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The Lindsey Case and Inadequate Penalties Under the FCPA

May 13, 2011

By Ann Hollingshead

Ann Hollingshead is a Financial Transparency Coalition blog contributor, whose posts appear weekly. Formerly a Junior Economist at Global Financial Integrity, Ann is now pursuing a Master of Public Policy (MPP) from the University of California Berkeley. Follow her on Twitter: @AnnHollingshead.

Over the last decade or so, investment banks have chronically put their profits ahead of the interests of the community. Take Goldman Sachs, the investment bank, that sold complex financial structures en masse, which helped spread toxic mortgages throughout the financial system. In 2008 our financial system nearly collapsed, in large part because of these toxic mortgages. Goldman Sachs actually profited from that meltdown, by putting millions of dollars into a subprime mortgage deal in 2007. Soon after that little stunt, the firm paid a settlement fine of $550 million to the Securities and Exchange Commission (SEC) for charges of fraud and misleading investors. Robert Khuzami, head of the SEC, glowingly called it a “heavy price.”

The next day, Goldman Sachs’ share price rose $7…obviously the market didn’t agree.

Goldman’s total rise in share price added more than $1 billion to its market value. In the wake of this debacle, many analysts argued “the stock market…believes that Goldman has struck an amazing deal with the SEC.” Pro Publica, a non-profit investigative reporters group, calculated that the fine was worth less then one-tenth of the gain Goldman’s stock enjoyed after word of the settlement and it was only slightly less than the amount the company donated to help small businesses after criticism of its bonus structure. Arlen Specter, then Democratic Senator from Pennsylvania, gave a speech on the Senate floor questioning whether this behavior crossed “the criminal line.” Arguing that major companies consider such fines “a cost of doing business,” Specter contended: “I have long been concerned about the acceptance of fines instead of jail sentences in egregious cases.”

We see a parallel problem in the enforcement of the Foreign Corrupt Practices Act (FCPA) which makes it unlawful “for persons and entities to make payments to foreign government officials to assist in obtaining or retaining business.” In a very recent article Nicholas Wagoner, a student at South Texas College of Law and Professor Drury Stevenson argue corporations view fines and penalties under enforcement of the FCPA as “a cost of doing business” because the risk of losing profitable business outweighs “the cost of getting caught.” And Specter has pointed out, a multi-million dollar criminal fine may be a lot of money to most Americans, but it “doesn’t amount to a whole lot” for the corporations committing the crimes. Specter argues that Siemens AG paid $1.6 billion for widespread bribery overseas, but in comparison to Siemens’ yearly revenue of over $100 billion the figure is not startling large.

This Tuesday a federal jury in Los Angeles convicted Lindsey Manufacturing Co., its president, and its vice president of violating the FCPA. Analysts believe this conviction is the first-ever jury trial of its kind. The defendants will receive sentencing in September, but the charges carry a maximum sentence of 30 years in federal prison. The Lindsey case is a clear reminder of why guilty pleas are so common and FCPA cases never go to trial.

There is a lesson here. If foreign bribery continues to be a problem among U.S. firms and the SEC is not dissuading behavior with fines, other solutions should be explored.  Arlen Specter for one, argues that the solution is more jail time. Stevenson and Wagoner argue the SEC should use debarment from future government contracts, which is an allowable, but unused sanction for FCPA violations. “Debarment,” they reason “offers a far more potent deterrent than fines and penalties, as multinational contractors that conduct business with the U.S. are much less likely to view the sanction as merely a cost of doing business.”

I, for one, favor lowering them all into a tank full of sharks with laser beams attached to their heads.  Just kidding.  Ill-tempered, mutated sea bass would also do.


Disclaimer: Unless specifically stated to be the views of the Financial Transparency Coalition, the opinions expressed on this blog are solely the opinions of the individual blogger and are not necessarily those of the Financial Transparency Coalition.

  • http://www.eneke.com Reggie Akpata

    GS benefitted by betting against the same securities they were selling. A useful anaolgy would be to sell a house to a non qualified buyer then take out a bet that the buyer was going to default!

    • http://www.financialtransparency.org/author/ahollingshead/ Ann Hollingshead

      Exactly! Although I’d take it a step further than ‘analogy’ because by using CDOs and credit default swaps, that is literally what they did, but on a huge scale.

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