APPENDIX TO CHAPTER 3

The Line-Up: Corporate Crime

Robert A. G. Monks

This appendix was originally written as part of Chapter 3 (under Danger Number 4), but it grew too long! The sheer volume of examples contained herein provides ample proof of the persistence of corporate crime.

Large household-name corporations live down crime as easily as photogenic people. The only difference is that in most cases top corporate managers almost never have to have to serve jail time.[1] When senior executives are caught red-handed on videotape (remember Archer Daniels Midland?), all is forgiven and forgotten after the fines are paid.

Even when it comes to the national defense, the public seems impervious to company wrongdoing. Consider Boeing Corporation.

· A sting called Operation Undercover exposed the seedy side of Boeing in 1980, but less than three years later, reports Louis Pasztor in When The Pentagon Was for Sale, “Boeing made the list of the ten ‘most admired’ companies, alongside popular consumer-goods marketers such as Procter & Gamble, Wal-Mart Stores, and Coca-Cola.”[2]

· In the four years from 1990 to February 1994, Boeing had paid nearly $20 million dollars to settle four lawsuits against it for fraud, waste, and/or abuse, yet by mid-1997, the company was the darling of the nation.[3] The Clinton Administration threatened a trade war against Europe if the European Commission would not approve the giant’s merger with McDonnell Douglas (completed midnight, August 1, 1997).

The financial rewards of most corporate wrongdoing are so high and the costs so low (as discussed in Chapter 3) that criminal activity is all too common. One of the few tools that U.S. corporate crime fighters have at their disposal is the False Claims Act, which punishes corporations that try to defraud the government. Not surprisingly, many of the major government contractors have tried to weaken this law, especially those that had paid fines under the law in previous years. After all, in 1994, the U.S. government had already recovered $588 million in fines from these companies over a period of four years. Fortunately, this lobbying effort failed. From 1994 to 1996, the government collected an additional $2 billion in fines under the Act.[4]

Here is a list of the companies that signed the lobbying paper, followed by the number of settled fraud cases from 1990 to 1994 involving these companies: The Boeing Company (4); Eaton Corporation (2); FMC Corporation (0), General Electric (16); Grumman Corporation (5); GTE Government Systems (0); Honeywell Inc. (3); Hughes Aircraft Company (9); Litton Industries (4); Magnavox Electronics (3); Martin Marietta Corp. (5); McDonnell Douglas (4); Newport News Shipbuilding (11); Northrup Corporation (4); Raytheon Company (4); Rockwell International (4); Sunstrand Corporation (1); Teledyne Corporation (5); Texas Instruments (3); TRW Inc. (1); Unisys Corporation (2); United Technologies (3).[5] It is obvious from this list that fraud is a common practice at defense contractors, especially General Electric.

The marketplace seems indifferent to the sources of corporate gain, even when it is ill-gotten. And the press is quick to forget yesterday’s dirt in the search for today’s gold. In a February 1994 cover story, Fortune looked at “Jack Welch’s Nightmare on Elm Street” (the nightmare being scandal-plagued Kidder Peabody) and concluded that “misdeeds ... are not an isolated case at GE.” Yet just two years later, in its January 1996 issue, Fortune crowned GE’s charismatic leader Jack Welch as America’s most successful generator of shareholder value.

A Litany of Sins

Here is an incomplete list of GE’s wrongdoings over the past decade, based in part on the Fortune list, and in part on a February 1997 report by the Project on Government Oversight in Washington, D.C.[6] Only major settled incidents are listed.

1985 GE pleads guilty to fraud charges for overcharging the Air Force on its Minuteman missile contract; GE agrees to pay $2 million in criminal and civil penalties.

1989 GE settles four civil suits brought by whistleblowers who alleged that GE cheated the government out of millions of dollars by issuing faulty time cards. GE pays some $3.5 million.

1990 GE is convicted of defrauding the Defense Department by overcharging the Army for a battlefield computer system. GE pays $30 million in penalties for that and other defense contracting overcharges.

1992 GE pleads guilty to defrauding the Pentagon of more than $30 million in the sale of military jet engines to Israel after an employee received bribes. GE pays $69 million in fines.

1993 GE’s NBC News unit issues an on-air apology to General Motors for staging a misleading simulated crash test. NBC agrees to pay GM’s estimated $1 million legal and investigation expenses.

1995 GE pays $7.1 million to settle a lawsuit alleging that the company failed to satisfy electrical bonding requirements for its jet engine contracts, thereby creating a safety risk. Also, in a separate development, GE and Martin Marietta together paid $5.87 million to settle a lawsuit associated with improper sales of radar systems to Egypt.

1997 GE loses a lawsuit filed in the Federal court of Canada in Toronto. Justice Bud Cullen ruled in favor of the plaintiff, Whirlpool, which alleged that GE violated its patent on dual-action agitators with flexible fins. GE plans to appeal.[7]

Considering these crimes, one must ask: how can a company that breaks the law so often do so well in equity markets? High shareholder value and high corporate crime go together quite well, the answer may come, so if it ain’t broke, don’t fix it. The problem is that the current system for assessing shareholder value is about to break, and there will be no fixing. Instead, there will be a major change in how we value corporations.

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[1] Rare exceptions proving this rule are two 1995 fraud cases—Gary Singer, co-chairman of Cooper Companies, sentenced to 18 months in U.S. prison, and Didier Pineau-Valencienne, chairman of Schneider, sentenced to 12 days in Belgian prison for alleged crimes against Belgian shareholders)

[2] Louis Pasztor, When the Pentagon Was for Sale: Inside America’s Biggest Defense Scandal (New York: Charles Scribners & Sons, 1995), p. 264.

[3] Survey of Defense Contractor Signatories of the ‘Position Paper: Reform of the Federal Civil False Claims Act’ ” (Washington, D.C., Project on Government Oversight, January 1994).

[4] Terence P. Parre, “Jack Welch’s Nightmare on Wall Street,” Fortune, September 5, 1994; Defense and Health Care Industries: Rather than Clean up their Act, They Attack the Act (Washington, D.C.: Project on Government Oversight, February 1997).

⁵ Only 11 of the cases cited against the 20 companies were False Claims Act cases, but those cases recovered over $125 million for the government. Source: “Defense Companies that Lobby for Weaker False Claims Act Have Defrauded Government, Study Finds,” Corporate Crime Reporter, Volume 8, Number 9 (February 28, 1994), pp. 2-3.

[6] Defense and Health Care Industries, op. cit. (note 4).

[7] William M. Carley, “A Load Off Its Mind: Whirlpool Beats Foe in Washer Action, The Wall Street Journal, September 15, 997, pp. A1, A6.