in a class by himself. In exchange for lucrative defense contracts, Cunningham received a mansion in Rancho Santa Fe, California, one of America’s wealthiest communities, a Rolls Royce, a $140,000 luxury yacht (named the Duke-Stir), museum quality 81

antiques, $40,000 Persian rugs, and heaps of cash. Between 2000 and 2005, the total of Cunningham’s bribes was set at a stunning $2.4 million. In terms of dollar amount, that made Duke Cunningham the most corrupt member of Congress ever uncovered in U.S. history.

In 1986, Attorney General Edwin Meese announced Justice Department focus on local corruption.

The irony was that 225 Reagan federal appointees, including Meese himself, would face allegations of ethical and criminal misconduct. Governors, state legislators, mayors, and county officials have been accused of bribery, bid-rigging, and kickbacks. Misuse of funds, pardons, and loans from S&Ls have all troubled state political figures. Governor Edwin Edwards of Louisiana was targeted by authorities for years—22 grand jury investigations—and finally was snared with the testimony of businessman Edward DeBartolo, Jr. County officials in numerous states have been indicted and convicted of abusing the public trust, as have municipal officials.

Corruption scandals have plagued every major city in the United States. One typology of police corruption has taken six variations: corruption of authority, kickbacks, shakedowns, the fix, opportunistic theft, and protection of illegal activities. Other theories have to do with organizations—and structural opportunities, the code of silence, and inadequate organizational controls. Officers have a greater amount of exposure to criminal activity, officers protect their own—including sodomizing a Haitian immigrant (and cover up of same), and the nature of the job and management isolates the officer. The NYPD perhaps is the poster child for police corruption.

On the other hand, it is the largest metropolitan police force in the country—it may simply be a microcosm reflective of society at large. The traits that make individuals good police officers can also be used to describe many lawbreakers. They also see themselves as isolated from society, associate only with other officers, and their jobs are stressful and demoralizing. This can culminate in an “us-versus-them” mindset. The New York City Police Department, which covers five boroughs and 75 precincts, unfortunately has a long history of corruption.

Even a small percentage of corrupt officers can be a significant number when the force has 30,000 members. Many of the divisions have experienced wrongdoing but, not surprisingly, the most lucrative division for illegal moneymaking is vice. The most recent commission to examine corruption made a strong recommendation for external controls of the department.

LECTURE OUTLINE I. POLITICAL CORRUPTION A. The Executive Branch The two best examples of corruption at the highest level come from the Nixon and Clinton administrations. Discuss these cases with students and ask them to compare and contrast them.

1. The Department of Agriculture These cases of bribery and the use of undue influence seem to be minor variations on what was observed in the earlier cases. The public’s health was disregarded as the USDA allowed adulterated food into the country,

82

including 20 tons of contaminated seafood in 1988. Ask students to discuss how they are related.

2. The Department of Defense This case of inflated costs and kickbacks to government officials is a landmark in the field of white-collar crime. Melvin Paisley served as Assistant Secretary of the Navy for R & D between 1981 and 1987. He corrupted the bidding process on hundreds of millions of dollars of weapons systems in order to divert contracts to those who secretly bought his services.

He was arrested as part of the biggest federal investigation of defense procurement fraud ever conducted. Ask students to detail the excesses and account for the corruption.

3. The Department of Homeland Security US Customs and Border Security These cases focus primarily on security agents who were bribed into collaboration with criminal organizations. Ask students to consider how this type of corruption can be controlled.

US Citizenship and Immigration Services Again, these cases mostly involve bribery and the exploitation of immigrants. See if students can find additional connections or common threads between them.

The DHS may insist that the vast majority of Border Patrol and ICE agents are law-abiding but the cases have revealed flaws in the screening process of agents, inadequate training, weak internal controls, and the greed factor.

B. The Legislative Branch Most critics contend that at the heart of congressional corruption is the manner by which American political campaigns are funded. “The overwhelming majority of voters believe the current system for financing campaigns is basically unsound” and “a parasitic symbiosis between the public and private sectors.”

1. Violation of Elections Laws Explain the mechanics of this process and then ask students to consider how this type of corruption can be prevented.

2. Payroll Fraud In these cases congressmen divert funds from inflated payroll expenditures for use in their personal expenditures.

3. Bribery Each of these cases maintains the core similarity of elected officials using their positions for personal gain. Ask students to point out any variations that they observe.

C. Case Study: James Traficant In 2002 Traficant was convicted of everything from soliciting bribes, to extorting money from his staff to tax evasion. How did Traficant’s personality play into his crimes?

83

D. Case Study: Operation ABSCAM In 1978 the FBI conducted this sting operation and utilized an agent posing as a sheik in order to lure congressmen into taking bribes. The go-between from the sheik to the congressman was a known con-artist who worked for the FBI in exchange for probation. Ask students to consider the impact of such a public and well documented case of corruption on the population.

E. Case Study: Duke Cunningham Cunningham was the most corrupt member of congress ever exposed in US history.

He took millions of dollars in bribes from defense contractors. How is this case both similar to and different from the Traficant case?

F. Case Study: Bob Ney Like Traficant and Cunningham, Ney used his political position for personal gain.

With the help of Jack Abramoff, Ney was able to peddle his influence to the highest bidder. Ask students to explain how lobbying factored into this case. .

G. The Judicial Branch While cases of corruption are much less frequent in the judicial branch, they tend to follow the basic pattern of people paying to get what they want. Between 1984 and1989, 15 judges from Chicago’s Cook County courts were convicted of assorted bribery, extortion, racketeering, and conspiracy charges. They had been investigated by the FBI for flagrant corruption inside the country’s largest municipal court system. Judicial corruption is a nationwide issue and it is difficult to overstate the social costs. No profession demands more unswerving honesty in the eyes of the public.

H. State and Local Government 1. State Corruption This section details numerous cases of corrupt Governors. Have students describe the cased and then explain their commonalities and differences.

2. County Corruption These case involve the misappropriation of taxpayer dollars, the diversion of fines and bribes. Ask students to consider the variation between crimes at the higher levels of government and those at the lower.

3. Municipal Corruption These cases tend to involve mayor’s who use their positions in order to create lucrative business opportunities for themselves.

I. Case Study: Edwin Edwards He had been the subject of 22 grand jury investigations over his three-decade political career. Like many of the other corrupt officials, Edwards had a grandiose personality. How might this factor into his crimes.

J. Case Study: George Ryan

84

Governor Ryan was convicted for illegally selling licenses to unqualified truck drivers. This is another case where students might be asked how the crime fits with his larger career.

II. POLICE CORRUPTION Like political corruption, police corruption is an illegal use of official authority for personal gain.

“Personal gain” distinguishes police corruption from certain other forms of police misconduct, such as brutality or violations of constitutional rights committed by law enforcers in pursuit of organizational goals. “Official authority” distinguishes police corruption from simple police criminality and thus excludes street crimes like rape or burglary, even though such offenses may be (and have been) committed by police officers. Every major urban police department has faced periodic corruption.

A. Typology of Criminal Activities 1. Corruption of Authority This involves giving police officers free or discounted products or services.

2. Kickbacks This occurs when officers are rewarded by companies for sending business their way.

3. Shakedowns This occurs when people pay their way out of being arrested.

4. The Fix Historically, this refers to having a police officer “make a traffic ticket go away.”

5. Opportunistic Theft This type of theft occurs when police steal from crime scenes.

6. Protection of Illegal Activities This occurs when criminals bribe police to ignore their criminal enterprises.

B. Typology Based on Organizational Theory 1. Structural Opportunities Police work affords officers numerous opportunities to take part in criminal activities. Police work places officers in close proximity to a wide array of illegal activities. Low managerial and civic visibility affords officers such wide behavioral discretion that the opportunities for corruptions are unavoidable. Ask students to consider how this can be altered.

2. The Code of Silence Police generally keep each other’s secrets when it comes to inappropriate or illegal activities. This is a cultural norm that proscribes officers from informing on corrupt colleagues. Officers often fear being labeled an informer, as they may not get needed backup on dangerous calls.

3. Organizational Controls Many police administrators have been unwilling to confront corruption as a systemic problem and have often ignored the pervasive nature of the problem. Police officers spend most of their time working without supervision. How can this lead to crime? What can be done about it?

85

C. Case Study: The NYPD The NYPD has a long history of corruption. There have been numerous investigations to clean up the department and it was recommended that a small external commission be created that would perform continuous assessments of the department’s systems to prevent corruption. Ask students to chart this history and explain the evolution.

MEDIA RESOURCES Serpico (1973) The Departed (2006) The Distinguished Gentlemen (1992) The War on Democracy (2007) The War Room (1993)

STUDENT ACTIVITIES AND DISCUSSION The following items are designed to be used by students for small-group or class discussion. Some are suitable for research-paper assignments or essay questions. Students may also use them for oral presentations to the class.

1. Research Spiro Agnew. What are the circumstances of his fall from grace?

2. Investigate the case of Jack Abramoff. What are the various allegations of wrongdoing? Who is targeted by this investigation?

3. There was campaign finance reform in the 1970s, and then again in early 2000s. What changes were made in the most recent effort at campaign finance reform? Will the changes be effective in preventing corruption?

4. Outline the history of lobbying Congress. Is federal law adequate to correct lobbying abuses?

5. NASA contractors and employees were targeted in the 1990s for wrongdoing. What was the end result of the investigation and federal probe?

6. In 2006 the office of a Congressman was searched. What happened as a result of that search? What were the facts behind the investigation? Is this an impermissible intrusion on the legislative branch by the executive branch?

7. The television show 60 minutes has repeatedly targeted Texas and its election system for choosing judges. Review what the program has said in its various reviews of Texas justice and whether it is for sale. Do you agree or disagree with its views?

86

8. Alcee Hastings was impeached even after an acquittal. Where is he now? What was he supposed to have done? How good was the government’s case?

9. City councilmen from Houston, Texas, were investigated for bribery in the 1990s.

One of them went to jail, as did a port commissioner. Take a look at the undercover investigation and its results. Does the case fit the definition of corruption?

10. Has the police department in your community been accused of corruption or abuse of citizens? Describe the accusations and what happened as a result of the investigation.

11. What cities besides New York have had ongoing problems with corruption? Is it more difficult to be an ethical officer in a big city than in a small- to medium-size community? Why or why not?

12. Kimba Wood is mentioned in the story about New York City Police Department.

Examine her career and why it was difficult for her to achieve higher office.

13. Has New York City suffered additional scandals since publication of the text? If so, what are the circumstances?

87

Chapter 11

Medical Crime CHAPTER SUMMARY There can be little doubt that the U.S. health-care system is vulnerable to fraud, waste, and abuse.

Given the wide array of private and public services, insurance plans, medical corporations, and treatment facilities, it is very difficult to pinpoint losses due to crime in the gargantuan, trilliondollar-a-year health-care industry—an industry that consumes 15.2 percent of our gross national product, making it the largest business in the country.

Even in the absence of a precise estimate, the sheer cost of medical care in America assures that even relatively small amounts of crime add up to illicit profits of sizable magnitude. The FBI estimates that between 3 and 10 percent of all health-care expenditures are lost to fraud. Currently, those expenditures total $2.4 trillion annually. Using the upper bound, this means that the FBI estimates a staggering $240 billion a year is stolen from taxpayers and insurers as a result of healthcare fraud on the part of physicians and, to a lesser extent, other providers, such as dentists, pharmacists, psychologists,6 chiropractors, and podiatrists. This accounts to a robust total figure of about $740 million a day One scam involved recruiting people for free tests and then billing insurance companies and the government for $50 million in charges. Unwitting victims found it difficult to get insurance with false diagnoses in their medical histories. In 2005 California surgical clinics billed the government and insurers for $1.3 billion for unnecessary surgeries, and the FBI estimated that approximately $350 million has already been paid out in claims.

Medicare has been subjected to thousands of claims for unnecessary equipment. The health care program for the elderly is especially vulnerable because there is no system for documenting the legitimacy of suppliers. Doctors sign blank forms, and not only may the equipment be unnecessary but it could be defective as well. The home care industry is also a favorite target for unscrupulous entrepreneurs. There is little oversight, which permits the use of unqualified personnel and billing for services never rendered. Overcharging is also rampant.

Anyone who has seen a hospital bill recently is familiar with the astronomical cost of serious illness and injury. You may have wondered why, instead of one bill for all services and supplies received during a hospital stay, patients get bills from every individual provider. An explanation for that practice might be the medical industry’s desire to obscure the total cost of care, and the practice also helps disguise double billing.

Hospitals typically blame the startling cost for common products like Acetaminophen or a bandage on “overhead.” The truth is that insurers and patients are subjected to upcoding, fragmentation, unbundling, and ghost or nonexistent services. Some hospitals also demand kickbacks from doctors—in other words, physicians must pay for the privilege of offering services at the hospital. Obviously, doctors will attempt to recoup the kickback money using whatever tactics are available. Some psychiatric hospitals have become cash cows for providers who are more concerned with money than service.

88

People have been kept against their will, and school counselors offered payment for referrals. The state of Texas was even billed for questionable treatment of crime victims.

Another criticism of medical practitioners is the practice of self-referral, where doctors send patients to entities in which the physician has a financial interest for additional services. There are numerous examples of fraud in the Medicare system. Common methods for accomplishing this are overcharges, retainers, and waivers. Overcharges are self-explanatory, retainers are fees charged to patients that are not permitted by Medicare, and waivers permit the doctor to charge patients directly for items that Medicare considers covered by its payments.

The Case Study“Lying and Outlying in New Jersey” investigates the St. Barnabas Health System. It is the largest health care network in NJ and agreed to pay a $265 million settlement to resolve fraud charges. Medicaid has suffered from fraud almost since the program began. Doctors try to justify abuses based on the clientele. Abuses include charging for services not provided, obtaining drugs and then selling them on the street, daily psychotherapy sessions totaling more than 24 hours, hysterectomies on male patients, and circumcisions on female patients. Doctors have performed unnecessary cataract surgery and dental procedures on baby teeth. Dr. Olga Romani was convicted of Medicaid fraud and also for the murder of her associate. Another type of Medicaid fraud involves pharmaceutical companies who may overcharge the government for drugs, market drugs for off-label use, and bribe doctors to prescribe their medications.

Psychiatrists represent 8 percent of all physicians, but 20 percent of those sanctioned for Medicaid fraud are psychiatrists. However, these figures may be misleading. Other medical specialists bill for specific services, but psychiatrists bill for time. Therefore, it is much easier for regulators to ascertain if improper billing has occurred. Psychotherapists are also targeted for sexual abuse of patients.

Couples who seek medical services for fertility issues because of the emotion involved and willingness to try almost anything are vulnerable to fertility specialists. Dr. Cecil Jacobson used his position of trust to impregnate women with his own sperm (sperm that was supposed to come from an anonymous donor), and he told women they were pregnant when they weren’t. Three doctors at the University of California-Irvine were accused of using unapproved drugs, performing research without patient consent, and stealing eggs or embryos. The doctors were also accused of financial misdeeds.

Though research fraud is relatively rare, doctors have also been accused of marking mice to support research findings, not performing experiments in accordance with grant applications, and falsifying results. In the Case Study “Funded Fakery,” Dr. Eric Poehlman reported a link between menopause and obesity. When an assistant brought discrepancies to his attention, it appears the doctor deliberately altered the test findings.

Nursing homes are for-profit enterprises paying the lowest wages in the health care industry.

Patient deaths have gone unnoticed; patients have sustained rat bites; patients have been left to lie or sit for hours in their own urine or feces. In North Carolina alone a resident wandered away and drowned; a patient’s bedsore developed into gangrene, necessitating limb amputation; a patient 89

experienced swelling and frothing at the mouth for a period of 16 days and, ultimately died, after no physician was summoned; a diabetic patient was given insulin and fed improperly, finally drowning in orange juice that was pumped into his lungs; and Alzheimer’s patients have disappeared and strangled themselves on medical apparatus. In other states, patients have been given power psychotropic drugs. Nursing homes have also been accused of financial irregularities.

The medical profession does a very poor job of policing itself. Tragic consequences have resulted when doctors have been permitted to continue practicing after having been criticized by colleagues for lapses. Medicare and Medicaid defrauders are often not penalized by state medical boards. While it should be stressed that the vast majority of physicians and other health providers are honest and dedicated to quality care, it does not take a large contingent of deviant practitioners to steal enormous sums of money or cause extensive physical harm.

Control of these miscreants has been a thorny public policy issue for some time. Doctors reflexively argue that their profession is capable of policing itself. After all, who knows more about medical procedures and potential errors and mistakes than them? There is, however, at least one glaring flaw in this linear assumption. Physicians are seldom willing to report colleagues who practice medicine below generally accepted standards. Often, even in egregious cases, doctors will not come forward to identify fellow professionals who are putting patients at great risk.

The United States is the only Western nation that does not regulate the pricing of pharmaceuticals.

Scandals over drug pricing first emerged in the 1970s, but have roared back in the last several years, particularly in markets for drugs used to treat relatively rare conditions.

Since the mid-1980s, as evidence of the cost and extent of medical fraud has grown, private insurance companies have also become more actively engaged in fraud detection and prevention.

Yet many experts still criticize the health insurance industry for not doing enough in this area. A 1990 survey conducted by the Health Insurance Association of America found that only half of the companies questioned had formed fraud prevention units.348 With great sums of money at risk, some skeptics believe that the industry has not moved fast enough or far enough. Part of the reason for this sluggishness is that, like with so many white-collar crimes, the costs of insurance fraud are merely passed along to consumers—in this case, in the form of higher premiums.

Anti-fraud enforcement in government programs, where the pressure to turn a profit is absent, is even more deficient.

LECTURE OUTLINE Chapter Preview Acquaint students with the size of the medical industry. Discuss the scams of free tests, boiler rooms, and the consequences in addition to monetary loss. Explore how California clinics exploited companies, the government, and patients. Explore how this fraud affects consumers and businesses in terms of higher rates and costs for care. Medicare and Medicaid government assistance programs are two victims of these billing crimes. The ink was hardly dry when President Johnson signed the

90

legislation in 1965 for these programs when critics stated that criminals would rob the health care programs blind.

I. EQUIPMENT SALES Criminals bill insurers for equipment that is not needed and, in some cases, defective.

Operators of the equipment are making diagnoses and have little or no training. Talk with students about doctor involvement in these schemes. Medicare, which is meant to assist the elderly, is particularly susceptible to equipment scams because it often fails to account for the legitimacy of suppliers, the costs of the equipment, and the patients’ need for the equipment.

II. HOME CARE FRAUD Assess with students why the home care industry has become so attractive to shysters.

Home care is often a preferred form of treatment, as it is less expensive than staying in a hospital, or because the patient wishes to remain in their own home. There are over 12,500 companies that provide home health care, mostly to the aged. Detail the ways in which home health care providers can cheat people. Why are home infusion services and AIDS patients the targets of criminals?

III. HOSPITAL FRAUDS A. Billing Practices Explain how exorbitant prices can be legitimately included in overhead and how this differs from criminal behavior. For example, hospitals must include in patient billing the costs of the building, staff, equipment, staff, insurance and even the unpaid bills of former patients. Define the terms “ghost services,” “upcoding,” “fragmentation,” “unbundling,” and “cost shifting.” Identify how hospitals can get in trouble for multiple billings and kickbacks from doctors.

B. Psychiatric Hospitals Horrific public mental institutions have been replaced by for-profit institutions.

Discuss with students the abuses possible with this new kind of institution. Provide examples of these abuses such as unnecessary stays, terminating treatment when the money runs out, ignoring patient wishes, aggressive marketing campaigns, and bribes being offered for referrals. Show students that overcharging and unnecessary treatment is also prevalent in this venue. Adding insult to injury, once people are confined in some of these institutions, medical conditions are left untreated. Two such examples are that of Tennessee, where a federal judge has ruled that the state had violated the constitutional rights of developmentally delayed residents of the Arlington Developmental Center (ADC), a state-operated institution and America’s most malignant public repository for the developmentally delayed was Forest Haven in Washington, D.C. During just a two-year period, at least ten Forest Haven residents died of aspiration pneumonia. The exact death toll can never be known, but the problem was believed to date back at least 20 years IV. SELF-REFERRALS 91

Not surprisingly, doctors own interests in laboratories and other medical service facilities.

The questionable aspect to this ownership occurs when doctors refer their patients to facilities in which they have a financial interest. Ask students whether this raises the specter of unnecessary testing and the possibility of price-gouging.

V. MEDICARE FRAUD A. Patterns Kidney dialysis patients in the United States are twice as likely to die compared with dialysis patients in Japan or Western Europe. Individual operators send false invoices, steal Medicare numbers, and bill for gourmet popcorn. A prominent university and large laboratories were targeted for unnecessary testing and overbilling. What do students think should be the consequences of such actions?

1. Overcharges Doctors charge more for services than permitted by Medicare.

2. Retainers New patients have to pay up front to get “comprehensive treatment.” The extra services may be covered by Medicare supplement policies—and of course Medicare will be billed, despite the services having already been paid for by the patient.

3. Waivers Patients waive their right for the doctor billing Medicare directly and end up paying for items that Medicare regards as covered by Medicare payments.

B. Case Study: Lying and Outlying in New Jersey This case study tells the story of one hospital chain and three hospitals in New Jersey that inflated the healthcare costs of patients with severe illnesses in order to bilk Medicare out of millions of dollars.

C. Problems with Investigation/Enforcement Medicare hires companies to process and investigate Medicare claims. There is little incentive for the companies to aggressively investigate without additional compensation. Congressmen with excellent medical insurance benefits find it far easier to talk of dismantling Medicare than attempting to improve it.

VI. MEDICAID FRAUD A. Nature of the Fraud Medicaid, like Medicare, is riddled with problems. Billing for services never rendered or not necessary is fairly common. One justification for Medicaid abuse is that the Medicaid population is unpleasant and lucky to have doctors’ services at all.

Little attention has been paid by regulators to provider or patient misdeeds. Inquire whether students believe that conservative politicians who want to get rid of Medicare have any incentive to pursue fraud claims. Blatant billing offenses have included circumcisions on females and hysterectomies on males. Other doctors have performed unneeded cataract surgery, leading to patient blindness in 92

some cases. Children’s baby teeth have been treated by pediatric dentists who have overused anesthesia and sedatives, which has resulted in children’s deaths.

B. Case Study: Medicaid Murder?

One Medicaid doctor murdered an associate to cover up her fraud. Dr. Olga Romani, after pleading guilty to unlawful practice of medicine, became the largest Medicaid provider in Florida. She was indicted in 1981 for fraud, which included treating a 19-year-old football player for diaper rash and submitting a bill for 51 visits when she had seen the same football player twice for a cold. Her associate had planned to testify against her before his murder.

C. Pharmaceutical Fraud Overcharging the government is one of the ways large drug companies can commit fraud. Companies such as Merck and Cephalon have advertised their drugs for offlabel use and bribed doctors to use their drugs. Off-label use, which has not been approved by the FDA, can be a danger to patients.

VII. PSYCHIATRISTS—“LAST AMONG EQUALS”?

Psychiatrists are overrepresented in the number of physicians who are the subject of fraud accusations. They may be easier to investigate for monetary wrongdoing because they bill by the time and not the procedure, making it easier to track misuse of billing. The sexual abuse of psychiatric patients is a recurring infraction of both legal and professional codes and the number of doctors disciplined for sexual misconduct reportedly doubled between 1990 and 1994. Ask students why abuse of mental health patients is so egregious.

VIII. FERTILITY FRAUD Unscrupulous fertility doctors may be an example of a new low. Dr. Cecil Jacobson impregnated unknowing women with his own sperm; he also told women they were pregnant when they weren’t and faked medical evidence to support his findings. Doctors at a major university used unapproved drugs, performed unauthorized research, and allegedly stole eggs/embryos, resulting in one instance of the birth of twins to other individuals. Other doctors in this area have been accused of financial wrongdoing. Discuss with students why fraud may be easier to accomplish in this specialty.

IX. RESEARCH FRAUD Fraud is more rare in this medical field, but some have faked results, failed to follow grant protocols, and misreported findings.

A. Case Study: Funded Fakery Dr. Eric Poehlman sought to show a link between menopause and obesity, and with a little manipulation of test results, he managed to do just that. He was able to secure nearly $3 million in federal grants. An assistant pointed out inconsistencies, and Poehlman changed the data.

X. NURSING HOME ABUSES Perhaps no group of people is more vulnerable to abuse than nursing home patients. Their relatives entrust them into the care of these facilities and they often been the victims of 93

abuse and fraud. Patients left in their own urine and feces, rat bites, unexplained injuries, and gangrene and amputation are just some of the examples. Patient deaths have been reported after they were left unattended for long periods of time or no doctor was notified when a patient displayed symptoms of illness. Ask students how these events can be prevented and what has to change to improve conditions at nursing homes.

XI. POLICING DOCTORS: PHYSICIAN HEAL THYSELF? The medical profession is very protective of its members. Explore with students why state medical boards are so hesitant to censure doctors and the consequences when they don’t do so.

MEDIA RESOURCES One Flew over the Cuckoo’s Nest (1975) Say Anything (1989) First Do No Harm (1997) Sicko (2007) John Q (2002)

STUDENT ACTIVITIES AND DISCUSSION The following items are designed to be used by students for small-group or class discussion. Some are suitable for research-paper assignments or essay questions. Students may also use them for oral presentations to the class.

1. Investigate and compare the cost of provider fraud versus patient fraud in the Medicare or Medicaid area.

2. Gather together all the bills from a recent hospital stay for yourself or a family member. Identify the questions you have about the billing. What about the bills raises your concern? (To maintain confidentiality, black out any confidential information before discussing the bills with the class.)

3. Compare advertisements in the yellow pages for mental health facilities in your area.

Supplement your research with a review of material on the Internet. What practices identified in the text do you see in the ads?

4. Text authors note the contributions made by nursing home operators to politicians. Using the Web site opensecrets.org, investigate Congressmen or U.S. Senators from your state and see if they are receiving contributions from those in the health care industry. Discuss why medical providers would make political contributions.

5. Congressman Tom DeLay of Texas had an eyelift before he left Congress. Did public funds pay for the operation, which is normally considered cosmetic? According to DeLay, what was the medical necessity for the operation?

94

6. Have any cases been filed against providers or patients in your state in the last five years?

Describe the allegations and the result. What action did the state licensing board take?

7. Compare the policing of other professions with that of doctors. Lawyers in many states are required to post signs in their office with the telephone number for the state bar association complaint department and provide instructions to clients for filing complaints. What are the procedures for engineers, accountants, etc.?

8. Find other examples where state licensing boards failed to censure practitioners, and the failure resulted in tragedy. Why do state licensing boards not do more? Would federal oversight be better?

9. Review the material concerning the investigation of Elvis Presley’s doctor. What did the medical profession do? What happened to his doctor? Would any action have been taken if the deceased had not been the King?

10. Interview a doctor and get his/her views on licensing oversight by state boards. Is it too intrusive, or are bad doctors permitted to continue practicing? How does the medical board conduct its investigation?

95

Chapter 12

Computer Crime CHAPTER SUMMARY Today, corrupted software programs are replacing the falsified ledger, long the traditional instrument of the embezzler. The classic weapons of the bank robber as well can now be drawn from a far more sophisticated arsenal containing such modern tools as automatic teller machines and electronic fund transfers. In short, white-collar crime has entered the computer age.

Just as the computer world is divided into hardware and software, computer crime can either be defined as crimes involving damage to hardware or software or interference with their ownership, or it can also include crimes where computers are used to cause a loss. For obvious reasons, computer crime has a relatively short history.

Its most immediate precursor was the invention of the so-called blue box in the early 1960s. The blue box was an illegal electronic device capable of duplicating the multi-frequency dialing system developed by AT&T. The telephone company had described its new direct-dialing technology in its technical journals, apparently confident that no one in the general public would ever read or at least understand such esoteric information. How wrong they were.

“Ma Bell” became the first casualty of the first law of electronic crime: if it can be done, someone will do it. Motivated by a curious blend of mischievousness and greed, a cadre of young wizards tape-recorded piccolos and other high-pitched sounds, and thus created the blue box, which gave them unauthorized access to the entire Bell network. They called themselves “phone phreaks.”.

Among the first generation of phone phreaks, some achieved legendary status: Jerry Schneider, the shameless self-promoter who appeared on the 60 Minutes television program in 1976 and used his telephone to raise the overdraw limit on Dan Rather’s personal checking account from $500 to $10,000, as millions of viewers looked on—including a stunned Rather.

Captain Crunch (John Draper) took his “nom-de-phreak,” of course, from the breakfast cereal with the direct-dialing whistle. At the time of the famous Esquire article, Crunch was a 28-year-old walking encyclopedia of telephony. Despite three convictions, he has never considered himself a criminal and utilizes the same neutralization techniques as his hacker brethren, claiming he performs a valuable public service by exposing weaknesses in communication systems. Captain Crunch’s early ambition was to phreak legally in the employ of the phone company. Reportedly, he was quite dismayed when AT&T hired his old friend Joe the Whistler, but not him.

Computer hackers came on the scene in the 1970s, when computer buffs began using school computers to access mainframe computers for a variety of misdeeds. By the early 1980s modems had become available, and computers at homes and offices could be used to wreak havoc. What began as prankster behavior escalated into plain old theft. It is believed that crime using a computer is the fastest growing crime in America.

96

How common and how costly has computer crime become? It is now believed to be the fastestgrowing category of crime in America and can be found all over the world.

Estimates in 2012 place the worldwide loss from cyber crime between $250 billion and $1 trillion per year. The wide variation is the result of computer crime classification. Should tax fraud, directions on the Internet on blowing up toilets, trolling by pedophiles on the Internet, computerization of records of criminal activities, or money laundering be included or excluded?

Software piracy is another problem in the American computer industry. Eighty percent of the software market is controlled by American companies; hence, international cooperation in protecting it is hard to come by. A substantial portion of illegal copying software is facilitated by certain Web sites. The cost of software piracy is in the billions.

When one considers as well the vast amount of undetected software piracy certain to exist, guessing the bottom line jolts the imagination. Indeed, based on their survey of 45,000 American households, McGraw-Hill Information Systems conservatively estimates that there is one pirated copy of software for every authorized copy.

The average bank robbery nets approximately $3000; the average computer crime loss may reach $500,000. Some computer crimes can rise to the level of the bizarre—stealing millions of gallons of heating oil or 30-ton boxcars, and moving nonexistent money that has never been recovered. Like other embezzlers, those who use a computer rationalize their actions by arguing that they had a terrible financial problem, they had easy access to a means to solve their problem, and, finally, that it was borrowing rather than stealing.

During the beginning years of the computer revolution, embezzlement crimes increased by 56 percent. Computers enable embezzlers to steal very small amounts from large numbers of customers, which makes the crimes more difficult to detect. In one case top level management used company computers to issue insurance policies for dead people and make money by selling the policies to reinsurers.

When outsiders rather than insiders steal funds, the crime becomes theft and the use of electronic fund transfers enable thieves to take millions. Another technique used was to leave electronically coded deposit slips on the bank counter, and customers using the slips would unknowingly transfer funds into the thieves’ accounts. Using computers to obtain credit and debit card information is part of the more recent wave of computer crime. Two criminals went so far as to make a fake automatic teller machine that stole access codes.

Originally hackers were computer aficionados who either broke into databases for fun or wandered around the electronic highway trying doors to see what they could open. These individuals may have drifted into this norm-violating deviant behavior. Hackers gravitated to more serious offenses, including breaking into nuclear weapons facilities, purchasing goods on hacked credit cards, and identity theft.

In the Case Study “America’s Most Wanted “Nerd,” Kevin Mitnick started predictably by hacking into school computers and moved on to other targets, like the Department of Defense. He then 97

broke into a Digital Equipment Corporation computer and stole software. After a one-year jail sentence he was released and went on to steal credit card numbers. He plans to open a computer consulting firm after serving his five-year federal sentence. Hackers have corrupted the databases of major U.S. corporations, and, many times, the deviant behavior escalates in an effort to impress rival hackers.

The federal government and government contractors are a favorite target of hackers, though their success does expose the vulnerability of government computers. Hacker applicants to prestigious business schools have used their skills to check on applications. Perhaps the most damaging hacker attacks involve “denial of service.” Hackers design programs that make it impossible for people to access Web sites. Amazon.com, eBay.com, Yahoo.com, and Buy.com have all been victimized. In 2000 some of these sites were all attacked at the same time by “Mafiaboy,” a 15-year-old Canadian.

The Case Study“The Amazing Adventures of Mafiaboy” tells the story of Max Butler, a former FBI informant who was indicted for breaking into and damaging hundreds of computer systems and websites, causing an estimated $1.2 billion in damages.

Former business associates and employees also have the inside track to causing major damage to company computer systems. Disgruntled ex-employees acting out of revenge or in an attempt to obtain compensation they believed they were due use their access to data to hack into systems. Two Russian hackers, detailed in the Case Study “The “Hack Back” Sting, got into a San Diego-based ISP and cost victims $25 million. In a sting operation, the two men were lured to the United States and arrested. It was the first time extra-territorial evidence was used to prosecute. In 2002, Congress passed the Cyber Security Enhancement Act, thereby leaving no doubt as to the seriousness and the magnitude of cyber crime. The cyber criminal group “Anonymous” is responsible for several attacks against online corporations and governments. The crimes are detailed in the Case Study “We Are Legion-Anonymous.” This group considers themselves to be a type of “hacktivism” which is motivated by political, rather than recreational or economic, drives.

One of the biggest data breaches of all time took place in 2017. Perhaps the worst news of all was that it occurred at one of the “big three” credit-reporting companies tasked with protecting personal information, and that it could have easily prevented the theft. Equifax Inc. is one of the largest consumer reporting agencies that sells credit-monitoring and fraud-prevention services directly to consumers. The breach was discovered on July 29, 2017, which included the sensitive personal information of almost a million and a half consumers, including Social Security numbers, birthdays, addresses, and driver’s license numbers.

Equifax did not announce the cybersecurity incident for almost two months, finally reporting the theft on September 7, 2017. At this time, Chairman and CEO Rick Smith stated that approximately 143 million U.S. consumers could be impacted by the data breach. In addition to stolen personal information, about 209,000 U.S. consumer credit card numbers were accessed.

The threat of viruses is now reaching epidemic proportions. A virus is an instructional code lodged in a computer’s disk operating system that is designed to copy itself over and over A virus may have four phases: dormancy, propagation, triggering, and damaging. Some viruses are playful and simply print messages. Others wipe files off computers or open portals for criminals. One variety of a virus has a delay built in to go off at some point in the future. New viruses have been 98

programmed to hide from detection programs. In 2003 thousands of computers were infected with a worm that caused rebooting and interrupted browser service. A second worm attempted to destroy the first one, but it left computers vulnerable to remote commands. The third 2003 worm turned computers into spam machines. This case is detailed in the Case Study “The Worms of August.”

Computers have been used in stock schemes to pump and dump stocks and to create false identities as financial advisors or licensed brokers. Using a computer, fraud schemes can target huge numbers of people and spread at warp speed. “Phishing” schemes are used to obtain important personal information from people using deceptive e-mails. The Nigerian scam uses human greed against its victims, telling them that money can’t be claimed for some reason or that a bank account is needed to shelter funds from someone; the con is on once a fee or bank account information is requested. The Nigerian scam is now so well-recognized that these same Nigerians are now claiming a different country of origin in their e-mails. Mass e-mailings or “spam” circulate through the web with speed and offer getrich-quick schemes with a few mouse clicks. Engineers estimate that spam costs society $20 billion a year but believe that spammers only make $200 million in revenue.

Misuse of computers has been employed to perform industrial, political, and international espionage. Industrial espionage can target competitors for theft of intellectual property or simply cause disruption of the competitor’s business. Political espionage involves the use of computers to obtain damaging information against an opponent. When computer users access sensitive government or military data and furnish it to foreign governments, they are committing international espionage. Even “innocent” access to such information can provide the basis for an international crisis between governments. It is a federal crime even if no attempt is made to transfer the information. Protections against all forms of cyber crime are being developed; for example, voice-recognition spectrographs, biometric technology, and more sophisticated firewalls.

LECTURE OUTLINE Chapter Preview Explain to students the difference between defining computer crime as those crimes where hardware or software is the target and defining it as crime in which the computer is the tool used to commit the crime.

Phone Phreaks Review the use of devices or the human voice to imitate phone sounds to make unauthorized calls. Examine the progress from phone pranks to toll fraud and its attendant cost.

The Problem of Classification Enumerate the wide variety of offenses and activities that could be committed using a computer.

Piracy Discuss the problem of unauthorized use or copying of copyright protected

99

software. Outline the cost to American business and the economy and identify the reasons why international cooperation is lacking.

I. EMBEZZLEMENT AND FINANCIAL THEFT A. Insiders Employees, middle managers, and even upper management can be tempted to take from the company cookie jar. Identify the ways in which embezzlers rationalize their actions. Remind students about the increase in the incidence of embezzlement as computers became more widely available. Delineate the common and not-socommon targets of embezzlers and the methods they use.

B. Outsiders When the taking is committed by someone not associated with the business, the crime is theft. Banks are frequently the target of techno thieves who use a variety of methods to steal. Sometimes the object of the theft is money, other times it is credit information that is then used to obtain merchandise. Analyze the victims and methods with students.

II. HACKING A. Variations Recall the progression of hacker activities for students. Provide examples for students that illustrate the move from mischief to crime by hackers.

Explain how hacker activity with no harm intended for the victim can still be classified as a crime. Differentiate the more playful hacker from the more criminally minded hacker. Hackers get their start in the sense of superiority in their ability to trespass into another computer system. Breaking into the system was the goal, not the means to some larcenous end. Discuss with students how hackers use the computer to commit identify theft. What are other harms that occur in connection with identify theft? The FTC estimates that 4.7 percent of the American population were victims of identity theft in 2002, with total losses of $53 billion.

Explore the motivations of a hacker. Do students have any ideas about preventing computer break-ins? Why is the government so vulnerable to attack? Have any students suffered when there was interruption of service due to hacker activity?

Differentiate juvenile hackers from adult hackers. Do they hack for different reasons? What about foreign hackers?

B. Case Study: America’s Most Wanted “Nerd” Review the not-so-illustrious career of Kevin Mitnick, who began as a student breaking into school computers and finally ended up in a federal prison.

C. Case Study: The Amazing Adventures of Mafiaboy In February 2000, a 15-year-old Canadian student targeted Amazon.com, eBay, Buy.com, Yahoo.com, and CNN.com with denial-of-service attacks. The cost to business exceeded $1 billion. Why do you think the boy would do this?

100

D. Case Study: The “Hack Back” Sting Discuss the first case in which American authorities managed to lure foreign hacker criminals to the United States and the use of digital evidence.

E. Case Study: We Are Legion-Anonymous Cyber criminals believe that they are acting as “hactivists” by being a friend of the people, attempting to right apparent wrongs by large corporations and governments.

III. VIRUSES AND WORMS A. Strains Chart the various viruses by name, effect, and potential for damage. Group similar viruses. Review the growth cycle of a virus. Delineate the possible reasons why an individual would disseminate a virus. Discuss with students how a virus spreads. Chart the named worms that have been used and the purpose of the worm. Many individuals have been caught and convicted for the costly and destructive nature of infecting computers.

B. Case Study: The Worms of August Why were the worms released in 2003 so harmful? Identify the significant effects of these worms.

IV. INTERNET SCAMS Scams, cons, and fraud have been covered in a previous chapter. Review the methods used in computer-powered scams and compare them to the fraud methods addressed previously. The internet has provided a fairly anonymous method for thieves to resell stolen merchandise. In 2012 a mother and son team used eBay to resell expensive toys and made over $909,000. Phony pharmaceuticals is another product available widely on the internet, but ordering and using them can cause major health problems.

A. Phishing Where did this slang term originate? How is this computer crime accomplished? How do students think it can be prevented?

B. The Nigerian Scam What happens when you have a third-world country whose populace is very well educated, the language of choice is English, and there are no jobs? Some of the country’s residents might choose to get on the technological superhighway and take their best shot at parting “rich” Americans from their money. Explore with students the tactics and methods of the Nigerians. Ask students to discuss the naiveté and greed of Americans and their role in the Nigerian scam.

V. ESPIONAGE 101

A. Industrial Computers are used to steal trade secrets, book contents, exact revenge by former employees, and interfere with competitors’ business. How have computers made this so much easier?

B. Political Spying on one’s political enemies is nothing new, but it is now much easier and faster with computers.

C. International It is a federal crime to access classified data, whether or not there is any intention to transfer it to a foreign government, though some of those engaged in international espionage with a computer have done just that.

What are the government’s concerns other than information falling into the wrong hands?

MEDIA RESOURCES We Are Legion: The Story of the Hacktivists (2012) Hackers (1995) War Games (1983) Sneakers (1992)

STUDENT ACTIVITIES AND DISCUSSION The following items are designed to be used by students for small-group or class discussion. Some are suitable for research-paper assignments or essay questions. Students may also use them for oral presentations to the class.

1. What are the current figures for the economic cost of computer crime? What sources did you consult?

2. Has your computer been subject to a virus or worm? What effect did it have on your computer or documents? Were you able to find out the kind of virus? What did it take to fix it?

3. What common characteristics do computer hackers share? Do the things they have in common help explain their motivations for hacking activity?

4. Investigate Web sites that give advice on avoiding identity theft. What advice do they give on how to avoid being a victim?

5. What is the difference between a virus and a worm? Is one more harmful than the other?

6. Have you received e-mails from people you suspect of being part of the Nigerian scam? What did the e-mails say? (WARNING: Do not reply to suspect e-mails. Do not open any attachments from people you do not know personally do not open attachments in forwarded emails—even from friends—unless you are expecting the e-mail and know what it will contain.)

102

7. Is there a conflict in the text in the definition of a worm? What is the correct definition?

8. Why is it appropriate to criminally prosecute hackers for simply breaking into government computers? Should we prosecute those who break into private corporation computers if no other criminal activity occurs?

103

Chapter 13

Conclusions CHAPTER SUMMARY Most people, most of the time, do not engage in fraud, embezzlement, bribery, and cover-ups.

Rather, these acts involve persons occupying certain societal roles and transpire only under certain conditions. In this final chapter, we will consider some of the factors that give rise to white-collar criminality, along with some changes that need to be made in order to control it.

In attempting to identify the causes of white-collar crime, we will focus on three basic levels of sociological analysis. We will see how societies, institutions, and organizations generate the opportunity, motives, and means for white-collar criminality.

Causation theories related to street crime have a tautological or circular quality. Criminality is defined in terms that are the same as the causes. Street crimes are largely committed by those who are male, poor, and uneducated, and the causes are lack of education, poverty, and male culture.

Profiling street criminals seems to make sense because they are different from the bulk of society.

Profiling white-collar criminals may seem less useful because the white-collar criminal is indistinguishable from an average citizen. A sociological analysis that examines societies, institutions, and organizations may have greater explanatory value.

A societal explanation with an examination of the cultural values that may support options or conduct that otherwise would be considered unethical or illegal may provide reasons why people would commit white-collar crime. Predominant values such as material success, being a winner, being innovative, and the notion that upward mobility is a right could be part of a culture conducive to white-collar crime. The same precepts that might enable one to succeed in business might also encourage deviant behavior. Rationalizations for failure in business are very similar to those used by criminals: denial of responsibility, denial of injury, denial of victim, appeal to higher authority, 1and condemning the condemners. White-collar criminals can also see themselves as pioneers or visionaries.

Americans in previous generations have had modest expectations in regard to wealth; they were conformist—interested in jobs and economic security. Business leaders today grew up in a different environment that promoted a view of enormous wealth, entitlement, and having it now.

The country has changed from executives who pointed to the companies they built, the products they invented, and the services they provided to executives who are more concerned with the price of their car, the size of their home, and the amount of money they have in the bank.

Like psychopaths, the executive criminal lacks empathy, is selfish, and has difficulty in delaying gratification. American culture has seen the gap between executive and wage-earner compensation expand exponentially. One percent of Americans now own more wealth than the bottom 95 percent.

One thousand public corporations were forced to revise financial statements in a five-year period between 1998 and 2003.

104

It appears that more businessmen think they can get away with cutting ethical and financial corners. Donald Carty of American Airlines, to avoid corporate bankruptcy, convinced three unions to accept lower wages while at the same time negotiating a $1.6 million bonus for himself and his efforts in overseeing a company that had lost $5 billion in the previous two years. Unfortunately for Carty, the press got wind of this, and he was forced to give up the bonus and, ultimately, to resign.

Some organizations are structured in a way that makes it easier and more tempting to engage in criminal activity. Criminogenic industries’ internal structures—legal, economic, organizational, and normative—facilitate criminal activity. High-stakes testing in public schools may be an example of a criminogenic environment—extensive pressure to succeed and large monetary rewards are incentives that push the ethically challenged to furnish tests to students and eliminate or change student scores to improve averages. Wall Street in the 1980s, as detailed in a previous chapter, is another example of a criminogenic atmosphere.

Whether America’s corporate elite will continue to believe they are entitled to all the benefits of the free market with none of the risks or will be deterred by the sobering image of fallen executives working in prison laundries remains to be seen. Change may be in the air, but so always is the heady scent of big money. In the eternal battle between greed and accountability, most of us would probably bet on greed. It usually wins.

Individuals commit occupational crime to attain individual financial gain. Corporate crime is committed by corporate insiders to benefit the organization itself. Ultimately, the insider will reap the benefits of corporate success in the form of increased salary, stock options, bonuses, and other material benefits. Some believe this type of crime should be changed to organizational crime in which the actors would be motivated by power or prestige. Some greedy business heads like Mickey Monus of the Phar-Mor drugstore chain drive their own companies into bankruptcy as a result of their own greed. Using Merton’s theory of blocked aspirations, it can be argued that some resort to illegal means when legal means do not achieve the results desired or if the results do not happen at the rate desired. Pressure by management to cut costs and improve profits can be the driving force behind illegal behavior. The Olde Discount Corporation, a leading discount brokerage chain, actively encouraged its employees to push risky investments based not on the stocks’ suitability for the customer but because the salesman could reap greater financial rewards and meet quotas.

Under the utilitarian deterrence theory, the reason most people do not commit crime is that there is the possibility of punishment. Perhaps white-collar criminals engage in their illicit activities because the possibility of any real punishment is nonexistent. Also, using utilitarian theory, the rewards far exceed the possible risk. The socioeconomic status and financial resources of white-collar criminals may also protect these individuals. Victims, such as aggregated groups of unrelated faceless individuals or the government, do not engender the sympathy in the same way as street-crime victims.

A study of savings and loan cases in Texas and California demonstrated that, at most, only a quarter of those involved were indicted, and an average sentence was three years. Burglars and first-time drug offenders in federal court received longer sentences. There is a counter argument, 105

however, that some white-collar criminals are punished much too harshly. James Olis, a mid-level at Dynegy, received a 292-month sentence (24 years and 4 months). His boss, however, agreed to a five-year plea deal. (The moral to this story may be to plead guilty when indicted by the federal government.) His sentence was later overturned. Ebbers from WorldCom and Rigas from Adelphia did draw the functional equivalent of life sentences, but those are certainly outliers in white-collar sentencing. Under the wealth maximization theory, white-collar criminals should be punished with monetary sanctions rather than incarceration, since they suffer collateral status consequences that street criminals do not. There is some argument about whether this is in fact true, and the theory violates a central tenet of American justice—that of equal treatment. The leniency shown toward white-collar criminals may come about for several reasons: High educational levels create a “status shield,” many judges identify with them as having similar backgrounds, life is seldom fair, they can afford better legal defenses, and they rarely have a personal relationship with the victims.

Who pays these costs? Are they equally shared by all members of society? Should some groups—particularly those who may have profited from the crimes—absorb a larger share of the cost? The evidence indicates that the burden is not shared equally across society but is shifted to the middle- and lower-income segments of the population. Because these costs are typically passed on to taxpayers, they represent a “regressive tax” imposed on those individuals least able to pay. At the same time, companies victimized by white-collar crime or slapped with punitive fines for their own offenses pass the costs on to consumers.

Environmental and human costs of white-collar crime do not receive much media attention, and the American public seems to have a difficult time appreciating the long-term consequences of corporate wrongdoing. The economic loss from white-collar crime is staggering and tends to be distributed equally among all citizens, transforming the loss into a regressive tax, since those less able to pay the cost pay the same amount as those with greater financial resources. When the government bailed out all depositors in the savings and loan scandal, not just deposits up to $100,000, wealthy individuals were compensated by American taxpayers who had far less money. Orange County, one of the wealthiest areas in the United States, stunned the country when its dire financial condition was disclosed. Merrill Lynch sold risky investments to the County Investment Pool and settled criminal charges for $30 million. The ripple effect of Orange County includes governmental entities having to pay higher interest rates to borrow money.

Social costs include negative attitudes toward institutions and loss of faith in the rule of law. Organized crime has long taken advantage of corruption in the legitimate world to facilitate its illegal activities. The President’s Commission on Law Enforcement and Administration of Justice reached the same conclusion: “All available data indicate that organized crime flourishes only where it has corrupted local officials.” Drug cartels depend on corrupt banks to launder the huge amounts of unlawfully obtained cash they receive.

The 1994 Republican Contract with America was a blueprint for Adam Smith’s self-reliance and utilized free-market rhetoric to outline its terms. Government and its regulations would be removed as an impediment to business. Government would also not be able to protect citizens or 106

the environment. One objective of the Contract was deregulation of the securities industry and, in 1995, under the heading of tort reform, the government made it very difficult to sue to recover losses due to securities fraud. Product liability awards were also capped. Street criminals would draw harsher punishments, but the Contract said nothing about white-collar criminals.

Proposals to deter white-collar crime include harsher punishments, but some believe that financial transparency for corporate executives and a system of graduated sanctions focused on all levels of a corporation would be more effective. Greater focus on ethics and international standards are suggested by those who believe institutional change is the answer to preventing white-collar crime. Socialization of future businessmen should include training in ethical decision making and analysis of the financial advantages to operating an ethical company. Large retirement funds refusing to trade with sanctioned firms and taking a stand against exorbitant executive compensation are likewise effective agents of change.

Until there is collective American public attention to the problem of white-collar crime and its consequences, and a strong message that it will not be tolerated or condoned, the problem is likely to continue.

LECTURE OUTLINE I. CAUSES OF WHITE-COLLAR CRIME A. Societal Causes Explore the positive and negative aspects of values such as competition, innovation, material success, upward mobility, utility maximization, and making a profit, and the ways these values might influence white-collar crime.

Review the rationalizations that all criminals can use to justify their behavior.

Ironically, when individuals engage in white-collar crime, though they are breaking the law, they are often conforming to cultural values—such as the accumulation of wealth. Does Merton’s” Social Structure and Anomie” apply to white collar criminals? How does Coleman’s “culture of competition” pervade the business world? Ask students how these “reasons” for misbehavior apply to white-collar crime.

1. Psychopathic Wealth Compare the expectations of different generations of workers and executives. What is the difference between “patient wealth” and “psychopathic wealth”? How are 21st-century executives different from those in years past? Explore with students the topics of wealth and income in the United States. a. Case Study: America’s Most Ostentatious War Profiteer David H. Brooks is a manufacturer of bulletproof vests for the military who came under investigation when major flaws were found in the vests. It was his not his first run-in with a financial investigation.

B. Institutional Causes 107

Review characteristics of institutions—economic, legal, organizational and normative—that might be conducive to criminal activity. What industries are most vulnerable and why? Provide specific examples of criminogenic businesses.

C. Case Study: High-Stakes Cheating Discuss with students high stakes or exit testing with which they have personal experience. What are the elements of the testing environment that lend themselves to cheating? Does this type of testing in the public school system put pressure on administrators and teachers to succumb to criminal behavior?

D. Organizational Causes How is occupational crime different from organizational crime? Compare the motivations behind each kind of activity. What organizations are more active in promoting or facilitating deviance? Blocked opportunities and blocked aspirations are part of street-crime causation theories. How do they relate to white-collar crime?

Can the organization be both victim and weapon?

E. Case Study: The Mickey Monus Club Specify the tools that Monus used to cheat investors and creditors. Why was his sentence not the usual slap on the wrist? What elements of his business made his crime easier to commit?

F. Case Study: Olde Whine in New Bottles Enumerate the offenses that salesmen and management of Olde Discount Corp. committed. Evaluate the possible explanations for the behavior.

Why is the case an example of organization deviance?

II. RESPONSES TO WHITE-COLLAR CRIME One theory of punishment is deterrence. Discuss this concept with students and whether deterrence is effective in controlling white-collar crime. Why or why not? Economic theories of utilitarianism, cost/benefit analysis, and rational choice may or may not apply to white-collar crime activity.

Review the theories with students and explore their application to this kind of crime. The characteristics of perpetrators and those of victims can influence treatment in the criminal justice system. Is this true in white-collar crime scenarios? Review the study of Texas and California savings and loan failures. Do white-collar criminals suffer social punishment?

A. Case Study: Tough Math—From Zero to Life Federal sentencing guidelines have been amended recently to increase the penalties for white-collar crime. Explore with students the effect the changes will have. What do the critics of the guidelines say about them?

Should white-collar criminals be able to pay rather than sit in a cell?

III. EFFECTS OF WHITE-COLLAR CRIME Review the aspects of white-collar crime that are different from street crime.

A. Environmental and Human Costs 108

Assess public and media responses to white-collar crime. Compare them to the responses to street crime.

B. Economic Costs Demonstrate the financial cost of white-collar crime. Expose students to the more subtle economic costs. Why is the bail out of the savings and loan industry an example of a more subtle cost? Diffusion of accountability or buck passing is prevalent in white-collar crime. Does everyone share equally in the cost of this kind of crime?

C. Case Study: The Orange County Bankruptcy Explain why the bankruptcy of a wealthy California area had negative financial effects across the country. Examine the role Merrill Lynch played in these events. Describe the environment that enabled the perpetrators of this financial disaster to succeed.

D. Social Costs Review the collateral effects of white-collar crime on institutions and public trust. Relate the relationship between white-collar crime and street crime.

IV. CONTROLLING WHITE-COLLAR CRIME Analyze the politics that influence white-collar crime control. Identify the parts of a laissez-faire or free-market economy that may support white-collar deviance.

A. Legal Changes Consider the effectiveness of increased punishment. What are the alternatives to punitiveness? Identify other changes to the law that might work better.

B. Institutional Changes Examine the effect that codes and standards could have on institutions.

C. Social Changes Experiment with students using role-playing and ethical problems to demonstrate that ethical behavior can be taught. Demonstrate the beneficial financial effects of ethical leadership. Can large pension and financial institutions lead by example?

D. Occupy Wall Street In September of 2011 protesters moved into Zuccotti Park in downtown Manhattan to bring attention to the unfair distribution of wealth, claiming they were the 99 percent.

This then focused attention on the remaining one percent who owned and controlled much of the nation’s wealth. OWS wanted those responsible for corporate crimes to be held as responsible as street criminals. Many schools have started to introduce ethics courses into their fields of study, including MBA programs. However, a former chairman of IBM has declared that if an MBA candidate does know the difference

109

between honesty and crime, or lying and telling the truth, then it’s not likely a college course will convert them.

MEDIA RESOURCES No End in Sight (2007) Iraq For Sale: The War Profiteers (2006)

STUDENT ACTIVITIES AND DISCUSSION The following items are designed to be used by students for small-group or class discussion. Some are suitable for research-paper assignments or essay questions. Students may also use them for oral presentations to the class.

1. Review the text provisions relating to the causes of white-collar crime. Are there other explanations suggested by the crimes detailed in the text? List and discuss them.

2. Critique the causal explanations outlined in the text.

3. How are Warren Buffett and Bill Gates different from the “new” executives discussed in the text?

4. Do other countries or regions of the world have the same problems with white-collar crime as the United States? Research and explain your answer.

5. Are there other examples from newspapers and magazines of huge bonuses being paid to executives? Look into these bonuses and be prepared to discuss whether they were justified. Why or why not?

6. Does your state use high-stakes testing to determine whether students graduate? Have there been instances of test irregularities? What form did they take?

7. Can you provide other examples where businesses strenuously encourage employees to perform—encouragement that might be interpreted by the employee as a need to succeed at any cost, including crime?

8. Interview a salesperson. Inquire about the pressure put on him/her to make sales.

What cautionary advice was given about behavior that was unacceptable?

9. One social scientist argued that crime was normal—that there would always be some sort of criminal behavior. What percentage of people working in various industries actually commits white-collar crime? Do your findings support the “one bad apple” explanation for white-collar crime (i.e., that there are just a few greedy individuals)? What statistics refute this argument?

110

10. Is it appropriate to increase the penalties for financial crimes—fines that go to the government and prison time—and at the same time make it more difficult for victims harmed by the crime to sue for damages?

11. Does your state law protect significant amounts of property from creditors? One place to look is in your state’s property code or statutes under exemptions.

12. How did the less affluent get hurt by the savings and loan bailout?

111

Testbank

112

Profit Without Honor, 7e (Rosoff) Chapter 1 Introduction 1.1 Multiple Choice Questions 1) Who took advantage of a market that operated outside of formal rules and regulations by selling counterfeit bottles of wines alongside genuine bottles of rare and vintage wines?

A) Edwin Sutherland B) Charles Ponzi C) Rudy Kurniawan D) George Ryan Answer: C Page Ref: 2 Level: Basic 2) When was the term "white-collar crime" was first used?

A) 1909 B) 1939 C) 1959 D) 1989 Answer: B Page Ref: 3 Level: Basic 3) Who coined the term "white-collar crime," which is a social science construct that has transcended its academic roots and entered the public lexicon?

A) Upton Sinclair B) John D. Rockefeller C) Charles Ponzi D) Edwin Sutherland Answer: D Page Ref: 3 Level: Intermediate 4) The term "white-collar" is based on: A) the types of victims.

B) occupations of the perpetrator.

C) offenders' association with religion.

D) its association with factories and tradesmen.

Answer: B Page Ref: 3 Level: Intermediate

113

5) Which of the following describes a theory that forces social scientists to reconsider accepted theories?

A) Debunking B) Historical C) Revised D) Vacuum Answer: A Page Ref: 4 Level: Intermediate 6) Who wrote a book which expressed his dismay about corrupt business practices?

A) Upton Sinclair B) John D. Rockefeller C) Louis Brandeis D) E.A. Ross Answer: D Page Ref: 5 Level: Intermediate 7) Based on the 1907 book Sin and Society, which of the following refers to a pillar of society/paragon of virtue who in reality was interested only in personal gain using any means?

A) Atavist B) Robber baron C) Criminaloid D) Elite deviant Answer: C Page Ref: 5 Level: Intermediate 8) A Ponzi scheme attempts to cheat people by: A) selling stocks in nonexistent companies to investors.

B) selling worthless real estate to investors.

C) paying original investors with money from new investors.

D) creating an investment scheme that targets the elderly.

Answer: C Page Ref: 5 Level: Intermediate 9) Which is another term for a Ponzi scheme?

A) Reverse investment B) Pyramid C) Triangle D) Upside-down Answer: B Page Ref: 6 Level: Basic 114

10) According the U.S. Postal Service ________ of scams using spam mailings on the Internet are really Ponzi schemes.

A) 40% B) 50% C) 60% D) 80% Answer: D Page Ref: 8 Level: Basic 11) Which year brought the close of 500 different banks in the United States?

A) 1913 B) 1923 C) 1933 D) 1943 Answer: C Page Ref: 8 Level: Basic 12) In what decade did the Justice Department undertake some vigorous prosecutions of whitecollar offenders?

A) 1950s B) 1960s C) 1970s D) 1980s Answer: C Page Ref: 9 Level: Basic 13) The 1980s saw a dramatic increase in the incidence of white-collar crime. One of the reasons for the increase may have been: A) support for collective welfare ideals.

B) increase in the quality of public schools.

C) government deregulation.

D) focus on non-material goals.

Answer: C Page Ref: 10 Level: Intermediate 14) Barry Minkow regarded money generated from stock sales as: A) a source of working capital to be used to buy new equipment.

B) money he could use to invest in other companies.

C) money he could use to pay some creditors without other creditors finding out.

D) a great source of revenue that did not have to be paid back.

Answer: D 115

Page Ref: 12 Level: Intermediate 15) The 1990s could be dubbed as: A) the "betrayal decade."

B) the "greed decade."

C) the "scam decade."

D) the "great decade."

Answer: A Page Ref: 13 Level: Basic 16) White-collar crime of the 1990s included all of the following except: A) the killing of a champion stallion for insurance money.

B) a biologist faking research findings.

C) the U.S. President being found guilty of perjury.

D) the U.S. Treasurer being found guilty of tax evasion.

Answer: C Page Ref: 14 Level: Intermediate 17) The Keystone and Oakwood bank frauds are particularly appalling because of: A) the amount of money taken.

B) the ease with which outsiders were able to infiltrate the banks.

C) the effect on the national economy.

D) the identity of the victims.

Answer: D Page Ref: 15 Level: Intermediate 18) Who conspired to conceal $105 million in missing funds after September 11, 2001?

A) Tishman Construction Corporation B) Bank of America C) Keystone D) First Equity Answer: D Page Ref: 17 Level: Intermediate 19) What is the main reason that government agencies have a difficult time gathering data specific to white-collar crime?

A) The complex nature of crime B) Crime definition C) Not enough resources D) Identifying the criminals Answer: D 116

Page Ref: 17 Level: Intermediate 20) In his pioneering 1949 study, Sutherland used data relating to many industries from many different sources. This is referred to as ________ data.

A) longitudinal B) cross-sectional C) complex D) qualitative Answer: B Page Ref: 18 Level: Basic 21) Industry-specific studies showed that although white-collar crime can occur in a variety of settings, it is concentrated in certain specific industries, such as: A) securities, defense contractors, and savings and loans.

B) banking, the computer industry, and pharmaceuticals.

C) sports entertainment, the record industry, and gambling entertainment.

D) entertainment, banking, ranching, and farming.

Answer: A Page Ref: 19 Level: Intermediate 22) What two types of fraud did individuals identify as most prevalent in victimization surveys?

A) Overcharging for medical services and overcharging for drugs B) Government untruths about use of tax money and Medicaid C) False advertising and selling outdated foods D) Prize scams and auto repairs Answer: D Page Ref: 21 Level: Basic 23) The financial cost of street crime is what fraction of the cost of white-collar crime?

A) Less than 1/10 B) Over half C) 1/4 D) 1/3 Answer: A Page Ref: 23 Level: Intermediate

117

24) What message does it send to the public when influential business executives, powerful politicians, and respected members of the professions are seen flaunting the system with little or no punishment?

A) People are not treated equally.

B) White-collar criminals are usually always caught and prosecuted.

C) Crime pays.

D) There are few victims.

Answer: C Page Ref: 22 Level: Intermediate 25) The public does not regard white-collar crime as a severe problem. Reasons for this include all of the following except: A) consequences difficult to visualize.

B) the low cost of white-collar crime.

C) the complicated nature of the facts.

D) faceless victims and faceless villains.

Answer: B Page Ref: 22 Level: Intermediate 26) Which is an especially alarming characteristic of white-collar crime that, ironically, is also an explanation of low public interest in white-collar crime?

A) The small number of people actually victimized by white-collar crime B) Excessive government regulation C) Delay in harm D) Cover-up by media Answer: C Page Ref: 22 Level: Intermediate 27) Which major Wall Street investment firm "rigged" the U.S. Treasury bond market and received little backlash from the media and other outlets?

A) Salomon Brothers B) Enron C) Einstein Brothers D) Madoff and Associates Answer: A Page Ref: 22 Level: Intermediate

118

1.2 True/False Questions 1) The Rudy Kurniawan wine fraud case is one colorful example of the pervasiveness of whitecollar crime.

Answer: TRUE Page Ref: 2 Level: Basic 2) Edwin Sutherland coined the term "white-collar crime."

Answer: TRUE Page Ref: 3 Level: Basic 3) The term "white-collar crime" is not a social science construct that has transcended its academic roots and entered the public lexicon.

Answer: FALSE Page Ref: 3 Level: Basic 4) A theory that forces social scientists to reconsider accepted theories is a debunking theory.

Answer: TRUE Page Ref: 4 Level: Intermediate 5) Atavists enjoys a public image as pillars of the community and paragons of virtue.

Answer: FALSE Page Ref: 5 Level: Intermediate 6) Charles Ponzi was one of the most influential white-collar criminals in American history.

Answer: TRUE Page Ref: 5 Level: Basic 7) Ponzi schemes are occurring less now than they ever have before.

Answer: FALSE Page Ref: 6 Level: Basic 8) Many scams involving junk e-mail are for pyramid schemes.

Answer: TRUE Page Ref: 7 Level: Basic

119

9) Barry Minkow regarded money generated from stock sales as money he could use to invest in other companies.

Answer: FALSE Page Ref: 11 Level: Difficult 10) The notorious gangsters who captured the public's attention during the 1930s often became unlikely folk heroes.

Answer: TRUE Page Ref: 8 Level: Intermediate 11) The 1980s was dubbed the "betrayal decade."

Answer: FALSE Page Ref: 10 Level: Basic 12) In the 1990s, three separate trade groups were victimized by trusted insiders.

Answer: TRUE Page Ref: 13 Level: Basic 13) Traders at the First Equity were instrumental in helping people who needed support and aid after September 11, 2001.

Answer: FALSE Page Ref: 17 Level: Intermediate 14) Sutherland's cross-sectional studies indicate that white-collar crime is relatively common among large corporations.

Answer: TRUE Page Ref: 18 Level: Intermediate 15) Victimization surveys have been used to gain more information about the prevalence of street crime for many years.

Answer: TRUE Page Ref: 20 Level: Basic 16) According to victimization surveys, approximately half of all respondents reported that they had been targets of an attempted or successful fraud.

Answer: TRUE Page Ref: 21 Level: Basic

120

17) Personal frauds cost American tax payers an estimated $40 billion annually.

Answer: TRUE Page Ref: 21 Level: Basic 18) The consequences of corporate accounting fraud can be extremely expensive.

Answer: TRUE Page Ref: 20 Level: Basic 19) Loss of trust when the privileged wealthy few are punished less severely than others is referred to as the opportunity cost.

Answer: FALSE Page Ref: 22 Level: Intermediate 20) Americans tend to view white-collar crime as a problem, but not a particularly severe one.

Answer: TRUE Page Ref: 22 Level: Basic 1.3 Fill in the Blank Questions 1) The term "white-collar crime" was coined in ________.

Answer: 1939 Page Ref: 3 Level: Basic 2) Edwin ________ defined white-collar crime as crimes committed by a person of respectability and high social status in the course of his or her occupation.

Answer: Sutherland Page Ref: 3 Level: Basic 3) Between 1895 and 1908, thousands of ________ disappeared as larger firms gobbled them up.

Answer: companies Page Ref: 4 Level: Intermediate 4) A Ponzi scheme is also known as a(n) ________ scheme.

Answer: pyramid Page Ref: 7 Level: Intermediate

121

5) During the Great Depression, the nation was rocked by a monetary crisis that eventually led to the ________ of over 500 banks.

Answer: closure Page Ref: 8 Level: Basic 6) Another aspect of gangsters being unlikely folk heroes and being popular stemmed from the deep ________ that many victims of the Depression felt toward big business.

Answer: antipathy Page Ref: 8 Level: Difficult 7) White-collar crime appeared to be on the upswing in the ________.

Answer: 1990s Page Ref: 12 Level: Basic 8) ________ is another sign of the "betrayal decade."

Answer: Embezzlement Page Ref: 13 Level: Intermediate 9) ________ business had long centered on providing home equity loans for home improvement and debt consolidation.

Answer: Keystone's Page Ref: 15 Level: Intermediate 10) Cross-sectional studies indicate that white-collar crime is relatively ________ among large corporation.

Answer: commonplace Page Ref: 19 Level: Basic 11) Victimization ________ have recently started to collect data on white-collar crimes.

Answer: surveys Page Ref: 20 Level: Basic 12) Some costs of white-collar criminality ________ be measured in dollars and cents.

Answer: cannot Page Ref: 22 Level: Basic

122

13) The government pays so little attention to white-collar crime because members of the ________ do not express outrage over it as they do over street crime.

Answer: public Page Ref: 22 Level: Intermediate 1.4 Matching Questions Match the key terns listed in Column 1 to the description in Column 2. Use each description only once.

A) Coined the term "white-collar" crime B) A pillar of society/paragon of virtue who in reality was interested only in personal gain using any means C) Is based on the occupations of the perpetrator D) Loss of trust when the privileged wealthy few are punished less severely than others E) A theory that forces social scientists to reconsider accepted theories F) Former treasurer of the United States imprisoned for tax fraud G) Used by Edwin Sutherland to study data relating to many industries from different sources H) A scheme that attempts to cheat people by paying original investors with money from new investors 1) Edwin Sutherland Level: Basic 2) White-collar crime Level: Basic 3) Debunking theory Level: Basic 4) Criminaloid Level: Basic 5) Ponzi scheme Level: Basic 6) Cross-sectional data Level: Basic 7) Demoralization cost Level: Basic 8) Catalina Vasquez Villalpando Level: Basic

123

Answers: 1) A 2) C 3) E 4) B 5) H 6) G 7) D 8) F 1.5 Essay Questions 1) Why were the 1980s thought of as the "greed decade"?

Answer: • The unprecedented magnitude of white-collar crimes • The cultural shift in Americans need for material objects • The abuse of power among high-standing, trusted individuals Page Ref: 10 Level: Intermediate 2) Why is there is so much more public outcry over street crime compared to white-collar crime?

Answer: • The actual definition of white-collar crime • The government has failed to produce better data on white-collar crimes • White-collar crimes are less obvious Page Ref: 19 Level: Difficult 3) Which industries tend to have a higher level of criminality than others? Discuss the reasons for this phenomenon.

Answer: • Defense contractors sometimes overcharge, use defective products, and conflicts of interests • The securities industry includes excessive trading, unsuitable recommendations, and unauthorized trading Page Ref: 21 Level: Difficult 1.6 Critical Thinking Questions 1) Evaluate Ponzi schemes. What is a Ponzi scheme? Discuss examples from the text that resulted in substantial losses. How do people become victims of Ponzi schemes?

Answer: A Ponzi scheme attempts to cheat people by paying original investors with money from new investors. Answers may vary.

Page Ref: 6 Level: Difficult 2) Explore the reasons why the government has been slow in collecting data on white-collar crime.

Answer: The reason is that the public does not express outrage over white-collar crime compared to street crimes. The government has devoted very few resources to gathering data specific to white-collar crime, and has only recently begun collecting such data.

Page Ref: 23 Level: Difficult

124

Profit Without Honor, 7e (Rosoff) Chapter 2 Crimes Against Consumers 2.1 Multiple Choice Questions 1) In 1999, Susan Collins described the predatory practices of sweepstakes companies as "increasingly deceptive and increasingly aggressive." She made these remarks in what setting?

A) As chairman of a Senate committee B) During a television news magazine segment C) In testimony before a Congressional committee D) In a nationally syndicated newspaper column Answer: A Page Ref: 31 Level: Intermediate 2) Magazine sweepstakes typically rely on which two ploys to entice people to buy magazines and enter contests?

A) Gift certificates and free merchandise B) Personal guarantees and personalized letters C) Travel and restaurant guarantees D) Free magazines and coupons Answer: B Page Ref: 31 Level: Intermediate 3) American Family Publishers used which two individuals as front men for its sweepstakes and promotions in the 1990s?

A) Ed McMahon and Dick Clark B) Dan Rather and Peter Jennings C) Pat Robertson and Martin Sheen D) Johnny Carson and James Darren Answer: A Page Ref: 32 Level: Basic 4) American Family Publishers used all of the following techniques to trick entrants except: A) free merchandise.

B) small print.

C) YOU'RE OUR NEWEST $12 MILLION WINNER! D) backgrounds that made print difficult to read.

Answer: A Page Ref: 33 Level: Intermediate

125

5) American Family is half-owned by which media giant?

A) Disney Corporation B) Sony Pictures C) Turner Broadcasting D) Time Warner Answer: D Page Ref: 32 Level: Basic 6) Which telemarketing scam relies on use of a certain area code to make money just from phone calls?

A) 777 calls B) 900 calls C) 800 calls D) 888 calls Answer: B Page Ref: 34 Level: Basic 7) Five to 10 percent of all minutes logged on the telephone time scams are concentrated in what area?

A) Psychic hotlines B) Music sales C) Work at home offices D) Sex lines Answer: D Page Ref: 35 Level: Intermediate 8) The term "laissez-faire" refers to which of the following?

A) Governments should not interfere with free markets.

B) Consumers being protected from fraud artists C) Buyers should be aware of offers that sound too good to be true.

D) Fairness to consumers Answer: A Page Ref: 36 Level: Intermediate 9) The term "caveat emptor" refers to which of the following?

A) Buyers should be aware of offers that sound too good to be true.

B) Governments should not interfere with free markets.

C) Consumers being protected from fraud artists D) Fairness to consumers Answer: A Page Ref: 36 Level: Intermediate 126

10) A criticism of the caveat emptor doctrine is: A) too much government regulation.

B) reduced profit for businesses.

C) hurts consumers by raising prices.

D) latent defects.

Answer: D Page Ref: 36 Level: Intermediate 11) Some of the worst con artists practice their craft based on meteorological events. These are known as ________ con artists.

A) event B) disaster C) weather D) special occasion Answer: B Page Ref: 37 Level: Basic 12) The number one consumer complaint concerning fraud involves: A) refinance loans.

B) home improvement.

C) auto repair.

D) telemarketing.

Answer: C Page Ref: 38 Level: Basic 13) Which of these corporate giants were not involved in a research program involving perfectly functioning car batteries?

A) Ford B) Kmart C) Goodyear D) Firestone Answer: A Page Ref: 39 Level: Basic 14) What is one of the easiest ways that oil distributors can deliver less oil to customers by shorting and overcharging them?

A) Fix the balance on the receipt.

B) Pump air in the line while the meter still records as oil.

C) Use the same dipstick to check the oil.

D) Divert oil to another compartment of the truck.

Answer: B 127

Page Ref: 40 Level: Difficult 15) Telemarketers target all of the following groups except: A) family members of AIDS victims.

B) the bereaved.

C) those worried about dependence on foreign oil.

D) college students living away from home for the first time.

Answer: D Page Ref: 43 Level: Intermediate 16) A boiler room might be characterized by: A) telephones.

B) well-dressed salesmen.

C) support personnel.

D) fancy furniture.

Answer: A Page Ref: 43 Level: Basic 17) The front, the drive, and the close are all part of the telephone swindle. The drive includes: A) empty slogans and statistics.

B) sense of urgency.

C) assessment of assets.

D) information about competitors.

Answer: A Page Ref: 43 Level: Intermediate 18) A victim of a fraud is known as a mark because he/she: A) could fall for future scams.

B) has been identified as a victim.

C) was a more available victim.

D) is an easy target.

Answer: A Page Ref: 43 Level: Intermediate 19) The "toner-phoner" salesman coerced the school district office manager to pay fraudulent invoices by: A) threatening to accuse her of accepting gifts and then paying for goods not received.

B) threatening her children.

C) threatening to disclose an affair to her husband.

D) refusing to send supplies for students.

Answer: A 128

Page Ref: 44 Level: Intermediate 20) Schemes that offer fee-based credit cards, loan applications saying "guaranteed approval," home equity loans, and trade schools for low-paying jobs target what group of people?

A) The elderly B) The unemployed C) The middle class D) The poor Answer: D Page Ref: 45 Level: Basic 21) Transamerica Financial Services and Mellon Bank and also Resources Financial and Fleet Financial bank worked together to offer home loans to low-income people because: A) there were not enough lenders in predominantly minority areas.

B) the finance companies wanted to assist first-time home buyers.

C) it enabled both to offer lower interest rates.

D) the banks wanted to conceal involvement in this lending practice.

Answer: D Page Ref: 46 Level: Intermediate 22) Regarding education, what was one of the most significant "hidden" factors between 1995 and 2010?

A) University of Phoenix on-line program B) Rise in student enrollment C) Involvement of Wall Street in the for-profit education industry D) Loans being dismissed for many students Answer: C Page Ref: 49 Level: Intermediate 23) The three major categories of advertisements include all of the following except: A) celebrity.

B) informative.

C) puffing.

D) deceptive.

Answer: A Page Ref: 54 Level: Basic 24) Which federal agency regulates advertising?

A) FTC B) SEC C) FDIC 129

D) FCC Answer: A Page Ref: 54 Level: Basic 25) What is one of the fastest growing market segments involving fraud in the United States?

A) exercise B) nutrition C) video games D) car sales Answer: B Page Ref: 57 Level: Basic 26) The United States is one of the few countries that permit television advertising for products that target children. Most countries consider this to be: A) illegal.

B) immoral.

C) dishonest.

D) disrespectful.

Answer: B Page Ref: 59 Level: Intermediate 27) Which of the following activities could be described as "bait and switch"?

A) Substituting a more expensive item with a product of lesser quality B) Substituting a generic product for a brand name product C) Substituting a product of lesser quality with a more expensive item D) Using misleading ads to get consumers to buy substandard products Answer: A Page Ref: 60 Level: Intermediate 28) Monopolistic activities were criminalized in the Sherman Antitrust Act of 1890. Reasons for penalizing monopolistic behavior include all of the following except: A) benefits to big business.

B) reduced competition.

C) poorer-quality products.

D) higher prices.

Answer: A Page Ref: 61 Level: Intermediate

130

29) Microsoft was prosecuted for engaging in monopolistic practices for providing a free internet browser with its operating system. This practice is known as bundling. Why was free bad?

A) Consumers were forced into buying a low-quality browser.

B) Microsoft had a secret agreement with other browser manufacturers.

C) Consumers got no choice of browser.

D) After competition was eliminated, there was no restraint on pricing.

Answer: D Page Ref: 64 Level: Intermediate 30) Which company holds the all-time record for the most suits filed against an employer by the Equal Employment Opportunity Commission?

A) Sears B) Target C) Walmart D) Toyota Answer: C Page Ref: 70 Level: Basic 31) What two industries are frequent targets of antitrust litigation?

A) Oil and airlines B) Car repair and steel C) Utility and drug companies D) Grocery and department stores Answer: A Page Ref: 73 Level: Basic 32) When governments are the target of price-fixing by vendors providing goods and services, it is called: A) bid-rigging.

B) government fraud.

C) illegal rigging.

D) contract manipulation.

Answer: A Page Ref: 74 Level: Basic

131

33) Pharmaceutical companies have been criticized by Congress for excessive and unreasonable profits. Drug company profits are more than ________ times the average profit of Fortune 500 companies.

A) three B) two C) five D) four Answer: A Page Ref: 77 Level: Intermediate 34) Items that look like brand name merchandise but in fact are counterfeit are: A) markoffs.

B) ripoffs.

C) liftoffs.

D) knockoffs.

Answer: D Page Ref: 79 Level: Basic 2.2 True/False Questions 1) Computer-generated personalized letters are a standard marketing ploy in the sweepstakes industry.

Answer: TRUE Page Ref: 31 Level: Intermediate 2) American Family employed Ed McMahon and Johnny Carson as sweepstake representatives.

Answer: FALSE Page Ref: 32 Level: Basic 3) Many legitimate companies use 900 numbers to serve customers.

Answer: TRUE Page Ref: 34 Level: Intermediate 4) Live "sex lines" account for 5 to 10% of all "900" minutes logged.

Answer: TRUE Page Ref: 35 Level: Basic

132

5) The myth of the free market and caveat emptor work in tandem to make consumers vulnerable to unscrupulous vendors.

Answer: TRUE Page Ref: 35, 36 Level: Intermediate 6) Crimes against consumers do not carry a heavy social cost.

Answer: FALSE Page Ref: 36 Level: Basic 7) Consumer fraud entails the use of deceit, lies, or misrepresentations to entice customers to buy goods or services.

Answer: FALSE Page Ref: 36 Level: Basic 8) The collapse of the home mortgage market has led to very few scams.

Answer: FALSE Page Ref: 37 Level: Basic 9) One of the best ways to understand the extent of consumer fraud is through surveys of victims.

Answer: TRUE Page Ref: 38, 39 Level: Basic 10) Auto repairs make up the largest category of complaints received by Congressional panels.

Answer: TRUE Page Ref: 38, 39 Level: Basic 11) In New York City, taxi drivers were allowed to charge a higher rate per mile for trips that leave the city's five boroughs without informing the customers.

Answer: FALSE Page Ref: 40 Level: Basic 12) Telemarketing fraud is characterized by use of the Internet to get consumers to send money to the promoter for worthless or overvalued products or services.

Answer: FALSE Page Ref: 41 Level: Basic

133

13) The classic telephone swindle consists of the front, the drive, and the walk.

Answer: FALSE Page Ref: 44 Level: Basic 14) Regarding education, one of the most signification "hidden" factors between 1995 and 2010 was the notable increased involvement of Wall Street in the for-profit educational industry.

Answer: TRUE Page Ref: 49 Level: Intermediate 15) In January 2017, the new secretary for education hired a special assistant, Robert S. Eitel, a lawyer for Bridgepoint Education Service, who was not affiliated with any for-profit colleges.

Answer: FALSE Page Ref: 51 Level: Intermediate 16) One of the fastest growing market segments in the United States is in the area of video games.

Answer: FALSE Page Ref: 57 Level: Basic 17) The United States is one of the few countries in the world that does not permit advertisers to sell products to children via television.

Answer: FALSE Page Ref: 59 Level: Basic 18) Bait and switch is the mainstay of some sleazy retail stores.

Answer: TRUE Page Ref: 60 Level: Basic 19) Wal-Mart is well known for squeezing price concessions from its vendors.

Answer: TRUE Page Ref: 67 Level: Basic 20) Two frequent targets of major antitrust litigation are the oil industry and the transportation industry.

Answer: FALSE Page Ref: 73 Level: Intermediate

134

21) Price-gouging occurs when entities take advantage of laws, monopolies, and real or contrived shortages to demand excessive payments.

Answer: TRUE Page Ref: 76 Level: Intermediate 22) The pricing practices of the American pharmaceutical industry do not come under particular scrutiny.

Answer: FALSE Page Ref: 77 Level: Basic 23) "Economic adulteration," involves the use of cheaper, inferior ingredients to cheat customers and undercut competition.

Answer: TRUE Page Ref: 78 Level: Basic 24) Consumers have not been victimized by bogus labels misrepresenting Levi, Jordache, and Guess jeans and couturiers, Gucci, Cartier, and Ralph Lauren.

Answer: FALSE Page Ref: 79 Level: Intermediate 2.3 Fill in the Blank Questions 1) Computer-generated personalized letters are a standard marketing ploy of the ________ industry.

Answer: sweepstakes Page Ref: 31 Level: Basic 2) In 1995, the state of ________ filed suit against American Family, Ed McMahon, and Dick Clark.

Answer: Florida Page Ref: 33 Level: Intermediate 3) About ________% of American households make at least one 900 call each year.

Answer: 17 Page Ref: 34 Level: Intermediate 4) Consumer ________ is a category of crimes against consumers.

Answer: fraud Page Ref: 36 135

Level: Basic 5) One of the best ways to understand the extent of consumer fraud is through ________ of victims.

Answer: surveys Page Ref: 38 Level: Basic 6) Much of the auto repair fraud that has been uncovered implicates major ________ chains.

Answer: corporate Page Ref: 39 Level: Intermediate 7) Oil-shorting schemes have been going on for more than ________ years.

Answer: 50 Page Ref: 41 Level: Basic 8) ________% of Americans have been targeted at least once by telemarketers.

Answer: 90 Page Ref: 41 Level: Basic 9) The classic telephone swindle consists of three calls known as the front, the drive, and the ________.

Answer: close Page Ref: 43 Level: Basic 10) Telemarketing fraudsters tend to view their victims as ________ in their plight.

Answer: deserving Page Ref: 45 Level: Difficult 11) Regarding education, one of the most significant "hidden" factors was the notable increased involvement of ________ in the for-profit education industry.

Answer: Wall Street Page Ref: 49 Level: Intermediate 12) The Federal Trade Commission has classified ads as informative, puffing, and ________.

Answer: deceptive Page Ref: 54 Level: Basic

136

13) One of the fastest growing market segments in the United States is in the area of ________.

Answer: nutrition Page Ref: 57 Level: Intermediate 14) No type of deceptive advertising has generated more public outrage than that aimed at ________.

Answer: children Page Ref: 59 Level: Basic 15) The United States is one of the few countries in the world that ________ advertisers to sell products to children via television.

Answer: permits Page Ref: 59 Level: Intermediate 16) Price-fixing is criminalized under the ________ Antitrust Act of 1890.

Answer: Sherman Page Ref: 61 Level: Basic

137

2.4 Matching Questions Match the key terns listed in Column 1 to the description in Column 2. Use each description only once.

A) Bid-rigging where consumers lose the benefits of competition B) The practice of taking extraordinary advantages of consumers because of the bias of the law, monopoly of the market, or because of contrived or real shortages C) Consists of three calls beginning with the front D) Defined by the FTC as an alluring but insincere offer to sell a product or service which the advertiser does not intend or want to sell E) Used a telemarketing scheme to convince a public-school office manager to send him checks totaling $2 million for nothing F) Characterized by the use of the telephone to get consumers to send money to the promoter for worthless or overvalued products or services G) Deceptive advertisements that make false or misleading claims H) The covert substitution of low-quality counterfeit versions of brand-name consumer products.

1) Telemarketing fraud Level: Intermediate 2) Mark Suckman Level: Intermediate 3) Telephone swindle Level: Intermediate 4) False advertising Level: Intermediate 5) Bait and switch Level: Intermediate 6) Price-fixing Level: Intermediate 7) Price-gouging Level: Intermediate 8) Knockoffs Level: Intermediate Answers: 1) F 2) E 3) C 4) G 5) D 6) A 7) B 8) H

138

2.5 Essay Questions 1) What are some of the tactics that are used to entice people into believing that they are actual winners in sweepstakes?

Answer: Answers may include personal guarantees and personalized letters stating they have been selected as winners.

Page Ref: 31-33 Level: Intermediate 2) Evaluate consumer fraud. What does consumer fraud entail? Give an example of consumer fraud discussed in the text.

Answer: Consumer fraud entails the use of deceit, lies, or misrepresentations to entice customers to buy goods or services. Examples include a furniture store holding a "Going Out of Business" sale every week, numerous illegitimate mail-order companies, and sending a woman a mink coat made from the fur around the animal's genital area.

Page Ref: 36, 37 Level: Intermediate 3) Discuss and give examples of the "Wal-Mart Way." Answer: • The Hurricane Katrina disaster, when Wal-Mart told employees that they would only receive three days of pay, compared to other companies that offered their employees 90 days of pay to recover.

• The Colorado Wal-Mart store toy drive, in which the manager ordered all of the toys in the bin to be placed back on the shelf unless the toy drive organizer could produce receipts for the items purchased.

Page Ref: 67-73 Level: Difficult 2.6 Critical Thinking Questions 1) Do you think the United States is losing manufacturing jobs? Examine historical data, taking into account inflation, population growth, and employment in other sectors. Explain how data can be compared over time.

Answer: The United States is losing manufacturing jobs for many reasons. For example, knockoff rip-offs cost American manufacturers billions of dollars. Trademark infringements are also reasons for the loss of manufacturing jobs. American manufacturers can get more cost-efficient labor in other countries (such as China), compared with American workers.

Page Ref: 31-79 Level: Difficult

139

2) Evaluate knockoff rip-offs. What are they? Which industries are most prone to knockoffs? Why do you think the knockoff business is booming?

Answer: Knockoffs are the covert substitutions of low-quality counterfeit versions of brand-name consumer products. Knockoffs are most often found in the bootlegging of videotapes, video games, computer software, furniture, and the garment industry.

Page Ref: 78-79 Level: Difficult

140

Profit Without Honor, 7e (Rosoff) Chapter 3 Unsafe Products 3.1 Multiple Choice Questions 1) The Food and Drug Administration has cited evidence that nicotine is an addictive drug, 5 to 10 times more potent than: A) cocaine.

B) crack.

C) heroin.

D) marijuana.

Answer: A Page Ref: 91 Level: Basic 2) Tobacco companies have engaged in all of the following activities except: A) spraying tobacco plants with additional nicotine.

B) hiding negative research on tobacco's harmful properties.

C) failing to investigate whether smoking cause heart disease and lung cancer.

D) denying that cigarettes were addictive.

Answer: C Page Ref: 91-92 Level: Intermediate 3) Tobacco companies have used specific marketing campaigns with flavored cigarettes, new packages, and posters at fast food restaurants to target which of the following groups?

A) Hispanics B) African Americans C) Women D) Teenagers Answer: D Page Ref: 93 Level: Basic 4) Tobacco companies avoided paying damages for the negative health effects of tobacco for decades; eventually they agreed to pay billions to: A) foreign governments.

B) state governments.

C) individuals in a class-action lawsuit.

D) the United States government.

Answer: B Page Ref: 94 Level: Intermediate

141

5) Tobacco industry damage is a clear example of the ________ of white-collar crime.

A) postponed violence B) obvious danger C) hidden cost D) public ignorance Answer: A Page Ref: 96 Level: Basic 6) Corporate disregard for consumer safety has two elements: A) profit motive and concern for overhead costs.

B) corporate officer salaries and cost of repairs.

C) resistance to safety devices and disregard for design defects.

D) consumer complaints and avoidance of lawsuits.

Answer: C Page Ref: 96 Level: Intermediate 7) Ford decided that repairs would not be cost effective, based on a comparison of total repair costs for all Pintos and: A) statistical likelihood of plaintiffs winning lawsuits.

B) profit margin for the Pinto automobile.

C) total of Pinto projected sales.

D) total of average lawsuit settlements for serious burn injuries and burn deaths.

Answer: D Page Ref: 96-97 Level: Intermediate 8) What percentage of the most dangerous problems that led to recalls of children's products were never voluntarily reported to the government?

A) 75 B) 25 C) 60 D) 50 Answer: A Page Ref: 98 Level: Basic 9) After reports became public, airports were advised not to allow passengers to carry the Galaxy Note 7 onboard because: A) the cell phone interfered with the computer guidance systems.

B) devices had exploded due to faulty lithium batteries.

C) devices were faulty and could not be switched to "airplane mode."

D) the cell phone could not be completely turned off during flight.

Answer: B Page Ref: 99 142

Level: Basic 10) There are over 7,000 full-time federal meat inspectors; nonmeat food processing plants are inspected an average of once every ________ years.

A) 2 B) 10 C) 5 D) 7 Answer: B Page Ref: 101 Level: Basic 11) In 2016, which restaurant chain had issues with contaminated food as patrons were becoming seriously ill?

A) Outback B) Chipotle C) Olive Garden D) Longhorn Steakhouse Answer: B Page Ref: 103 Level: Basic 12) Fen-phen, Bendectin, and thalidomide were all approved by the FDA and prescribed to patients. Which one of these drugs is alleged to cause valvular heart disease?

A) Thalidomide B) Bendectin and thalidomide C) Bendectin D) Fen-phen Answer: D Page Ref: 103 Level: Basic 13) The Merrell drug company that tried to bring thalidomide to the United States also marketed a cholesterol inhibitor with serious side effects for 5,000 people. Two Merrell employees were fined $80,000 and the company made an $18 million profit. What had the company done wrong?

A) Substituted the results for a tested drug for an untested drug B) Forged signatures on test reports C) Failed to disclose that the drug caused blindness in lab animals D) Testified that testing had been done when it had not Answer: C Page Ref: 104 Level: Intermediate

143

14) What drug with a history of psychotic effects was President George Bush taking when he vomited and fainted at a state dinner in Japan?

A) Librium B) Nordal C) Xanex D) Halcion Answer: D Page Ref: 106 Level: Basic 15) Michael M. Walton was given a six-year sentence for selling ________ when they were, in fact, used and in some cases damaged.

A) catheters B) oxygen tanks C) diabetic testing devices D) pacemakers Answer: D Page Ref: 109 Level: Basic 16) Despite inadequate testing, H.R. Robins marketed a product that caused death, birth defects, miscarriages, and blindness in infants. The product was: A) intrauterine birth control device.

B) diaphragm.

C) birth control pills.

D) birth control patch.

Answer: A Page Ref: 109 Level: Intermediate 17) In 1992, the FDA called a halt to a silicone breast enlargement. Scientists working for Dow Corning, the largest manufacturer of the implants, had concerns about leaks and ruptures for how long before silicone breast enlargement was stopped?

A) Since the 1970s B) Since the 1960s C) For five years D) Since the 1980s Answer: A Page Ref: 110 Level: Basic

144

18) Plaintiffs have charged that silicone implants caused serious illness, autoimmune disorders, arthritis, and lupus. Dow Corning disclosed that it had faked quality control records for implants.

The individuals responsible received the following criminal punishment: A) 5 years in prison B) 5 years' probation C) 6 months in prison D) None Answer: D Page Ref: 110-111 Level: Intermediate 19) Which of the following statements is false regarding saline implants?

A) There are risks, but not serious ones.

B) They have not received FDA safety approval.

C) They break open and cause repeated surgeries.

D) They are often removed after a few years.

Answer: A Page Ref: 110-111 Level: Intermediate 20) One of the best-known companies in America marketed the Rely tampon, which ultimately killed 38 women and injured thousands of others. The name of the company was: A) Johnson & Johnson.

B) Bayer.

C) Procter & Gamble.

D) Dow Corning.

Answer: C Page Ref: 111 Level: Basic 21) The company responsible for the Rely tampon used all of the tactics in marketing its product and in defending itself, except: A) giving research grants to doctors to prevent them from testifying against the company.

B) acknowledging the connection between tampons and toxic shock but denying that Rely had that effect.

C) opposing the FDA on recall.

D) cross-examining the plaintiff about the deceased wife's sexual practices.

Answer: B Page Ref: 111-112 Level: Intermediate

145

22) Quackery involves products that are: A) dangerous.

B) worthless.

C) mislabeled.

D) misunderstood.

Answer: B Page Ref: 112 Level: Basic 23) Quackery not only refers to products but also to persons who: A) promise nonexistent cures.

B) sell defective products.

C) lie about their qualifications.

D) are not trained to perform the medical services that they are hired to perform.

Answer: A Page Ref: 112 Level: Intermediate 24) Quackery robs consumers of ________ per year.

A) $10 million B) $25 billion C) $10 billion D) $2 billion Answer: B Page Ref: 113 Level: Basic 25) The population that is the primary target of quackery is: A) teenagers.

B) the elderly.

C) the overweight.

D) minorities.

Answer: B Page Ref: 113 Level: Basic 26) Quackery is most evil when it: A) sells devices that are dangerous.

B) cheats people of their life savings.

C) permits unsafe doctors to practice medicine.

D) promises cures for incurable illness.

Answer: D Page Ref: 113 Level: Intermediate

146

27) Quackery takes all of the following forms except: A) drugs.

B) nutrition.

C) cosmetics.

D) devices.

Answer: C Page Ref: 113-114 Level: Basic 28) According to Dudley LeBlanc, his product Hadacol, though not much good for others, was grossing how much annually by 1950?

A) $5.5 million B) $15 million C) $20 million D) $1 million Answer: C Page Ref: 117 Level: Basic 29) According to the World Health Organization, approximately what percent of all medications globally are counterfeit?

A) 5% B) 10% C) 15% D) 20% Answer: B Page Ref: 117 Level: Basic 30) Approximately what percent of medications are counterfeit in the United States?

A) 1% B) 5% C) 10% D) 15% Answer: A Page Ref: 117 Level: Basic 31) Counterfeit medications in Africa can be found in: A) district hospitals.

B) local vendors.

C) households.

D) all of the above Answer: D Page Ref: 117 Level: Basic 147

32) What country sold a syrup which traveled through a "toxic pipeline" that circled the globe to the country of Panama in 2006?

A) Japan B) China C) Russia D) United States Answer: B Page Ref: 118 Level: Basic 3.2 True/False Questions 1) According to the FDA, nicotine is not an addictive drug.

Answer: FALSE Page Ref: 91 Level: Basic 2) Tobacco companies have used specific marketing campaigns with flavored cigarettes to target women.

Answer: FALSE Page Ref: 93 Level: Intermediate 3) The tobacco companies ended up paying billions of dollars to individuals in a class-action lawsuit.

Answer: FALSE Page Ref: 94 Level: Intermediate 4) The tobacco industry symbolizes the "postponed violence" of white-collar crime.

Answer: TRUE Page Ref: 96 Level: Basic 5) Ford did not recall the Pinto because they decided that the average lawsuit settlements for serious burn injury and burn deaths would be cheaper.

Answer: TRUE Page Ref: 97 Level: Intermediate 6) Sport utility vehicles are most like to roll in an accident.

Answer: TRUE Page Ref: 97 Level: Basic

148

7) Children are not a concern for those who work in the area of consumer safety.

Answer: FALSE Page Ref: 98 Level: Basic 8) Food has been regulated in the United States since the 19th century.

Answer: TRUE Page Ref: 100-101 Level: Basic 9) In response to disgusting conditions, the Wholesome Meat Act was passed in 1967, requiring that states must at least match federal inspection standards.

Answer: TRUE Page Ref: 101 Level: Intermediate 10) In 2006, a crucial first step was taken when the USDA drafted new meat inspection rules calling for increased microbial testing for salmonella in place of the traditional "sniff and poke" method.

Answer: FALSE Page Ref: 101 Level: Basic 11) The baby food industry has failed to measure up to the public's trust.

Answer: TRUE Page Ref: 101 Level: Basic 12) Manufacturers withdrew the drug Bendectin because it caused birth defects in children of some mothers who took the drug.

Answer: TRUE Page Ref: 104 Level: Intermediate 13) The FDA is requiring doctors who prescribe thalidomide and pharmacies that sell it to register with the agency and undergo specific training on how to warn patients about the drug's dangers.

Answer: TRUE Page Ref: 106 Level: Intermediate 14) The Dalkon Shield was an intrauterine birth control device (IUD) which was found not to be very effective and some of the women suffered miscarriages.

Answer: TRUE Page Ref: 109 Level: Intermediate

149

15) Saline-filled implants have replaced silicone implants; however, they are not without serious risks.

Answer: TRUE Page Ref: 110-111 Level: Intermediate 16) Rely tampons were introduced to the general public in early 1980, and when women started getting ill, a consumer advocate asked Procter & Gamble for a copy of its safety records but was refused.

Answer: TRUE Page Ref: 111 Level: Intermediate 17) Quackery refers both to medical products that are worthless and to persons who cannot deliver miraculous cures they promise.

Answer: TRUE Page Ref: 112 Level: Intermediate 18) Magnetic therapy became a trend in the early 19th century.

Answer: FALSE Page Ref: 114 Level: Basic 19) The World Health Organization estimates that 10 percent of the global medicine supply is counterfeit.

Answer: TRUE Page Ref: 117 Level: Basic 20) In Africa, counterfeit medications cannot be found in hospitals.

Answer: FALSE Page Ref: 120 Level: Basic 3.3 Fill in the Blank Questions 1) For decades, ________ has been recognized as the primary preventable cause of death in the United States.

Answer: smoking Page Ref: 91 Level: Intermediate

150

2) The most serious charge raised against the tobacco industry involves its covert campaigns to addict ________ to nicotine in order to create lifetime smokers.

Answer: teenagers Page Ref: 93 Level: Intermediate 3) There are ________ of other tobacco suits, both individual and class action, which remain pending in a state of limbo.

Answer: thousands Page Ref: 96 Level: Basic 4) Placement of the gas tank in the rear of Ford ________ resulted in fiery crashes and deaths.

Answer: Pintos Page Ref: 97 Level: Basic 5) ________ were found to have a product defect in many other countries, 19 months before the American recall.

Answer: Tires Page Ref: 98 Level: Basic 6) Sport utility vehicles need different equipment because they are more likely to ________ in an accident.

Answer: roll Page Ref: 98 Level: Basic 7) ________ Galaxy Notes containing defective batteries purchased before September 15, 2016, were recalled.

Answer: Exploding Page Ref: 99 Level: Basic 8) Chicken is considered especially ________ because of its susceptibility to salmonella bacteria.

Answer: pathogenic Page Ref: 100 Level: Difficult 9) In January 2016, customers who ate at the restaurant chain ________ became seriously ill due to food being contaminated with the dangerous Escherichia coli bacteria.

Answer: Chipotle Page Ref: 103 Level: Basic

151

10) One grocery product for which consumers expect the utmost purity is ________ food.

Answer: baby Page Ref: 103 Level: Basic 11) President George Bush vomited and fainted at a state dinner in Japan due to taking the drug ________.

Answer: Halcion Page Ref: 106 Level: Intermediate 12) The first class-action suit regarding silicone implants was filed against Dow in ________ on behalf of 1,800 women.

Answer: Louisiana Page Ref: 111 Level: Basic 13) ________ tampons were introduced to the general public in the early 1980s after five years of test marketing.

Answer: Rely Page Ref: 111 Level: Basic 14) ________ refers to products that are worthless.

Answer: Quackery Page Ref: 112 Level: Basic 15) Three forms of quackery are drugs, nutrition, and ________.

Answer: devices Page Ref: 115 Level: Basic

152

3.4 Matching Questions Match the key terns listed in Column 1 to the description in Column 2. Use each description only once.

A) A highly addictive drug additive B) Term that refers to products that are worthless C) The company that marketed the Rely tampon which killed 38 women D) FDA-approved drug that is alleged to cause valvular heart disease E) Fake drugs that are sold under the pretense of being legitimate F) A drug alleged to cause birth defects in children of mothers who took the drug G) The company that faked quality control records for silicone breast implants H) Author of The Jungle, which depicted practices in the meat packing industry 1) Nicotine Level: Intermediate 2) Bendectin Level: Intermediate 3) Upton Sinclair Level: Intermediate 4) Fen-phen Level: Intermediate 5) Dow Corning Level: Intermediate 6) Procter & Gamble Level: Intermediate 7) Quackery Level: Intermediate 8) Counterfeit medicine Level: Intermediate Answers: 1) A 2) F 3) H 4) D 5) G 6) C 7) B 8) E

153

3.5 Essay Questions 1) Evaluate Big Tobacco. Where is it today? Look at advertising and the rise or decline in tobacco use. Is there still litigation or legislation attempting to control tobacco use? Should consumers be able to sue for voluntary use of a substance?

Answer: Big Tobacco is involved and will continue to be involved in litigation for many years to come. Litigation in the tobacco industry is ongoing. Marketing has been scaled back for tobacco; however, tobacco use is continually increasing amongst teens. Answers may vary based on opinion.

Page Ref: 91-96 Level: Difficult 2) Discuss the apparent reluctance of auto manufacturers to put consumer safety issues ahead of profits. Discuss some of the automobile or automobile-related defect cases.

Answer: The automakers' resistance to safety devices and defects in designs stems from the relative expense of safety testing and producing safer devices. Many times, automobile manufacturers dismiss safety devices because they are too costly. Examples include General Motors' refusal to install safety glass windshields and Ford's awareness that the Pinto's fuel system ruptured easily in rear-end collisions.

Page Ref: 97-98 Level: Difficult 3) Discuss the dangers of the drug Halcion and why it was approved under questionable circumstances. Provide specific examples.

Answer: Halcion reportedly led to people suffering from amnesia, anxiety, bizarre delusions, hostile paranoia, and delirious behavior. Company failed to address some of the issues with Halcion so it could be placed on the market. In 1992, President George Bush vomited and fainted at a state dinner in Japan after taking Halcion.

Page Ref: 106-107 Level: Difficult 4) Discuss the human and social costs of quackery. Why are people vulnerable to quackery? What groups of people are more susceptible to this type of fraud? What are the three types of quackery?

Answer: Quackery can delay timely and appropriate treatment of medical conditions and cause severe illness or death. Some products or services are not only useless, but lethal. People are more vulnerable to quackery because it appeals to emotion rather than reason. Older adults are the most susceptible to quackery. Three basic types of quackery are Nutrition, Drugs, and Devices.

Page Ref: 112-116 Level: Difficult

154

3.6 Critical Thinking Questions 1) Evaluate the marketing strategies of the tobacco industry. How do these strategies serve to attract and retain customers? What did the tobacco companies do that was so bad? How did the tobacco companies attempt to deal with the accusations of wrongdoing?

Answer: The tobacco companies stated that nicotine was merely a flavor additive and not addicting, hiding negative research on tobacco's harmful properties, and using money to distort the truth about smoking. The tobacco companies deferred wrongdoing, but ended up settling in some cases.

Page Ref: 91-96 Level: Difficult 2) Provide examples of products that are currently being marketed that you believe are examples of quackery. Why do you believe these products fit the definition? Could some stores or restaurants be accused of quackery tactics or selling quack products?

Answer: Answers may include diet aids, energy drinks, cellulite reduction creams, and anti-aging agents that are insignificant and promise nonexistent cures to consumers looking for miracle cures.

Answers may vary.

Page Ref: 112-116 Level: Difficult

155

Profit Without Honor, 7e (Rosoff) Chapter 4 Environmental Crime 4.1 Multiple Choice Questions 1) Ralph Nader has commented that the following distinguishing characteristic of white-collar crime has been dispelled: A) That it is less costly B) That it affects few people C) That it lacks physical threat D) That its effects are not as long-lasting Answer: C Page Ref: 127 Level: Intermediate 2) The Hooker Chemical Corporation dumped 20 million pounds of chemical waste that contaminated the Love Canal area. The chemical waste contained very dangerous levels of what substance?

A) Benzene and dioxin B) Strychnine and chromium C) E. coli and salmonella D) Arsenic and belladonna Answer: A Page Ref: 128 Level: Basic 3) Studies conducted in several decades noted the presence of dangerous substances in the Love Canal area. Hooker Chemical had known of the danger since: A) 1958.

B) 1965.

C) 1975.

D) 1962.

Answer: A Page Ref: 128 Level: Basic 4) According to the World Health Organization, approximately what percentage of human disease is waterborne?

A) 25% B) 50% C) 65% D) 75% Answer: D Page Ref: 129 Level: Basic

156

5) Three major kinds of contamination and predictable effects have been recognized. They include all of the following except: A) radioactivity and prenatal damage.

B) chemical contamination and birth defects.

C) inorganic metals and developmental problems.

D) organic contamination and cancer.

Answer: B Page Ref: 130 Level: Intermediate 6) Rockwell International, the company responsible for the problem at Rocky Flats, was able to make a $4.1 million profit because: A) of the government's failure to assess a fine.

B) the bonus paid by the government exceeded the fine.

C) of kickbacks from vendors.

D) of additional government contracts for the company.

Answer: B Page Ref: 130-131 Level: Intermediate 7) W.R Grace and its Cryovac Division that produced the Woburn Leukemia Cluster was guilty of performing all of the following activities except: A) providing false information to the federal government about toxic disposal practices.

B) dumping toxic waste.

C) admitting to the dumping but denying the carcinogenic nature of the substances.

D) inadequate workplace safeguards.

Answer: D Page Ref: 132-133 Level: Intermediate 8) Approximately 10,000 deaths each year are attributed to: A) asbestos.

B) alcohol.

C) textured paint.

D) drugs.

Answer: A Page Ref: 135 Level: Intermediate

157

9) Which well-known automaker was involved in one of the most recent scandals which involved releasing thousands of tons of excess toxic pollutants into the atmosphere?

A) Ford B) Toyota C) Volkswagen D) Hyundai Answer: C Page Ref: 136 Level: Intermediate 10) A recent decade was known as the golden age of environmental crime. Which President's administration is associated with an anti-regulation mindset during the same decade?

A) Bush I B) Clinton C) Bush II D) Reagan Answer: D Page Ref: 143 Level: Basic 11) Which of the following continents has become a toxic waste safe haven?

A) North America B) Africa C) Europe D) Antarctica Answer: B Page Ref: 139 Level: Basic 12) According to the EPA, what percent of chemical wastes were disposed of illegally in the golden age decade of environmental crime?

A) 50% B) 90% C) 75% D) 60% Answer: B Page Ref: 141 Level: Basic

158

13) An assistant administrator in which federal agency would eventually go to prison for perjury?

Her agenda included changing the perception of Love Canal from dangerous to benign, obtaining data that 50 of the most dangerous sites were benign, and proving that industries today were not dangerous to public health.

A) Environmental Protection Agency B) Securities and Exchange Commission C) Food and Drug Administration D) Federal Emergency Management Agency Answer: A Page Ref: 140 Level: Intermediate 14) Landfills and toxic waste disposal sites are more likely to be located near: A) warehouse districts.

B) government housing.

C) African American communities.

D) Hispanic communities.

Answer: C Page Ref: 142 Level: Basic 15) Toxic terrorism is: A) government inattention to environmental problems.

B) use of chemicals and biological weapons.

C) pollution of the environment by American manufacturing companies.

D) the exporting of environmental products to foreign companies.

Answer: D Page Ref: 143 Level: Intermediate 16) In regards to toxic terrorism, one of the first official acts of this president was immediate revocation of the executive order which had set guidelines and policies for toughening the notification requirements for companies wishing to export products whose use is restricted in the United States.

A) President Ford B) President Carter C) President Regan D) President Bush Answer: D Page Ref: 144 Level: Intermediate

159

17) American-owned factories in Mexican border town across the Rio Grande are profitable for the following reasons: A) Use of child labor is allowed and safety practices are lax.

B) Labor is cheap and the companies have huge tax write-offs.

C) Environmental regulations are lax and labor is cheap.

D) Environmental regulations and safety procedures are lax.

Answer: C Page Ref: 144 Level: Basic 18) In 1980, Congress passed the Comprehensive Environmental Response Compensation and Liability Act (CERCLA). It is more commonly known as: A) Greenfund.

B) Environmental Fund.

C) Emergency Fund.

D) Superfund.

Answer: D Page Ref: 145 Level: Basic 19) Which one of the following companies has not been fined or cited for environmental pollution?

A) Wal-Mart B) Procter & Gamble C) Texaco D) Ocean Spray Answer: B Page Ref: 148 Level: Basic 20) What does the EPA consider to be the most powerful tool when it comes to punishing environmental offenders?

A) fines B) probation C) incarceration D) nontraditional sanctions Answer: C Page Ref: 149 Level: Basic

160

21) What percent of all cancer cases come from carcinogens in the workplace?

A) 30% B) 40% C) 10% D) 20% Answer: D Page Ref: 150 Level: Basic 22) Allied Chemical Corporation, developer of Kepone, a highly toxic pesticide, committed all of the flowing acts in connection with manufacturing or in an effort to avoid liability for the health damage caused by the chemical except: A) it caused the state of Virginia to prohibit consumption of fish in the James River.

B) it slowed down but did not stop production to investigate complaints.

C) it formed a new corporation.

D) it produced airborne drifts so thick traffic had to be diverted.

Answer: B Page Ref: 150-151 Level: Intermediate 23) Johns-Manville, the largest manufacturer of asbestos, endangered workers by doing all of the following except: A) deciding not to install a dust-control system.

B) providing inadequate insurance coverage.

C) failing to inform workers of dangers after learning of them.

D) not informing symptomless asbestosis victims of illness.

Answer: B Page Ref: 154 Level: Intermediate 24) Studies have shown that all of the following have contracted asbestosis despite the fact they did not work in an asbestos factory except: A) spouses of workers.

B) workers hired on to remove insulation from a manufacturing plant.

C) domestic pets of workers.

D) children of workers.

Answer: C Page Ref: 154 Level: Basic

161

25) Which disease can cotton dust cause?

A) Chronic obstruction pulmonary disease B) Emphysema C) Brown lung D) Kidney failure Answer: C Page Ref: 155 Level: Basic 26) In 1990, Congress passed a bill acknowledging that the government had exposed over 370,000 people between 1944 and 1953 to: A) toxic waste in California.

B) toxic chemicals in paints used on United States Navy ships and carriers.

C) radiation.

D) beryllium.

Answer: C Page Ref: 156 Level: Basic 27) Whistleblowers at nuclear weapons facilities have been threatened with all of the following except: A) being chased on a highway.

B) holes punched in their gloves.

C) negative references to future employers.

D) negative reporting to plant manager.

Answer: D Page Ref: 156 Level: Intermediate 28) Workers at private weapons plants in Ohio and Pennsylvania allegedly were exposed to levels of beryllium dust ________ times federal safety limits.

A) 25 B) 50 C) 75 D) 100 Answer: D Page Ref: 158 Level: Basic 29) Which state had over 1,400 construction deaths during the 1980s, more than any other state?

A) California B) Texas C) Florida D) New York Answer: B Page Ref: 159 162

Level: Basic 30) Tyson foods, the nation's largest poultry-processing company with profits of $403 million in 2004, was penalized for the deaths of two men who died in a vat of decomposing chicken parts from exposure to methane gas and for other violations. The fine was what percent of its profits?

A) .1% B) .05% C) .001% D) .0004% Answer: D Page Ref: 158 Level: Basic 31) British Petroleum will ultimately end up having to pay out more than ________ for legal settlements in the Deepwater Horizon drilling rig disaster.

A) $30 billion B) $50 million C) $100 billion D) $250 million Answer: A Page Ref: 163 Level: Basic 32) The Bethlehem steel plant at Sparrows Point was fined $27,000 for failing to place shields around wire machines. The shields had been recommended but the company did not have to install them based on: A) political contributions.

B) demonstration that cost would force the plant to close.

C) shutting down the work area.

D) executive protest at a meeting with agency officials.

Answer: D Page Ref: 163 Level: Intermediate 33) McWane, Inc., is the dominant company in the cast iron water and sewer pipe manufacturing industry. It also holds the record for most safety violations. The unsafe environment is created by all of the following except: A) a financial incentive system.

B) missing safety guards and no training.

C) no bathroom breaks for workers.

D) those workers who complain about violations are transferred.

Answer: D Page Ref: 166 Level: Intermediate

163

34) Which of the following companies has one of the worst safety records in the United States?

A) McWane, Inc. B) Exxon Oil C) Procter & Gamble D) Wal-Mart Answer: A Page Ref: 166 Level: Basic 35) In the deregulation era, which of the following entities took the lead in pursuing workplace violators?

A) Occupational Safety and Health Administration B) Department of Labor C) Federal Trade Commission D) Individual states Answer: D Page Ref: 167-168 Level: Intermediate 36) The case of Illinois v. O'Neil involving Film Recovery Systems was significant and trendsetting in the area of workplace safety because: A) the company was forced to give up all of its yearly profit.

B) those individuals responsible for the death of the employee were forced to pay civil damages out of their own pockets.

C) the company was forced out of business as part of a settlement.

D) company officials were prosecuted criminally and sentenced to prison.

Answer: D Page Ref: 173 Level: Intermediate 4.2 True/False Questions 1) After the Alaskan oil spill in 1989, the lifestyle of the Native American population in Kodiak returned to normal within a few years.

Answer: FALSE Page Ref: 127 Level: Basic 2) The infamous case at Love Canal has become the symbol of environmental crime.

Answer: TRUE Page Ref: 128 Level: Basic

164

3) The culprits in the medical waste debacle are dishonest haulers who contract with hospitals to dispose of their waste at special dump sites around the country, but avoid costly transportation expenses by simply tossing the infected material into the ocean.

Answer: TRUE Page Ref: 129 Level: Intermediate 4) Truckers known as "sludge runners" actually open the spigots of their storage tanks and release toxic waste as they drive.

Answer: TRUE Page Ref: 130 Level: Intermediate 5) The Food and Drug Administration has urged the courts to view environmental crime as a crime of violence and an egregious departure from responsible citizenship.

Answer: FALSE Page Ref: 130 Level: Intermediate 6) Benzene and dioxin are the chemical wastes that contaminated the Love Canal area.

Answer: TRUE Page Ref: 128 Level: Basic 7) More than three-quarters of all human disease is waterborne.

Answer: TRUE Page Ref: 129 Level: Basic 8) Much of our poisoned water is not due to illegal hauling but is the result of criminal negligence on the part of the industrial corporations themselves.

Answer: TRUE Page Ref: 130 Level: Basic 9) The EPA has estimated that as many as 30,000 waste sites may pose significant health problems related to water contamination.

Answer: TRUE Page Ref: 131 Level: Intermediate 10) It is only corporate executives who are responsible for the contamination of water sources in America.

Answer: FALSE Page Ref: 133 Level: Intermediate 165

11) Heart disease has become the most rapidly increasing cause of death in America.

Answer: FALSE Page Ref: 135 Level: Basic 12) There are more harmful pollutants outdoors than indoors.

Answer: FALSE Page Ref: 135 Level: Basic 13) Asbestos is a mineral found in rocks, and it has been used in construction since the time of ancient Rome.

Answer: TRUE Page Ref: 135 Level: Basic 14) The most recent automobile industry scandal involved the world's largest automaker, Toyota.

Answer: FALSE Page Ref: 136 Level: Basic 15) Paper use worldwide has decreased due to the use of electronic files and e-mail.

Answer: FALSE Page Ref: 138 Level: Basic 16) The recycling of electronic products is such a lucrative business that even prisons in the United States have gotten in on the action.

Answer: TRUE Page Ref: 139 Level: Basic 17) The EPA states that 75% of chemical wastes disposed were disposed of illegally in the golden age decade of environmental crime.

Answer: FALSE Page Ref: 142 Level: Intermediate 18) Toxic dumps are randomly distributed across America.

Answer: FALSE Page Ref: 142 Level: Basic

166

19) Toxic terrorism includes the careless destruction of dangerous chemicals, the importation of hazardous wastes, and the construction of polluting factories.

Answer: TRUE Page Ref: 143 Level: Intermediate 20) Under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA), the parties responsible for the hazardous conditions are supposed to do the cleanup themselves or reimburse the government for doing it.

Answer: TRUE Page Ref: 145 Level: Intermediate 21) Criminal law is a relatively new tool used to enforcing environmental statutes.

Answer: TRUE Page Ref: 149 Level: Basic 22) Exposure to cotton dust may cause asthma.

Answer: FALSE Page Ref: 155 Level: Basic 23) Radiation may be less visible than cotton dust, but it can be no less lethal.

Answer: TRUE Page Ref: 156 Level: Basic 24) Beryllium is a strong lightweight metal used to encase nuclear weapons. It creates a dust that when breathed can cause berylliosis which is an incurable disease marked by lung inflammation and ulceration.

Answer: TRUE Page Ref: 158 Level: Basic 25) The President's omission was relatively restrained in its criticisms of BP, focusing its most critical comments on the industry as a whole rather than BP specifically.

Answer: TRUE Page Ref: 163 Level: Basic 26) West Pharmaceutical is one of the world's largest manufacturers of plastic components for syringes and drug vials.

Answer: FALSE Page Ref: 164 Level: Basic 167

27) Under President Bush, OSHA issued the most significant standards in its history.

Answer: FALSE Page Ref: 168 Level: Basic 28) Incarcerating corporate officials whose decisions or neglect endanger workers is predicated on the belief that it is a far more effective deterrent than fines.

Answer: TRUE Page Ref: 172 Level: Intermediate 4.3 Fill in the Blank Questions 1) The EPA estimates that ________% of the hazardous waste produced in the U.S. each year is disposed of in an environmentally unsafe manner.

Answer: 90 Page Ref: 127 Level: Intermediate 2) Truckers known as ________, actually open the spigots of their storage tanks and release toxic waste as they drive.

Answer: sludge runners Page Ref: 130 Level: Basic 3) The most serious health problem with water contamination is cancer, and the most susceptible population is ________.

Answer: children Page Ref: 131 Level: Basic 4) ________ disease has become the most rapidly increasing cause of death in America.

Answer: Respiratory Page Ref: 135 Level: Intermediate 5) ________ has been called the most widespread toxic substance in the nation.

Answer: Asbestos Page Ref: 135 Level: Intermediate 6) The recycling of electronic products is such a lucrative business that even U.S. ________ have gotten in on the action.

Answer: prisons Page Ref: 139 168

Level: Basic 7) Pearland, Texas, home to the abandoned Brio refinery, a site targeted for clean up under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA), is said to have developed the highest ________ rate in the country.

Answer: cancer Page Ref: 146-147 Level: Intermediate 8) A growing number of ________ victims without any direct or long-term connection to its production are now being identified.

Answer: asbestos Page Ref: 154 Level: Basic 9) There are more than ________ fatal work injuries in the United States each year.

Answer: 6,000 Page Ref: 158 Level: Basic 10) In 1977, the Occupational Safety and Health (OSHA), actually ________ its standard in a compromise with President Carter's Council on Wage and Price Stability.

Answer: lowered Page Ref: 156 Level: Basic 11) An investigative report published in 1999 charged that a closed vermiculite mine had killed at least ________ people in Libby, Montana, over the preceding 40 years.

Answer: 192 Page Ref: 154 Level: Basic 12) Exposure to ________ dust causes brown lung.

Answer: cotton Page Ref: 155 Level: Basic 13) The causal link between ________ and cancer has been acknowledged for over a century.

Answer: radiation Page Ref: 156 Level: Basic 14) Beryllium is a strong lightweight metal used to encase ________ weapons.

Answer: nuclear Page Ref: 157-158 Level: Basic 169

170

15) When the Texas City Disaster occurred in 1947, a tremendous blast sent a ________ surging over the shoreline and set waterfront refineries on fire.

Answer: tsunami Page Ref: 159 Level: Intermediate 16) Joe Nocera, a columnist for the New York Times, concluded that the Deepwater Horizon accident would not have occurred if BP executives had been ________ for earlier incidents such as the Texas City explosion.

Answer: prosecuted Page Ref: 164 Level: Basic 17) The McWane company operates under a financial ________ system that puts the lives of workers at risk every day.

Answer: incentive Page Ref: 166 Level: Basic 18) Morale at OSHA became ________, especially during the second Regan term.

Answer: dispirited Page Ref: 168 Level: Basic 19) California now has a small team of circuit-riding ________ pursuing criminal cases against employees who kill workers by violating workplace safety laws.

Answer: prosecutors Page Ref: 171 Level: Basic 20) Common law prosecutions can serve an auxiliary purpose as well, by ________ popular recognition of the violent side of white-collar crime.

Answer: heightening Page Ref: 176 Level: Basic

171

4.4 Matching Questions Match the key terns listed in Column 1 to the description in Column 2. Use each description only once.

A) The most widespread toxic substance in the nation B) Dumped millions of pounds of chemical waste that contaminated the Love Canal C) Has become the most rapidly increasing cause of death in America D) Fibers that, when inhaled, can scar the lungs and cause breathing problems E) Can cause cancer and other serious health problems F) Corporation that was dumping radioactive matter into local rivers G) Legislation that provided remedies for uncontrolled and abandoned hazardous waste sites H) Scientific researchers falsifying results 1) The Hooker Chemical Corporation Level: Intermediate 2) Rocky Flats Level: Intermediate 3) Water contamination Level: Intermediate 4) Respiratory disease Level: Intermediate 5) Benzene Level: Intermediate 6) "Cheating on Tests" Level: Intermediate 7) Asbestos Level: Intermediate 8) Superfund Level: Intermediate Answers: 1) B 2) F 3) E 4) C 5) A 6) H 7) D 8) G

172

4.5 Essay Questions 1) Identify the three major types of contaminations resulting from waterborne diseases and provide examples.

Answer: Organic contamination, which has been linked to various forms of cancer; inorganic contamination, most notably metals such as lead, which are suspected of causing developmental problems in children; and radioactivity, which is believed to cause prenatal damage.

Page Ref: 129-130 Level: Difficult 2) How does air pollution occur? Illustrate your answer with instances and examples from the text.

Answer: Air pollution occurs not only outside from noxious smog and acid rain, but also indoors from asbestos. When asbestos fibers are inhaled, they lead to a potentially lethal illness called asbestosis. An example would be Johns-Manville.

Page Ref: 134-135 Level: Difficult 3) Examine environmental racism. Discuss the underlying issues of economic and social assumptions.

Answer: Toxic waste dumps are often located in communities with high percentages of minority residents. Being that many of the minority workers tend to live in lower-income areas, public opposition has not been taken as serious as in middle- and upper-income localities. For example, in McFarland, California, many of the residents are dying from cancer at a rate four times the national average. The county has sought help from the federal government, but has yet to receive it.

Page Ref: 142 Level: Difficult 4) Illustrate the development of Superfund and discuss its deficiencies, including (but not limited to) the Brio site.

Answer: Superfund is a federal program under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) established for hazardous waste cleanup. In effect, waste was simply moved from one place to another. The Brio site was designated a Superfund site in 1984. For over a decade, bureaucratic red tape and wholesale litigation have combined to thwart any meaningful remediation.

Page Ref: 145-147 Level: Difficult 5) Identify and describe four hazardous substances that affect employee health in the workplace.

What are the health problems that can be associated with these substances?

Answer: Answers should include asbestos, cotton dust, radioactivity, and beryllium. Health problems include asbestosis, which scars the lungs making it difficult to breathe; lung disease caused by cotton dust; radiation is linked to cancer; and berylliosis is an incurable disease marked by lung inflammation and ulceration.

Page Ref: 153-158 Level: Difficult

173

4.6 Critical Thinking Questions 1) Discuss the various ways that water has the potential to become contaminated based on cases from the text.

Answer: Examples may include the waste found on beaches, such as vials of blood containing the AIDS virus. Some of the pollution occurs as a result of attempts to avoid the cost of proper disposal. An example would be W.R. Grace and its Cryovac Division that produced the Woburn Leukemia Cluster.

Page Ref: 129-131 Level: Intermediate 2) Identify the principle of the preemption doctrine and discuss implications for state prosecution of crimes in the workplace. What specific actions have states taken against environmental and workplace safety violators?

Answer: The preemption doctrine invalidates state laws that interfere with or are contrary to federal law. The flaw in applying the preemption doctrine to crimes in the workplace is that preemption would require states to afford less protection to employees. States have begun to pursue criminal cases against environmental wrongdoers. This can be justified on the traditional criminal justice punishment goals of deterrence and retribution.

Page Ref: 175 Level: Difficult

174

Profit Without Honor, 7e (Rosoff) Chapter 5 Institutional Corruption: Mass Media and Religion 5.1 Multiple Choice Questions 1) White-collar crimes that violate trust have the potential to create: A) social disorganization.

B) cultural chaos.

C) widespread immorality.

D) institutional collapse.

Answer: A Page Ref: 188 Level: Basic 2) In the 1930s, who argued that money was the yardstick used to measure achievement?

A) Merton B) Durkheim C) Sutherland D) Hirschi Answer: A Page Ref: 188 Level: Basic 3) In a culture where money equals achievement, all of the following can occur except: A) an atmosphere hospitable to white-collar crime.

B) superiority determined by competition.

C) the notion that the quest for financial success prevails over ethics.

D) dependence on faith-based institutions.

Answer: D Page Ref: 188 Level: Intermediate 4) Talcott Parsons referred to institutions as the ________ of the society.

A) muscle B) backbone C) heart D) brain Answer: B Page Ref: 188 Level: Basic

175

5) The mass media has been identified as among the most influential source for: A) reliable information on world events.

B) social construction of reality.

C) escape from personal responsibility.

D) public opinion.

Answer: B Page Ref: 189 Level: Intermediate 6) The Quiz Show Scandal involved: A) contestants who were not randomly selected but paid to appear.

B) contestants in a conspiracy with other contestants.

C) contestants who were given answers to questions.

D) contestants provided with fake identities.

Answer: C Page Ref: 189 Level: Intermediate 7) In connection with The Quiz Show Scandal, most of those indicted and arrested were: A) quiz show staffers.

B) program developers.

C) contestants.

D) media owners.

Answer: C Page Ref: 189 Level: Basic 8) The fact that The Quiz Show Scandal occurred so early in the history of television may explain all of the modern media events except: A) dramatized documentaries.

B) reality TV shows.

C) some televangelists.

D) fraudulent advertising.

Answer: B Page Ref: 189 Level: Intermediate 9) Payola is: A) a bribe to promote records over the air paid to disc jockeys and station managers.

B) the practice of not reporting payments to performers.

C) a bribe to movie reviewers.

D) a bribe to radio station owners.

Answer: A Page Ref: 190 Level: Intermediate

176

10) Alan Freed, who testified before Congress and lost his job in connection with the payola scandal, rationalized the gifts he received by saying they were: A) lobbying payments just like those received by politicians.

B) payments for extra services.

C) additional income he had been promised.

D) gifts between friends.

Answer: A Page Ref: 190 Level: Intermediate 11) Dick Clark also testified before Congress in the payola scandal. He was never accused of wrongdoing, although all of the following were true except that: A) he received 143 song copyrights as gifts.

B) he promoted Elvis Presley based on promise of future benefits.

C) singers involved with companies he owned got special places in his program.

D) he said he may have promoted artists associated with his companies without realizing it.

Answer: B Page Ref: 190-191 Level: Intermediate 12) In 1976, a New York grand jury indicted the former president of ________ and another executive from the same company for engaging in payola.

A) CBS B) Warner Brothers C) Motown D) Disney Answer: A Page Ref: 191 Level: Basic 13) As recently as ________ Sony BMG Music and Warner Music Group reached settlements with the government for payola-like bribery.

A) 2004 B) 2006 C) 2003 D) 2005 Answer: D Page Ref: 192 Level: Basic

177

14) Print journalism scandals have included writers manufacturing books and stories for which there was little factual basis. These have included all of the following except: A) a Pulitzer prize being awarded to a Washington Post reporter for a story on an 8-year-old heroin addict.

B) James Frey's autobiography A Million Little Pieces, about his life as a drug addict, alcoholic, and career criminal.

C) Washington Post reporters Woodward and Bernstein's All the President's Men, about Nixon and Watergate.

D) The Autobiography of Howard Hughes by Clifford Irving.

Answer: C Page Ref: 192-193 Level: Intermediate 15) Emile Durkheim regarded religion as the ________ of society.

A) brain B) conscience C) heart D) blood Answer: B Page Ref: 194 Level: Basic 16) Henry Lyons, the president of the influential African American Protestant National Baptist Convention, was convicted of criminal wrongdoing for: A) setting fire to his home for insurance proceeds.

B) stealing from his wife's family.

C) tricking corporations into paying for nonexistent membership lists.

D) tricking parishioners into contributing to the ministry.

Answer: C Page Ref: 197-198 Level: Intermediate 17) Henry Lyons tried to argue in his defense to criminal charges that: A) his actions had been encouraged by church elders.

B) this is the way things were done in black churches.

C) he had been blackmailed by a former mistress into his actions.

D) his actions were necessary to protect church interests.

Answer: B Page Ref: 197-198 Level: Intermediate

178

18) Faith healer Peter Popoff used all of the following tactics in his schemes except: A) bibles attached to balloons.

B) encouraging people to throw medications on stage.

C) holy shower caps.

D) faking injuries and healing himself.

Answer: D Page Ref: 200-201 Level: Intermediate 19) Faith healer Peter Popoff was exposed when a skeptic got Popoff's wife on tape and he tried to cure a man of: A) heart disease.

B) uterine cancer.

C) AIDS. D) breast cancer.

Answer: B Page Ref: 200-201 Level: Basic 20) Jimmy Swaggart railed against Catholics, Jews, intellectuals, mental health professionals, liberals, gays, and other social scapegoats. He was dismissed from the Assemblies of God ministry when it was disclosed that: A) he acknowledged a child conceived outside of marriage.

B) he disclosed obsession with prostitution and pornography.

C) he was a homosexual.

D) he admitted to an addiction to prescription drugs.

Answer: A Page Ref: 202 Level: Intermediate 21) Jim and Tammy Faye Bakker's PTL organization collapsed because of Bakker's: A) having lawsuits against PTL for wrongdoing.

B) outrageous personal expenses.

C) funds diverted to pay personal gambling expenses.

D) risky investments.

Answer: B Page Ref: 203-204 Level: Intermediate 22) Which of the following televangelists avoids appeals for money?

A) Jerry Falwell B) Billy Graham C) Robert Schuller D) Oral Roberts Answer: B Page Ref: 205 179

Level: Basic 23) Less direct consequences of unscrupulous televangelists have included all of the following except: A) weakening of organized religion.

B) increasing the number of converts, but contributions declined.

C) the decline of teleministries in general.

D) damaging even the legitimate electronic ministries.

Answer: B Page Ref: 205 Level: Intermediate 24) Religious affinity scams involve: A) investment schemes pitched to fellow churchgoers.

B) fake preachers with no credentials.

C) nonexistent churches.

D) investment schemes disguised as church memberships to get tax benefits.

Answer: A Page Ref: 206 Level: Intermediate 25) In his Ponzi scheme, what did Abraham Kennard use to lure his victims?

A) Loans to corporations headed by African Americans B) Investment opportunities for black investment bankers C) Promise of grants to black preachers D) Insurance coverage for members of black churches Answer: C Page Ref: 207 Level: Intermediate 26) What provisions of the United States Constitution has made authorities very hesitant to pursue schemes and scams with a faith-based initiative?

A) Necessary and proper clause B) First Amendment C) Supremacy clause D) Tenth Amendment Answer: B Page Ref: 208 Level: Basic 27) What did California evangelist Tony Alamo not do?

A) Built a $5 million home with church funds B) Failed to file tax returns C) Married 8 women, some of whom were already married D) Married a 15-year-old Answer: A 180

Page Ref: 209 Level: Basic 28) Which is a possible solution to corruption in the world of religion?

A) Additional government reporting B) Limiting pleas for money C) Longer jail sentences for wrongdoers D) Outside board of directors Answer: D Page Ref: 209-210 Level: Intermediate 29) Which of the following charitable organizations has not been rocked by financial scandal?

A) American Cancer Society B) March of Dimes C) Texas Fraternal Order of Police D) United Way Answer: B Page Ref: 218 Level: Basic 30) The president of which charitable organization was force to resign when it was found out he was drawing a huge salary and placing friends and relatives on the payroll?

A) Red Cross B) Salvation Army C) United Way D) Wounded Warriors Answer: C Page Ref: 210 Level: Basic 5.2 True/False Questions 1) White-collar crime mirrors American culture, with its strong emphasis on achievement and what has been termed the "fetishism of money."

Answer: TRUE Page Ref: 188 Level: Intermediate 2) The mass media has been identified as among the least influential sources for the "social construction of reality."

Answer: FALSE Page Ref: 189 Level: Basic 3) The Quiz Show Scandal involved contestants who were in a conspiracy with other contestants.

181

Answer: FALSE Page Ref: 189 Level: Intermediate 4) The most serious effect of the quiz show scandal was the long-term corruption of the American preeminent mass medium.

Answer: TRUE Page Ref: 189 Level: Basic 5) Payola is the practice of not reporting payments to performers.

Answer: FALSE Page Ref: 190 Level: Basic 6) Janet Cooke wrote a non-fiction account of an 8-year-old heroin addict named Jimmy and she was awarded the Pulitzer Prize.

Answer: FALSE Page Ref: 192 Level: Basic 7) Religion is one of the most fundamental cultural institutions and arose from man's perception of a power outside himself.

Answer: TRUE Page Ref: 195 Level: Basic 8) Emile Durkheim believed that religion is society's consciousness of itself.

Answer: TRUE Page Ref: 195 Level: Basic 9) Clerical enrichment is an exclusively Catholic problem.

Answer: FALSE Page Ref: 197 Level: Basic 10) With the use of technology and family members, Peter Popoff was able to identify likely victims and design cures accordingly.

Answer: TRUE Page Ref: 201 Level: Intermediate 11) Many successful televangelists have been ordered to pay significant fines to the IRS and have lost tax-exempt status.

Answer: TRUE 182

Page Ref: 205 Level: Basic

183

12) Religious affinity scams involve investment schemes disguised as church memberships to get tax benefits.

Answer: FALSE Page Ref: 205, 206 Level: Basic 13) Abraham Kennard ran a Ponzi that targeted a tight network of Catholic Priests.

Answer: FALSE Page Ref: 207-208 Level: Basic 14) The government has been reluctant to involve itself in the policing of religious commerce because of the First Amendment's protection regarding the free exercise of religion.

Answer: TRUE Page Ref: 208 Level: Intermediate 15) The conduct of religious entrepreneurs such as Tony Alamo would seem to cast doubt on the efficacy of any self-regulating code of ethics.

Answer: TRUE Page Ref: 209 Level: Intermediate 16) A more stringent alternative to religious corruption would be longer jail sentences for wrongdoers.

Answer: FALSE Page Ref: 210 Level: Basic 17) The United Way one of the only charitable organizations that has not been rocked by financial scandal.

Answer: FALSE Page Ref: 210 Level: Basic 18) A Florida organization that solicits donations for more than 75 actual charities has been accused of keeping up to 90% of the donations it collects.

Answer: TRUE Page Ref: 211 Level: Intermediate

184

5.3 Fill in the Blank Questions 1) Social ________ is usually seen by sociologists as a synthesis of culture and institutional structure.

Answer: organization Page Ref: 188 Level: Basic 2) Talcott Parsons referred to institutions as the ________ of society.

Answer: backbone Page Ref: 188 Level: Basic 3) ________ is the most dominant and pervasive of all modern mass media.

Answer: Television Page Ref: 189 Level: Basic 4) In 1976, a New York grand jury indicted the former president of ________ and another executive from the same company for engaging in payola.

Answer: CBS Page Ref: 191 Level: Intermediate 5) To thwart embezzlement, parishes and dioceses clearly need to be more ________.

Answer: vigilant Page Ref: 197 Level: Basic 6) Pastor Randall Radic was not a very ________ man but had a faithful flock who even provided him with a home free of charge.

Answer: educated Page Ref: 198 Level: Intermediate 7) Faith healing is probably as ________ as religion itself.

Answer: old Page Ref: 199 Level: Basic 8) ________ broadcasting has been part of American culture since the invention of electronic media.

Answer: Religious Page Ref: 199-200 Level: Intermediate

185

9) Some persons perhaps are persuaded to ________ Popoff's flock as gullible fools, all but asking to be bilked.

Answer: ridicule Page Ref: 201 Level: Basic 10) After his release, ________ announced that he planned to write inspirational books in order to help people who suffered great personal losses in their lives.

Answer: Bakker Page Ref: 204 Level: Basic 11) Unlike other televangelists, Billy Graham's ________ are notable in their lack of appeals for money.

Answer: crusades Page Ref: 206 Level: Basic 12) Religious affinity fraud seems especially insidious because it exploits the trust, friendship, and cohesiveness that exist in people sharing a common spiritual ________.

Answer: identity Page Ref: 206 Level: Difficult 13) The government has been reluctant to involve itself in the policing of religious commerce because of the ________ Amendment.

Answer: First Page Ref: 208 Level: Basic 14) A number of critics have contended that the self-regulation of religious broadcasting must be supplemented with some measure of ________ control.

Answer: external Page Ref: 209 Level: Basic

186

5.4 Matching Questions Match the key terns listed in Column 1 to the description in Column 2. Use each description only once.

A) Faith healer who used tactics such as holy shower caps said to heal people B) A charitable organization that has been rocked by financial scandal more than once C) A bribe to promote records over the air paid to DJs and station managers D) Sociologist who regarded religion as the conscience of society E) Promised grants to black preachers to lure them into his Ponzi scheme F) A scandal that involved contestants given the answers to questions G) Convicted of tricking corporations into paying for nonexistent membership lists H) An evangelist who married eight women and failed to file tax returns 1) The Quiz Show Scandal Level: Intermediate 2) Payola Level: Intermediate 3) Emile Durkheim Level: Intermediate 4) Henry Lyons Level: Intermediate 5) Peter Popoff Level: Intermediate 6) Abraham Kennard Level: Intermediate 7) Tony Alamo Level: Intermediate 8) United Way Level: Intermediate Answers: 1) F 2) C 3) D 4) G 5) A 6) E 7) H 8) B

187

5.5 Essay Questions 1) How extensive is the mass media's influence on the social construction of reality? Provide examples and explain your rationale.

Answer: The mass media has been called one of the most influential sources for the social construction of reality because each person constructs his or her perception of the world through a socialization process derived from the mass media.

Page Ref: 189 Level: Difficult 2) Examine the Quiz Show Scandal and the music industry's use of Payola to promote new songs.

What happened and who was punished? Who was not punished? Provide your thoughts on the issue.

Answer: The Quiz Show Scandal and Payola are examples of white-collar crime in the television and radio industries. The Quiz Show Scandal contestants were provided with the answers to questions. The contestants were punished, but not the owners. Payola involved the payment of bribes to disc jockeys to get play time. Alan Freed was fired and many CBS executives were indicted.

Page Ref: 189-192 Level: Difficult 3) Discuss and provide examples of religious affinity scams. How do these schemes work?

Answer: Answers may include scams involving real estate, investment, insurance, and Ponzi/pyramid schemes. The schemes exploit the trust, friendship, and cohesiveness that exist in people sharing a common spiritual identity.

Page Ref: 205-206 Level: Difficult 4) Identify possible solutions of the problem of religious fraud. Provide your own thoughts on this topic.

Answer: Placing external control over television ministries in the hands of the large evangelical denominations themselves. Also, make television ministries accountable to a board of directors composed of respected business leaders from outside the ministry.

Page Ref: 209-210 Level: Difficult 5.6 Critical Thinking Questions 1) Evaluate and discuss why the government is so reluctant to become involved in the enforcement of religious fraud. Do you think there are reasons the government has become even more reluctant?

Answer: The government has been reluctant to enforce religious fraud because of the First Amendment's protection of religious freedom. Answers may vary.

Page Ref: 209-210 Level: Difficult

188

2) Examine the reasons that self-regulation has not been effective in minimizing or eliminating religious fraud. Discuss the reasons and incorporate solutions into your answers.

Answer: Self-regulation may be a useful control mechanism, but is not sufficient. Self-regulation makes evangelists less accountable. Answers may vary.

Page Ref: 210-211 Level: Difficult

189

Profit Without Honor, 7e (Rosoff) Chapter 6 Securities Fraud 6.1 Multiple Choice Questions 1) Darlene Gillespie, who went from Mouseketeer to racketeer, is an example that those who commit security fraud: A) can come from any background.

B) face the hazards of using a broker to make stock purchases.

C) need some background in securities.

D) need a financial base to get started.

Answer: A Page Ref: 218 Level: Basic 2) All of the following major firms have been accused of securities fraud except: A) Technical Equities Corporation.

B) Charles Schwab.

C) Prudential Securities.

D) E.F. Hutton.

Answer: B Page Ref: 219 Level: Basic 3) The term "insider trading" involves insiders: A) using non-public information to buy or sell stock.

B) trading in competitors' stock.

C) stealing from the corporations they work for.

D) providing misinformation to traders.

Answer: A Page Ref: 220 Level: Intermediate 4) All of the following statements describe Paul Thayer except: A) CEO of LTV Corporation.

B) Deputy Secretary of Defense in the Reagan administration.

C) used his position on corporate boards to get insider information.

D) made huge profits from his illegal trades.

Answer: D Page Ref: 220 Level: Intermediate

190

5) How did R. Foster Winans get caught up in insider trading?

A) Bought stock based on tips from Dennis Levine B) Used his computer knowledge to steal inside information C) Leaked information about his Wall Street Journal column D) Placed incorrect information in the Wall Street Journal Answer: C Page Ref: 221 Level: Intermediate 6) Dennis Levine was involved in what aspect of the stock trade?

A) Mergers and acquisitions B) Arbitrage C) Investment banking D) International finance Answer: A Page Ref: 221-222 Level: Basic 7) The investigation that snared Dennis Levine took notice of all of the following except: A) a proposed merger, trade, or acquisition would occur.

B) a Swiss bank in the Bahamas.

C) heavier-than-usual sales would take place involving companies that would later be involved in a merger, trade, or acquisition.

D) the trades all involved Levin's firm.

Answer: D Page Ref: 221-222 Level: Intermediate 8) Arbitrage involves trading in: A) junk bonds.

B) common stock.

C) deal stock.

D) penny stock.

Answer: C Page Ref: 222 Level: Basic 9) Ivan Boesky was involved in what aspect of the stock trade?

A) Mergers and acquisitions B) Arbitrage C) International finance D) Investment banking Answer: B Page Ref: 233 Level: Basic

191

10) In return for Ivan Boesky's cooperation, the United States government let Ivan Boesky do all of the following except: A) use inside information of his deal with the government to sell before others.

B) serve a probated sentence.

C) pay a mere $100 million fine.

D) sell $1 billion in deal stocks before announcement of his cooperation.

Answer: B Page Ref: 223-224 Level: Intermediate 11) As a result of the Boesky disclosure, the stock market: A) showed no reaction.

B) suffered billion-dollar losses.

C) went up 100 points.

D) caused Boesky to lose the rest of his money.

Answer: B Page Ref: 224 Level: Intermediate 12) Martin Seigel's punishment for insider trading included all of the following except: A) keeping his pension plan.

B) a 10-year prison sentence.

C) testifying against other securities firm personnel.

D) keeping two homes.

Answer: B Page Ref: 225-226 Level: Intermediate 13) All of the following are terms applicable to Michael Milken's favorite investment vehicle except: A) asset-stripping to pay debts.

B) the creation of a mutual fund for Milken's investment vehicle.

C) lack of government regulation permitted huge fees for underwriting.

D) it generated 50% of Drexel's profits.

Answer: D Page Ref: 226-227 Level: Intermediate 14) Milken and Boesky entered into a parking arrangement that was beneficial to both of them.

This arrangement involved: A) shifting the loss of investment to the fake stock owner.

B) limiting Drexel exposure to loss.

C) a risky but legal arrangement.

D) disguising the true stock owner's identity to comply with regulations.

Answer: D Page Ref: 227-228 192

Level: Intermediate 15) Michael Milken's scheme was exposed as a result of: A) Milken becoming suddenly reclusive and secretive.

B) Ivan Boetsky.

C) salesman defection.

D) Milken's testimony before Congress.

Answer: C Page Ref: 228 Level: Basic 16) Milken agreed to pay a $600 million fine and serve ________ years in prison.

A) 5 B) 2 C) 10 D) 20 Answer: B Page Ref: 228 Level: Basic 17) The term "criminogenic" means: A) a culture conducive to crime.

B) a culture adverse to crime.

C) a culture dominated by street crime.

D) a culture of greed and egomania.

Answer: A Page Ref: 229 Level: Basic 18) Which one of the following terms is associated with the idea that less regulation is better for the securities industry despite the number of securities violations?

A) Level playing field B) Fixed race C) Fairness D) Laissez-faire Answer: D Page Ref: 229 Level: Basic 19) An argument in favor of regulation is that the economy is a social institution needing both efficiency and: A) fairness.

B) competitiveness.

C) openness.

D) effective.

Answer: A 193

Page Ref: 230 Level: Basic 20) High-yield bonds were used for actual or threatened leveraged buyouts of Fortune 500 companies. Negative consequences of these takeovers or attempted takeovers include all of the following except: A) diversion of assets from company improvement to save the company.

B) bankruptcy avoidance.

C) downsizing.

D) layoffs.

Answer: B Page Ref: 230 Level: Intermediate 21) Junk bonds have been blamed for causing financial problems in what other industry besides the securities industry?

A) Savings and loan B) Energy C) Health care D) Defense Answer: A Page Ref: 230-231 Level: Basic 22) Levying fines against wrongdoers is an example of what theory of punishment? This theory does not appear to be working.

A) Incapacitation B) Restoration C) Retribution D) Deterrence Answer: D Page Ref: 233 Level: Basic 23) The Great "Chat Room" Conspiracy is notable for two reasons: A) broker-dealers were charged and sentenced to prison.

B) the source of the information and the insiders involved.

C) the amount of money involved and the government's inability to track wrongdoing.

D) the number of people involved and their occupations.

Answer: D Page Ref: 234-235 Level: Intermediate

194

24) Some argue that the law has been ineffective in deterring insider trading because: A) there is little incentive for whistleblowers to turn in wrongdoers.

B) there is no support from the business community.

C) of the risk/reward ratio.

D) the SEC is understaffed.

Answer: C Page Ref: 237 Level: Intermediate 25) All of the following are true about the Martha Stewart criminal case except: A) Stewart bought stock based on information from a corporate insider.

B) Stewart was not convicted of insider trading.

C) Stewart's financial gain was negligible in light of her wealth.

D) Stewart was a former stockbroker.

Answer: C Page Ref: 238-242 Level: Intermediate 26) President George W. Bush sold his stock in Harkin Oil for an $835,000 profit eight days before huge losses were disclosed and Harkin stock value dropped like a rock. Bush denied any prior knowledge about the red ink in the audit report. This was unusual in that: A) he signed the report.

B) he was president of the company at the time.

C) he was a member of the audit committee.

D) his degree is in accounting.

Answer: C Page Ref: 242 Level: Intermediate 27) In 2003, the Securities and Exchange Commission announced $1.4 billion in fines and disgorged profits against the nation's biggest and most powerful brokerage firms. At the root of the penalties was: A) recommending stock to investors while privately criticizing the stocks.

B) buying stocks for the firm before making recommendations to clients.

C) failing to make investments requested by clients.

D) charging excess fees.

Answer: A Page Ref: 243 Level: Intermediate

195

28) "Pump and Dump" is a technique used by individuals, such as the teenage wheeler-dealer, where: A) the investor pumps up his financial worth, steals the money to invest, and quickly dumps the stock.

B) the salesman pumps up the stock and then dumps his investment into the stocks.

C) a corporate insider pumps up the value of company stock and then dumps bad loans into the business before the business is sold.

D) the salesman pumps up his qualifications and secretly dumps the investors' stock.

Answer: B Page Ref: 245-246 Level: Intermediate 29) With huge amounts of money being invested in securities during the longest and biggest bull market in American history, who became involved in joining the feeding frenzy?

A) Politicians B) Small time investors C) Organized crime D) Golden Sachs Answer: C Page Ref: 249 Level: Basic 6.2 True/False Questions 1) Darlene Gillespie was one of the six original Mouseketeers on television's Mickey Mouse Club.

Answer: FALSE Page Ref: 218 Level: Basic 2) Economy refers to activities organized around the production and distribution of goods and services.

Answer: TRUE Page Ref: 218 Level: Basic 3) Public confidence in the honesty of its financial markets was shaken in the 1960s by a seemingly endless chain of scandals.

Answer: FALSE Page Ref: 219 Level: Basic 4) Insider traders are stockholders, directors, officers, or any recipients of information not publicly available who take advantage of such limited disclosure for their own benefit.

Answer: TRUE Page Ref: 220 Level: Intermediate 196

5) Dennis Levine was arrested in May 1986, convicted in February 1997, fined $11.6 million and sentenced to two years in prison.

Answer: TRUE Page Ref: 223 Level: Basic 6) Ivan Boesky graduated from the Harvard School of Law, but was not able to get a job with any of the city's big law firms.

Answer: FALSE Page Ref: 223 Level: Basic 7) Michael Milken's attempt to reshape the junk bond market was very unsuccessful.

Answer: FALSE Page Ref: 227 Level: Basic 8) Some economists have argued that expecting a level playing field or criticisms of fixed races is naïve, and a more laissez-faire atmosphere leads to greater efficiency.

Answer: TRUE Page Ref: 229 Level: Intermediate 9) Corporate restructuring means downsizing, which is a euphemism for large-scale layoffs and firings.

Answer: TRUE Page Ref: 230 Level: Basic 10) Front-running refers to managers buying stock for themselves after buying it for their funds.

Answer: FALSE Page Ref: 234 Level: Basic 11) The Great "Chat Room" conspiracy in 2000 was the largest criminal insider trading case to date.

Answer: TRUE Page Ref: 234, 235 Level: Basic 12) The "Great Chat Room Conspiracy" signaled the emergence of a hospitable new public arena for a crime once largely restricted to the private world of the Wall Street elite.

Answer: TRUE Page Ref: 235 Level: Basic 197

13) The risk/reward ratio of white-collar crime has not limited the deterrent value of criminal punishments.

Answer: FALSE Page Ref: 237 Level: Basic 14) Insider trading is an example of illegal stock manipulation.

Answer: TRUE Page Ref: 243 Level: Basic 15) Martha Stewart is a major Republican contributor and a friend of President Trump.

Answer: FALSE Page Ref: 242 Level: Basic 16) In the 1980s, the Internet was used to drive up the price of a stock with false claims and then to sell before the public catches on.

Answer: FALSE Page Ref: 244 Level: Basic 17) Insider trading and securities fraud have yet to move towards the Internet.

Answer: FALSE Page Ref: 245 Level: Basic 18) Internet financial blogs and chat rooms have created a particularly hospitable environment for securities fraud.

Answer: TRUE Page Ref: 245 Level: Intermediate 19) The most publicized of Internet investment schemes involve microcap fraud, often called penny stocks or over-the-counter stocks.

Answer: TRUE Page Ref: 245 Level: Basic 20) Investors have brought an element of violence to Wall Street seldom seen in the white-collar world of securities fraud.

Answer: FALSE Page Ref: 249 Level: Intermediate

198

21) It took a national economic crisis and major recession to uncover the Bayou Hedge Fund scandal.

Answer: FALSE Page Ref: 249-250 Level: Intermediate 22) Ponzi schemes collapse when too many investors seek to pull out their money at the same time.

Answer: TRUE Page Ref: 252 Level: Basic 23) Bernie Madoff's gigantic swindle was both a Ponzi scheme and an affinity scam.

Answer: TRUE Page Ref: 253 Level: Basic 6.3 Fill in the Blank Questions 1) Many scholars have suggested that the ________ is the most dominant institution in the United States.

Answer: economy Page Ref: 218 Level: Basic 2) The term "paper entrepreneurism" places a great deal of emphasis on ________.

Answer: trading Page Ref: 218 Level: Intermediate 3) ________ trading was criminalized under the Securities Exchange Act of 1934.

Answer: Insider Page Ref: 220 Level: Basic 4) Paul Thayer used his position on corporate boards to get insider ________.

Answer: information Page Ref: 220-221 Level: Basic 5) Dennis Levine was involved in ________ and acquisitions.

Answer: mergers Page Ref: 221-222 Level: Basic

199

6) Arbitragers are investment specialists who specialize in ________ stocks.

Answer: deal Page Ref: 229 Level: Basic 7) An argument in favor of regulation is that the economy is a social institution needing both efficiency and ________.

Answer: fairness Page Ref: 229 Level: Intermediate 8) Corporate restructuring usually means ________.

Answer: downsizing Page Ref: 230 Level: Basic 9) A form of insider trading is ________ running.

Answer: front Page Ref: 234 Level: Basic 10) Insider trading is an example of illegal ________ manipulation.

Answer: stock Page Ref: 235 Level: Basic 11) Some defenders of ________ have insisted that she was being punished for being a tough, successful woman in a male-dominated milieu of big business.

Answer: Martha Stewart Page Ref: 240 Level: Basic 12) Like insider trading, ________ fraud has moved to the Internet.

Answer: securities Page Ref: 249 Level: Basic 13) The most publicized of Internet investment schemes involve ________ fraud.

Answer: microcap Page Ref: 245 Level: Basic

200

6.4 Matching Questions Match the key terns listed in Column 1 to the description in Column 2. Use each description only once.

A) Refers to insiders using non-public information to buy or sell stock B) Is suggested as being the most dominant institution in the United States C) This individual was eventually taken down by a salesman defection D) Ran a massive investment fraud that is believed to have lost at least $50 billion E) Buying stocks ahead of the public F) Was involved in arbitrage, which caused the stock market to suffer billion-dollar losses G) A technique where the salesman pumps up the stock and then dumps his investment in the stock H) Corporate restructuring entailing lay-offs and firings 1) Economy Level: Basic 2) Insider trading Level: Basic 3) Ivan Boesky Level: Basic 4) Michael Milken Level: Basic 5) Pump and dump Level: Basic 6) Downsizing Level: Basic 7) Front-running Level: Basic 8) Bernie Madoff Level: Basic Answers: 1) B 2) A 3) F 4) C 5) G 6) H 7) E 8) D

201

6.5 Essay Questions 1) Why is the economy considered the most important of all social institutions? How does security fraud affect the public's perception of the economy?

Answer: The economy functions to satisfy people's basic material requirements. People maintain trust in the economy, and when that trust is betrayed, everyone pays. If the economy is weakened the result may result in paper entrepreneurism.

Page Ref: 218 Level: Difficult 2) What is insider trading and why is it considered a crime? Provide some examples from the textbook and your own thoughts and ideas about why insider trading happens? Who are the victims?

Answer: Insider trading is defined as stockholders, directors, officers, or any recipient of information not publicly available who take advantage of such limited disclosure for their own behalf. Victims include the investing public.

Page Ref: 221-243 Level: Difficult 3) Discuss the various approaches to eliminating or reducing insider trading. What is stopping some of the approaches from being implemented?

Answer: Answers may include Warren Buffett's idea of decreasing the profit. The other approach is increasing the risk.

Page Ref: 232 Level: Intermediate 4) How has the increase in financial information on the Internet changed the nature of securities crimes?

Answer: The mass audience, low costs, and perceived anonymity of cyberspace is very attractive to criminals. It makes it easier for the criminals to prey on their victims.

Page Ref: 236, 245 Level: Intermediate 5) Explore Warren Buffett's idea for a 100% tax on stocks owned a year or less. Is the liquidity argument valid?

Answer: Opinion-based question; answers may vary.

Page Ref: 232 Level: Intermediate

202

6.6 Critical Thinking Questions 1) How has corporate effectiveness of general deterrence measures and special deterrence punishment affected the incidence of insider trading? Have businessmen in general and accused individuals in particular learned that crime does not pay when it comes to insider trading?

Answer: Deterrence has not been more successful because the risk/reward ratio of white-collar crime remains a bargain in the minds of some market insiders. A required prison term may be a good example for general deterrence.

Page Ref: 231-232, 237-238 Level: Difficult 2) Develop a more effective deterrence program for white-collar criminals. What needs to be done that is not being done at present?

Answer: Answers may vary.

Page Ref: 238 Level: Intermediate

203

Profit Without Honor, 7e (Rosoff) Chapter 7 Corporate Fraud 7.1 Multiple Choice Questions 1) Enron, the seventh-largest corporation in the United States, laid off thousands of employees, and most of them had lost ________% of their 401k retirement savings.

A) 85 B) 60 C) 99 D) 50 Answer: C Page Ref: 268 Level: Basic 2) Enron's annual report issued in late 2000 proudly claimed to have ________ in two years.

A) tripled its revenue B) doubled its revenue C) quadrupled its revenue D) matched the revenue for all previous years combined Answer: A Page Ref: 265 Level: Intermediate 3) When Ken Lay stepped down as CEO in 2000, he planned to: A) start a new company.

B) take early retirement and travel.

C) pursue political office.

D) become more involved in charity work.

Answer: C Page Ref: 265 Level: Intermediate 4) Lay's connections and contributions to political candidates resulted in the spouse of what elected official being named to the Enron board?

A) Kay Bailey Hutcheson B) Phil Gramm C) Tom DeLay D) Barack Obama Answer: B Page Ref: 265 Level: Basic

204

5) Arthur Andersen, the accounting firm who audited Enron and was also paid for consulting work, met shortly before Jeff Skilling became CEO and agreed that all of the following were matters of concern about Enron except: A) the annual report was a house of cards.

B) the cash flow was the only accurate part of the annual report.

C) the company had been engaging in risky and deceptive accounting practices.

D) limited partnerships were being used to disguise debt.

Answer: B Page Ref: 266-267 Level: Intermediate 6) Which of the following is true about limited partnerships?

A) A common way to share losses B) A legal way to raise venture capital C) A method to divide responsibility D) A way to limit the power of executives Answer: B Page Ref: 266 Level: Basic 7) Enron's limited partnerships were all of the following except: A) a way to raise money.

B) a tool permitting insiders to reap huge profits.

C) used to conceal colossal debt.

D) a mechanism to limit employee losses.

Answer: D Page Ref: 266-267 Level: Intermediate 8) Enron may have been involved in ________ limited partnerships and shell companies.

A) 500 B) 3000 C) 5000 D) 1000 Answer: B Page Ref: 283 Level: Basic 9) Enron limited partnerships were named after all of the following except: A) Jurassic Park characters.

B) birds.

C) Star Wars characters.

D) constellations.

Answer: D Page Ref: 266 Level: Basic 205

10) Andrew Fastow made more than $30 million while at Enron based on a ________ investment.

A) $1 million B) zero out-of-pocket C) few thousand dollar D) $100,000 Answer: C Page Ref: 267 Level: Basic 11) Jeff Skilling's reign as a successful CEO came to an end with his resignation after only: A) two years.

B) 18 months.

C) five months.

D) one year.

Answer: C Page Ref: 267 Level: Basic 12) Skilling's resignation happened in conjunction with an energy crisis in what area?

A) California B) The Southwest United States C) Texas D) The Northeast United States Answer: A Page Ref: 267 Level: Basic 13) The ________ hypnotized by Enron's success missed a critical wake-up call with the Skilling resignation.

A) Enron board members B) financial press C) stockholders D) regulators Answer: B Page Ref: 267-268 Level: Basic 14) Enron experienced the beginning of the end with major losses in the third quarter of 2001. The company had to explain a ________ loss to corporate credit-rating agencies.

A) $250 million B) $638 million C) $1 billion D) $2 billion Answer: B Page Ref: 267 206

Level: Basic 15) Ken Lay, in an apparent move toward self-preservation, borrowed $70 million from the company after losses were announced and paid back the money with: A) partnership interests.

B) Enron stock.

C) his wife's real estate holdings purchased with money she received from Enron.

D) money he had already stolen.

Answer: B Page Ref: 268 Level: Intermediate 16) Lay told securities analyst that the major loss was caused by: A) an accounting error.

B) downturn in the energy market.

C) employee embezzlement.

D) bad investments.

Answer: A Page Ref: 267 Level: Intermediate 17) Lay's paying back loans with questionable assets accomplished which of the following, besides putting money in his bank account?

A) Avoided alerting regulators B) Took advantage of his co-conspirators C) Was a last-ditch effort to improve the company's bottom line D) Avoided substantial tax consequences Answer: A Page Ref: 267 Level: Intermediate 18) Twenty-nine executives and directors sold ________ worth of stock knowing Enron was in danger of collapse.

A) $1.4 million B) $1.1 billion C) $550 million D) $5.6 million Answer: B Page Ref: 269 Level: Basic

207

19) Unlike the captain and the officers of the Titanic, Enron leadership: A) grabbed the first lifeboat.

B) was not on board.

C) went down with the ship.

D) saved the ship.

Answer: A Page Ref: 269 Level: Basic 20) The whistleblower in the Enron case was: A) Vinson Elkins.

B) J. Clifford Baxter.

C) Sherron Watkins.

D) A. Andersen.

Answer: C Page Ref: 270 Level: Basic 21) The Enron whistleblower was concerned about advice from a certain law firm because of: A) malpractice lawsuits against the firm.

B) its conflict of interest because of partnership fees.

C) family ties between Enron and the law firm.

D) the law firm's investment in Enron stock.

Answer: B Page Ref: 270-271 Level: Intermediate 22) Fastow would eventually cooperate with the government and testify against Lay and Skilling for which reason?

A) Government videotapes of meetings B) Government threats against his father-in-law C) Indictment of wife D) 1000-year sentence he was facing Answer: C Page Ref: 272 Level: Intermediate 23) An Enron executive would eventually plead guilty to price manipulation related to the energy crisis referenced previously. The following are all elements of Enron machinations in the energy crisis except: A) selling the same store of emergency power to three different communities.

B) selling nonexistent emergency back-up power.

C) using false energy schedules to create appearance of congestion.

D) payments to Enron for easing fake congestion.

Answer: A Page Ref: 271 208

Level: Intermediate 24) Enron seemed more interested in selling its own stock than in selling anything else. As a result, the Enron debacle can be characterized as a gigantic version of all of the following except: A) insider trading scam.

B) pump and dump operation.

C) confidence game.

D) Ponzi scheme.

Answer: D Page Ref: 273 Level: Intermediate 25) Post mortems of the Enron collapse have targeted the "Casablanca maneuver" by members of the Enron board of directors. What does this reference mean?

A) Distancing themselves by being unavailable for questioning B) Secretly furnishing information to the government C) Pointing an accusatory finger at everyone but themselves D) Denying any knowledge of questionable activity despite damming evidence Answer: D Page Ref: 278 Level: Intermediate 26) Explanations of the Enron collapse include all of the following except: A) auditors who failed to audit.

B) over-analysis by stock analysts.

C) inattentive board of directors.

D) executive compensation plans.

Answer: B Page Ref: 279 Level: Intermediate 27) Arthur Andersen demonstrated its culpability when it suddenly: A) withdrew from Enron representation.

B) proposed revising the annual report.

C) became concerned about conflict of interest policy.

D) paid an unusual amount of attention to its document retention policy.

Answer: D Page Ref: 279 Level: Intermediate

209

28) During the Andersen criminal trial, the judge made a controversial ruling that was very adverse to the defendant. The court ruled that evidence of ________ could be admitted for consideration by the jury.

A) Andersen internal e-mails concerning the Enron partnerships B) Andersen's history of willingness to agree with client demands and approve questionable financial statements C) Andersen's discussions with Enron lawyers about how to conceal wrongdoing D) Andersen's shredding of documents Answer: B Page Ref: 280-281 Level: Intermediate 29) WorldCom has cooked its books by ________. The net effect of this was to make a huge loss look like a sizeable profit.

A) classifying ordinary expenses as capital expenditures B) misrepresenting bonuses to stock holders C) maintaining two set of books–one with real expenses and cash flow and the other with false numbers D) exaggerating cash flow Answer: A Page Ref: 282 Level: Intermediate 30) WorldCom and Enron had all of the following in common except: A) an executive compensation plan to die for.

B) a CFO who was implicated in the scandal simply for not doing his job.

C) a CEO who borrowed large sums from the company.

D) the same accountant.

Answer: B Page Ref: 284 Level: Intermediate 31) Global Crossing was sold for $250 million to Asian interests in 2002, it was a far cry from the company's peak value of ________.

A) $25 billion B) $50 billion C) $75 billion D) $100 billion Answer: B Page Ref: 284 Level: Basic

210

32) The SEC investigated another major telecom company, Quest Communications, and suspected them of ________ with its competitors.

A) communicating B) insider trading C) collusion D) working Answer: C Page Ref: 285 Level: Basic 33) The company Tyco was plagued by serious ________ problems.

A) morale B) employee C) accounting D) spending Answer: C Page Ref: 289 Level: Basic 34) Richard Scrushy founded HealthSouth, one of the nation's largest healthcare service providers.

Scrushy was convicted of paying bribes to the governor of ________.

A) Florida B) Mississippi C) Georgia D) Alabama Answer: D Page Ref: 293 Level: Basic 35) Which vice president of the United States was a CEO with Halliburton?

A) Dick Cheney B) Al Gore C) Mike Pence D) Joe Biden Answer: A Page Ref: 294 Level: Basic 7.2 True/False Questions 1) The deregulation of the energy market in the mid-1990s provided a golden opportunity for Enron.

Answer: TRUE Page Ref: 264-265 Level: Basic

211

2) Ken Lay stepped down as CEO from Enron to start a new company.

Answer: FALSE Page Ref: 264-265 Level: Basic 3) Limited partnerships are typically set as a perfectly legal way to raise venture capital.

Answer: TRUE Page Ref: 265-266 Level: Basic 4) Jeff Skilling's resignation happened in conjunction with an energy crisis in Texas.

Answer: FALSE Page Ref: 267 Level: Basic 5) The financial press, mesmerized by Enron's dazzling bottom line, missed a critical wake-up call.

Answer: TRUE Page Ref: 267-268 Level: Intermediate 6) Ken Lay borrowed $70 million from the company after losses were announced and paid back the money with MCI stock.

Answer: FALSE Page Ref: 268 Level: Intermediate 7) Author Andersen was the whistleblower in the Enron case.

Answer: FALSE Page Ref: 270-271 Level: Basic 8) Jeff Skilling was the Enron executive who received the longest prison sentence.

Answer: TRUE Page Ref: 276 Level: Basic 9) Enron's profitability was largely an article of faith.

Answer: TRUE Page Ref: 278 Level: Intermediate 10) Directors of privately held corporations' paramount responsibility is to protect the best interests of shareholders.

Answer: FALSE Page Ref: 278-279 Level: Intermediate 212

11) Enron has been dubbed as "Greed Incorporated" by former employees.

Answer: TRUE Page Ref: 280 Level: Basic 12) WorldCom cooked its books by classifying ordinary expenses as capital expenditures.

Answer: TRUE Page Ref: 282 Level: Intermediate 13) Bob Ebbers was Worldcom and Worldcom was Bob Ebbers.

Answer: FALSE Page Ref: 282 Level: Basic 14) Global Crossing executives walked away from the bankruptcy with personal fortunes.

Answer: TRUE Page Ref: 282 Level: Intermediate 15) Qwest was accused of artificially pumping up its revenue over a period of several years.

Answer: TRUE Page Ref: 286 Level: Intermediate 16) The SEC also suspected Quest of collusion with its customers.

Answer: FALSE Page Ref: 286 Level: Basic 17) Dennis Kozlowski was the CEO behind Adelphia at the time the company filed for bankruptcy.

Answer: FALSE Page Ref: 287 Level: Basic 18) Dennis Kozlowski was further indicted on more state charges accusing him of looting Tyco of about $600 million.

Answer: FALSE Page Ref: 289 Level: Basic

213

19) The government won 17 guilty pleas from HealthSouth executives, including all three chief financial officers since the company was founded.

Answer: FALSE Page Ref: 292 Level: Basic 20) Dick Cheney was a CEO of Halliburton while serving as Vice President of the United States of America.

Answer: FALSE Page Ref: 294 Level: Basic 21) The purpose of Fannie Mae is to purchase and securitize mortgages in order to ensure that funds are consistently available to the institutions that lend money to home buyers.

Answer: TRUE Page Ref: 297 Level: Intermediate 7.3 Fill in the Blank Questions 1) In 2000, Enron proudly claimed to have ________ its revenue in just two years.

Answer: tripled Page Ref: 265 Level: Basic 2) Andrew Fastow was the Chief Financial Officer of ________.

Answer: Enron Page Ref: 266-267 Level: Basic 3) Jeff Skilling's resignation happened in conjunction with an energy crisis in ________.

Answer: California Page Ref: 267 Level: Basic 4) The ________ press, hypnotized by Enron's success, missed a critical wake-up call with the resignation of Jeff Skilling.

Answer: financial Page Ref: 267 Level: Intermediate 5) Lost shareholder equity for ________ was estimated at $63 billion.

Answer: Enron Page Ref: 269 Level: Basic

214

6) Arthur Andersen was the accounting firm that ________ WorldCom's books.

Answer: approved Page Ref: 282 Level: Intermediate 7) WorldCom cooked its books by classifying ordinary expenses as ________ expenditures.

Answer: capital Page Ref: 282 Level: Intermediate 8) Halliburton failed to disclose its questionable bookkeeping techniques to investors (or the SEC) until ________ months later, when it was revealed in a footnote buried deep inside the company's annual report.

Answer: 18 Page Ref: 293 Level: Basic 9) ________was a financial services company best known as a commodities and futures broker.

Answer: Refco Page Ref: 297 Level: Basic 10) In a plea for mercy, Phillip Bennett argued that he was motivated by ________ for Refco employees.

Answer: concern Page Ref: 297 Level: Basic 11) The Federal National Mortgage Association (FNMA) is commonly known as ________ Mae. Answer: Fannie Page Ref: 298 Level: Basic

215

7.4 Matching Questions Match the key terns listed in Column 1 to the description in Column 2. Use each description only once.

A) Former Chief Financial Officer of Enron B) Former CEO of Enron who stepped down in 2000 to pursue political office C) The accounting firm in charge of the WorldCom scandal D) Former CEO of Enron who resigned after five months and in conjunction with an energy crisis E) A financial services company known as a commodities and futures broker F) A scandal that lost millions in retirement accounts of office managers, pipefitters, and sheet metal workers G) A corporation that purchases and securitizes mortgages ensuring funds are available to lend to home buyers H) Misled the public and regulators by classifying expenditures improperly and had drawn excessively on reserves 1) Enron Level: Basic 2) Kenneth Lay Level: Basic 3) Andrew Fastow Level: Basic 4) Jeff Skilling Level: Basic 5) WorldCom Level: Basic 6) Arthur Andersen Level: Basic 7) Refco Level: Basic 8) Fannie Mae Level: Basic Answers: 1) F 2) B 3) A 4) D 5) H 6) C 7) E 8) G

216

7.5 Essay Questions 1) Discuss what limited partnerships are. How did Enron use them to conceal its debt?

Answer: Limited partnerships are set up as a perfectly legal way to raise venture capital. Enron did not only use limited partnerships to raise capital, but used them to hide colossal debt. Provide examples of how this was accomplished Page Ref: 266-267 Level: Difficult 2) What role did the financial press play in the Enron debacle? What happenings should have been noticed, and why?

Answer: The financial press was mesmerized by Enron's dazzling bottom line. Basically, Enron had "Wall Street beaten into submission." Economists have even blamed shareholders. Lay's vague explanation of losses should have been just cause for concern.

Page Ref: 267-268 Level: Difficult 3) What part did Wall Street, with its stockbrokers, investment advisors, and stock analysts, play in the Enron debacle? What action did the Securities and Exchange Commission (SEC) take? How did the smaller energy company Dynegy come into the picture?

Answer: Wall Street has a hard time admitting when it does not understand something. Enron also generated enormous fees for investment bankers, which was hardly conducive to asking questions, let alone tough ones. SEC launched a formal investigation into Enron. Dynegy attempted a buyout of Enron and had executives who were indicted on security fraud charges.

Page Ref: 268-269 Level: Difficult 4) What commonalities exist among the corporate disasters identified in this chapter? Are there some types of wrongdoing that are more problematic than others? Why or why not?

Answer: Many of the corporate disasters included the same accounting agency, Arthur Andersen, along with many executives making millions off of others. Answers will vary.

Page Ref: 267-294 Level: Difficult 5) How do you think corporate fraud affects consumer confidence in the economy?

Answer: Answers will vary.

Page Ref: 267-294 Level: Intermediate

217

7.6 Critical Thinking Questions 1) Identify the major players in the Enron scandal. Discuss their jobs, what effects their conduct had on Enron, what effects their conduct had on stock prices, and their history with the company.

How did they profit from their activities?

Answer: Kenneth Lay, the first CEO of Enron, attempted to reassure stockholders, employees, regulators, and everyone else; however, Enron collapsed. Andrew Fastow, the CFO of Enron, made millions while at Enron. Jeff Skilling took over as CEO after Kenney Lay; however, he resigned after only five months during an energy crisis in California. Arthur Andersen, the accounting firm for Enron, received millions of dollars in consulting fees from Enron.

Page Ref: 266-269 Level: Difficult 2) How has the Sarbanes-Oxley Act changed the responsibility of people involved in companies whose stock is publicly traded? Can accounting firms still audit and accept consulting fees? How about directors and company officers–are their duties different now?

Answer: The Sarbanes-Oxley Act mandated tough sentences for executives participating in falsified earnings reports. It also heightened financial reporting requirements for public corporations and enhanced penalties for violations. It has been labeled as a huge success for the average investor. Complaints have been raised that the law has increased accounting costs for public companies. However, the Sarbanes-Oxley Act most likely had a significant deterrent effect on financial reporting fraud since its passage.

Page Ref: 294-297 Level: Difficult

218

Profit Without Honor, 7e (Rosoff) Chapter 8 Fiduciary Fraud 8.1 Multiple Choice Questions 1) In the 1946 movie, It's a Wonderful Life, George Bailey inherits the leadership of a small savings and loan institution from his father. In the 1980s it might have been known as: A) It's a Terrible Life.

B) George Buyout.

C) George Bailout.

D) George Keating.

Answer: C Page Ref: 312 Level: Basic 2) The traditional crime of embezzlement by low-level employees has been replaced by: A) thefts masterminded by outsiders.

B) low-level employees engaging in stock fraud.

C) company owners building up companies and selling them to the highest bidder with consequent job loss.

D) mismanagement and looting by upper-level management.

Answer: D Page Ref: 312 Level: Intermediate 3) Financial institutions can include all of the following except: A) pensions.

B) check-cashing companies.

C) financial service companies.

D) savings and loan industry.

Answer: B Page Ref: 314 Level: Basic 4) Financial institutions handle other people's money and they all have one thing in common: they have to get the public to ________ them.

A) trust B) invest in C) investigate D) find Answer: A Page Ref: 312 Level: Basic

219

5) Which of the following is not true about the crimes identifies in the whirlwind tour of financial crimes?

A) Most involved million-dollar losses.

B) In all the cases individuals received prison sentences.

C) Most of those convicted were mid-level managers.

D) None involved insurance companies.

Answer: C Page Ref: 312-313 Level: Intermediate 6) Estimates of the cost of the savings and loan disaster range from a mere ________ to ________.

A) $500 million; $20 billion B) $500 billion; $750 billion C) $200 billion; $1.4 trillion D) $20 billion; $500 billion Answer: C Page Ref: 315 Level: Intermediate 7) Federal authorities have agreed that which of the following was a major contributing factor to the savings and loan implosion?

A) Careless investment practices B) The downturn in the economy C) Fraud and insider abuse D) Regulation practices Answer: C Page Ref: 315 Level: Intermediate 8) Actions by the government that contributed to the collapse of the savings and loan industry included all of the following except: A) increasing down payment requirements.

B) commercial real estate loans.

C) permitting money market mutual funds.

D) deregulation.

Answer: A Page Ref: 316 Level: Intermediate

220

9) Insider thrift fraud took all of the following forms except: A) desperation dealing.

B) borrowing up.

C) covering up.

D) collective embezzlement.

Answer: B Page Ref: 317-318 Level: Basic 10) Like other criminogenic cultures, the savings and loan industry placed a heavy emphasis on: A) presence of organized crime interests.

B) intricate government regulations.

C) reduced competition.

D) profit.

Answer: D Page Ref: 319 Level: Intermediate 11) Though thrift failures occurred nationwide, what two states accounted for the preponderance of the worst thrift frauds?

A) Oklahoma and Texas B) Florida and California C) New York and California D) California and Texas Answer: D Page Ref: 319 Level: Basic 12) Outsider thrift frauds primarily involved all of the following except: A) appraisers.

B) accountants.

C) lawyers.

D) bank examiners.

Answer: D Page Ref: 320-321 Level: Basic 13) ________ is the process of progressively increasing the sales price of real estate and the size of the loan and defaulting on the final loan.

A) Nominee loans B) Land flips C) Linked financing D) Reciprocal lending Answer: B Page Ref: 321 Level: Basic 221

14) ________ involve(s) loans between insiders at different thrifts to evade regulations pertaining to restrictions on insider loans.

A) Land flips B) Linked financing C) Reciprocal lending D) Nominee loans Answer: C Page Ref: 321-322 Level: Basic 15) ________ refers to loans conditioned on receipts of deposits. The loan then goes into default and deposits can be withdrawn.

A) Land flips B) Reciprocal lending C) Linked financing D) Nominee loans Answer: C Page Ref: 322 Level: Basic 16) The Keating Five were: A) the five institutions controlled by Keating.

B) Keating and his four relatives who looted Lincoln Savings and Loan.

C) five regulators bribed by Keating.

D) United States Senators.

Answer: D Page Ref: 324 Level: Basic 17) Alan Bond was convicted and sentenced to prison for cheating retirees and workers by "cherrypicking." This term involves: A) keeping profitable investments and investing others money in unprofitable ones.

B) favoring some clients' accounts over others when making investments.

C) directing investment funds to brokerage houses with the highest fees and getting kickbacks.

D) deliberately mixing unprofitable investments in with profitable ones to increase fees.

Answer: A Page Ref: 327 Level: Intermediate 18) The primary investment vehicle for First Pension was: A) penny stock.

B) nonexistent mortgages.

C) deal stocks.

D) junk bonds.

Answer: B 222

Page Ref: 327 Level: Basic 19) First Pension went so far as to ________ to fool an employee who questioned company investments.

A) hire an actress to impersonate an auditor B) recruit investors to lie to regulators C) present false trust deeds to auditors D) produce fake company records showing the profitability of the investments Answer: A Page Ref: 328 Level: Intermediate 20) Steve Wymer's Institutional Treasury Management lost $174 million. Investors were mainly: A) teachers with retirement funds.

B) individuals with private mutual funds.

C) municipalities and government agencies.

D) individual investors with IRAs. Answer: C Page Ref: 328-329 Level: Intermediate 21) Wymer and others tried to justify their schemes by saying that there was an economic downturn and it was necessary to pursue risky investments and hide information from regulators so they could try to recover. This might have been more believable had it not been for: A) amassing of personal fortunes.

B) lack of fraud in investments.

C) insolvency in a time of great economic prosperity.

D) other firms' ability to weather the tough financial times.

Answer: A Page Ref: 329 Level: Intermediate 22) The biggest losers in the Institutional Treasury Management case were: A) stockbrokers.

B) taxpayers.

C) banks.

D) the public.

Answer: B Page Ref: 329 Level: Basic

223

23) When it comes to the insurance industry, the public is in most danger from: A) customers who make false claims.

B) the state's failure to pay claims out of its guaranty fund.

C) unscrupulous insurance companies.

D) states who let insurers raise premiums.

Answer: C Page Ref: 330-331 Level: Intermediate 24) An example of premium diversion would be: A) using premiums to pay excessive salaries to executives.

B) using premiums to pay operating costs.

C) using premiums collected to pay claims.

D) failure to pay legitimate claims.

Answer: A Page Ref: 330 Level: Basic 25) Unscrupulous insurance companies can also cheat the public by claiming to have assets they do not have, or assets that are worth more than they really are. The reason companies do this is: A) to obscure money received from illegal activities.

B) to conceal diversion of premiums.

C) to meet capitalization requirements.

D) to lure investors.

Answer: C Page Ref: 331 Level: Intermediate 26) The Multiple Employer Welfare Arrangement was created by Congress to: A) enable small business owners to avoid the requirement to provide insurance.

B) enable employers to provide life insurance.

C) enable employers to meet welfare payments requirements for health care.

D) enable employers to provide group medical insurance.

Answer: D Page Ref: 331 Level: Basic 27) Reinsurance is a legitimate business practice in the insurance industry. It becomes a problem when: A) insurance companies fail to adequately diversify their investments.

B) insurance companies do not spread possible losses adequately.

C) reinsurers are undercapitalized.

D) insurance companies use reinsurers that are located outside the United States.

Answer: C Page Ref: 331 Level: Intermediate 224

28) The term "offshore" means: A) a company based outside the continental United States.

B) a company located in a fictitious country.

C) a location in a place other than the United States.

D) a company located in a United States territory but not in one of the 50 states.

Answer: C Page Ref: 331-333 Level: Basic 29) Regulator reaction to insurance scams can be very slow. In the case of Martin Bramson and his fake malpractice insurance policies for doctors, an insider had tipped regulators for ________ before action was taken.

A) 15 years B) 10 months C) 10 years D) 5 years Answer: C Page Ref: 333 Level: Basic 30) Alan Teale and his far-flung group of companies took advantage of the public in all of the following ways except: A) avoiding the reinsurance scam.

B) disability plans for professional athletes.

C) liability policies for high school athletes.

D) securing claims with treasury notes secured by the Sovereign Cherokee Nation Tejas.

Answer: A Page Ref: 333-334 Level: Intermediate 31) In mid-March 2008, the Federal Reserve took drastic measures and negotiated a bargainbasement sale of ________ for $2.00 a share.

A) Merrill Lynch B) JP Morgan Chase C) Bear Stearns D) Lehman Brothers Answer: C Page Ref: 336 Level: Basic

225

32) Years before its demise, this company had established working relationships with some of the sleaziest firms in the mortgage business: A) Merrill Lynch.

B) JP Morgan Chase.

C) Bear Stearns.

D) Lehman Brothers.

Answer: D Page Ref: 339 Level: Basic 8.2 True/False Questions 1) In the 1980s, the savings and loan debacle resulted in almost $200 billion in short-term losses to taxpayers.

Answer: TRUE Page Ref: 312 Level: Basic 2) The traditional crime of embezzlement by lower-level employees has become overshadowed by concerns with upper-level management mismanaging and looting their own companies.

Answer: TRUE Page Ref: 312 Level: Basic 3) White-collar crime was not a key instrument in the savings and loan debacle.

Answer: FALSE Page Ref: 315 Level: Basic 4) Federal authorities have agreed that careless investment practices were a major contributing factor to the savings and loan implosion.

Answer: FALSE Page Ref: 315-316 Level: Intermediate 5) Deviance in the savings and loan industry is an example of the organization being both victim and perpetrator.

Answer: TRUE Page Ref: 318 Level: Basic 6) The traditional embezzler is usually seen as a high-level employee working alone to steal from a large organization.

Answer: FALSE Page Ref: 318 Level: Basic 226

7) Nominee loans involve loans on real estate to borrowers that do not exist or are not in fact real borrowers.

Answer: TRUE Page Ref: 322 Level: Basic 8) Reciprocal lending involves loans between insiders at different thrifts to evade regulations pertaining to restrictions on insider loans.

Answer: TRUE Page Ref: 322 Level: Basic 9) Regulation of the thrift industry in the early 1980s, combined with continued deposit insurance, were key elements of a criminogenic industry environment.

Answer: FALSE Page Ref: 323 Level: Intermediate 10) Charles Keating contributed $1.4 million to the campaigns and causes of four U.S. Senators, who would later be known as the "Keating Four."

Answer: FALSE Page Ref: 324 Level: Basic 11) One of the most callous forms of white-collar predication entails the looting of money from retirees and workers who have deposited their savings in pension funds.

Answer: TRUE Page Ref: 326 Level: Intermediate 12) The First Pension Corporation investments was an insider trading scam.

Answer: FALSE Page Ref: 327-328 Level: Basic 13) The insurance industry is largely regulated by individual states.

Answer: TRUE Page Ref: 330 Level: Basic 14) An example of premium diversion would be using premiums collected to pay claims.

Answer: FALSE Page Ref: 330 Level: Intermediate

227

15) The Multiple Employer Welfare Agreement enables employers to meet welfare payment requirements for healthcare.

Answer: FALSE Page Ref: 331 Level: Intermediate 16) Reinsurance companies function outside of the formal regulatory system because they do not directly affect consumers.

Answer: TRUE Page Ref: 331 Level: Basic 17) A number of recognized Caribbean nations such as Belize, Dominica, and Grenada have offered economic citizenships, which have a lot in common with the offerings of nonexistent countries.

Answer: TRUE Page Ref: 333 Level: Intermediate 18) Alan Teale, in his varied insurance schemes, sold disability policies to professional athletes and liability policies to high-school athletic programs.

Answer: TRUE Page Ref: 333-334 Level: Intermediate 19) More than 90 percent of the loans issues by Fannie Mae were prime rate due to relaxed underwriting standards.

Answer: FALSE Page Ref: 335 Level: Basic 20) Bear Stearns shares went from $40 to $2 in a matter of days.

Answer: FALSE Page Ref: 336 Level: Basic 21) Merrill Lynch was a key player in the subprime mortgage collapse. It had been securitizing subprime loans and then selling them to investors who had borrowed the money to purchase them from Merrill Lynch itself.

Answer: TRUE Page Ref: 337-338 Level: Intermediate

228

22) Lehman Brothers announced it was filing for Chapter 11 bankruptcy protection the day after Bear Stearns was bought out by the Bank of America.

Answer: FALSE Page Ref: 338 Level: Basic 8.3 Fill in the Blank Questions 1) Financial institutions are entrusted to properly invest and oversee large amounts of funds which are ________ in them.

Answer: deposited Page Ref: 312 Level: Basic 2) The ________ of the savings and loan industry in the 1980s will cost the American taxpayer hundreds of millions of dollars.

Answer: devastation Page Ref: 315 Level: Basic 3) In a few strokes, ________ dismantled most of the regulatory infrastructure that had kept the thrift industry together for four decades.

Answer: Washington Page Ref: 316 Level: Basic 4) ________ were central players in the epidemic of fraud as they are essential to real estate and banking systems.

Answer: Appraisers Page Ref: 320 Level: Basic 5) ________ loans involve loans on real estate to borrowers that do not exist or are not in fact the real borrowers.

Answer: Nominee Page Ref: 321 Level: Intermediate 6) First Pension Corporation investments turned out to be a(n) ________ scheme.

Answer: Ponzi Page Ref: 327-328 Level: Basic

229

7) Steven Wymer testified before ________ that broker-dealers had aided and abetted him in his schemes.

Answer: Congress Page Ref: 328-329 Level: Basic 8) The biggest losers in the Institutional Treasury Management case were ________.

Answer: taxpayers Page Ref: 329 Level: Basic 9) "Premium Diversion" is a common form of fraud where funds are ________ for other purposes.

Answer: diverted Page Ref: 330 Level: Basic 10) The insurance industry is largely regulated by individual ________.

Answer: states Page Ref: 329 Level: Basic 11) The term ________ refers to a location in a place other than the United States.

Answer: offshore Page Ref: 331 Level: Intermediate 12) Because so many loans had been repackaged by Fannie Mae and others into mortgage-backed securities, the growing default problem spread to ________ and international financial backers.

Answer: Wall Street Page Ref: 336 Level: Basic 13) Subprime ________ fraud is one of the main reasons for the current national surge in foreclosures.

Answer: mortgage Page Ref: 336 Level: Intermediate 14) Bear Stearns grew to be a global investment bank and securities broker and today, it does not ________.

Answer: exist Page Ref: 336 Level: Basic

230

15) In 2008, Lehman Brothers faced unprecedented losses in the continuing ________ mortgage crisis.

Answer: subprime Page Ref: 338 Level: Basic

231

8.4 Matching Questions Match the key terns listed in Column 1 to the description in Column 2. Use each description only once.

A) Cheated retirees and workers by "cherry-picking" B) Involves loans between insiders at different thrifts to evade regulations pertaining to restrictions on insider loans C) A group that received over $34 million from the thrift and parent company D) The process of progressively increasing the sales price of real estate and the size of the loan and defaulting on the final loan E) Entities that handle other people's money and invest it on behalf of others F) Took advantage of the professional sports players by offering disability insurance G) Involves loans on real estate to borrowers that do not exist or are not the real borrowers H) Loans conditioned on receipt of deposits. The loan then goes into default and deposits can be withdrawn.

1) Financial institutions Level: Basic 2) Nominee loans Level: Basic 3) Land flips Level: Basic 4) Reciprocal lending Level: Basic 5) Linked financing Level: Basic 6) The Keating Five Level: Basic 7) Alan Bond Level: Basic 8) Alan Teale Level: Basic Answers: 1) E 2) G 3) D 4) B 5) H 6) C 7) A 8) F

232

8.5 Essay Questions 1) Distinguish insider thrift fraud from outsider thrift fraud. Who is involved? What are the techniques? What are the motivations?

Answer: Insider thrifts involve not only deviance in an organization, but deviance by the organization. This can include management personnel. Outsider thrifts involve outsiders from various occupations and professional groups. This may include appraisers, lawyers, and accountants.

Page Ref: 317-322 Level: Difficult 2) Discuss what pension fund fraud is. Why do you think this crime is especially heinous? Who are the victims of pension fund fraud?

Answer: Pension fraud is the looting of money from retirees and workers who have deposited their savings in pension funds. Many persons have spent years putting away this money and rely on such institutions to manage their money for retirement. When that trust is broken, the results are devastating–their entire retirement savings have disappeared.

Page Ref: 327-329 Level: Difficult 3) How does investment and financial services fraud work? Who are the actors typically involved in this sort of fraud?

Answer: It is claimed by owners that fraud occurs because they are pushed to the brink of insolvency by various market conditions, so they gamble to recover by making risky investments that could produce a high return. In reality, it is usually revealed that their investments were not only unsafe and illegal, but usually involved substantial fraud as well.

Page Ref: 330-332 Level: Difficult 4) How are offshore entities used in committing financial fraud? Provide examples.

Answer: Offshore entities are often protected by bank secrecy laws or even located in fictitious countries. It is often thought that investors, customers, and regulators would catch on once that a country was fictitious; however, that is not always the case. Examples include Herbert Williams' Fantasy Islands, California Pacific Bankers and Insurance Ltd., and Martin Bramson's International Bahamian Insurance Company.

Page Ref: 332-333 Level: Difficult 5) What are economic citizenships? Why do individuals obtain these items? Why do countries issue them? What is the negative side of economic citizenships?

Answer: Economic citizenships may be offered by places in actual countries or fictitious countries.

Individuals obtain them to avoid taxes or to conceal funds. Countries issue them to ultimately make profit. Economic citizenships can lead to various types of fraud including bank and insurance fraud.

Page Ref: 332-333 Level: Difficult

233

8.6 Critical Thinking Questions 1) Why were criminal networks a necessary part of many of the savings and loan frauds? What activities occurred in the criminal network? What were the common methods used to cheat the public?

Answer: Criminal networks were necessary because the nature of many of the crimes permeating depended on mutual support from each entity. Activities include misrepresentation in the amount of capital reserves, risky developmental loans, covering up the use of illegal investment activity, and money laundering. This included land flips, nominee loans, reciprocal lending, and linked financing.

Page Ref: 315-320 Level: Difficult 2) Investigate the reinsurance industry. Is it still a common practice in the United States? Have there been any recent insurance scandals that involved the practice of reinsurance?

Answer: Reinsurance is a legitimate practice in the industry, which allows companies to sell their policies to other companies so that they can write additional policies and are not "wiped out" in the event of a disaster precipitating a deluge of expensive claims. Reinsurance companies function outside the formal regulatory system because they do not directly affect consumers. Many have operated offshore, where they can be protected by bank secrecy law of other countries. There were four major insurance company failures that were attributed to questionable reinsurance transactions.

Page Ref: 330-331 Level: Difficult

234

Profit Without Honor, 7e (Rosoff) Chapter 9 Crimes by the Government 9.1 Multiple Choice Questions 1) Justice Louis Brandeis of the United States Supreme Court said that governmental lawlessness was: A) contagious.

B) dangerous.

C) unprecedented.

D) devastating.

Answer: A Page Ref: 348 Level: Basic 2) At the core of the Nazi atrocities was eugenics, which includes: A) bionics.

B) selective breeding and compulsory sterilization.

C) euthanasia.

D) assisted suicide.

Answer: B Page Ref: 348 Level: Intermediate 3) It is estimated that ________ have been sterilized under statutes permitting the procedure.

A) 5000 B) 20,000 C) 40,000 D) 63,000 Answer: D Page Ref: 349 Level: Basic 4) In the Tuskegee Study, what population was used in the study?

A) Asians B) African Americans C) Hispanics D) Caucasians Answer: B Page Ref: 349-350 Level: Basic

235

5) In the Tuskegee Study, study subjects failed to receive treatment for: A) AIDS. B) heart disease.

C) cancer.

D) syphilis.

Answer: D Page Ref: 349-350 Level: Basic 6) Which of the following is true about the Tuskegee Study?

A) When penicillin became available the wives and children received treatment.

B) Autopsies were not performed once the participants died.

C) The issues with the study came to light twenty years after the study started.

D) The only contribution the Tuskegee study ever made to medical science was keeping laboratories supplied with syphilitic blood samples for testing purposes.

Answer: D Page Ref: 350-351 Level: Intermediate 7) In 1958, the CIA prepared a report which suggested to intelligence agencies that they might be able to control people through: A) brainwashing.

B) hypnosis to create amnesia or elicit false confessions.

C) sensory deprivation.

D) drug addiction.

Answer: D Page Ref: 351 Level: Intermediate 8) The object of depatterning is the disintegration of a subject's personality and one way to do this is through: A) electroconvulsive shock treatment; levels up to eighty times the intensity considered safe.

B) limited doses of hallucinogenic drugs.

C) lengthy periods of drug-induced sleep D) having them some large quantities of marijuana for weeks at a time.

Answer: C Page Ref: 351 Level: Intermediate

236

9) When the CIA began experimenting with LSD in the early 1950s, the subjects included: included: A) military members.

B) juvenile delinquents.

C) prostitutes.

D) mobsters.

Answer: C Page Ref: 351 Level: Basic 10) During the Cold War, the CIA tested knockout drugs and incapacitating substances at: A) University of Southern California.

B) Harvard.

C) Georgia Tech.

D) Georgetown University.

Answer: C Page Ref: 352 Level: Intermediate 11) Though most of the medical experimentation by the military took place decades ago, soldiers in what recent conflict were given an unapproved pretreatment for nerve gas attacks without their knowledge?

A) Bosnian conflict B) Vietnam War C) Persian Gulf War D) United States invasion of Iraq Answer: C Page Ref: 354 Level: Basic 12) Mentally retarded ________ at the Fernald State School in Massachusetts were used as guinea pigs in radiations studies sponsored by the Atomic Energy Commission between 1946 and 1956.

A) children B) prisoners C) teenage girls D) teenage boys Answer: D Page Ref: 354 Level: Basic

237

13) In 1995, it was disclosed that the government had conducted 4,000 radiation experiments between 1945 and 1974. Most of these experiments were conducted using ________ populations as subjects.

A) knowledgeable B) healthy C) vulnerable D) young Answer: C Page Ref: 356 Level: Basic 14) The Defense Department has engaged in questionable radiation experiments on: A) animals.

B) prisoners of war.

C) the elderly.

D) humans.

Answer: D Page Ref: 355 Level: Basic 15) Experiments conducted using prisoners have included all of the following except: A) drug toxicity experimentation by drug companies.

B) prisoners being given large doses of vitamins and minerals.

C) Harvard University study using hallucinogens.

D) testicle exposure to x-rays.

Answer: B Page Ref: 357 Level: Intermediate 16) Prison studies are: A) acceptable practice in most countries.

B) economical.

C) expensive.

D) beneficial for all involved.

Answer: B Page Ref: 358 Level: Basic 17) The Lockheed corporation: A) was able to help elect government officials in Japan.

B) nearly destroyed the British monarchy.

C) corrupted national elections in Germany and Spain.

D) caused the arrest of a former Italian prime minister.

Answer: D Page Ref: 358 Level: Basic 238

18) The Iran-Contra affair was a "gun-for-money" operation designed to assist rebels in: A) Nicaragua.

B) Peru.

C) Chile.

D) Honduras.

Answer: A Page Ref: 360 Level: Basic 19) Not only did certain individuals in the United States government funnel money to the Contras, but "third country" strategy had foreign countries like Saudi Arabia being encouraged to supply aid.

The Saudi contribution exceeded $30 million. Why did Saudi Arabia contribute this money to the Contras?

A) To help foreign relations with Israel B) To cement diplomatic relations with the Contras and their country C) To curry personal favor with the American president D) To facilitate trade relations with Iran Answer: C Page Ref: 361 Level: Intermediate 20) Who was president of the United States during the Iran-Contra Affair?

A) President Carter B) President Regan C) President Bush D) President Clinton Answer: B Page Ref: 360-362 Level: Intermediate 21) Oliver North became a: A) public hero.

B) newscaster.

C) host of a nationally syndicated daily radio program.

D) host of Good Morning America.

Answer: C Page Ref: 365 Level: Basic 22) The Nixon administration and CREEP were involved in all of the following except: A) payments of personal expenses.

B) illegal campaign contributions.

C) rewarding corporate friends with legislative action.

D) use of funds to facilitate the China trade proposal.

Answer: D 239

Page Ref: 366-367 Level: Intermediate 23) The acronym CREEP stands for: A) Committee to RE-Elect the President.

B) Corruption Reward Exploitation.

C) Candidate RE-Election Project.

D) Communist Rejection Executive Expulsion Project.

Answer: A Page Ref: 366 Level: Basic 24) Nixon and his cohorts engaged in all of the following except: A) hiring people to disrupt the National Democratic Convention.

B) leaking false stories to the press.

C) forging letters from prominent Democrats.

D) threatening candidates' family members.

Answer: D Page Ref: 366-371 Level: Intermediate 25) What happened to President Nixon?

A) Sentenced to probation B) Retired in luxury C) Died in office D) Tried and convicted of impeachment charges by the Senate Answer: B Page Ref: 370 Level: Basic 26) Nixon's imperious assault on the Constitution caused a crisis of: A) legitimacy.

B) conscience.

C) order.

D) power.

Answer: A Page Ref: 370 Level: Basic 27) President ________ may have criminal charges filed against him to include, but are not limited to, lying to investigators, filing false documents, money laundering, conspiracy, and covering up and colluding with a foreign government.

A) Trump B) Franklin Roosevelt C) Eisenhower D) Truman 240

Answer: A Page Ref: 372 Level: Basic 28) President ________ ordered J. Edgar Hoover to conduct surveillance programs against American citizens.

A) Trump B) Franklin Roosevelt C) Eisenhower D) Truman Answer: B Page Ref: 372 Level: Basic 29) FBI surveillance targets included all of the following except: A) Helen Keller.

B) Justice Felix Frankfurter.

C) Attorney General Robert Kennedy.

D) Chicago Mayor Richard Daley.

Answer: C Page Ref: 374 Level: Basic 30) Of all the federal government agencies, which one keeps the most data on Americans?

A) Homeland Security B) FBI C) IRS D) CIA Answer: C Page Ref: 376 Level: Basic 31) The CIA's abuse of power included of all of the following except: A) spying on citizens inside the United States.

B) always staying just inside the law.

C) intercepting personal letters.

D) monitoring overseas activities of domestic dissidents.

Answer: B Page Ref: 376-378 Level: Intermediate 32) The most secretive federal agency is the: A) DEA. B) FBI. C) CIA. D) NSA. 241

Answer: D Page Ref: 377 Level: Basic 33) What remains a popular method of repression and punishment in totalitarian regimes and terrorist organizations?

A) torture B) water boarding C) imprisonment D) exile Answer: A Page Ref: 381 Level: Basic 34) The use or encouragement of torture by the CIA has a document history going back how long?

A) nearly 40 years B) nearly 50 years C) nearly 60 years D) nearly 70 years Answer: B Page Ref: 382 Level: Basic 35) Abu Ghraib is a prison located in: A) Iran.

B) Iraq.

C) Syria.

D) Afghanistan.

Answer: B Page Ref: 384 Level: Basic 9.2 True/False Questions 1) The state of Virginia sterilized over 8,300 mentally retarded citizens between 1924 and 1972.

Answer: TRUE Page Ref: 348 Level: Basic 2) Most states ended their forced sterilization programs by the early 1980s, but we are still living with the legacies of these horrific policies today.

Answer: FALSE Page Ref: 349 Level: Basic 3) The Tuskegee study group was selected based on genetic predisposition for certain behavior.

242

Answer: TRUE Page Ref: 350 Level: Basic 4) The CIA experimented with LSD in the 1950s and one agent even slipped some LSD to mob boss Lucky Luciano.

Answer: TRUE Page Ref: 352 Level: Basic 5) The DEA has a long history of medical abuse.

Answer: FALSE Page Ref: 352 Level: Basic 6) A spokesperson for the Army scientific division argued that its experiments were no more dangerous than an urban bus ride and demonstrated the Army's contempt for humanity.

Answer: TRUE Page Ref: 353 Level: Intermediate 7) The most sickening medical experiments conducted by the military involved subjects being exposed to torture devices.

Answer: FALSE Page Ref: 353 Level: Intermediate 8) In 1993, it was disclosed that the government had injected 18 civilians who may or may not have known of the risks with radioactive plutonium.

Answer: TRUE Page Ref: 354 Level: Basic 9) At some prisons, pharmaceutical corporations have competed vigorously to purchase exclusive rights to conduct drug toxicity tests on inmates.

Answer: TRUE Page Ref: 357 Level: Basic 10) Bribery of government officials, helping rebels to overthrow elected officials, and participating in revolution in other countries are outside of United States government control because the activity occurs in a foreign country.

Answer: FALSE Page Ref: 358 Level: Intermediate

243

11) In Chile, the CIA and ITT, an American corporation, worked to try and defeat Salvador Allande during the 1970 elections. When Allende was assassinated, his government was replaced by a military junta friendly to American interests.

Answer: TRUE Page Ref: 359 Level: Intermediate 12) During the 1980s, the United States Congress was willing to authorize funding on behalf of the Contras in Nicaragua.

Answer: FALSE Page Ref: 360 Level: Basic 13) Oliver North was a Marine Major who was responsible for putting together the arms-forhostages deal with Iran for President Regan.

Answer: FALSE Page Ref: 363 Level: Basic 14) There was only one individual that was sentenced in connection with the Iran-Contra affair.

Answer: TRUE Page Ref: 364 Level: Basic 15) Citizens of Japanese ancestry in Central America and South America countries were rounded up, handed over to American authorities, transported to the United States, and thrown into concentration camps in the early 1940s.

Answer: TRUE Page Ref: 367 Level: Basic 16) In 1972, Carl Bernstein and Bob Woodward reported in the Washington Post that a check for Nixon's campaign had been deposited in the account of one of the Watergate burglars.

Answer: TRUE Page Ref: 367 Level: Basic 17) The Saturday Night Massacre was Nixon's firing of Justice Department personnel when they would not fire the special prosecutor.

Answer: TRUE Page Ref: 369 Level: Intermediate

244

18) Only five of the twenty-one business executives sanctioned for illegal presidential campaign contributions by the Watergate Special Prosecutor were convicted of "willful violations"; one of them being George Steinbrenner.

Answer: TRUE Page Ref: 371 Level: Intermediate 19) After World War II started, President Roosevelt issued a proclamation officially placing the CIA in charge of all investigations of espionage, sabotage, and subversive activities.

Answer: FALSE Page Ref: 373 Level: Basic 20) The investigation of Martin Luther King began in earnest in 1962 with the knowledge and tacit approval of President John Kennedy, who publicly claimed he did not support King.

Answer: FALSE Page Ref: 376 Level: Basic 21) During the Kennedy administration, the IRS was encouraged to target right-wing extremists.

Answer: TRUE Page Ref: 377 Level: Basic 22) Helen Keller at one time was a surveillance target of the FBI. Answer: TRUE Page Ref: 373 Level: Basic 23) The National Security Agency (NSA) was the most secretive federal agency between 1952 and 1974.

Answer: TRUE Page Ref: 377 Level: Intermediate 24) Solitary confinement and sensory deprivation are recommended as ways to induce stress and anxiety.

Answer: TRUE Page Ref: 382 Level: Basic 25) Abu Ghraib, 20 miles outside of Baghdad, was one of the world's most infamous prisons.

Answer: TRUE Page Ref: 383 Level: Basic

245

9.3 Fill in the Blank Questions 1) Justice Louis Brandeis of the United States Supreme Court said that government lawlessness was ________.

Answer: contagious Page Ref: 348 Level: Basic 2) At the core of ________ atrocities was eugenics, which included selective breeding and forced sterilization.

Answer: Nazi Page Ref: 348 Level: Basic 3) The ________ Study involved testing an African American group of subjects.

Answer: Tuskegee Page Ref: 349-350 Level: Basic 4) During the Civil War, a government agency used knockout drugs and incapacitating substances at Georgetown University. The subjects of the study were uninformed ________ patients.

Answer: cancer Page Ref: 352 Level: Basic 5) To medical researchers, the poor were especially appealing ________ for human experimentation.

Answer: targets Page Ref: 355 Level: Intermediate 6) The CIA has also been clearly implicated in ________ involving foreign leaders.

Answer: murders Page Ref: 359 Level: Intermediate 7) The Salvadoran "death squad" was trained in the United States and these troops later ________ dozens of peasants in El Salvador.

Answer: massacred Page Ref: 360 Level: Basic 8) The Iran-Contra affair occurred during the ________ presidency.

Answer: Reagan Page Ref: 360 Level: Intermediate 246

9) Lt. Col. Oliver North, when called to testify before Congress about his activities with the NSC and Iran-Contra, came across as a persecuted ________.

Answer: patriot Page Ref: 364 Level: Intermediate 10) A national poll reported that the majority of the public rated Watergate as the ________ scandal in American history.

Answer: deviance Page Ref: 366 Level: Basic 11) One of the ringleaders of the Republican political ________ conspiracy was the president's appointments secretary Dwight Chapin.

Answer: sabotage Page Ref: 366 Level: Basic 12) ________ maintained that President Nixon had been aware of the Watergate cover-up from the beginning.

Answer: Dean Page Ref: 368 Level: Basic 13) Watergate was a scandal motivated by ________ power.

Answer: political Page Ref: 370 Level: Basic 14) Less than two weeks after the Kennedy assassination, while the country still mourned, the FBI held an all-day conference to plan the destruction of ________ and the civil rights movement.

Answer: Martin Luther King Page Ref: 377 Level: Basic 15) The NSA is perhaps best known for its ________ operation, an automated global interception and relay system.

Answer: deviance Page Ref: 378 Level: Basic

247

16) In 2002, President Bush signed a secret executive order allowing the NSA to ________ on Americans within the country without the court-approved warrants ordinarily required for domestic spying.

Answer: deviance Page Ref: 379 Level: Basic 17) ________ remains a popular method of repression and punishment in totalitarian regimes and terrorist organizations.

Answer: Torture Page Ref: 381 Level: Basic 18) After U.S. and coalition military forces overthrew Saddam in 2003, ________ was cleaned up, repaired, and turned into the Bagdad correctional facility.

Answer: Abu Ghraib Page Ref: 384 Level: Basic 19) Abu Ghraib was the culmination of secret CIA policy began during the ________ and formalized in two infamous torture manuals.

Answer: Cold War Page Ref: 386 Level: Basic 20) ________ consists of strapping the person being interrogated onto a board as pints of water are forced into their lungs through a cloth covering their face.

Answer: Waterboarding Page Ref: 388 Level: Basic

248

9.4 Matching Questions Match the key terns listed in Column 1 to the description in Column 2. Use each description only once.

A) Nixon's firing of Justice Department personnel when they would not fire the special prosecutor B) Began with the taking of United States Embassy personnel by followers of Ayatollah Khomeini C) The leader of the FBI D) Bribery and individual malfeasance E) A committee for the reelection of the president F) Normalized governmental deviance G) Involved human experiments without the participants' knowledge H) Believed that government lawlessness was contagious 1) Louis Brandeis Level: Basic 2) Tuskegee Study Level: Basic 3) Iran-Contra affair Level: Basic 4) J. Edgar Hoover Level: Basic 5) Little corruption Level: Basic 6) Big corruption Level: Basic 7) CREEP Level: Basic 8) Saturday Night Massacre Level: Basic Answers: 1) H 2) G 3) B 4) C 5) D 6) F 7) E 8) A

249

9.5 Essay Questions 1) Identify and discuss some of the most egregious examples of the United States government using people as human guinea pigs. Provide your own thoughts with your examples.

Answer: Answers may include the Tuskegee Study, mind control experiments, unethical medical practices, radiation exposure experiments, and numerous experiments on prisoners.

Page Ref: 349-353 Level: Difficult 2) Are there particular groups of people who were more likely to be used as human guinea pigs?

Describe these vulnerable populations and why they are likely to be selected for experimentation.

Answer: Answers may include the poor, minorities, and the developmentally delayed. Answers will vary.

Page Ref: 353-356 Level: Difficult 3) Explain how American corporations justify the use of bribery in foreign countries.

Answer: Bribery of government officials is commonly used to obtain business contracts in many foreign countries. American corporations argue that bribery is a traditional and necessary cost of doing business overseas.

Page Ref: 358-359 Level: Difficult 4) Provide examples of how each of the following entities arguably abused its power: CIA, Defense Department, NSA, and the FBI. Answer: CIA: Over time the CIA has conducted clandestine spying operations on American political dissidents, collected police reports on homosexuals, and spied on radicals in the United States. Defense Department: Military intelligence during the turbulent 1960s collected enormous amounts of data on individuals associated with domestic unrest.

NSA: Arguably the most secretive of all intelligence agencies, the NSA has compiled files on thousands of Americans, intercepted all cables leaving the United States, and monitored international phone calls of people on a "watch list," which includes the names of the peaceful, the nonviolent, and the totally legal.

FBI: Spying on American citizens has been the most far-reaching and most vindictive act. Targets have included the ACLU, the NAACP, Martin Luther King, Jr., and Supreme Court Justices. The FBI has not stopped at spying but has conducted active smear campaigns.

Page Ref: 362-380 Level: Difficult 5) Discuss how Hoover's FBI interfered with people's Constitutional rights. What were his justifications? Explain when you think law enforcement crosses the line.

Answer: Hoover's FBI used surveillance which encroached on the constitutional rights of citizens regarding free speech, free assembly, or security against unreasonable search and seizures. The vagueness of domestic intelligence laws gave the FBI such latitude that abuse was inevitable.

Page Ref: 373-376 Level: Difficult 250

9.6 Critical Thinking Questions 1) Evaluate Watergate. What were the motivations of those involved? Identify the events that occurred as Watergate began to unravel. Discuss the various explanations for why Watergate occurred.

Answer: Watergate straddles the line between "little corruption" and "big corruption." Examples of "little corruption" include violation of election laws, donations to political figures for personal use, quid pro quo action by the administration for campaign contributions, and probably income tax evasion by the President. What make Watergate so terrible are the aspects of "big corruption." A shadow government that thought of itself as exempt from accountability to the public and other branches of government came as close to despotism as this country has ever seen.

Page Ref: 365-370 Level: Difficult 2) Evaluate waterboarding, a torture technique that dates back over 100 years. Do you believe it is an effective means of torture especially because it does not leave any marks on its victim?

Answer: Answers will vary.

Page Ref: 388-389 Level: Difficult

251

Profit Without Honor, 7e (Rosoff) Chapter 10 Corruption of Public Officials 10.1 Multiple Choice Questions 1) Which of the following would be representative of "little corruption"?

A) Trivial, less costly deviance B) Bribery or corruption by individuals C) Corruption with no national implications D) Organizational deviance Answer: B Page Ref: 403 Level: Intermediate 2) Which of the following is an example of public corruption?

A) Sexual relations with an intern in the Oval Office B) Unskilled relative hired as a policy analyst C) Use of a prostitute D) Drug use Answer: B Page Ref: 403-404 Level: Intermediate 3) "Little corruption" in the highest level of federal executive office has been: A) rare.

B) occurring at regular intervals.

C) persistent.

D) nonexistent.

Answer: A Page Ref: 404 Level: Basic 4) In Washington, D.C., what now rivals or exceeds power as the preeminent goal?

A) Political aspirations B) Fame C) Money D) Political connections Answer: C Page Ref: 404 Level: Basic

252

5) Inspectors in the Department of Agriculture have done all of the following except: A) allowed adulterated food into the country.

B) failed to condemn beef infected with e. Coli bacteria.

C) ignored a shipment infested with insects.

D) misgraded, substandard or adulterated grain.

Answer: B Page Ref: 405 Level: Basic 6) Melvyn Paisley was an Assistant Secretary of the Navy for six years and was in charge of: A) investigators.

B) vendor services.

C) product research.

D) procurement.

Answer: D Page Ref: 405 Level: Basic 7) Paisley and others committed all of the following except: A) having a financial interest in a subcontractor selected by the Navy.

B) giving bid information to favored vendors.

C) arguing for more lenient treatment of government contractors who tried to cheat the government.

D) altering requirements to suit favored vendors.

Answer: C Page Ref: 405 Level: Intermediate 8) One of the busiest border crossings into the United States is: A) San Diego.

B) San Ysidro.

C) El Paso.

D) Sonora.

Answer: B Page Ref: 406 Level: Basic 9) Soft money is: A) untraceable.

B) unrestricted.

C) undocumented.

D) restricted.

Answer: B Page Ref: 407 Level: Basic

253

10) What may be the most important factor at the core of corruption surrounding some Border Patrol Agents?

A) inadequate training B) weak internal controls C) greed D) poor morale Answer: B Page Ref: 409 Level: Basic 11) PAC stands for: A) politicians and contributions.

B) polls and campaigns.

C) politics and change.

D) political action committee.

Answer: D Page Ref: 409 Level: Basic 12) An unnamed congressman, after receiving a $10,000 check from an organization, did what?

A) Voted for a regulation requiring disclosure of defects in automobiles B) Voted against a regulation requiring disclosure of defects in automobiles C) Voted the wishes of his constituency, the people from his district D) Made his decision based on party affiliation Answer: B Page Ref: 412 Level: Intermediate 13) A gift becomes a bribe when: A) it is requested.

B) there is a quid pro quo.

C) the amount exceeds the salary of the elected official.

D) it is freely given.

Answer: B Page Ref: 412 Level: Basic 14) Prosecutions of corrupt federal legislators have been divided into three categories. They include all of the following except: A) violations of election laws.

B) payroll fraud.

C) bribery.

D) theft.

Answer: D Page Ref: 412 Level: Intermediate 254

15) Which of the following activities would not constitute payroll fraud?

A) Hillary Rodham Clinton hired to advise a congressional committee B) Elected official household staff put on congressional payroll C) Staff required to pay portion of salary to elected official D) Surplus pay raise for congressional staff used to pay for personal expenses Answer: A Page Ref: 413 Level: Intermediate 16) Giving money to an elected official is bribery when: A) it is done in hopes that the elected official will make an inquiry to an IRS audit.

B) the contributor plans to present information on a bill to the legislator.

C) it is done in return for vote on a piece of legislation.

D) it is given hopes of getting an audience with elected official.

Answer: C Page Ref: 414 Level: Intermediate 17) Representative Daniel Flood of Pennsylvania flooded his home district with federal funds and numerous public institutions carried his name. He took money from businessmen to do all of the following except: A) to contribute campaign funds to a personal charity.

B) to persuade the Treasury Department to approve a merger.

C) to enable a religious school to get millions in federal grants.

D) to direct government family planning funds.

Answer: A Page Ref: 415 Level: Intermediate 18) Who is the predecessor to Governor Rod Blagojevich? This individual was serving a 6-1/2-year prison sentence the day Blagojevich was arrested.

A) Fredrick Richmond B) Daniel Flood C) George Ryan D) Melvin Weinberg Answer: C Page Ref: 417 Level: Intermediate 19) The ABSCAM operation was criticized because: A) the amount of money involved was miniscule.

B) it was not targeted at wrongdoing that was already occurring.

C) a lot of money was spent but there were no convictions for serious felonies.

D) the criminal informant was left holding the bag by the government, literally.

Answer: B 255

Page Ref: 417-420 Level: Intermediate 20) The eight-year, four-month sentence given to arch-conservative Duke Cunningham was ironic because: A) he had argued for lighter sentences for particular offenses.

B) only James Traficant's sentence was longer.

C) he had sponsored legislation to improve prison conditions.

D) he had argued for tougher sentences.

Answer: D Page Ref: 420 Level: Intermediate 21) Federal District Judge Alcee Hastings was impeached and removed from office after: A) he denounced a Washington lawyer for accepting a bribe.

B) he was acquitted of conspiracy to commit bribery.

C) he was convicted of conspiracy to commit bribery.

D) he was investigated for bribery but never indicted.

Answer: B Page Ref: 424 Level: Intermediate 22) Governor Fife Symington, before he was indicted for defrauding creditors in connection with a savings and loan, was the chief executive for what state?

A) Arizona B) Colorado C) Pennsylvania D) Texas Answer: A Page Ref: 427 Level: Basic 23) After numerous tries, the government finally convicted Governor Edwin Edwards of Louisiana based on testimony from: A) the owner of a professional football team.

B) his right-hand man.

C) a flunky who worked for Edwards.

D) his banker.

Answer: A Page Ref: 428-429 Level: Basic

256

24) The worst scandal in a scandal-ridden city occurred in the ________ of New York City.

A) Parking Violation Bureau B) Housing Authority C) Taxi and Limousine Commission D) Health and Hospitals Corporation Answer: A Page Ref: 432-433 Level: Basic 25) Periodic corruption scandals have plagued ________ major urban police department(s) in the United States.

A) few of the B) every C) some of the D) half of the Answer: B Page Ref: 434-435 Level: Basic 26) Which of the following would not be an example of police corruption?

A) Kickbacks B) Embezzlement C) Bribery D) Theft from a police supervisor's bank account Answer: D Page Ref: 435-437 Level: Basic 27) Police officers could be the greatest ________ in the world.

A) moochers B) deadbeats C) thieves D) criminals Answer: A Page Ref: 436-437 Level: Intermediate 28) Which one of the following would be part of a kickback scheme?

A) Turning in all but $2,000 from money confiscated at drug seller's house B) Putting a relative on the payroll C) Taking money from police retirement funds D) Taking money from arranging contracts with the city Answer: D Page Ref: 436 Level: Intermediate

257

29) Which one of the following could be a part of a shakedown?

A) Arresting a business rival B) Planting evidence C) Money for not making an arrest D) A lying eyewitness Answer: C Page Ref: 437 Level: Intermediate 30) Working in close proximity to illegal activities and an abundance of illicit profits represents which explanation of police misconduct?

A) Structural opportunity B) Organization deviance C) Lack of organizational controls D) Structural choice Answer: A Page Ref: 436 Level: Intermediate 31) All of the following lead to an "us versus them" mentality on the part of officers except: A) their risk-taking personality.

B) the large amount of time officers spend with civilian public.

C) the isolation of officers.

D) their feeling invulnerable.

Answer: B Page Ref: 437 Level: Intermediate 32) Which of the following would be associated with grass-eaters?

A) Trying to help B) Graft C) Looking the other way D) Aggressive corruption Answer: B Page Ref: 440 Level: Intermediate 33) Which of the following would be associated with meat-eaters?

A) Aggressive corruption B) Graft C) Looking the other way D) Trying to help Answer: A Page Ref: 440 Level: Intermediate

258

10.2 True/False Questions 1) Corruption has been attributed to under-representation of the disadvantaged.

Answer: FALSE Page Ref: 403 Level: Intermediate 2) Hiring an unskilled relative as a policy analyst would be an example of public corruption.

Answer: TRUE Page Ref: 404 Level: Intermediate 3) "Little corruption" in the highest level of federal executive office has been persistent.

Answer: FALSE Page Ref: 404 Level: Basic 4) Melvyn Paisley was an Assistant Secretary of the Navy who was in charge of procurement.

Answer: TRUE Page Ref: 405-406 Level: Basic 5) William Jennings Bryan was a famous orator who threatened to withdraw his legislative services if the bank did not refresh his retainer.

Answer: FALSE Page Ref: 411 Level: Basic 6) The division of the DHS into multiple agencies with overlapping responsibilities has meant coordinated approaches to investigations.

Answer: FALSE Page Ref: 409 Level: Basic 7) Gulf Oil Corporation maintained a multimillion-dollar secret fund used to make illegal campaign contributions. It appeared the Gulf though the United States Senate was for sale.

Answer: TRUE Page Ref: 412-413 Level: Intermediate 8) Giving money to an elected official is bribery when in return you receive a favorable vote on a piece of legislation.

Answer: TRUE Page Ref: 414 Level: Basic

259

9) The ABSCAM operation was criticized because the amount of money involved was miniscule.

Answer: FALSE Page Ref: 417-419 Level: Basic 10) More often than not, running afoul of the Internal Revenue Service puts elected officials on the fast track for prosecution.

Answer: TRUE Page Ref: 426 Level: Intermediate 11) Governor Fife Symington was the chief executive of the state of Texas, before he was indicted for defrauding creditors.

Answer: FALSE Page Ref: 427-428 Level: Basic 12) Taking services or money for referring a business to a certain provider or company would be an example of a kickback scheme.

Answer: TRUE Page Ref: 436 Level: Basic 13) Money for not making an arrest could be part of a shakedown.

Answer: TRUE Page Ref: 436 Level: Basic 14) Working in close proximity to illegal activities and an abundance of illicit profits represents a structural opportunity explanation of police misconduct.

Answer: TRUE Page Ref: 437 Level: Intermediate 15) Aggressive corruption would be associated with grass-eaters.

Answer: FALSE Page Ref: 440-443 Level: Basic 10.3 Fill in the Blank Questions 1) Bribery or ________ by individuals are examples of "little corruption."

Answer: corruption Page Ref: 404 Level: Basic

260

2) In Washington, D.C., ________ now rivals or exceeds power as the preeminent goal.

Answer: money Page Ref: 404 Level: Basic 3) Congressional incumbents and electoral challengers have come to rely increasingly on ________ interests to run for office.

Answer: special Page Ref: 411-412 Level: Basic 4) Soft money is ________.

Answer: unrestricted Page Ref: 411 Level: Basic 5) One lobbyist described PAC money as a civilized approach to ________ buying.

Answer: vote Page Ref: 412 Level: Basic 6) ________ received the toughest sentence ever meted out to a former Congressman indicted while still in office.

Answer: Duke Cunningham Page Ref: 420 Level: Basic 7) Operation Greylord, which targeted judicial wrongdoing, took place in ________.

Answer: Chicago Page Ref: 423 Level: Basic 8) Graft cases have been prosecuted in ________ major American cities.

Answer: most Page Ref: 430-433 Level: Intermediate 9) Periodic corruption scandals have plagued ________ major urban police department in the United States.

Answer: every Page Ref: 435-436 Level: Basic

261

10) A former police officer once observed that police officers are the greatest ________ in the world.

Answer: moochers Page Ref: 435 Level: Basic 11) Attempts to legislate morality have made it easier for officers to rationalize bribery and wrongdoing in connection with ________ crimes.

Answer: victimless Page Ref: 435-436 Level: Intermediate

262

10.4 Matching Questions Match the key terns listed in Column 1 to the description in Column 2. Use each description only once.

A) Occurs when a law enforcement officer receives a payoff in exchange for not making an arrest B) A source of campaign money C) Bribery and corruption by individuals D) This sting operation utilized an agent posing as a sheik in order to lure congressmen into taking bribes E) Money is unrestricted F) The Parking Violations Bureau operated out of this city G) Goods, services, or money received by law enforcement for referring business to other agencies H) The location of Operation Greylord 1) Little corruption Level: Basic 2) Soft money Level: Basic 3) PAC Level: Basic 4) ABSCAM Level: Basic 5) Chicago Level: Basic 6) New York City Level: Basic 7) Kickback Level: Basic 8) Shakedown Level: Basic Answers: 1) C 2) E 3) B 4) D 5) H 6) F 7) G 8) A

263

10.5 Essay Questions 1) What is the difference between corrupt behavior and illegal acts? Provide several examples of each.

Answer: Behavior can be considered corrupt when it deviates from the formal duties of a public role for personal gain. All illegal acts are not necessarily corrupt and all corrupt acts are not necessarily illegal. Allan Howe would be an example.

Page Ref: 411-443 Level: Difficult 2) Identify the three methods used by federal legislators to cheat the public. Provide examples.

Answer: Violations of election laws, payroll fraud, and bribery. Answers will vary.

Page Ref: 412-416 Level: Difficult 3) Identify the types of police corruption and give an example of each.

Answer: Corruption of authority: receiving free meals Kickbacks: receiving goods, services, or money for referring business to certain entities Shakedowns: officer receives a payoff in exchange for not making an arrest The Fix: officers agree to dispose of traffic tickets in exchange for a fee Opportunistic Theft: stealing money from arrestees or unconscious accident victims Protection of Illegal Activities: persons engaging in illegal activities and seeking to operate without police interference sometimes pay officers protection money Page Ref: 434-436 Level: Difficult 4) What are possible explanations for police corruption?

Answer: Explanations include personality features, stress, the "us-versus-them" mentality, and the mere fact that they are "an officer."

Page Ref: 437-439 Level: Difficult 10.6 Critical Thinking Questions 1) What cities besides New York have had ongoing problems with corruption? Do you think it is more difficult to be an ethical officer in a big city than in a small- to medium-size community?

Why or why not?

Answer: Corruption scandals have found in virtually every major urban police department in the United States. Cities include Chicago, Houston, Philadelphia, Detroit, Cleveland, and many others.

Police corruption exists in smaller cities and towns, too. Answers will vary.

Page Ref: 404-420 Level: Difficult

264

2) Explain why individuals are motivated to engage in corrupt behavior. How do they justify their actions?

Answer: Some individuals are motivated because they believe it is necessary. It may be unethical, but it can also be beneficial. Provide examples and your reasons why some people engage in corrupt behavior.

Page Ref: 404-430 Level: Difficult

265

Profit Without Honor, 7e (Rosoff) Chapter 11 Medical Crime 11.1 Multiple Choice Questions 1) Boiler rooms with slick telemarketers offered full physicals for a little or no fee. This free diagnostic service turned out to be very costly because: A) information was used to file claims against insurance companies and government insurance.

B) patients were pushed to take out loans to cover services.

C) patients' credit card information was obtained and card companies were billed.

D) patients were required to furnish bank information and electronic checks were processed by financial institutions.

Answer: A Page Ref: 454-455 Level: Intermediate 2) The ripple effect of false medical diagnoses to get money includes which of the following?

A) Negative credit card history created B) People denied jobs C) People unable to get life insurance D) People unable to get bonding necessary for particular jobs Answer: C Page Ref: 455 Level: Intermediate 3) The phrase "cartel-type frauds" used in connection with health care refers to frauds perpetrated by: A) passing patients from doctor to doctor.

B) foreigners.

C) a single central provider with thousands of patients.

D) criminal organizations.

Answer: D Page Ref: 455-456 Level: Intermediate 4) Medicare is an easy mark for fraudulent equipment sales because: A) of failure to account for the legitimacy of suppliers.

B) no check is made on patient eligibility.

C) no check is made on the qualifications of doctors.

D) no verifications are made of patient conditions.

Answer: A Page Ref: 456 Level: Intermediate

266

5) Medicare can be an easy mark because: A) doctors' signatures are forged.

B) it often fails to account for the legitimacy of suppliers.

C) patients pressure doctors to sign forms.

D) of corrupt doctors.

Answer: B Page Ref: 456 Level: Basic 6) In some instances, the equipment is not only nonessential, it is also: A) outdated.

B) defective.

C) harmful.

D) overpriced.

Answer: D Page Ref: 456 Level: Basic 7) Home care is a burgeoning business for scam artists. A company called Professional Care was paid for all of the following except: A) work done by nonexistent workers.

B) care for nonexistent patients.

C) more hours than those provided.

D) services done by untrained workers.

Answer: B Page Ref: 459 Level: Intermediate 8) ________ treatment accounts for 1/4 of all home infusion services, providing plenty of opportunity for would-be criminals.

A) Emphysema B) AIDS C) Cancer D) Kidney disease Answer: B Page Ref: 459 Level: Basic 9) Ghost services are: A) services designated so that maximum fees can be charged.

B) procedures where one service is divided into many services and billed accordingly.

C) services that never happened.

D) hospital room charges that are reasonable but other charges are very high.

Answer: C Page Ref: 458, 459 Level: Basic 267

10) Upcoding is: A) hospital room charges that are reasonable but other charges are very high.

B) a procedure where one service is divided into many services and billed accordingly.

C) services that never happened.

D) services designated so that maximum fees can be charged.

Answer: D Page Ref: 461 Level: Basic 11) Unbundling is: A) services designated so that maximum fees can be charged.

B) a procedure where one service is divided into many services and billed accordingly.

C) hospital room charges that are reasonable but other charges are very high.

D) services that never happened.

Answer: B Page Ref: 461 Level: Basic 12) Bounty hunters in the medical fraud area are: A) people who use strong-arm tactics to collect bills that are not owed.

B) doctors who receive a fee for a particular diagnosis.

C) facilities that specialize in the patients who are most seriously ill.

D) people who collect a fee for patient referral.

Answer: D Page Ref: 462 Level: Intermediate 13) What Houston school personnel have been offered rewards to refer troubled students?

A) Assistant principals B) Teachers C) Counselors D) Nurses Answer: C Page Ref: 463 Level: Basic 14) The term "self-referral" stands for the practice of: A) doctor selection of specialists and services based on financial connections.

B) HMO selection of specialists and services based on providers in a network.

C) insurance company selection of specialists and services based on low cost.

D) patient selection of specialists and services based on recommendations from friends.

Answer: A Page Ref: 465 Level: Intermediate

268

15) Doctors referring patients to labs and other institutions in which they have partial ownership is problematic for all of the following reasons except: A) conflict of interests.

B) higher prices.

C) failure to make a referral if it is no benefit to doctor.

D) unnecessary referrals.

Answer: C Page Ref: 465 Level: Intermediate 16) American dialysis patients are how many times more likely to die in a given year as those in Western Europe or Japan?

A) 5 B) 4 C) 2 D) 3 Answer: C Page Ref: 466 Level: Basic 17) Prominent universities and institutions have also been involved in Medicare/Medicaid fraud and abuse. Their activities include all of the following except: A) $10 million in false Medicare claims.

B) unnecessary lab tests.

C) charging $18 separately for blood tests; private insurers paid 65 cents.

D) not following guidelines and underpricing services.

Answer: D Page Ref: 467 Level: Intermediate 18) Excessive billing can take several forms. What are retainers?

A) Patients paying directly for services such as calls, refills, and conferences that Medicare considers covered B) Contracts for services that exceed Medicare limits C) Up-front fees for services covered by Medicare supplemental policies D) Patients giving up the right to question fees Answer: C Page Ref: 468 Level: Basic

269

19) Excessive billing can take several forms. What are waivers?

A) Contracts for services that exceed Medicare limits B) Patients giving up the right to question fees C) Patients paying directly for services such as calls, refills, and conferences that Medicare considers covered D) Up-front fees for services covered by Medicare supplemental policies Answer: C Page Ref: 468 Level: Basic 20) Health Maintenance Organizations (HMOs) are the new model for providing medical care.

Criticisms of HMOs include all of the following except: A) big salaries for administrators.

B) overemphasis on profit instead of care.

C) multiple trips to many specialists.

D) negligent under-treatment.

Answer: C Page Ref: 469 Level: Intermediate 21) One investigator states that catching people who defraud Medicaid is like catching fish that jump into the boat. Why would he say this?

A) Only those who treat the most patients get caught.

B) Only repeat offenders get caught.

C) Only those who make the most money get caught.

D) Only the stupid and reckless get caught.

Answer: D Page Ref: 471 Level: Intermediate 22) The case of Dr. Jose Manaya was described as shocking by the judge who sentenced him. Dr. Manaya had performed unnecessary ________ on patients.

A) dialysis B) appendectomies C) cataract surgery D) gallbladder surgery Answer: C Page Ref: 471 Level: Basic

270

23) Physicians are not the only ones involved in Medicaid fraud. Investigators have recently been looking into services offered by: A) chiropractors.

B) physical therapists.

C) massage therapists.

D) pediatric dentists.

Answer: D Page Ref: 472 Level: Intermediate 24) Dr. Olga Romani was involved in all of the following except: A) the disfiguring of an acne patient.

B) billing for 165 visits for a patient she had never seen.

C) the murder of her partner.

D) refusing to treat a patient for diaper rash.

Answer: D Page Ref: 472-473 Level: Intermediate 25) Psychiatrists represent what percentage of all doctors?

A) 2 B) 8 C) 15 D) 20 Answer: B Page Ref: 477 Level: Basic 26) Psychiatrists represent what percentage of all doctors suspended from Medicaid for fraudulent practices?

A) 10 B) 25 C) 30 D) 20 Answer: D Page Ref: 477 Level: Basic 27) Doctors at a clinic at the University of California-Irvine abused fertility patients in all of the following ways except: A) terminating pregnancies without patient consent.

B) using unapproved fertility drugs.

C) performing research on patients without their consent.

D) stealing eggs and using them on other patients.

Answer: A Page Ref: 478-479 271

Level: Intermediate 28) Which of the following activities could constitute research fraud?

A) Adjusting findings to support grant applications B) Using animals to test harmful drugs C) Not reporting findings D) Taking grant money for questionable biological research Answer: A Page Ref: 480 Level: Intermediate 29) Some argue that nursing home abuse occurs for all of the following reasons except: A) the vulnerability of its patients.

B) unreasonable expectations of family members.

C) institutions are run for profit.

D) low pay for workers.

Answer: B Page Ref: 481-482 Level: Intermediate 30) Some of the worst nursing home stories have been reported in: A) Florida.

B) Texas.

C) California.

D) North Carolina.

Answer: D Page Ref: 482 Level: Basic 11.2 True/False Questions 1) Boiler rooms with slick telemarketers offered full physicals for little or no fee. This free diagnostic service turned out to be very costly because patients were required to furnish bank information and electronic checks were processed by financial institutions.

Answer: FALSE Page Ref: 454-455 Level: Intermediate 2) The phrase "cartel-type frauds" used in connection with health care are frauds perpetrated by criminal organizations.

Answer: TRUE Page Ref: 456 Level: Basic

272

3) Medicare can be an easy mark for fraudulent equipment sales because it often fails to account for the legitimacy of suppliers.

Answer: TRUE Page Ref: 456-457 Level: Intermediate 4) Services that are designated so that the maximum fees can be charged is called upcoding.

Answer: TRUE Page Ref: 461 Level: Basic 5) Cost-shifting is where hospital room charges are reasonable, but other charges are very high.

Answer: TRUE Page Ref: 461 Level: Basic 6) Fragmentation is where a number of charges can be made from what is usually one single lessexpensive charge for services or procedures.

Answer: TRUE Page Ref: 462 Level: Basic 7) Bounty hunters in the medical fraud area are doctors who receive a fee for a particular diagnosis.

Answer: FALSE Page Ref: 462-463 Level: Basic 8) HMO selection of specialists and services based on providers in a network is referred to as "selfreferral."

Answer: FALSE Page Ref: 469 Level: Intermediate 9) Contracts that exceed Medicaid limits are called overcharging.

Answer: TRUE Page Ref: 470 Level: Basic 10) Abuses in Medicaid may be worse than those in Medicare because it covers more services.

Answer: FALSE Page Ref: 468-470 Level: Intermediate

273

11) Psychiatrists represent 20% of all doctors suspended from Medicaid for fraudulent practices.

Answer: TRUE Page Ref: 477 Level: Basic 12) An item that millions use every day that makes it easier to catch psychiatrists in wrongdoing is a wristwatch.

Answer: TRUE Page Ref: 477 Level: Basic 13) Using animals to test harmful drugs would be an activity that could constitute research fraud.

Answer: FALSE Page Ref: 480-481 Level: Intermediate 14) Some argue that nursing home abuse occurs because of the vulnerability of its patients, the fact that the institutions are run for profit, and low pay for workers.

Answer: TRUE Page Ref: 481 Level: Intermediate 15) Techniques that nursing homes use to keep patients cooperative include psychotropic substances.

Answer: TRUE Page Ref: 484-485 Level: Intermediate 11.3 Fill in the Blank Questions 1) In some instances, medical equipment is not only nonessential, but also ________.

Answer: overpriced Page Ref: 456 Level: Basic 2) ________ services are services that never happened.

Answer: Ghost Page Ref: 457 Level: Intermediate 3) Patient referral firms are known as ________.

Answer: headhunters Page Ref: 459 Level: Basic

274

4) The need to fill beds has resulted in a veritable catalogue of fraudulent and abusive practices designed to maximize revenue; patients abducted by ________.

Answer: bounty hunters Page Ref: 462-463 Level: Basic 5) One whistle-blower has even charged that doctors actually hold seminars on how to dupe ________.

Answer: Medicare Page Ref: 467 Level: Basic 6) ________ are up-front fees for services covered by Medicare supplemental policies.

Answer: Retainers Page Ref: 468 Level: Basic 7) Doctors can also ________ the Medicare system by prescribing the most expensive drugs, rather than generics.

Answer: bleed Page Ref: 468 Level: Basic 8) Despite, or perhaps because of, the Anti-Fraud and Anti-Abuse Amendments of 1977, Medicaid fraud has grown more ________.

Answer: sophisticated Page Ref: 470 Level: Intermediate 9) As a social problem, ________ fraud has never garnered enough official attention to be rectified.

Answer: Medicaid Page Ref: 470 Level: Basic 10) Olga Romani became the second-largest Medicaid provider in ________ and operated two clinics.

Answer: Florida Page Ref: 472 Level: Basic 11) The single case against ________ more than doubled the amount obtained through fraud claim settlements with drug companies in 2011.

Answer: GlaxoSmithKline Page Ref: 474 Level: Basic

275

12) Psychiatrists represent ________% of all doctors.

Answer: 8 Page Ref: 477 Level: Basic 13) Cecil Jacobson operated a(n) ________ clinic that hurt patients by using his own sperm for fertilization without patient knowledge and using hormones to convince women they were pregnant when they were not.

Answer: fertility Page Ref: 478 Level: Basic 14) Some ________ argue that competition to succeed in the growing area of fertility technology could cause doctors to cut moral corners.

Answer: bioethicists Page Ref: 479 Level: Basic 15) Nursing homes use psychotropic substances to keep ________ cooperative.

Answer: patients Page Ref: 484-485 Level: Basic

276

11.4 Matching Questions Match the key terns listed in Column 1 to the description in Column 2. Use each description only once.

A) Services are designated so that maximum fees can be charged B) Patients paying directly for services such as calls, refills, and conferences that Medicare considers covered C) Patient referral firms D) Health care fraud resulting from criminal activity E) Hospital room charges are reasonable but other charges are high F) A procedure where one service is divided into many services and billed accordingly G) Upfront fees for services covered by Medicare supplemental policies H) The practice of doctor selection of specialists and services based on financial connections 1) Cartel-type frauds Level: Basic 2) Upcoding Level: Basic 3) Unbundling Level: Basic 4) Cost-shifting Level: Basic 5) Headhunters Level: Basic 6) Self-referrals Level: Basic 7) Retainers Level: Basic 8) Waivers Level: Basic Answers: 1) D 2) A 3) F 4) E 5) C 6) H 7) G 8) B

277

11.5 Essay Questions 1) Describe how fraud can be committed in medical equipment sales. What are the dangers for the public when this occurs?

Answer: Criminals bill insurers for equipment that is not needed and, in some cases, defective.

Operators of the equipment are making diagnoses and have little or no training. Dangers include legitimacy of the suppliers and overpricing.

Page Ref: 456-457 Level: Difficult 2) Explain why home care fraud has increased. What forms does it take and why is this crime difficult to investigate? Provide examples to support your response.

Answer: The trend toward outpatient treatment, shorter hospital stays, and new technology has led to the growth of the home care industry. Fraud has increased because of the large number of disabled and low-income people who want to spend their final years at home because it is an alternative to costly hospital and nursing home care. It is hard to investigate because of the massive services that are provided in thousands of private residences.

Page Ref: 458-460 Level: Difficult 3) What are self-referrals, and how do they constitute a conflict of interest for physicians?

Answer: Self-referrals are when doctors refer their patients to facilities in which they have a financial interest. A conflict is apparent because it opens the door to fraud through the intentional provisional of unnecessary but profitable services.

Page Ref: 465 Level: Difficult 4) Identify and describe the three most common billing irregularities in physician Medicare fraud.

Answer: Overcharges: contracts for services that exceed Medicare limits Retainers: up-front fees for services covered by Medicare supplemental policies Waivers: patients pay directly for services such as calls, refills, and conferences that Medicare considers covered Page Ref: 467-469 Level: Difficult 5) What is fertility fraud? Discuss who is victimized and how they are victimized.

Answer: Couples having problems trying to conceive are willing to try almost anything. Fertility fraud is a new form of crime in the medical professions, as rapid advances in knowledge and technology allow for a range of offenses which were not possible earlier.

Page Ref: 477-479 Level: Difficult

278

11.6 Critical Thinking Questions 1) Identify the various reasons Medicaid fraud does not receive much regulator or media attention.

Analyze this in terms of the same aspects you would look at if this were a street crime. Why do you think some street crimes receive little attention?

Answer: Little attention has been paid by regulators to provider or patient misdeeds. There is little incentive for the companies to aggressively investigate without additional compensation.

Politicians have little incentive to investigate fraud. Answers will vary.

Page Ref: 471-472 Level: Difficult 2) How effective is the medical profession at policing itself? Give specific examples for your answers. What changes do you think would be needed to improve accountability in the profession?

Answer: Not very effective. The medical profession is very protective of its members. Physicians are seldom willing to report colleagues who practice medicine below generally accepted standards.

Answers will vary.

Page Ref: 485-486 Level: Difficult

279

Profit Without Honor, 7e (Rosoff) Chapter 12 Computer Crime 12.1 Multiple Choice Questions 1) According to the text, the broad but somewhat more specific definition of computer crime can be described as: A) destruction, theft, unauthorized or illegal use, modification or copying of information, programs, services, equipment, or communication networks.

B) crimes that could not be committed without a computer.

C) crimes using a computer to accomplish their ends.

D) a computer or its periphery used as a weapon.

Answer: A Page Ref: 493 Level: Intermediate 2) Which one of the following crimes could not be classified as a computer crime?

A) Espionage B) Scams C) Assault D) Sabotage Answer: C Page Ref: 493 Level: Intermediate 3) Computer crimes may have begun with the use of the blue box. The blue box involved which instrument?

A) Phones B) Radios C) Televisions D) Stereos Answer: A Page Ref: 493 Level: Basic 4) Toll fraud is: A) avoiding a fee to use a road.

B) avoiding phone charges.

C) avoiding cable television fees.

D) avoiding internet services fees.

Answer: B Page Ref: 494 Level: Basic

280

5) Hackers first targeted: A) the stock exchange.

B) the government.

C) schools.

D) banks.

Answer: C Page Ref: 496 Level: Basic 6) An unauthorized program planted on a computer is known as a(n): A) Trojan Horse.

B) Achilles Heel.

C) Sword of Damocles.

D) Cyclops Eye. Answer: A Page Ref: 495 Level: Basic 7) Which of the following is unlikely to be classified as a computer crime?

A) Phony tax returns B) Public intoxication C) Blowing up toilets D) Pedophilia Answer: B Page Ref: 496 Level: Basic 8) WAREZ sites encourage which of the following activities?

A) Violent acts B) Contact with terrorist cells C) Copying of copyrighted programs D) Buying cheap foreign computers Answer: C Page Ref: 498 Level: Intermediate 9) Crackers break which of the following?

A) Government security codes B) Copy protection codes C) Password codes D) Access codes Answer: B Page Ref: 498-499 Level: Basic

281

10) The average bank robbery nets approximately: A) $1,200.

B) $3,200.

C) $5,400.

D) $2,100.

Answer: B Page Ref: 501 Level: Basic 11) According to Cressey, embezzlers go through a process that includes all of the following except: A) opportunity.

B) secret financial problem.

C) remorse.

D) rationalizing.

Answer: C Page Ref: 501-502 Level: Intermediate 12) In the 1970s a Los Angeles-based insurance company programmed its computers to do all of the following except: A) fail to pay legitimate claims.

B) sell fake policies to other companies.

C) issue policies on people who did not exist.

D) use reinsurance to disguise indebtedness.

Answer: A Page Ref: 503 Level: Intermediate 13) The acronym EFT stands for: A) east fun target.

B) ending fund target.

C) earned from trust.

D) electronic funds transfer.

Answer: D Page Ref: 503 Level: Basic 14) According to the text, all of the following have been invaded to get credit and debit card information except: A) Western Union.

B) Yahoo.com.

C) America Online.

D) Egghead.com.

Answer: B Page Ref: 503 282

Level: Intermediate 15) The term "hacker" can include all of the following except a(n): A) norm-violating individual.

B) accidental tourist.

C) curious individual.

D) computer virtuoso.

Answer: B Page Ref: 504-505 Level: Intermediate 16) Showoffs have which of the following qualities?

A) Goal is to do the most damage B) Goal is fun, not profit C) Coasting along looking for doors to open D) Goal is breaking in Answer: B Page Ref: 505 Level: Intermediate 17) Hacking can include all of the following except: A) a bank employee checking credit history of bank customers.

B) using the telephone book to target doctors and searching their credit records.

C) checking TRW records for credit ratings.

D) tapping into local credit bureau records.

Answer: A Page Ref: 505-506 Level: Intermediate 18) The Masters of Destruction (MOD) corrupted the databases of all of the following companies except: A) ITT. B) Sprint.

C) Pacific Bell.

D) Nynex.

Answer: B Page Ref: 510-511 Level: Basic 19) Malicious hacking, affecting national security, has affected all of the following except: A) White House computers.

B) Pacific Fleet computers.

C) Congressional committee files.

D) Boeing Corporation.

Answer: C Page Ref: 510-513 283

Level: Basic 20) In 1996 the General Accounting Office said that hackers had targeted the Pentagon ________ times and gained entry 2 of every 3 times.

A) 250,000 B) 100,000 C) half a million D) a million Answer: A Page Ref: 511 Level: Basic 21) Back door programs: A) allow entry at will.

B) insert advertisements.

C) attack specific programs.

D) look for passwords.

Answer: A Page Ref: 511 Level: Basic 22) Mafiaboy activities affected all of the following except: A) eBay. B) Buy.com.

C) Yahoo.com.

D) Amazon.com.

Answer: C Page Ref: 514 Level: Basic 23) The magnitude of Mafiaboy damage was estimated to exceed at least: A) $1 billion.

B) $100 million.

C) $10 million.

D) $500 million.

Answer: A Page Ref: 514 Level: Basic 24) Mafiaboy turned out to be a(n) ________ Canadian.

A) 25-year-old B) 12-year-old C) 15-year-old D) 18-year-old Answer: C Page Ref: 514 284

Level: Basic

285

25) Viruses: A) infect the host computer.

B) multiply.

C) are triggered at some point in the future.

D) hide from virus protection programs.

Answer: B Page Ref: 517 Level: Basic 26) Stealth programs: A) hide from virus protection programs.

B) are triggered at some point in the future.

C) infect the host computer.

D) multiply.

Answer: A Page Ref: 518-519 Level: Basic 27) If you send out 30,000 e-mails and get only one response, but you get $40.00 per response and you send out a half a million e-mails, how much money can you make?

A) $750,000 B) $100,00 C) $1 million D) $250,000 Answer: A Page Ref: 524 Level: Intermediate 28) Phishng comes from a metaphor describing how early computer criminals used e-mails to lure fish for passwords and: A) e-mail account information.

B) URL addresses.

C) financial data.

D) personal data.

Answer: C Page Ref: 526 Level: Basic 29) The Nigerian scam involved: A) contributions to overthrow Communist Nigerian government.

B) a fake charity for Nigerian refugees.

C) a smuggling operation to get dissenters out of Nigeria.

D) a ploy using deceptive e-mails and stories of sequestered funds.

Answer: D Page Ref: 528 Level: Intermediate 286

30) Reasons for the Nigerian scam include all of the following except: A) it has a well-educated populace.

B) it is an oil-rich country with a healthy economy.

C) it uses English as a first language.

D) it is a well-populated country.

Answer: B Page Ref: 528-529 Level: Intermediate 31) Computers can be used to commit all of the following kinds of espionage except: A) social.

B) international.

C) political.

D) industrial.

Answer: A Page Ref: 531-532 Level: Intermediate 32) In 1994, two computer hackers broke into the computers at: A) Lackland Air Force Base.

B) Langley Air Force Base.

C) Griffiss Air Force Base.

D) Vandenburg Air Force Base.

Answer: C Page Ref: 532 Level: Basic 12.2 True/False Questions 1) The broad but somewhat more specific definition of computer crime can be described as destruction, theft, unauthorized or illegal use, modification or copying of information, programs, services, equipment, or communication networks.

Answer: TRUE Page Ref: 493 Level: Intermediate 2) A less formal definition of computer crime would be those crimes using a computer to accomplish its ends.

Answer: TRUE Page Ref: 493 Level: Basic 3) So-called first generation phone "phreaks" used their talents to steal from checking accounts.

Answer: FALSE Page Ref: 494 287

Level: Basic 4) As a devoted member of the 1970s counterculture, Captain Crunch's favorite activity was spying electronically on the government.

Answer: FALSE Page Ref: 494 Level: Basic 5) Computer crime has become increasingly globalized.

Answer: TRUE Page Ref: 496-497 Level: Basic 6) International cooperation in regards to stealing software has faltered because of minimal economic impact.

Answer: FALSE Page Ref: 510 Level: Intermediate 7) The average computer crime nets $500,000.

Answer: TRUE Page Ref: 501 Level: Basic 8) Because of public humiliation, liability issues, and security inadequacies, many corporations report computer crime losses.

Answer: FALSE Page Ref: 500 Level: Basic 9) Trap doors or sleepers allow a technique known as salami slicing to loot accounts. This is taking small amounts from a lot of people.

Answer: TRUE Page Ref: 502 Level: Intermediate 10) Salami slicing techniques divert very large amounts of assets from private accounts.

Answer: FALSE Page Ref: 502 Level: Basic 11) The most effective computer crimes are those perpetrated by experts.

Answer: FALSE Page Ref: 502-503 Level: Basic

288

12) Playpen-mentality hackers have the goal of breaking in.

Answer: TRUE Page Ref: 505 Level: Intermediate 13) Coasting along looking for doors to open is a quality of cookbook hackers.

Answer: TRUE Page Ref: 505 Level: Intermediate 14) The motivation for the Masters of Destruction was money.

Answer: FALSE Page Ref: 510 Level: Basic 15) Mafiaboy got caught because he was traced through e-mails.

Answer: FALSE Page Ref: 514 Level: Intermediate 16) Michael Bloomberg was the subject of a computer crime. He was asked to pay a sum of money in return for being advised as to the perpetrator's methods that were used to invade his system. In street crime terms this would be extortion.

Answer: TRUE Page Ref: 515 Level: Intermediate 17) Over the years, the definition of what constitutes a phishing attack has been narrowed down to a few specific computer crimes.

Answer: FALSE Page Ref: 526 Level: Basic 18) To put spam attacks into numerical perspective, there are more than 10 billion electronic mailboxes in the world.

Answer: FALSE Page Ref: 526 Level: Basic 19) A reason for the Nigerian scam is that it has a well-educated populace.

Answer: FALSE Page Ref: 527 Level: Intermediate

289

12.3 Fill in the Blank Questions 1) Another cause for concern is the movement of phone phreaks into the area of industrial ________.

Answer: espionage Page Ref: 495 Level: Basic 2) Another gray area in estimating losses from computer crime is ________.

Answer: software piracy Page Ref: 497 Level: Basic 3) The dark figure of crime is crime that is ________.

Answer: unreported Page Ref: 500 Level: Basic 4) Only the ________ computer criminals are read about.

Answer: failed Page Ref: 501 Level: Basic 5) The easiest way into a computer is through the ________ door.

Answer: front Page Ref: 502 Level: Basic 6) When someone from outside the victimized organization commits the computer fraud, ________ becomes theft.

Answer: embezzlement Page Ref: 503 Level: Basic 7) A simple but effective form of electronic bank robbery used ________ slips.

Answer: deposit Page Ref: 504 Level: Intermediate 8) If there is such a construct as white-collar ________, teenage hackers are its embodiment.

Answer: delinquency Page Ref: 506 Level: Basic

290

9) One especially outrageous development has been the emergence of ________ identity theft.

Answer: child Page Ref: 509 Level: Basic 10) ________ is one of the largest consumer reporting agencies that sell credit-monitoring and fraud-prevention services directly to consumers.

Answer: Equifax Inc. Page Ref: 513 Level: Basic 11) ________ are sometimes placed in so-called logic bombs.

Answer: Viruses Page Ref: 519 Level: Basic 12) A denial of service ________ shuts down a Web site.

Answer: attack Page Ref: 517-518 Level: Intermediate 13) Worms infect the ________ computer.

Answer: host Page Ref: 518-519 Level: Basic 14) The virus that overwrites the system, and whose data files download a password-thieving program, destroys files, and is sent to everyone on the contact list was called ________ Letter.

Answer: Love Page Ref: 520 Level: Basic 15) ________ attacks by e-mail employ many of the same tools and techniques used by spammers.

Answer: Phishing Page Ref: 526 Level: Basic

291

12.4 Matching Questions Match the key terns listed in Column 1 to the description in Column 2. Use each description only once.

A) Allow reentry at will B) Infect the host computer C) Multiplies D) Look for programs E) Avoid phone charges F) Hide from virus protection programs G) Steal access codes at airports H) Unreported crime 1) Toll fraud Level: Basic 2) Shoulder surfers Level: Basic 3) Dark figure of crime Level: Basic 4) Sniffer programs Level: Basic 5) Back-door programs Level: Basic 6) Virus Level: Basic 7) Worm Level: Basic 8) Stealth programs Level: Basic Answers: 1) E 2) G 3) H 4) D 5) A 6) C 7) B 8) F

292

12.5 Essay Questions 1) Explain what the "dark figure" of computer crime means and provide examples.

Answer: The "dark figure" of computer crime is all of the unreported cases of computer crime.

Computer crimes go unreported because of public humiliation, liability issues, security inadequacies, and many companies do not report losses, especially large ones.

Page Ref: 496-500 Level: Difficult 2) Describe the three-state process defined by Cressey that characterized typical embezzlers.

Answer: Stage I: Individuals are faced with a need for money that they do not feel they can share with family members.

Stage II: They recognized an opportunity to solve the problem.

Stage III: They manage to avoid internalizing a criminal identity by rationalizing their acts as borrowing rather than stealing.

Page Ref: 501-502 Level: Difficult 3) Discuss why early computer hackers exhibited few characteristics of secondary deviance as defined by Lemert.

Answer: For many, the intent was not to steal data, but just to be able to break in. Many hackers break into databases for fun rather than profit, as a fun challenge just to see if they can do it.

Page Ref: 505-506 Level: Difficult 4) Identify and describe the four phases of computer viruses. Practically speaking, how do these stages work and what are the implications in the context of computer crime?

Answer: Dormancy: the virus does not destroy files Propagation: the virus begins to multiply Triggering: the virus is launched by some occurrence, such as a particular date Damaging: the virus carries out the actual harm intended by its author Computers can be infected with a virus for months or even years without the user's knowledge Page Ref: 517-518 Level: Difficult

293

5) Distinguish between the following: Trojan horse, sniffer, spyware, trap door, logic bomb, stealth virus, and phishing.

Answer: Trojan horse: hacker back-door virus Sniffer: intercepts and records electronic traffic Spyware: tracking online Trap door: allows the security safeguards to be bypassed Logic Bomb: virus programs that contain a delay Stealth Virus: viruses that hide inside computer memory Phishing: fish for passwords and financial information, usually via e-mail Page Ref: 519-522 Level: Difficult 12.6 Critical Thinking Questions 1) Examine both domestic and international computer espionage and give examples of each. Why do you think it is more difficult to determine the extent of international espionage?

Answer: An example of domestic international computer espionage would be the breaking into confidential computer files and publicly releasing a nasty memo written about another colleague.

An example of international computer espionage would be a student from another country stealing university passwords to break into American military computers. Answers will vary.

Page Ref: 531-534 Level: Difficult 2) Evaluate and explain why you think it has become so much easier to commit identity theft.

Answer: Answers may attribute this to phishing scams, hacking, and spamming. Hackers are exploiting Internet auctions, along with sweepstakes scams, which make it easier to commit identity fraud. Answers will vary.

Page Ref: 495-518 Level: Difficult

294

Profit Without Honor, 7e (Rosoff) Chapter 13 Conclusions 13.1 Multiple Choice Questions 1) Commentators have suggested that white-collar crime flourishes because of the ________ reaction of law enforcement.

A) overB) dramatic C) nonexistent D) tepid Answer: D Page Ref: 549 Level: Basic 2) The authors of the text focus on three basic levels of sociological analysis. These three levels include all of the following except: A) societies.

B) institutions.

C) individuals.

D) organizations.

Answer: C Page Ref: 549-550 Level: Intermediate 3) When some individuals engage in white-collar crime, though they are breaking the law, they are often ________ cultural values.

A) conforming to B) showing ambivalence toward C) rejecting D) demonstrating ignorance of Answer: A Page Ref: 550 Level: Intermediate 4) Economist Milton Freidman states that people are ________ guided by rational self interest in free markets.

A) self-interested consumers B) utility maximizers C) do-gooders D) selfish citizens Answer: B Page Ref: 551 Level: Intermediate

295

5) Gresham Sykes and David Matza posit that ________ techniques make it possible for whitecollar criminals to annul guilt.

A) discounting B) explaining C) neutralization D) substantiation Answer: C Page Ref: 551-552 Level: Basic 6) One of the five common techniques to annul guilt is denial of responsibility, where: A) perpetrators claim that those injured deserved what happened to them.

B) perpetrators claim that things happened because of factors over which they had no control.

C) perpetrators claim to be victims.

D) perpetrators claim to be trying to achieve a more important purpose.

Answer: B Page Ref: 551 Level: Intermediate 7) One of the five common techniques to annul guilt is condemning the condemners, where: A) perpetrators claim to be victims.

B) perpetrators claim that those injured deserved what happened to them.

C) perpetrators claim that there has been no direct suffering.

D) perpetrators claim to be trying to achieve a more important purpose.

Answer: A Page Ref: 551-552 Level: Intermediate 8) One of the five common techniques to annul guilt is denial of victim, where: A) perpetrators claim to be victims.

B) perpetrators claim that there has been no direct suffering.

C) perpetrators claim to be trying to achieve a more important purpose.

D) perpetrators claim that those injured deserved what happened to them.

Answer: D Page Ref: 551-552 Level: Intermediate 9) One of the five common techniques to annul guilt is denial of injury, where: A) perpetrators claim to be victims.

B) perpetrators claim to be trying to achieve a more important purpose.

C) perpetrators claim that those injured deserved what happened to them.

D) perpetrators claim that there has been no direct suffering.

Answer: D Page Ref: 551 Level: Intermediate

296

10) Corporate criminals also cast themselves in characters in the folklore of capitalism. In this myth they are: A) simply ahead of their time and misunderstood.

B) smarter than competitors.

C) more wily and strategic than others.

D) harder-working than rivals.

Answer: A Page Ref: 552 Level: Intermediate 11) Under the psychopathic wealth explanation of white-collar crime, previous generations are characterized as having all of the following characteristics except that they are: A) more entrepreneurial.

B) willing to patiently wait for wealth.

C) conformist.

D) possessing modest expectations.

Answer: A Page Ref: 552-553 Level: Intermediate 12) In recent years the earnings gap between CEOs and employees has: A) widened.

B) diminished.

C) nearly disappeared.

D) remained stagnant.

Answer: A Page Ref: 553 Level: Basic 13) The richest ________% of Americans now own more wealth than the bottom 95%.

A) 5 B) 1 C) 10 D) 20 Answer: B Page Ref: 553 Level: Basic 14) Overstating earnings makes all of the following appear more justifiable, except: A) exorbitant salaries.

B) perks.

C) bonuses.

D) extravagant company medical benefits.

Answer: D Page Ref: 555 Level: Intermediate 297

15) Between 1998 and 2003, nearly ________ public corporations were forced to correct financial statements.

A) 5,000 B) 100 C) 400 D) 1,000 Answer: D Page Ref: 555 Level: Basic 16) American Airlines CEO Carty lost his bonus and was forced to resign when ________ disclosed a proposal to raise salaries and pay enormous bonuses to select executives at a time when the company had lost billions and employees were asked to take pay cuts.

A) media B) government regulators C) politicians D) plaintiffs' lawyers Answer: A Page Ref: 555 Level: Basic 17) Certain industries are distinguished by means and opportunities that are conducive to crime.

These factors include all of the following except: A) large amounts of money changing hands.

B) individual decision-making.

C) public attention on business activities of industry.

D) absence of government regulation.

Answer: C Page Ref: 556 Level: Intermediate 18) All of the following could provide motivation in a criminogenic industry except: A) raises.

B) bonuses.

C) comp time.

D) stock options.

Answer: C Page Ref: 556 Level: Basic

298

19) In the world of high-stakes cheating in high-stakes testing, all of the following are tied to teachers and administrators providing a little extra help to test-takers except: A) accreditation.

B) enabling students to graduate.

C) bonuses.

D) jobs.

Answer: B Page Ref: 558-559 Level: Intermediate 20) Of the following, the best example of occupational crime would be: A) hot checks.

B) embezzlement.

C) theft from an ATM. D) savings and loan fraud.

Answer: B Page Ref: 559 Level: Basic 21) Of the following, the best example of a corporate crime would be: A) savings and loan fraud.

B) hot checks.

C) embezzlement.

D) theft from and ATM. Answer: A Page Ref: 559 Level: Basic 22) Comparative leniency extended to white-collar criminals, in contrast to street criminals, can be explained by all of the following except: A) difference in resources.

B) victims' lives are not affected.

C) victims are either the government or large groups of individuals.

D) education and occupational prestige.

Answer: B Page Ref: 564 Level: Intermediate 23) James Olis, a former director of Dynegy, turned down a plea bargain. Because of the new sentencing guidelines for white-collar criminals, the end result of his criminal case was that: A) he received a much longer sentence.

B) the guidelines had no effect.

C) he received a much lighter sentence.

D) the validity of the guidelines was questioned.

Answer: D Page Ref: 565 299

Level: Intermediate 24) Wealth maximization theorists argue that white-collar criminals suffer collateral consequences that street criminals do not. Which one of the following consequences do white-collar criminals actually suffer?

A) None B) Social stigmatization C) Loss of wealth D) Difficulty in securing jobs Answer: A Page Ref: 566 Level: Intermediate 25) The General Accounting Office has estimated that nearly ________% of the $1 trillion spent by Americans on health care is lost to fraud and abuse.

A) 5 B) 10 C) 20 D) 1 Answer: B Page Ref: 568 Level: Basic 26) Losses attributable to white-collar crime are passed along to taxpayers and customers. This results in what segment of society paying the cost of white-collar crime?

A) Corporations B) The wealthy C) The poor D) The middle class Answer: D Page Ref: 568 Level: Basic 27) The shift of white-collar crime losses from the rich to others result in what kind of tax?

A) Progressive B) Graduated C) Flat D) Regressive Answer: D Page Ref: 568 Level: Basic

300

28) Diffusion accountability is a common byproduct of fiscal irresponsibility. This results in higher interest rates and higher prices for goods and services–consumers pay more. The burden falls disproportionately on: A) the poor.

B) the upper class.

C) nobody; it is evenly distributed.

D) the middle class.

Answer: D Page Ref: 568 Level: Basic 29) The Republican 1994 Contract with America may have unintended consequences favorable to the commission of white-collar crime. The contract provisions favorable to white-collar crime included all of the following except: A) costly regulations involving the environment, consumer safety, and worker safety to be eliminated.

B) lawsuit awards for securities fraud being easier to collect.

C) capping of product liability rewards.

D) legislation proposed to downgrade Securities and Exchange watchdog function.

Answer: B Page Ref: 572 Level: Intermediate 13.2 True/False Questions 1) Conventional theories of crime have a tautological quality to them. Criminality is defined using the same terms as are used for causal factors. The term circular may be substituted for tautological.

Answer: TRUE Page Ref: 549-550 Level: Intermediate 2) According to Robert Merton's formulation, the standard of material success is not an objective one, but exists on a sliding scale.

Answer: TRUE Page Ref: 550 Level: Intermediate 3) Gresham Sykes and David Matza call "techniques of substantiation" mechanisms that allow offenders to annul any potential guilt or internal conflict stemming from conduct on their part that breaks the law.

Answer: FALSE Page Ref: 551 Level: Intermediate

301

4) One of the five common techniques to annul guilt is condemning the condemners, where perpetrators claim to be victims.

Answer: TRUE Page Ref: 551-552 Level: Basic 5) One of the five common techniques to annul guilt is denial of injury, where perpetrators claim to be trying to achieve a more important purpose.

Answer: FALSE Page Ref: 551-552 Level: Basic 6) In recent years, the earnings gap between CEOs and employees has diminished.

Answer: FALSE Page Ref: 553 Level: Basic 7) Many of America's corporate elite believe that they are entitled to all of the benefits of the free market, with none of the risks.

Answer: TRUE Page Ref: 554 Level: Basic 8) Embezzlement would be an example of a corporate crime.

Answer: TRUE Page Ref: 559 Level: Intermediate 9) There is very little corporate leniency extended to white-collar criminals.

Answer: FALSE Page Ref: 561 Level: Basic 10) The General Accounting Office has estimated that nearly 10% of the $1 trillion spent by Americans on health care is lost to fraud and abuse.

Answer: TRUE Page Ref: 568 Level: Basic 11) Losses attributed to white-collar crime are passed along to taxpayers and customers.

Answer: TRUE Page Ref: 568 Level: Basic

302

12) Solomon Smith Barney was the major Wall Street firm that continued to sell questionable securities to Orange County after warning of risks.

Answer: FALSE Page Ref: 569-570 Level: Intermediate 13) Diffusion of accountability is a common byproduct of fiscal irresponsibility.

Answer: TRUE Page Ref: 570 Level: Basic 14) In addition to the environmental damage, the human destruction, and the economic losses, there are less tangible but other very serious consequences of white-collar crime.

Answer: TRUE Page Ref: 571 Level: Basic 15) One proposal to counter white-collar crime is for "excessive transparency." This would require disclosure of executive dealings with competitor companies.

Answer: FALSE Page Ref: 572-573 Level: Basic 13.3 Fill in the Blank Questions 1) There are questions as to why white-collar criminals suffer so little of the ________ experienced by street criminals.

Answer: stigma Page Ref: 549 Level: Basic 2) The term ________ might be substituted for tautological.

Answer: circular Page Ref: 550 Level: Intermediate 3) The three levels of sociological analysis are societies, institutions, and ________.

Answer: organizations Page Ref: 550 Level: Basic 4) James W. Coleman argues that the source of white-collar crime is the culture of ________.

Answer: competition Page Ref: 550-551 Level: Basic

303

5) According to Gresham Sykes and David Matza, ________ techniques make it possible for whitecollar criminals to annul guilt.

Answer: neutralization Page Ref: 551 Level: Intermediate 6) In recent years, the earnings gap between CEOs and employees has ________.

Answer: widened Page Ref: 553-554 Level: Basic 7) Recent corporate scandals reveal that some greedy CEOs and other top executives have ________ inflated the value of their firms' assets.

Answer: illegally Page Ref: 554 Level: Intermediate 8) Embezzlement would be an example of ________ crime.

Answer: occupational Page Ref: 559 Level: Basic 9) The shift of white-collar crime losses from the rich to others resulted in a(n) ________ tax.

Answer: regressive Page Ref: 560 Level: Basic 10) In addition to the environmental damage, the human destruction, and the economic losses, there are less tangible but other very serious ________ consequences of white-collar crime.

Answer: social Page Ref: 571-572 Level: Basic

304

13.4 Matching Questions Match the key terns listed in Column 1 to the description in Column 2. Use each description only once.

A) A major firm that continued to sell questionable securities to Orange County after warning of risks B) Appears to make exorbitant salaries, perks, and bonuses to executives more justifiable C) Argued that the source of white-collar crime is the culture of competition D) Stated that people are utility maximizers guided by self interest in free markets E) The burden of financial irresponsibility falls here F) Estimated that nearly 10% of the $1 trillion spent by Americans on health care is lost to fraud and abuse G) Causation theories related to street crime are thought to be this H) Believe that neutralization techniques make it possible for white-collar criminals to annul guilt 1) Tautological Level: Basic 2) James W. Coleman Level: Basic 3) Milton Friedman Level: Basic 4) Gresham Sykes and David Matza Level: Basic 5) Overstated earnings Level: Basic 6) The General Accounting Office Level: Basic 7) Merrill Lynch Level: Basic 8) Middle class Level: Basic Answers: 1) G 2) C 3) D 4) H 5) B 6) F 7) A 8) E

305

13.5 Essay Questions 1) What are the difficulties in defining white-collar criminality through the use of conventional theories of crime?

Answer: Conventional theories of crime often have a tautological quality in that they define criminality in terms of the same factors they posit as causes.

Page Ref: 549-551 Level: Difficult 2) What is meant by the term "psychopathic wealth"? How does it pertain to white-collar crime?

Answer: The elite are becoming increasingly disconnected from the social mainstream and have gone from executives "making" things happen to executives "taking" things. They do not seem to put in the time to "make" it happen because they want it now.

Page Ref: 552-553 Level: Difficult 3) Distinguish between corporate crime and occupational crime. Give examples of each.

Answer: Occupational crime can be defined as offenses committed by individuals in the course of their occupations and the offenses of employees against their employers. Embezzlement would be an example. Corporate crime is usually more complex and involves individuals who violate the law to advance the interests of the organization.

Page Ref: 559-560 Level: Difficult 4) Why does white-collar crime often appear to be a rational course of action? Provide examples to support your answer.

Answer: White-collar crime often appears to be a rational course of action because of the low probability of apprehension and the likelihood of light punishment.

Page Ref: 561-563 Level: Difficult 5) Discuss the three categories concerning the serious effect of white-collar crime. Provide examples of the effects in each category.

Answer: Environmental and human costs: Exxon Valdez Economic costs: the burden of white-collar crime is not shared equally. It is usually passed on to the middle- and low-income populations.

Social costs: white-collar crime promotes disrespect for the law among ordinary citizens.

Page Ref: 567-572 Level: Difficult

306

13.6 Critical Thinking Questions 1) Identify the factors that contribute to the comparative leniency shown to white-collar offenders.

Offer solutions that you think would help.

Answer: The risk-reward ratio, white-collar defendants have the resources generally unavailable to the general public, and white-collar crimes frequently involve complicated financial transactions in which the victims are either aggregated classes of unrelated persons, or large government agencies.

Solutions will vary.

Page Ref: 550-558 Level: Difficult 2) Evaluate legal changes that have been made to combat white-collar crime. Do you think laws that have provided tougher penalties for white-collar crimes serve as a general deterrent to potential criminals?

Answer: Answers will vary.

Page Ref: 560-566 Level: Difficult

307