White Collar Entrepreneurial Crime

Allen Stanford

Briefly describe the entrepreneurial crime you researched.

In 2009, the Antigua/Texas-based global financial group (which was made up several subsidiaries that were owned by the same investment firm) owned by R. Allen Stanford was charged with scamming their customers by the Securities and Exchange Commission. Stanford Financial Group was charged with fraud on the basis that they deceptively sold consumers over seven billion dollars in deposit certificates. The company advertised the CDs as safe investments to their clients yet they paid them a rate of return that was inconsistently higher than the market rate. The rate brought in many clients however the investments were not as safe as they were advertised. Instead of backing the investments with safe assets, the company used the funds to invest in high-risk mortgage funds and other risky investments. The sentencing memorandum after Stanford was convicted reads as follows:

Robert Allen Stanford is a ruthless predator responsible for one of the most egregious frauds in history, and he should be sentenced to the statutory maximum sentence of 230 years' imprisonment. For more than twenty years, Stanford orchestrated an epic, multibillion dollar fraud to indulge an extraordinarily lavish lifestyle and to finance a personal business empire, with devastating consequences for thousands of victims who entrusted him with their savings (Henning, 2012).

The company was guilty of running something of a Ponzi scheme that counting on growth in new customers in order to compensate the higher returns that the fund was offering new clients. Furthermore it was gambling much of the funding that it controlled on risky investments in the real estate sector. Stanford may have believed that these investments may have paid large returns and made the fund solvent; however the riskiness of such investments was never transparent to the client. The firm became so large that they actually had national advertising campaigns and even sponsored a PGA tour event.

Discuss how the psychological characteristics of individuals and accounting opportunities for omission(s) may have contributed to the commission of the entrepreneurial crime you researched.

Mr. Allen was actually known as Sir Allen Stanford because he was knighted by the Antiguan government for his philanthropy in the local island community. However, despite his philanthropy many employees were fully aware that Allen was a fraud. The Diagnostic Statistical Manual, which lists psychological disorders, listed how often a person might meet someone afflicted with a sociopathic disposition with makes up only a slight percentage of the population, but the places where one was most likely to encounter them were among politicians and salesmen -- people who will say whatever they need to in order to advance their purposes (Wilkinson, 2012). Although Stanford was definitely a charmer, many believe that his tactics were purely to further his own self-interest. Furthermore, he was guilty of cleverly crafting accounting opportunities that allowed for omission through illegal acts. This was an active construction of illegal accounting practices rather than simply taking advantage of opportunities for omission. They purposely set up dummy subsidiaries for the purpose of defrauding clients.

It seems as though it may often be the case that there are psychological issues with people who have amassed large amounts of power or money. While normal people will generally balance their own self-interests with the interest of others and the society in general, a person who is concerned only with their own self-interest may actually be more competitive as a leader in many industries; especially in financial investments. This is due to the fact that clients often look for the strongest firm and not necessarily the ones that act with ethical integrity. Many people overlook or do not understand the business practices in the investment companies that they put their money into. Instead they focus on the returns that they expect and assume that companies operate with minimal ethical standards at worst.

It is designed to ensure that the company's officers are honest in their financial reporting so investors and employees will not suffer the ramifications and financial losses that are due to criminal activities. Since the Act has been put into place less of a company's financial reporting is taken for granted and more of the organizations practices must be documented comprehensively. As a result most companies have been forces to implement better corporate governance procedures to maintain their compliance with the act. Audit Committees and Boards of Directors are now more in sync in regard to their responsibilities related to providing accurate and unbiased financial reporting. This acts to level the playing field in the free market as firms will find it more difficult to "cook the books."
The costs of the Sarbanes-Oxley act are also something that must be considered. One study by Ivy Xiying Zhang of the William E. Simon Graduate School of Business Administration at the University of Rochester estimated the net private cost amounts to $1.4 trillion which represents econometric estimate of "the loss in total market value around the most significant legislative events" -- ie, the costs minus the benefits as perceived by the stock market as the new rules were enacted (The Economist, 2005). Furthermore, even though many believe that the act is working to curb fraud, there are still important shortcomings that have allowed companies, such as the one Mr. Allen lead, to continue to fraudulently deceive their clients (Drawbaugh & Aubin, 2012). Even after a decade, some believe that the act is too expensive and burdensome to businesses while others argue that the act did not go far enough.

Compare and contrast the adjudication of the white-collar crime you researched as a criminal action vs. A civil action.

Mr. Stanford was convicted in a criminal action that will keep him in federal prison for the rest of his life. Other members in the organization also received shorter sentences. However, the civil actions took a unique form since the losses incurred in the crimes were in the billions. The Securities and Exchange Commission had sought to force a fund for the civil compensation for the victims, the Securities Investor Protection Corporation, to start liquidation proceedings for the victims, some of whom lost millions of dollars to the fraud but this was overturned in court (Reuters, 2012). The judge found that the commission did not meet its legal burden of showing why the corporation should be compelled to act. This caused many people to lose their entire life savings. White collar crimes can have incredibly far reaching implications that can affect millions of families either directly or indirectly cost taxpayers as well. However, it is sometimes difficult to determine the best course of action for pursuing criminals that commit these types of crimes.

Determine whether agencies that are vested with statutory powers of investigation and imposition of penalties should choose a non-adversarial approach to regulation, as well as how your determination would have impacted the crime you researched.

In this case, if a non-adversarial approach was on the table then it could have been possible for the victims to receive greater compensation. It would be reasonable to suspect that Mr. Allen would have been more cooperative in helping the victims in exchange for a reduced sentence. By criminalizing him, it is harder to develop his cooperation. However, by criminalizing Mr. Allen it does send a strong message to others who are or who are considering committing such crimes. Therefore it can have an effect that discourages other crimes. Therefore, when considering the costs and benefits of such actions, it may be necessary to weigh the factors involved to determine the best course of action.

In this case it may have been in…