The Nobel Prize winning physicist Richard P. Feynman once said, “The first principle is that you must not fool yourself and you are the easiest person to fool.†That notion seems especially applicable to white-collar crimes that are the result of ordinary decisions by people who rarely seem to have recognized the path they were going down because they decided to fool themselves.
The collapse of the New York law firm Dewey & LeBeouf provides a good example of how a series of seemingly mundane accounting maneuvers led to guilty pleas by seven workers in its financial operation, called the “Dewey Seven†by DealBook, and criminal charges against four others. Expenses were not properly recorded so it seemed that the firm’s net income was higher and false documents were created to make it appear that the firm would receive payments from clients when there was nothing to collect.
What is striking is the apparent casualness in which lower-level workers took orders to manipulate records to cover up the firm’s increasingly precarious financial situation. These were not one-time events, but occurred over a number of years as it tried to stay afloat after a merger in 2007.
Those directions came from the firm’s top financial managers. Among the Dewey Seven are Francis Canellas, the former director of finance; Thomas Mullikin, the former controller; and Jyhjing “Victoria†Harrington, a certified public accountant.
The accounting fraud was hardly the product of rogue employees who decided to pursue a course of action for their own self-interest. There is no indication in the guilty plea documents released by the New York district attorney’s office that any of these defendants received extra compensation for their work or diverted money from the firm’s coffers.
The government will try to show that the Dewey Seven acted on orders from the firm’s top leaders, including the firm’s former chairman, Steven H. Davis, and its former executive director, Stephen DiCarmine, to come up with ways to make the numbers look better. There is no “good soldier†defense to criminal charges, so engaging in misconduct at the urging of a superior will result in criminal liability even if the person has a good excuse for it.
What happened at Dewey & LeBoeuf was the product of a tone set by the firm’s leadership, at least within the finance department and, perhaps, throughout its executive ranks. The goal to keep the firm afloat may have seemed laudable. But manipulating accounts to meet short-term needs in the hope that it would eventually achieve financial stability is hardly a justification for fraud.
We have seen other recent examples of what appear to be ordinary business decisions ending up having momentous consequences for a company that can lead to criminal or civil charges.
General Motors is facing intense scrutiny over how it handled faulty ignition switches in certain vehicles that resulted in as many as 12 deaths when the engines shut off and air bags failed to deploy. Back in 2005, a company engineer proposed changing the design of the switch, which was initially approved but later canceled. That seemingly insignificant decision may have cost lives, and G.M.’s subsequent response is now the focus of a criminal investigation and congressional hearings.
It is unlikely anyone at G.M. involved in the decision to cancel the design change had any idea of the consequences. The company’s subsequent response to reports of problems indicates that employees were far more concerned with avoiding a costly design change and large-scale vehicle recall than in admitting to a defect.
This was probably not the result of some grand plan, but just a series of ordinary business decisions that have resulted in far greater costs that G.M. ever could have imagined. As Floyd Norris recently pointed out in The New York Times, “I suspect that every one of the people involved at G.M. considers himself or herself to be an honest, ethical person. Yet, collectively, they acted in a way that is absolutely stunning in its callousness.â€
When the management at JPMorgan first started to deal with trading in its chief investment office by the so-called London whale that led to over $6 billion in losses, Jamie Dimon, the bank’s chief executive, at first brushed off the issue as a “tempest in a teapot.†Once the parameters of the losses became clear, the bank’s management reacted by keeping information from the company’s audit committee and not acknowledging the severity of the loss.
The bank settled administrative charges filed by the Securities and Exchange Commission. Those charges included admitting that its internal controls broke down when senior management did not deal with the situation properly by failing to promptly disclose the scope of the losses. That initial dismissive response eventually led to a $200 million penalty against the company.
Even the huge Ponzi scheme perpetrated by Bernard L. Madoff involved seemingly ordinary decisions by lower-level employees. The recent conviction of five of Mr. Madoff’s associates revolved around their creation of false documents to deceive auditors and regulators, but those actions seem to have hardly drawn their notice. Indeed, the defense argued at the trial that employees had been duped by Mr. Madoff along with everyone else, and so they were just doing their jobs.
There is a certain fondness for conspiracy theories, ranging from the assassination of John F. Kennedy to aliens purportedly found in New Mexico. In white-collar crime, however, it is often the case that violations arise from workers who view themselves as just doing their jobs, even if it involves creating false records or shuffling accounts to keep the business running.
As is so often the case, committing a crime requires fooling yourself into thinking that there is nothing improper â€" or at least not something “really wrong†â€" in what you are doing. Once you fool yourself, the outcome can easily slide into criminality.
