'Inside the Mind of the White-Collar Criminal' (Audio)

can do they feel remorse about their victims. A new book, Why They Do It Inside the Mind of the White Collar Criminal explores what turns corporate executives into corporate criminals. It's based on the author's interviews with close to fifty well known white collar criminals, from Bernie made Off to Dennis Kozlowski. The author, Eugene Saltis, is a professor at Harvard Business School and joins me, now, how did you get these close to fifty white collar criminals to talk

to you? Well, I think many of the individuals, as they left their fields in finance and business, the lonely and they don't have the people to engage in the business community anymore. And being a financial economist, I was able to develop a relationship with them by connecting by talking about the world that they once loved and were passionate about, but obviously have now left that community. So I connected with them talking about the technical stuff that's

in the papers on a day to day basis. But I was also fortunate being an academic, that I could spend time with them, not just popping for one conversation, but I committed that I would spend as long as it took to really get to know them in their perspectives. So some people this might be weeks, months, and in some cases I actually spent years speaking with individuals over the course of this project. These people were wealthy, privileged people. Was it pure greed the need for more and more

that made them do it? I think it's a little bit more complicated than that. We're all driven by incentives, and to the extent that money can play some role around incentence. But what I explore is trying to think of why would these individuals who are really quite strategic and smart, I mean it really are titans of industry. To make sense, they could gain a little bit more money or prestige, they wouldn't risk their freedom for that.

They wouldn't risk everything. And I think that's the humbling question to ask, because why would someone that seems to have it all seem to want to push it a little bit farther, And so I explore in the book, should we be thinking of this as a rational calculation so many economists and regulators and prosecutors see it, or should we think of this as maybe a different type of failure, a different type of process that's causing these

executive failures? What type of failure? So, what I hypothesize and argue in the book is that it doesn't look so much like of a failure of that careful, analytical, deliberative reasoning of comparing the expected benefits against the expected costs, which is how people often type see this and and think executives would make these kinds of consequential decisions. But rather when one actually looks at some of the cases, it looks I think it's much closer to a failure

of manual intuition. They don't act, we see the harm associated with their actions at the time these decisions are being made. So I can give an example, Sam Waxel, the former CEO of m Clone Well no executive because it's also the case that ended up in snaring Martha

Stewart and leading to her obstruction of justice charges. Sam Waxel's brilliant, quite brilliant executive, but he also found out about some adverse test results coming back from the FBA that they weren't going to give the approval of his drug as expected, and so that evening he called his daughter and told her to dump her two million dollars worth of shares. Now, this isn't a particularly good white teller crime. I mean, this is actually about his stupid

as they come. I mean, this isn't hard for regulars to pick up this kind of misconduct. So you're almost certainly going to get caught. And so if you think of well, why would Sam Waxel tell his daughter to dump these shares, It's really hard to think of that as a careful cost benefit calculation. You're almost certainly going to get caught. But rather, at the time he was thinking about calling his daughter and telling her this. I see that as a failure of intuition. He didn't act.

We see the harm associate with that at the time. So one about the victims. I remember interviewing victims of the Enron scandal who were older and lost their retirements and didn't know how they would cope did any of these white color criminals that you spoke to think about

the victims and feel sorry about what they've done. One of the parts that I was initially surprised but then became quite used to over time is the lack of remorse, and the remorse that I tend to see was around the loss of their family, those privileges, they missed their child's graduation, but not really for the victims. And I think the reason why, going back to this notion that's the failure of intuition, is that much of the harm

associated with white color misconduct, the victims aren't close. Their psychologically distant, they're physically distant, and so it doesn't create that same visceral feeling that you're actually harming someone specifically.

Take something like insider trading the easiest example. It's really hard, if not impossible, in some circumstances, to actually identify who the victims are in those cases, so it doesn't create that natural, instinctive, visceral response that you're actually hurting someone specifically.

But even the case of financial fraud, as you point out with Enron, I mean, at the time the executives were actually engaged in the misconduct and the fraud that would ultimately lead to the devastation for the people at Enron's the time they were actually getting awards, Andy Fast out one CF of the Year award, at the same time he was actually engaged in and arguably the most severe conduct that led to undermining the firm and leading

to its failure. So there isn't that connection the time that you're actually hurting someone while you're actually doing it's actually delayed in years away, so it doesn't have that negative distance while you're actually engaged in the mouth season. I've been talking to Harvard Business School professor Eugene solved Us about his new book Why They Do It Inside the Mind of the White Color Criminal. Bernie made Off seems like one of the more unsympathetic of the people

that you spoke to. He stole from people he knew, and he told you it's like a comedy of errors. Did he have any remorse at all? Bernie made Off is different than the other executives I spoke with and find large different from the bath majority of people that engage in white collar crime. That he knew his victims. I mean, intimately, these were family, these were friends, These are members of the Jewish community, and he doesn't express remorse for this, even to those that he knew well.

And I think this is what raises some interesting and I think difficult questions about him as an individual, and that he's just simply not empathetic even when the evidence has put directly in front of him, which is one of the things I described and discussed in the books, putting the evidence in front of him of some of the people that were harmed. He sees ways much like we all do, but just in a much greater extent

of rationalizing. For example, the family Foundations which many of us have heard that lost just extraordinary mounts when the Ponte scheme collapsed, he sees it as well. Many instances these foundations wouldn't have ever been set up in the first place had it not been for the gains that

the parents had ten or twenty years ago. And so to the extent that the foundations ended up collapsing when the Ponte scheme ended, he sees is that well, those family foundations would have never existed had it not been for the artificial gains ten or twenty years earlier. So it's really kind of no harm, no foul, which I think we can all step back and and find a little bit terrifying. One of the more surprising stories was

Dennis Kozlowski, the former chief executive of Tycho. He said the board would have given him anything he wanted, So why did he arrange for tens of millions of dollars in unauthorized bonuses? It's an important question. I mean he at the time when he was actually engaged in, ultimately what would be the embezzment that would lead to his conviction. I mean, he was one of the highest paid CEOs in the country and still in the last twenty years, still, I mean it was over a hundred million dollars of

compensation per year. And I think the challenge in a case like his is that whether the board, I mean we talk a lot about corporate governance and independence of directors, whether the board was providing the appropriate level of accountability or not is almost even besides the point if an executive in his position subjectively believes that they would give him anything he wanted, and so to the extent that there was, I mean, ultimately these loans were being forgiven

but not appropriately, and that's what he was convicted for. Basically, forgiving himself and other executives hundreds of millions of dollars and loans. Didn't feel you had to go through the

same checks and balances as ought have been done. And I think it's that type of feeling of I'm in the position of power and not going through the appropriate channels that ultimately led to his failure because to the extent that the board if they would have given him more, which I think there's actually some evidence the board would have actually given him more conversation had he actually asked for it. I mean, he was a rock star CEO at the time, actually doing very well, but that doesn't

excuse is not going through those those appropriate channels. Did most of them think they would get away with it. One of the things I did find really pretty extraordinary is that no one thinks, even when you're doing the most platent types of misconduct, that you're ever going to face criminal sanctions. And I don't think this is because some people have argued that regulators are not being effective

or not seeking to punish people. I think this is just a matter of no one in a position of privilege and power could ever really see themselves behind bars. We all do things that are wrong, But no one ever thinks that if you do something wrong like that, that you ever faced criminal sanctions and be behind bars. That's for other people. That's for other bad people, not

for me. And I think that's one of the real challenges we face with regulation is that oftentimes what we're doing is making the safety is harsher if you do crime X, rather than giving someone a six months since we're now going to give you a ten year sentence. And to think people were doing a careful analytical calculation doing this kind of deliver cost benefits calculation that actually should have some grit because people see that the expected

costs are going up. The problem is that these executives at the time they're actually making decisions, never think they're ever going to face any sanction. It doesn't matter whether it's one week in prison or ten years in prison. That's just never going to happen. And I think that's a deep challenge we face, both from a regulatory standpoint, but also from ourselves in the executive community of actually thinking about but the consequences for these types of actions.

So then is there any way to stop white color crime, or at least to slow it down. So I think this goes to back to changing norms and changing the culture within instances, because I make the argument that because this harm is very distant, it's very abstract, our intuitions are not well designed to actually detect it. That's just an evolutionary fact. We're not going to be hardwired to

see things that are so far away. But at the same time, what we can do is layer on new norms and new almost artificial intuitions, but create systems to help protect us from mac really proceeding down this road. One of the cases I talked about in the book that's actually I think one of the more important ones.

Someone that wasn't actually convicted of white color crime actually narrowly escaped it is Ben Horowitz, the well known venture capitalist, and he actually hired a new CFO for one of his firms, and the CFO came to an idea that she used in her prior firm and others in Silicon Valley were widely doing its option back dating. You moved the option data round to make it more attractive for

the executive widely being practiced at the time fifteen years ago. Now, Ben Horowitz is in one of these inspiring, innovative strategic minds. But he's not a finance and accounting guy and actually

appreciates that that's where his weaknesses lie. His intuitions are not well designed to figure out, well, what should you do when you have a new financial accounting policy change, And so he routinely put into places systems saying, anytime I'm going to make one of these changes, I want to get the insight in opinion of an outsider, someone

sitting outside by near a little bubble here. So he called an outside attorney that he knew and respected, passed this idea by him, and his attorney came back, there's no way. I've looked over this six different ways and there's no way that this is actually legal. I don't know how the auditors signed off in the law firm were actually comfortable with this, and all these other firms

were comfortable with this, but I advise against it. And so because of this advice, Bend ended up turning this down. Two years later, the government started investigating this. The CFO actually end up going to prison for stock option backdating the taxavation associated with that, and Ben describes it as the only thing that kept me out of prison with some luck and the right organizational design. This had nothing to do with having a better moral compass, better values.

This simply had to do with understanding his weaknesses and putting a system in place to intercede when he might not see the consequences associated with a particular choice. Eugene, is there one person you spoke to that stands out in your mind for some reason? Either you felt more sympathetic towards him, or he seemed more brilliant than the others are more devious. I think each of those traits I can think of an individual. I mean, one case that did make me think and reflect upon myself a

lot more was the case of Scott Harkinnon. He was a CEO of a biotech company and he ran a test for a new drug for IPS, a fatal disease, and the test actually missed its primary endpoint, its main goal. But then in some subsequent data analysis they actually found that maybe in this one subgroup there was actually some promising results. So, as to be expected, you issue a press release, and on this press release they said, after this trial we found some results that demonstrated that there

could be some benefits associated with this treatment. And then the rest of the press release described all the technical nitty gritty. Couple years later, the government actually goes after him and says that press release actually was misleading, at was actually fraudulent because you put the word demonstrate and ultimately this drug wasn't effective. And maybe you could have put the word suggest, but demonstrate wasn't the appropriate word.

And when I look around and I think of the kinds of things that we see corporate leaders often saying, are political leaders often saying the choice between the word demonstrate and suggest in a press release, not in the scientific publication. We're talking about one single press release. He faced up to ten years in prison. Ultimately quote only received several years of probation. But it's pretty extraordinary that an individual because of a choice of one word and

one press release, really lost everything in life. I mean, spending millions of dollars on defense, losing his license not able to run a publicly traded firm. And when I think of his case, and I think of the kinds of things that we all say in a public sphere, in terms of how carefully we choose our words, I think it's pretty humbling. The penalties for white collar crime have gone up in recent years. Do you think that

they're too tough? The penalties they're they're generally around the dollar loss, and the difference between whether your action lost fifty million dollars or billion dollars in a fraud generally doesn't come down to the act itself was actually different. It comes down to that you happen to be a larger firm, and so your action simply had a larger

market effect. And I think that's a little bit odd um, and I think this is why some judges have started pushing back on the sentencing guidelines, which escalate so dramatically depending on the dollars that are perceived to have been lost. I read that white collar crime was first defined by sociologist Edwin Sutherland in as a crime committed by a person of respectability and high social status in the course

of his occupation. Should we stop calling them white color criminals and setting them apart from other criminals as if what they're doing is not quite as bad. I think that would go be a huge step forward. I think the part that I find most frustrating, and certainly I think we've seen some regulators express this, is that people think of white color crime in many instances just not as bad as street offenses. It doesn't seem as scary

because no one's wielding a knife in the nighttime. But if we start thinking about the economic ramifications, the effects that people on their livelihood. I mean, you can look at the victims of Enron and World com Bernie made up Ponzi scheme, and you see what this has done to their retirement plan, to their life. This has been in every way just has been in some sense is much worse than many street offenses. But by setting it apart is a white color offense that looks a little

bit more technical, it sometimes minimizes the effect. And this is what Edwin Southerland tried to point out nineteen thirty nine, and we've made some strides since. But in the idea of an executive going to prison for something they did in the course of business was really in a foreigner, exotic concept that wasn't crime. Crime occurred only what was on the street, not in the boardroom. And so we've been trying to fight against that concept, I think ever

ever since, to change that notion. Thank you for being on Bloomberg Law. That's Harvard Business School Professor Eugene Soltice. That's it for this edition of Bloomberg Law. I'm June Graasso. This is Bloomberg