Ethics Case

11

CASE OPENER4

2

Untenable Trading

In late 1997, John Freeman, employed at Goldman Sachs & Co., Inc., began misappropriating nonpublic information concerning impending mergers and acquisitions. Rather than using that information to make trades himself, Freeman began disclosing the insider information to James Cooper and Benton Erskine, with the understanding and agreement that they would share a portion of their trading profi ts with him.

During the course of the scheme, Cooper received Freeman’s permission to tip other individuals who might be able to assist them. Freeman knew of two people to whom Cooper gave the tips. Cooper, how-ever, also tipped certain individuals without Freeman’s knowledge or consent, including Chad Conner, a stockbroker. Cooper began regularly tipping Conner, who, in turn, tipped numerous other brokerage clients.

In the early fall of 1998, Freeman left Goldman Sachs to work part-time for Credit Suisse First Boston (CSFB), another investment bank. While Freeman continued to misappropriate information from CSFB, Conner and his clients believed the information they were now receiving was not as profi table as it had been in the past. Conner told Cooper that one of his clients was willing to pay the “New York source” $100,000 to return to Goldman Sachs. Cooper communicated this offer to Freeman.

Prior to receiving this offer, Freeman had been apprehended by the FBI and had agreed to assist the agency. On February 23, 2000, Conner and Cooper participated in a three-way telephone and online conversation with an FBI agent posing as Freeman. During this telephone conversation, Conner reiter-ated his offer to pay Freeman $100,000 to return to Goldman Sachs. The agent posing as Freeman asked Conner to personally deliver $5,000 to Atlantic City, and Conner agreed. On March 4, 2000, FBI agents arrested Conner in Atlantic City and seized an envelope containing $5,000. Conner was subse-quently charged with commercial bribery and 81 counts of insider trading. 1

1. Do you believe Conner did anything illegal? Anything unethical? 2. If a person has inside information and does not trade on it himself but passes it on to another

who uses it to trade, is the person who passed on the information guilty of insider trading?

1 United States v. Geibel, 369 F.3d 682 (2004).

Business Ethics and White-Collar Crime

C H A P T E RP

AR

T 1

T

he L

egal E

nviron

men

t of Bu

siness

Confirming Pages

kub77686_ch02_011-042.indd 11kub77686_ch02_011-042.indd 11 11/6/08 12:08:26 PM11/6/08 12:08:26 PM

12

After reading this chapter, you will be able to answer the following questions:

LO 1 What are business ethics and the social responsibility of business?

LO 2 How are business law and business ethics related?

LO 3 How can we use the WPH framework to make ethical business decisions?

LO 4 What are the basic elements of a crime?

LO 5 What is white-collar crime?

LO 6 Who can be held responsible when a corporate crime is committed?

LO 7 What are the basic steps of a criminal proceeding?

LO 8 What laws attempt to prevent white-collar crime?

LEARNING OBJECTIVES4

This chapter provides assistance for thinking systematically about issues of right and wrong in business conduct and recognizing when wrongful conduct has become criminal. The discussion begins with an explanation of key terms like business ethics and social responsibility. Then, because it is helpful to have a useful approach to ethical decision making, the chapter presents a practical method by which future business managers can think more carefully about the ethi-cal dilemmas they will face during their careers. Next, the chapter introduces the elements of a crime and explains some common crimes that occur in the business context. After discussing how liability can be imposed on corporations and corporate executives, the chapter sets forth the steps of criminal procedure. The chapter concludes by discussing some of the laws used to fi ght business crime.

As the Case Opener illustrates, unethical behavior and crime can come in many forms and affect large numbers of people. Also, crimes can quickly expand in terms of the number of peo-ple involved. It is important to note that Freeman, Cooper, Conner, and everyone Conner told made large sums of money at the expense of other investors. Although a crime might seem like a victimless one at fi rst, crime always has a victim, even if the victim is not readily identifi able.

Business Ethics and Social Responsibility Ethics is the study and practice of decisions about what is good, or right. Ethics guides us when we are wondering what we should be doing in a particular situation. Business ethics is an appli-cation of ethics to the special problems and opportunities experienced by businesspeople. An ethical dilemma is a problem about what a fi rm should do for which no clear, right decision is available. Reasonable people can expect to disagree about optimal solutions to ethical dilemmas.

For example, imagine yourself in the position of a business manager at Wells Fargo Bank. You know that providing bank accounts for customers has costs attached to it. You want to cover those costs by charging the customers the cost of their checking accounts. By doing so, you can preserve the bank’s revenue for shareholders and employees of Wells Fargo. So far, the decision seems simple. But an ethical dilemma soon appears.

LO 1LO 1

ethicsThe study and practice of decisions about what is good or right.

business ethicsThe use of ethics and ethical principles to solve business dilemmas.

ethical dilemmaA question about how one should behave that requires one to refl ect about the advantages and disadvantages of the optional choices for various stakeholders.

ethicsThe study and practice of decisions about what is good or right.

business ethicsThe use of ethics and ethical principles to solve business dilemmas.

ethical dilemmaA question about how one should behave that requires one to refl ect about the advantages and disadvantages of the optional choices for various stakeholders.

Confirming Pages


Chapter 2 Business Ethics and White-Collar Crime 13

You learn from recent government reports that 12 million families cannot afford to have bank accounts when they are charged a fee to maintain one. You want to do the right thing in this situ-ation. But what would that be? The study of business ethics can help you resolve this dilemma by suggesting approaches you can use that will show respect for others while maintaining a healthy business enterprise.

Making such decisions would be much easier if managers could focus only on the impact of decisions on the fi rm. If, for example, a fi rm had as its only objective the maximization of profi ts, the “right thing” to do would be the option that had the largest positive impact on the fi rm’s profi ts.

But businesses operate in a community. Communities have expectations for behavior of indi-viduals, groups, and businesses. Different communities have different expectations of businesses. Trying to identify those expectations and deciding whether to fulfi ll them complicate business eth-ics. The community often expects fi rms to do much more than just provide a useful good or service at a reasonable price. For example, a community may expect fi rms to resist paying bribes, even when the payment of such fees is an ordinary cost of doing business in certain global settings.

The social responsibility of business consists of the expectations the community imposes on fi rms doing business within its borders. These expectations must be honored to a certain extent, even when a fi rm wishes to ignore them, because fi rms are always subject to the implicit threat that legislation will impose social obligations on them. So, if the community expects businesses to obey certain standards of fairness even when the standards interfere with profi t maximization, fi rms that choose to ignore that expectation do so at their peril.

Business Law and Business Ethics Before business managers consider the social responsibilities of fi rms in their communities, they need to gather all the relevant facts. Experienced managers know that assembling the facts is just the beginning of a thoughtful business decision. Next, it makes sense to ask, Is it legal to go forward with this decision?

The legality of the decision is the minimal standard that must be met. But the existence of that minimum standard is essential for the development of business ethics. To make this point, let’s take a look at the growing practice of bribery in the absence of legal standards. In some countries businesses must pay bribes to receive legitimate supplies. Though the businessperson may be morally opposed to paying the bribes, the supplies are necessary to stay in business and there may be no other means of obtaining them.

Thus, foreign companies face an ethical dilemma: They must decide whether to pay bribes or fi nd alternative sources of supplies. For instance, when McDonald’s opened its doors in Moscow, it made arrangements to receive its supplies from foreign providers. These arrangements ensured that the franchise did not have to engage in questionable business practices.

The defi nition of business ethics refers to standards of business conduct. It does not result in a set of correct decisions. Business ethics can improve business decisions by serving as a reminder to not simply choose the fi rst business option that comes to mind or the one that enriches the fi rm in the short run. But business ethics can never produce a list of correct business decisions that all ethical businesses will make.

Well-managed fi rms try to provide ethical leadership by establishing a code of ethics for the fi rm. For example, Exhibit 2-1 presents General Motors’ statement about the importance of busi-ness ethics to GM. Notice, however, that this corporate code can never do more than provide guidance. The complications associated with managerial decisions do not permit any ethical guide to provide defi nitive lists of right and wrong decisions.

At the same time that business ethics guides decisions within fi rms, ethics helps guide the law. Law and business ethics serve as an interactive system—informing and assessing each other. For example, our ethical inclination to encourage trust, dependability, and effi ciency in market exchanges shapes many of our business laws. The principles of contract law, for instance, facilitate market exchanges and trade because the parties to an exchange can count on the enforceability of agreements. Legal rules that govern the exchange have been shaped in large part by our sense of commercial ethics.

social responsibility of businessThe expectations that a community places on the actions of fi rms inside that community’s borders.

social responsibility of businessThe expectations that a community places on the actions of fi rms inside that community’s borders.

LO 2LO 2

Confirming Pages


14

Business Ethics and Italian Taxes

When Italian corporations fi le their tax returns, the tax authorities assume that the corporations are underesti-mating their profi ts by 30 to 70 percent. This assumption proves to be true, yet the Italian Revenue Service does not press charges. In fact, purposely understating profi ts is the accepted practice within Italy.

Knowing the faulty nature of the tax return, the Revenue Service sends an “invitation to discuss” about six months after a corporation has fi led. The parties agree on a meet-ing date. At the meeting the corporation’s executives do not attend. Instead, they send a commercialista whose “func-tion exists for the primary purpose of negotiating corpora-tion tax payments.”

Several rounds of bargaining take place between the commercialista and the tax authorities. On the basis of the corporation’s taxes the previous year and the estimation of the current return, the two parties agree on a payment that

is usually much higher than the original estimation but still less than face value.

This negotiating process, while it may seem foreign to Americans, is a common business practice in Italy. In the early 1980s an American banker learned the diffi cult les-son that, for a fi rm doing business in a foreign country, local custom has a signifi cant impact on ethical practice. The banker refused, on ethical grounds, to underestimate profi ts on the tax return. The Italian Revenue Service sug-gested several times that he hire a commercialista and resubmit his tax return.

The American banker refused all such suggestions. Finally, the Revenue Service sent the American a notice that demanded payments 15 times larger than what he owed. The banker immediately arranged an appointment to express his outrage. When he arrived at the meeting, the Italian tax authorities were pleased to see him and said, “Now we can begin our negotiations.”

GLOBAL Context

The foundation for all conduct by GM and its employees is one of our core values: Integrity. Integrity is essential to achieving our vision of becoming the world leader in transportation prod-ucts and services, earning the enthusiasm of our customers, working together as a team, innovating, and continuously improving. We call this Winning With Integrity.

These Guidelines are designed to help GM and its employees understand and meet fundamental obliga-tions that are vital to our success. Some of those obligations are legal duties. They are established by the laws, regulations, and court rulings applicable to our business. Other obligations result from policies GM establishes to make sure our actions align with our core values and cultural priorities. Compliance with both types of obligation—our legal duties and our internal policies—is vital to our goal of winning with integrity.

Employees who violate these guidelines may be subject to disciplinary action which, in the judgment of management, is appropriate to the nature of the violation and which may include termination of employment. Employees may also be subject to civil and criminal penalties if the law has been violated.

These guidelines state the conduct obligations of GM employees, directors, and others to whom they apply. Neither the guidelines nor an employee’s observance of these constitute an employment contract or change the terms of the contract relationship between GM and any of its employees.

Exhibit 2-1

General Motors’ Code of Business Conduct

Of course, different ethical understandings prevail in different countries. Thus, ethical con-ceptions shape business law and business relationships uniquely in each country. Increasingly, business leaders require sensitivity to the differences in legal guidelines in the various countries in which they operate. These differences are based on somewhat different understandings of ethi-cal behavior among businesspeople in diverse countries.

As we mentioned above, business ethics does not yield one “correct” decision. So how are business managers to chart their way through the ethical decision-making process? One source of assistance consists of the general theories and schools of thought about ethics. Each ethical system provides a method for resolving ethical dilemmas by examining duties, consequences, or virtues.

In the interest of providing future business managers with a practical approach to business ethics that they can use, we suggest a three-step process: the WPH approach. This approach provides future business managers with some ethical guidelines, or practical steps, that serve as a dependable stimulus to ethical reasoning in a business context. Appendix 2A provides the theoretical basis for the WPH approach used in this book.

WPH approach (to ethical decision making)A set of ethical guide-lines that urges us to consider whom an action affects, the purpose of the action, and how we view its morality (whether by utilitarian ethics, deontology, etc).

ethical guidelineA simple tool to help determine whether an action is moral.

WPH approach (to ethical decision making)A set of ethical guide-lines that urges us to consider whom an action affects, the purpose of the action, and how we view its morality (whether by utilitarian ethics, deontology, etc).

ethical guidelineA simple tool to help determine whether an action is moral.

Confirming Pages



The WPH Framework for Business Ethics A useful set of ethical guidelines requires the recognition that managerial decisions must meet the following primary criteria ( Exhibit 2-2 ):

• The decisions affect particular groups of stakeholders in the operations of the fi rm. The pertinent question is thus, Whom would this decision affect?

• The decisions are made in pursuit of a particular purpose. Business decisions are instruments toward an ethical end.

• The decisions must meet the standards of action-oriented business behavior. Managers need a doable set of guidelines for How to make ethical decisions.

WHO ARE THE RELEVANT STAKEHOLDERS? The stakeholders of a fi rm are the many groups of people affected by the fi rm’s decisions. Any given managerial decision affects, in varying degrees, the following stakeholders:

1. Owners or shareholders. 2. Employees. 3. Customers. 4. Management. 5. The general community where the fi rm operates. 6. Future generations.

Managers should make sure they consider all relevant stakeholders when they engage in ethical reasoning.

WHAT ARE THE ULTIMATE PURPOSES OF THE DECISION? When we think about the ultimate reason or purpose that we make decisions in a business fi rm, we turn to the basic unit of business ethics—values. Values are positive abstractions that capture our sense of what is good or desirable. They are ideas that underlie conversations about business ethics. We derive our ethics from the interplay of values. Values represent our understanding of the purposes we will fulfi ll by making particular decisions.

For example, we value honesty. We want to live in communities where the trust we associate with honesty prevails in our negotiations with one another. Business depends on the maintenance of a high degree of trust. No contract can protect us completely against every possible contin-gency. So we need some element of trust in one another when we buy and sell.

If we think about the defi nition of values for a moment, we realize two things. First, a huge number of values pull and push our decisions. Second, to state that a value is important in a par-ticular situation is to start a conversation about what is meant by that particular value.

To help make WPH useful to you as a manager, Exhibit 2-3 outlines an effi cient way to apply this second step in the WPH framework. The exhibit identifi es four of the most important values infl uencing business ethics and presents alternative meanings for each. This table should not only help clarify the importance of values in your own mind but also enable you to question others who claim to be acting ethically.

For instance, a manager might be deciding whether to fi re an employee whose performance is less than impressive. In making the decision, the manager explores alternative visions of key values such as justice and effi ciency and then makes choices about which action to take. Values and their alternative meanings are often the foundation for different ethical decisions.

LO 3LO 3

stakeholders The groups of people affected by a fi rm’s decisions.

stakeholders The groups of people affected by a fi rm’s decisions.

valuesPositive abstractions that capture our sense of what is good and desirable.

valuesPositive abstractions that capture our sense of what is good and desirable.

1. W—WHO (Stakeholders): Customers Owners or investors Management Employees Community Future generations2. P—PURPOSE (Values): Freedom Security Justice Effi ciency3. H—HOW (Guidelines): Public disclosure Universalization Golden Rule

Exhibit 2-2

The WPH Process of Ethical Decision Making

Confirming Pages


16 Part I The Legal Environment of Business

HOW DO WE MAKE ETHICAL DECISIONS? Making ethical decisions has always been one of our most confusing and important human challenges. In the process of meeting this challenge, we have discovered a few general, ethical guidelines to assist us. An ethical guideline provides one path to ethical conduct. Notice that all three ethical guidelines below refl ect a central principle of business ethics: consideration of stakeholders.

The Golden Rule The idea that we should interact with other people in a manner consistent with the way we would like them to interact with us has deep historical roots. Both Confucius and Aristotle suggested versions of that identical guideline. One scholar has identifi ed six ways the Golden Rule can be interpreted:

1. Do to others as you want them to gratify you. 2. Be considerate of others’ feelings as you want them to be considerate of yours. 3. Treat others as persons of rational dignity like you. 4. Extend brotherly or sisterly love to others, as you would want them to do to you. 5. Treat others according to moral insight, as you would have others treat you. 6. Do to others as God wants you to do to them.

Regardless of the version of the Golden Rule we use, this guideline urges us to be aware that other people—their rights and needs—matter. The focus on others that is the foundation of the Golden Rule is also clearly refl ected in a second ethical guideline: the public disclosure test.

Public Disclosure Test One way to think of the public disclosure test is to view it as a ray of sun-light that makes our actions visible, rather than obscured. The public disclosure test is sometimes called the “television test,” for it requires us to imagine that our actions are being broadcast on national television. The premise behind this general guideline is that ethics is hard work, labor that we might resist if we did not have frequent reminders that we live in a community. Given our role as a member of a community, our self-concept is tied, at least in part, to how that community perceives us.

Freedom 1. To act without restriction from rules imposed by others.2. To possess the capacity or resources to act as one wishes.3. To escape the cares and demands of this world entirely.

Security 1. To possess a large-enough supply of goods and services to meet basic needs.

2. To be safe from those wishing to interfere with your property rights.3. To achieve the psychological condition of self-confi dence to such an

extent that risks are welcome.

Justice 1. To receive the products of your labor.2. To treat all humans identically, regardless of race, class, gender, age, and

sexual preference.3. To provide resources in proportion to need.4. To possess anything that someone else is willing to grant you.

Effi ciency 1. To maximize the amount of wealth in society.2. To get the most from a particular output.3. To minimize costs.

VALUE ALTERNATIVE MEANINGSExhibit 2-3

Primary Values and Business Ethics

Confirming Pages



Universalization Test A third general guideline shares with the other two a focus on the “other”—the stakeholders whom our actions affect. Before we act, the universalization test asks us to consider what the world would be like were our decision copied by everyone else. Applying the universalization test causes us to wonder aloud: “Is what I am about to do the kind of action that, were others to follow my example, makes the world a better place for me and those I love?”

In summary, business managers can apply the WPH approach to most ethical dilemmas. The WPH framework provides a practical process suited to the frequently complex ethical dilemmas that business managers must address quickly in today’s society.

White-Collar Crime ELEMENTS OF A CRIME The purpose of criminal law is to punish an offender for causing harm to public health, safety, or morals. In a criminal proceeding, the government fi les the charges against the defendant. Thus, the government is always a party to a criminal action. Government involvement distinguishes criminal trials from civil proceedings. For civil actions, an individual person or corporation can fi le a suit. The difference exists because in a criminal trial society is seen as the victim, whereas in a civil trial there is an individual victim or victims.

Criminal laws usually defi ne criminal behavior and set guidelines for punishment. To punish an individual for criminal behavior, the government must demonstrate the two elements of a crime:

1. Wrongful behavior, that is, actus reus (guilty act). 2. Wrongful state of mind, also known as mens rea (guilty mind).

The government thus must show that a defendant committed a prohibited act with a wrongful intent.

To prove the fi rst element, actus reus (guilty act), the government must establish the nonmen-tal elements of the crime. That is, the government must demonstrate that a prohibited act or a prohibited consequence resulted because of the behavior of the defendant.

To prove the second element, mens rea (guilty state of mind), the government must prove that the defendant acted with purpose, knowledge, recklessness, or negligence, depending on which of these states of mind is required by the law defi ning the relevant offense. The defendant’s type of wrongful state of mind helps determine the seriousness of the punishment for the crime.

A defendant can purposefully commit a crime by engaging in a specifi c wrongful behavior to bring about a specifi c wrongful result. A defendant can knowingly commit a wrongful act if the person knows the act is wrongful or believes that the act is wrongful yet does nothing to confi rm or disconfi rm this belief. A defendant is reckless if a criminal act occurs when the individual consciously ignores substantial risk. Finally, a defendant is negligent if he or she does not meet a standard of care that the reasonable person would use in the context that led to the criminal act.

In certain cases, liability may be assessed even without establishing the guilty-mind criterion discussed above. Only certain crimes, typically violations of regulatory statutes, allow punish-ment to be assessed without having to prove guilty mind. When liability is assessed without the guilty-mind criterion, it is known as liability without fault, or strict liability. Liability without fault involves actions that, regardless of the care taken, are deemed illegal to engage in; such acts are specifi cally prohibited regardless of state of mind. Liability without fault would apply, for example, if a business were to sell cigarettes or alcohol to a minor. Although the business might not have intended to sell cigarettes or alcohol to a minor (thus lacking a guilty mind), the statu-tory violation still allows liability to be imposed.

CLASSIFICATION OF CRIMES Crimes are divided into categories based on the seriousness of the offense. Today, the categories used are felonies, misdemeanors, and petty crimes. Felonies include serious crimes, such as murder, that are punishable by imprisonment for more than one year in a penitentiary or death. Misdemeanors are less serious crimes punishable by fi nes and/or imprisonment for less than

LO 4LO 4

actus reus Latin for “guilty act”; a wrongful behavior that is associated with the physical act of a declared crime.

mens rea Latin for “guilty mind”; the mental state accom-panying a wrongful behavior.

actus reus Latin for “guilty act”; a wrongful behavior that is associated with the physical act of a declared crime.

mens rea Latin for “guilty mind”; the mental state accom-panying a wrongful behavior.

liability without faultA legal term that imposes responsibility for damages regardless of the existence of negligence. Also called strict liability.

liability without faultA legal term that imposes responsibility for damages regardless of the existence of negligence. Also called strict liability.

felony A serious crime, such as murder, rape, or robbery, that is punishable by imprisonment for more than one year or death.

misdemeanor A crime that is less serious than a felony and is punishable by a fi ne and/or imprisonment for less than one year.

felony A serious crime, such as murder, rape, or robbery, that is punishable by imprisonment for more than one year or death.

misdemeanor A crime that is less serious than a felony and is punishable by a fi ne and/or imprisonment for less than one year.

Confirming Pages



one year. Petty offenses, such as violating a building code, are minor misdemeanors and are usually punishable by a jail sentence of less than six months or a small fi ne. The statute defi n-ing the crime usually establishes whether the crime is a felony, misdemeanor, or petty offense. Crimes may also be federal or state, depending on whether they are created by the state or federal legislature.

SPECIFIC WHITE-COLLAR CRIMES Originally, white-collar crimes were distinguished from other crimes because of the social status of the offender. The more modern approach is to defi ne white-collar crime as a variety of non-violent illegal acts against society that occur most frequently in the business context. Clearly, the crimes described in the Case Opener fall under this broad defi nition of white-collar crime.

Mail fraud, bribery, embezzlement, and computer crimes are examples of offenses typically clas-sifi ed as white-collar crimes. These crimes occur more frequently than you might think. According to some estimates, one in three American households is the victim of white-collar crime every year.

The consequences of white-collar crimes are far-reaching. First, the cost of white-collar crimes can be tremendous. It is estimated that fraud in the health care industry alone costs society over $100 billion each year. Second, in cases where company employees commit the crime, many companies fail to report the crime to avoid publicity. Third, white-collar crimes can be costly to the environment. For example, improper disposal of chemicals, such as dumping chemicals in a stream, has long-term repercussions for marine life, the surrounding ecosystem, and any humans who may come in contact with the contaminated water source.

Of course, the amount of money collected in fi nes from corporate executives engaged in criminal activity has not been insignifi cant either. For example, in 1999, the government won over $490 million in fi nes, judgments, and settlements from health care fraud cases alone. Fines, however, are only one way that those found guilty of fraud and other white-collar crimes might be punished.

There are at least four alternative ways to punish white-collar criminals. First, confi nement has been mandated for certain types of white-collar crimes. As the prevalence of white-collar crime has increased, so too has the number of white-collar offenders who are in jail. Second, white-collar criminals may be ordered to do community service, such as giving speeches about business crime. For instance, junk-bond king Michael Milliken was compelled to give speeches about corporate crime after he was convicted of insider trading. Third, judges may disqualify the individual from employment. For instance, the judge may prohibit the offender from engaging in an occupation where the same or a similar criminal act could occur again. Fourth, the offender can be placed under house arrest. Individuals must wear a sensor so that the government can monitor whether they have left their houses.

Bribery One of the better-known white-collar crimes is bribery. Bribery is the offering, giv-ing, soliciting, or receiving of money or any object of value for the purpose of infl uencing the judgment or conduct of a person in a position of trust. Bribery of a public offi cial is a statutory offense under federal law. The purpose of this law against bribery is to maintain the integrity of the government. This statute also covers bribes offered to witnesses in exchange for testimony. Perhaps one of the most publicized recent examples of bribery was the 2002 Winter Olympics bribery scandal in Salt Lake City, Utah. The Salt Lake City Olympics Bid Committee allegedly gave International Olympic Committee members between $4 million and $7 million in cash and other benefi ts. These benefi ts included college tuition assistance payments, shopping trips for bathroom fi xtures and doorknobs, and trips to the Super Bowl.

To demonstrate bribery under this statute, the government must show three elements: (1) Some-thing of value was offered, given, or promised to (2) a federal public offi cial with (3) intent to infl uence that person’s judgment or conduct. The “thing of value” element has been construed very liberally; actual commercial value is not necessary. For instance, had the Salt Lake City Olym-pics Bid Committee given a member of the International Olympic Committee shares of stock in a new Silicon Valley start-up called BellyUp.com but the shares turned out to be worthless because the start-up was never established, this act may constitute bribery even though the stock

petty offenseA minor crime that is punishable by a small fi ne and/or imprisonment for less than six months in a jail.

petty offenseA minor crime that is punishable by a small fi ne and/or imprisonment for less than six months in a jail.

white-collar crime A variety of nonviolent illegal acts against soci-ety that occur most fre-quently in the business context.

white-collar crime A variety of nonviolent illegal acts against soci-ety that occur most fre-quently in the business context.

bribery A corrupt and illegal activity in which a person offers, gives, solicits, or receives money, services, or anything of value in order to gain an illicit advantage.

bribery A corrupt and illegal activity in which a person offers, gives, solicits, or receives money, services, or anything of value in order to gain an illicit advantage.

LO 5

Confirming Pages



is commercially worthless. Ultimately, the Department of Justice was unable to prove any of the 15 charges of bribery that it had fi led against two members of the Salt Lake City Olympics Bid Committee. Several members of the committee resigned however. As a result of investigations into the matter, 10 members of the International Olympics Committee were fi red and another 10 were sanctioned.

Additionally, the defi nition of “public offi cial” is also expansive. The statute defi nes public offi cials as members of Congress, government offi cers and employees, and anyone “acting for or on behalf of ” the federal government “in any offi cial function, under or by authority of ” a federal government department or agency. For example, individuals who work for private corporations that have some degree of responsibility for carrying out federal programs or policies are consid-ered public offi cials. The Case Nugget provides an interesting twist on the crime of bribery.

A Question of Bribery?

United States of America, Plaintiff-Appellee, v. Sonya Evette Singleton, Defendant-AppellantCircuit Court of Appeals for the Tenth Circuit

165 F.3d 1297 (1999)

Often, when two defendants are charged with a crime, a prosecutor might offer to give one defendant leniency in exchange for truthful testimony against the other. Are such prosecu-tor plea deals really bribes and thus violative of federal bribery law, which prohibits the exchange of anything of value for testimony? The Tenth Circuit did not think so in this case.

Sonya Singleton was charged with money laundering and conspiring to distribute cocaine. Her co-conspirator, Napoleon Douglas, entered into a plea agreement with the prosecuting attorney under which he agreed to testify truthfully. In exchange, the pros-ecuting attorney promised leniency; the government would not prosecute him for related offenses, and the attorney would advise the sentencing court of Douglas’s cooperation. Singleton argued that such an agreement violated the “anti-gratuity” statute, U.S.C. § 201(c)(2). The district court allowed Douglas’s testimony and convicted Singleton. A panel of the Tenth Circuit Court reversed the conviction, arguing that the attorney’s promise for leniency did violate federal bribery law. The full circuit voted to rehear the case.

On rehearing, the court reinstated the defendant’s conviction, noting that to hold oth-erwise would “deprive the sovereign of a recognized or established prerogative, title, or interest.” The court held that from the common law, we have a long-standing practice sanc-tioning the testimony of accomplices against their confederates in exchange for leniency, and this long-standing practice created a vested sovereign prerogative in the government. In light of the long-standing practice of leniency for testimony, the court had to presume that if Congress had intended to overturn this ingrained aspect of American legal culture, it would have done so in clear, unmistakable, and unarguable language.

CASE Nugget

Another type of bribery is commercial bribery, which includes a bribe in exchange for new information or payoffs. For example, suppose Comdac Computers is looking for a company that manufactures a certain type of computer part. Jane Devlon owns such a company and real-izes that if Comdac gets the computer parts from her, she will potentially make a lot of money. When Comdac sends its contractor to the Devlon factory, Devlon offers the contractor $500,000 in exchange for the contractor’s promise that Comdac will buy all such parts from only her factory for the next year. Alternatively, she might offer the contractor $5,000 to disclose the

Confirming Pages



dollar amounts of the competing bids so that she can offer a better bid to earn the contract. This chapter’s Case Opener also involves commercial bribery. Conner’s offer of money to Freeman to return to his old job, so that he could provide better tips, is a commercial bribe.

One fi nal type of bribery is the bribery of foreign offi cials. The purpose of the Foreign Cor-rupt Practices Act (FCPA) is to combat such bribery. The FCPA prohibits payments to foreign offi cials to corruptly infl uence an offi cial act or decision or to infl uence a foreign government. You might think of the FCPA as an extension of the law to prevent bribery of a public offi cial. The FCPA allows the government to prosecute those who bribe foreign offi cials.

But Congress does not pass laws affecting foreign affairs in a vacuum. Laws governing white-collar crime, like all laws, are dynamic, and one source of change in these laws is international law. Multinational organizations in which the United States is a member often pressure the United States to alter American law so that it conforms to certain international standards. Thus, for example, Congress amended the FCPA in 1998 to conform to the antibribery convention adopted by the Organization for Economic Cooperation and Development (OECD). The amend-ments broaden the scope of actions covered by the FCPA and the defi nition of a public offi cial. As of this writing, it is expected that 30 OECD countries—such as Japan, South Korea, and Brazil—will adopt similar antibribery statutes. Before the amendment, U.S. companies com-plained that antibribery laws disadvantaged them because many European and Asian competitors were not subject to similar laws. Between May 1994 and April 1998, bribes were allegedly used to infl uence the outcomes of 239 international contract competitions.

Extortion Often confused with bribery, but completely different, is the crime of extortion. Extortion, otherwise known as blackmail, is the making of threats for the purpose of obtaining money or property. Whereas bribery is offering someone something to obtain a desired result, extortion involves the threat of doing something if the target of the extortion does not relinquish money or a specifi c piece of property. For example, if Connors in the Case Opener threatened to tell the government about Freeman’s actions if he did not return to Goldman Sachs, then Connors would have committed extortion. Connor’s actions would have been extortion because he would have issued a threat (to tell the government about Freeman’s insider trading) for the purpose of obtaining money (to get Freeman to behave in a way that would enable Connors to make more money by receiving the more profi table tips from Goldman Sachs).

Fraud Criminal fraud encompasses a variety of means by which an individual intentionally uses some sort of misrepresentation to gain an advantage over another person. Fraud generally requires the following three elements: (1) a material false representation made with intent to deceive (scienter), (2) a victim’s reasonable reliance on the false representation, and (3) dam-ages. Both the federal and the state governments have passed a number of statutes codifying spe-cifi c types of fraudulent schemes. These schemes to defraud include a multitude of frauds, such as credit card fraud, insurance fraud, and securities fraud. Exhibit 2-4 summarizes the fraudulent acts that might occur in the corporate setting, many of which are discussed below.

In June 2000, the FBI achieved its largest securities fraud crackdown in history when it arrested a group of Mafi a leaders for a series of scams that cost investors an estimated $25 million. Government offi cials claimed that the Mob bought large stakes in small companies and then bribed and coerced brokers to promote the stocks to other investors at infl ated prices.

The Enron scandal also involves securities fraud, with Enron’s top executives allegedly over-stating its earnings to maintain high stock prices. Complex accounting methods were used to hide the corporation’s debt. Enron’s top executives and big investors sold their stocks, while encour-aging employees to continue buying company stocks. With the drastic decline in the company’s stock value, many Enron employees lost much of their 401(k) investments.

Another specifi c type of securities fraud involved in the Enron case, as well as in this chapter’s Case Opener, is insider trading. Illegal insider trading is generally a person’s buying or selling of a security, in breach of a fi duciary duty or other relationship of trust and confi dence, while in possession of material, nonpublic information about the security. Insider-trading violations may also include “tip-ping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information. 2 Enron’s big investors and top executives knew the stock prices were

2 U.S. Securities and Exchange Commission, www.sec.gov/answers/insider.htm.

extortionA criminal offense in which a person obtains money, property, and/or services from another by wrongfully threatening or infl icting harm to his or her person, property, or reputation. Also called blackmail.

extortionA criminal offense in which a person obtains money, property, and/or services from another by wrongfully threatening or infl icting harm to his or her person, property, or reputation. Also called blackmail.

fraudAn intentional deception that causes harm to another.

fraudAn intentional deception that causes harm to another.

insider tradingIllegal buying or selling of a corporation’s stock or other securities by corporate insiders such as offi cers and directors, in breach of a fi duciary duty or other relationship of trust and confi dence, while in possession of material, nonpublic information about the security.

insider tradingIllegal buying or selling of a corporation’s stock or other securities by corporate insiders such as offi cers and directors, in breach of a fi duciary duty or other relationship of trust and confi dence, while in possession of material, nonpublic information about the security.

Confirming Pages



overinfl ated due to the overstated earnings. They then used their knowledge, which was not public knowledge, to decide to sell off their stock before the price lowered drastically, thus engaging in insider trading. How might insider trading violate each of the ethical norms we have previously discussed?

Another example of insider trading involves Qwest Communications, a Denver-based local phone provider in 14 western and midwestern states. Qwest has been under investigation over the past few years for various white-collar crimes, including insider training. Robin Szeliga, Qwest’s former chief fi nancial offi cer, is the highest-ranking offi cial at Qwest to admit wrongdoing in the scandal. She admits to selling 10,000 shares of Qwest stock in 2001 for a net profi t of $125,000. Szeliga knew some of Qwest’s business units would not meet their targets. She also knew Qwest had illegally used nonrecurring revenue to try to meet its goals. Because the information Robin acted on was not public, and because she gained substantially by acting on the private informa-tion, Szeliga recently pleaded guilty to a single count of insider trading.

Stock-option backdating is yet another type of securities fraud that the SEC has been increas-ingly cracking down on. Backdating occurs when an employee falsifi es documents to make it appear as if the company had granted options on certain dates, but the dates are selected after the fact by looking backward for dates on which the stock price was low, thereby falsely infl ating the net profi ts of the company. In 2007, Myron F. Olesnyckyj, the former general counsel of Monster Worldwide, Inc., pleaded guilty to securities fraud for participating in a multiyear scheme with other Monster executives to secretly backdate stock options granted to thousands of Monster offi cers, directors, and employees, including himself. By backdating and improperly accounting for options, Monster granted undisclosed compensation to its employees, failed to recognize compensation expenses, and overstated its net income by $340 million from 1997 through 2005. Olesnyckyj personally made $381,000 from the scheme, which he agreed to forfeit.

An additional type of fraud is false pretense. False pretense is the illegal obtainment of property belonging to another through materially false representation of an existing fact, with knowledge of the falsity of the representation and with the intent to defraud. For example, Jim goes door-to-door selling vacuum cleaners at an amazing discount. To obtain the discount, the

false pretenseMaterially false represen-tation of an existing fact, with knowledge of the falsity of the representa-tion and with the intent to defraud.

false pretenseMaterially false represen-tation of an existing fact, with knowledge of the falsity of the representa-tion and with the intent to defraud.

1. Forgery: The fraudulent making or altering of any writing in a way that changes the legal rights and liabilities of another.

2. Defalcation: The misappropriation of trust funds or money held in a fi duciary capacity. 3. False entries: The making of an entry into the books of a bank or corporation that is designed

to represent the existence of funds that do not exist. 4. False token: A false document or sign of existence used to perpetrate a fraud, such as mak-

ing counterfeit money. 5. False pretense: A designed misrepresentation of existing facts or conditions by which a per-

son obtains another’s money or goods, such as the writing of a worthless check. 6. Fraudulent concealment: The suppression of a material fact that a person is legally bound to

disclose. 7. Mail fraud: The use of mails to defraud the public. 8. Health care fraud: Any fraudulent act committed in the provision of health care products or

services. 9. Telemarketing fraud: Any scheme, including cramming and slamming, using the telephone to

commit a fraudulent act.10. Ponzi scheme: An investment swindle in which high profi ts are promised from fi ctitious

sources and early investors are paid off with funds raised from later ones.11. Check kiting: Drawing checks on an account in one bank and depositing them in an account

in a second bank when neither account has suffi cient funds to cover the amounts drawn. Just before the checks are returned for payment to the fi rst bank, the kiter covers them by deposit-ing checks drawn on the account in the second bank. Due to the delay created by the collection of funds by one bank from the other, known as the “fl oat” time, an artifi cial balance is created.

12. Pretexting: Using fraudulent means to obtain information about someone’s phone use.

Exhibit 2-4

Selected Types of Fraudulent Crimes

Confirming Pages



customers must pay immediately, and the vacuum cleaner will be delivered in three to fi ve busi-ness days. However, Jim possesses no vacuum cleaners and does not plan on delivering any. Jim has committed the crime of false pretense, as he illegally obtained another’s property (the money he received as payment) by making a false representation (telling the “customers” they would be receiving a vacuum) with the knowledge of the falsity (he knew there were no vacuum cleaners) and the intent to defraud (he did not plan on delivering any vacuum cleaners).

Forgery, the fraudulent making or altering of any writing in a way that changes the legal rights and liabilities of another, is another type of fraud. If you sign your colleague’s name to the back of a check made out to your colleague, you have committed forgery.

One of the most frequently prosecuted frauds is mail fraud, which is the use of mails to defraud the public. The Mail Fraud Act of 1990 makes mail fraud a federal crime. To prove mail fraud, the government must demonstrate two elements: (1) an intent to defraud and (2) the use of or causing the use of mails to further the fraudulent scheme. Case 2-1 demonstrates the consid-eration of these two elements.

forgeryA criminal falsifi cation by imitating, impersonating, or altering a real document with the intent to deceive or defraud.

forgeryA criminal falsifi cation by imitating, impersonating, or altering a real document with the intent to deceive or defraud.

UNITED STATES OF AMERICA v. GERSON COHEN COURT OF APPEALS FOR THE THIRD CIRCUIT

171 F.3d 796 (1999)

FACTS: Gerson Cohen, a meat salesperson for Butler Foods, made illegal cash payments to supermarkets’ meat managers in an attempt to persuade them to buy their meat from But-ler Foods. If the customer bought at least 10,000 pounds of meat per week, the cash payments usually amounted to one penny per pound of meat purchased. After a customer made the minimum purchase, Larry Lipoff, part-owner of Butler Foods, would give the cash payment to the salespeople, who then gave the cash to the customer. Over a period of three years, Cohen made payments totaling $111,548.21 to man-agers for Thriftway Food Stores. Invoices for the orders were sent through the mail but not by the defendant, although he knew the invoices would be mailed. The district court con-victed Cohen on 25 counts of mail fraud, in violation of 18 U.S.C. § 1341. Cohen appealed his conviction.

ISSUE: Does a person commit mail fraud if he does not personally place the documents in question in the mail?

REASONING: The court determined that a person com-mits mail fraud when the person knows that the use of the mail ordinarily follows his action. Here, defendant Cohen knew that the company’s policy was to mail invoices to customers. Butler employees testifi ed that it was standard business practice to send and receive invoice information from customers in the mail. These invoices were essential to supplying the illegal cash payments.

DECISION AND REMEDY: The conviction was affi rmed. A person can commit mail fraud even if he is not the person who places the documents in the mail.

SIGNIFICANCE OF THE CASE: This case shows what prosecutors must prove in a mail fraud case. This theory is important to prosecutors, so it is important for them to know how to use the theory effectively.

CASE 2-14

CRITICAL THINKING

Are you persuaded that Thriftway was using the mails to perpetuate a fraudulent scheme? Why or why not?

ETHICAL DECISION MAKING

Return to the WPH process of ethical decision making. Whom does this decision affect? In other words, who are the stakeholders in this decision?

Confirming Pages



Congress amended the mail fraud statute in 1994 to include commercial carriers and courier services as substitutes for the U.S. mail. In other words, using FedEx or UPS to further a fraudu-lent scheme can be prosecuted as mail fraud. Similarly, the wire fraud statute attempts to prevent the use of wire, radio, or television transmissions to defraud the public.

Other types of fraud include health care fraud, telemarketing fraud, and bankruptcy fraud. The Department of Justice recently named health care fraud its top priority after violent crime. An example of health care fraud is the submission of false claims to insurance plans such as Medi-care or Medicaid. Additionally, some doctors prescribe unneeded equipment to patients and then receive kickbacks from the manufacturers of the equipment.

Telemarketing fraud has also gained much attention recently. The National Fraud Information Center reported that telephone cramming was the top telemarketing fraud of 1998. Cramming is a scheme in which companies bill consumers for optional services that the consumers did not order. Another frequent telemarketing scheme is slamming, in which consumers are tricked into changing their phone service to another carrier without their consent.

The elderly, who have been more susceptible to telemarketing fraud, are often the specifi c targets of telemarketing schemes. Thus, the Department of Justice and the FBI have been col-laborating on various undercover operations, such as Operation Senior Sentinel, to investigate and prosecute fraudulent telemarketers.

Another type of fraud involves bankruptcies. In 2004, more than 1.6 million bankruptcy fi l-ings occurred. An individual can fi le for bankruptcy to be relieved of oppressive debt. Yet claims need to be carefully reviewed to prevent bankruptcy fraud. For example, an individual might hide some assets so that they will not be considered during the proceedings. Conversely, a creditor (a party to whom another owes money) might fi le a false claim against a debtor (the party who owes money to a creditor). Thus, bankruptcy fraud can occur on the part of the debtor or the creditor. The U.S. Department of Justice estimates that 10 percent of all bankruptcy petitions contain some elements of fraud. However, between the year 2000 and the year 2005, only a few more than 1,000 defendants faced bankruptcy fraud charges.

Expect the number of defendants facing bankruptcy fraud to be on the rise with the culmina-tion of the Justice Department’s Operation Truth or Consequences. In October 2006, the Justice Department created an Internet hotline for the public to report suspected bankruptcy fraud to the U.S. Trustee Program. This hotline is just one aspect of the Department of Justice’s revitalized com-mitment to combating bankruptcy fraud and protecting the integrity of the bankruptcy system.

Sometimes fraud cases can be very complex and involve multiple types of fraud. For example, in one case, a Beverly Hills lawyer was recently convicted of three counts of mail fraud, seven counts of wire fraud, and fi ve counts of lying to a court hearing. In an elaborate fraudulent scheme, the lawyer had purchased a yacht for $1.9 million, sold it to two other partners to drive up its insurance value, and then had a company he owned repurchase the yacht and insure it for $3.5 million. Finally, he and his partners sunk the yacht and tried to collect the insurance.

A fraudulent crime that has recently come into the public eye is pretexting. Pretexting can be defi ned as using or causing others to use false pretenses, fraudulent statements, fraudulent or stolen documents, or other misrepresentations, including posing as an account holder or employee of a telecommunications carrier, to obtain telephone records of another. Pretexting entered the national lexicon in 2006 when news broke that the investigators Hewlett-Packard’s board of directors had hired to locate the source of several leaks to the media were engaging in this practice. Under the federal Telephone Records and Privacy Protection Act of 2006, anyone convicted of employing fraudulent tactics to persuade phone companies to hand over confi dential data about a customer’s calling habits can be sent to prison for up to 10 years. Some states also have statutes outlawing pretexting.

Both individuals and businesses can be victims of fraud. To minimize the chances that your fi rm will be a victim of fraud, review Exhibit 2-5 , “Fraud Prevention Tips,” very carefully.

Embezzlement Joe is Kathleen’s attorney. Kathleen gave Joe $5,000 to put in escrow, an account where Joe will have access to the money, although the money is not his to use as he pleases. Sup-pose Joe takes some of that money out of the account and uses it to gamble, and he “fi xes” the records to cover up the fact that he has used some of the money for his personal use. He has com-mitted the crime of embezzlement, the wrongful conversion of another’s property by one who is

embezzlementA wrongful conversion of another’s funds or property by one who is lawfully in possession of those funds or that property.

embezzlementA wrongful conversion of another’s funds or property by one who is lawfully in possession of those funds or that property.

Confirming Pages



Exhibit 2-5

Fraud Prevention Tips

Red Flags Suggesting Possible Fraud

When you are looking at a brochure offering an investment opportunity that seems almost too good to be true, it may indeed not be as good as it seems, especially if it contains these red fl ags of fraud:

• No independent proof of profi tability: The brochure provides the investment strategy but includes no details that can be verifi ed, such as names and addresses of specifi c companies in which it invests.

• Control by a single person.• No audited fi nancial statements and no evidence of internal controls.• Unusually high rates of return: Rates of return are signifi cantly higher than those for other

funds with a similar investment strategy.• New investors’ reliance primarily on existing investors in deciding to invest.

False “Assurances” That an Investment Opportunity Is Not Fraudulent

• Long-time existence of investment opportunity: A Ponzi scheme can operate for a long time. As long as the company keeps getting new investors, it can continue to use the new investors to pay off the few who insist on collecting their returns. Many investors may be content to accu-mulate paper profi ts, especially if there is a fi nancial incentive for reinvestment of profi ts. For example, the Financial Advisory Fund had been in business for almost 20 years before its fraudulent foundation was uncovered.

• A list of names and addresses of satisfi ed investors you can contact: All such schemes will have some satisfi ed investors who have received payments from the new investment money.

• Membership in the Better Business Bureau: Any company can pay to join. If most of the inves-tors have not attempted to withdraw their funds and the company is still getting new invest-ments, there will be no disgruntled investors to complain to the BBB.

• A report of profi tability from Dun & Bradstreet: Dun & Bradstreet does not do an independent fi nancial audit of a company’s profi ts. As stated on its Web site, Dun & Bradstreet simply provides the information regarding profi ts that it receives from companies.

• Acceptance of money rolled over from IRAs: There is no government check on the soundness of fi rms that roll over IRAs.

• Bank references: If a fi rm simply has a large amount of money in a checking account in a bank and has never sought a loan from the bank, the bank would have no reason to do any due diligence on the fi rm. Also, if the owner of the fi rm is personable and the account has never been overdrawn, the bank personnel may well give the fi rm a good reference.

• Glossy brochures and television ads: All you need for both is some money and the knowledge that many people may be overly impressed by a fancy brochure or ad campaign.

These tips come from Barry Minkow, who went from starting his own carpet cleaning business at the age of 16, to taking this multimillion-dollar company public at the age of 20, to facing a 23-year prison sentence and $26 million victim restitution payment at the age of 21 for massive fraud and theft perpetuated on behalf of his company, to now being a pastor and the cofounder of the Fraud Discovery Institute.

The fascinating story of how Barry Minkow, through fraudulent Ponzi schemes, check kiting, and theft, managed to build the multimillion-dollar ZZZZ Best Carpet Cleaning Company by the age of 20 is contained in his book, Cleaning Up. The book also provides insights into why some people may commit white-collar crimes, and it describes many of the long-running frauds Minkow has helped to uncover since deciding to use his understanding of the perpetuation of fraud to help uncover and prevent it.

Confirming Pages


25

lawfully in possession of that property. Embezzlement is distinguished from larceny because the individual did not take the property from another; he was already in possession of the property.

Embezzlement usually occurs when an employee steals money. Thus, it is often employees in banks who commit the crime. However, as the recent embezzlement of $6.9 million from the American Cancer Society demonstrates, even nonprofi t organizations are vulnerable to the crime of embezzlement. White-collar crimes such as embezzlement are a problem in many countries. For example, the Chinese government, which has been focusing on economic crimes, caught employees in two major Chinese banks altering deposit slips and bank orders to direct the money to personal accounts throughout China. Those employees received death sentences for embezzle-ment, as discussed in the Global Context box.

Computer Crimes The term computer crime refers broadly to any wrongful act that (1) is directed against computers, (2) uses computers to commit a crime, or (3) involves computers. Computer crime is not necessarily a new kind of crime but is, instead, a new way of committing traditional crimes. Consider fraud, a crime that has existed for centuries. Today, online auctions, such as eBay, are a common source of fraud in the United States. Indeed, some statistics suggest that, compared with nonelectronic methods, using computers is a more profi table method of committing crimes. According to federal offi cials, the average loss in a nonelectronic embezzle-ment is $23,500; in contrast, in a computer fraud case, the average loss is almost $500,000.3

Computer crimes are often diffi cult to prosecute, in large part because they are diffi cult to detect. A computer crime could be committed by an insider, such as an employee, or by an outsider, such as a hacker —a person who illegally accesses or enters another person’s or a company’s computer system to obtain information or to steal money. In addition, computer sys-tems are quite open to attack. The American Society for Industrial Security has reported that the losses from computer crimes in a single year were more than $250 billion for U.S. companies. Furthermore, the attacks are frequent. The IRS alone detects 800 to 1,200 cases of computer system misuse annually.

3 Charles Alexander, “The Wells Fargo Stick-Up,” Time.com, www.time.com/time/magazine/article/0,9171,954673-3,00.html (accessed May 1, 2007).

computer crimeCrime committed using a computer.

computer crimeCrime committed using a computer.

hacker A person who illegally accesses or enters another person’s or a company’s com-puter system to obtain information or to steal money.

hacker A person who illegally accesses or enters another person’s or a company’s com-puter system to obtain information or to steal money.

Embezzlement and Bribery in China

On March 8, 1982, in response to a concern about a rise in white-collar crimes, Chinese offi cials added a resolu-tion entitled “Severely Punishing Criminals Who Do Great Damage to the Economy” to the Chinese Criminal Code. The provision targeted top-ranking offi cials by providing that any state functionaries who extort, accept bribes, or exploit their offi ce would no longer receive the fi xed-term punishment (usually 10 years) allocated for bribery and extortion. Instead, those offi cials found guilty of extortion and accepting bribes would be sentenced to life imprison-ment or possibly put to death.

Bank fraud is another white-collar crime that may be punishable by death. In 2004, China executed four people, including employees of two of its Big Four state banks, for fraud totaling $15 million. Three of the cases involved China Construction Bank.

A former accounting offi cer at this bank worked with others to steal 20 million yuan ($2.4 million) from the bank using fake papers. He and an accomplice were exe-cuted, along with another Construction Bank employee who was found to have taken 20 million yuan from the bank in an unrelated case. Additionally, an offi -cial employed by the Bank of China was executed for cheating.

The precise number of people executed in China is not made available to the public. Estimates range from 5,000 to 10,000 a year, for crimes including murder, corruption, and on occasion even bottom-pinching. Most are executed by a single shot in the back of the head.

Such punishments may seem extreme, but the reac-tion of the Chinese to this increase in white-collar crime refl ects the culture’s unusually great concern for social harmony.

GLOBAL Context

Confirming Pages


26

A cyber terrorist is a hacker whose intention is the exploitation of a target computer or net-work to create a serious impact, such as the crippling of a communications network or the sabo-tage of a business or organization. The activity of a cyber terrorist can have an impact on millions of citizens if the terrorist’s attack is successful, particularly if it involved the computer systems of a major stock exchange, any bank, or any federal agency or government.

In an attempt to aid prosecutions of computer crimes, Congress passed the Counterfeit Access Device and Computer Fraud and Abuse Act of 1984 (also know as the Computer Fraud and Abuse Act, or CFAA). The act prohibits six broad categories of computer crimes:

1. Unauthorized use of or access to a computer to obtain classifi ed military or foreign policy information with the intent to harm the United States or to benefi t a foreign country.

2. Unauthorized use of a computer to collect fi nancial or credit information protected under federal privacy law.

3. Unauthorized access to a federal computer and the use, modifi cation, destruction, or disclo-sure of data it contains or the prevention of an authorized person’s use of such data.

4. Alteration or modifi cation of data in fi nancial computers causing a loss of $1,000 or more. 5. Modifi cation of data that impedes medical treatment to individuals. 6. Fraudulent transfer of computer passwords or other similar data that could aid unauthor-

ized access that either (a) affects interstate commerce or (b) permits access to a government computer.

Computer crimes falling into the fi rst category are felonies, whereas the others are misdemeanors. The National Information Infrastructure Protection Act of 1996 amended the Computer Fraud

and Abuse Act. One of the major changes to the CFAA is the substitution of the term protected computers for federal interest computers so that the statute now protects any computer attached to the Internet.

In a further attempt to aid prosecution of computer crimes, the U.S. Department of Justice formed the Computer Crime and Intellectual Property Section (CCIPS) in its Criminal Division. Attorneys in this division prosecute only federal computer crimes. They also coordinate their activities with numerous government entities, the private sector, scholars, and foreign representa-tives in an attempt to develop a global response to computer crime.

Destruction of data is one of the most serious problems facing companies today. A virus is a computer program that rearranges, damages, destroys, or replaces computer data. Thus, if an employee or a hacker creates and releases a virus, a company can easily lose vital information.

cyber terroristA hacker whose inten-tion is the exploitation of a target computer or network to create a seri-ous impact, such as the crippling of a communi-cations network or the sabotage of a business or organization, which may have an impact on millions of citizens if the terrorist’s attack is successful.

cyber terroristA hacker whose inten-tion is the exploitation of a target computer or network to create a seri-ous impact, such as the crippling of a communi-cations network or the sabotage of a business or organization, which may have an impact on millions of citizens if the terrorist’s attack is successful.

virus A computer program that rearranges, dam-ages, destroys, or replaces computer data.

virus A computer program that rearranges, dam-ages, destroys, or replaces computer data.

Computer Use and Ethics

The use of computers to store and transfer important busi-ness information has resulted in a new set of ethical con-cerns. How private is the computer screen? Are companies allowed to collect information about their customers? Who owns the information customers give to e-businesses? E-commerce law is gradually adjusting to such questions. But, as the beginning of this chapter pointed out, knowing the law is just the fi rst step in discovering the ethical busi-ness decision.

One case that considered questions related to e-commerce and privacy involved Toysmart.com and its privacy policy. In 2000, the Federal Trade Commission (FTC) fi led a complaint against Toysmart.com, charging the online retailer with selling customer lists despite its

earlier privacy statements that claimed its customers’ per-sonal data would never be shared with a third party. The customer lists were included as assets to be sold as part of the company’s bankruptcy proceedings. The FTC issued a settlement with Toysmart.com allowing the lists to be sold as long as (1) the sale occurred before July 2001, (2) the lists would be sold to a family-oriented company, and (3) the buyer would agree to abide by the original Toysmart.com privacy policy. After the FTC imposed these restric-tions, the end result was that customers’ personal informa-tion was not sold.

The Toysmart.com case makes it clear that, for both ethical and legal reasons, companies that adopt a privacy policy need to think that policy through before announcing it to customers.

E-COMMERCE and the Law

Confirming Pages



The most economically destructive computer crime to date was the creation of the “love bug” virus. In May 2000, the virus spread rapidly throughout the world by e-mail. Once the e-mail was opened, it destroyed fi les on the user’s computer, and then the virus sent itself to every address in that computer’s e-mail address book. In the end, the virus caused over $10 billion in damages and halted computers in major companies and government agencies worldwide.

Companies can try to prevent the destruction of data by installing virus detection programs on their computers. However, the detection programs recognize only previously existing harmful fi les. As a result, if someone creates a new virus, the detection program is useless.

When an employee uses his or her computer in a manner not authorized by the employer, the employee has committed a crime. Employers, then, must clearly communicate with employees about authorized versus unauthorized behavior. For example, if an employee uses her work com-puter to run her own personal business on the side, her employer may argue that she is engaging in theft because she is not using her computer in an authorized manner. Thus, when you become a business manager, you will want to make sure that you explicitly list acceptable computer uses, along with the penalties associated with unauthorized use.

Corporate Criminal Liability An individual or a corporation can be charged with and convicted of a crime. However, there has been much debate over whether corporations should be held criminally responsible. Under the common law, a corporation could not be considered a criminal because it was not an actual per-son and thus did not have a “mind.” Consequently, it could not meet the mens rea (guilty-mind) requirement for a crime. Slowly, however, courts began to impose liability on corporations for strict-liability offenses, those offenses that do not require state of mind. Next, courts imposed liability on corporations by imputing the state of mind of the employee to the corporation.

Currently, corporations can be held criminally accountable for almost any crime. However, they cannot be held liable for crimes that are punishable only by a prison sentence. In order for a corporation to be held criminally liable for the acts of an employee, the prosecutor must show that (1) the employee was acting within the scope of her or his employment; (2) the employee was acting with the purpose of benefi ting the corporation; and (3) the act was imputed to the corporation.

In addition to corporations having criminal liability, corporate executives may also be person-ally liable for a business crime. The benefi ciary of the crime is irrelevant, as corporate executives and offi cers can be found to be personally liable regardless of whether the crimes were commit-ted for their personal benefi t or for the benefi t of the corporation.

Also, under the “responsible corporate offi cer” doctrine, a court may assess criminal liability on a corporate executive or offi cer even if he or she did not engage in, direct, or even know about a specifi c criminal violation. As Case 2-2 demonstrates, corporate executives sometimes have the responsibility and power to ensure the company’s compliance with the law. If the executive fails to meet this responsibility, the executive can be held criminally liable.

Since United States v. Park, the general rule that corporate executives may be held account-able for the crimes arising from their failure to meet their responsibility has remained intact. The rule has, in fact, broadened so that now executives can be held criminally liable for offenses that we generally do not think of as crimes. For example, in United States v. Iverson, 4 a corporate offi -cer of a waste treatment facility was convicted and sentenced for violating the Clean Water Act after he ordered employees to illegally dispose of wastewater. This case demonstrates that corpo-rate executives can be sentenced not only for committing the common law crimes that we have traditionally understood to be criminal offenses but also for violating provisions of regulatory statutes that permit criminal sanctions. In such cases, vicarious liability, or liability imposed on one person for the acts of another, is assessed to the corporate executive. In fact, courts have held that employers are vicariously liable for the wrongful acts of their employees if the employer directed, partook in, or authorized the wrongful act.

4 162 F.3d 1015 (1998).

LO 6LO 6

strict-liability offenseOffense for which no mens rea is required.

strict-liability offenseOffense for which no mens rea is required.

vicarious liabilityThe liability or respon-sibility imposed on a person, a party, or an organization for dam-ages caused by another; most commonly used in relation to employment, with the employer held vicariously liable for damages caused by its employees.

vicarious liabilityThe liability or respon-sibility imposed on a person, a party, or an organization for dam-ages caused by another; most commonly used in relation to employment, with the employer held vicariously liable for damages caused by its employees.

Confirming Pages


28

Criminal Procedure Criminal procedure differs from civil procedure in several key ways. First, the government, referred to as the prosecutor, always brings the criminal case, whereas in a civil case, the party fi ling the case, the plaintiff, can be an individual, business, or government entity. Second, the outcome of each is different. In a criminal case, the objective is punishment, so the defendant may be fi ned or impris-oned; in a civil case, the objective is to remedy a wrong done to the plaintiff, so the defendant either will have to provide compensation to the plaintiff or may be subject to an equitable remedy such as an injunction or order for specifi c performance. Third, because the potential impact of losing a crim-inal case is so much more serious than the impact of losing a civil case, the Constitution provides a number of safeguards for the criminal defendant. These safeguards are set forth in Exhibit 2-6 .

LO 7LO 7

UNITED STATES v. PARK UNITED STATES SUPREME COURT

421 U.S. 658 (1975)

FACTS: Defendant Park, the president of a national food-chain corporation, was charged, along with the corporation, with violating the Federal Food, Drug, and Cosmetic Act by allowing food in the warehouse to be exposed to rodent contamination. Park had conceded that his responsibility for the “entire operation” included warehouse sanitation, but he claimed that he had delegated the responsibility for sanitation to dependable subordinates. He admitted at trial that he had received a warning letter from the Food and Drug Administration regarding the unsanitary conditions at one of the company’s warehouses. The trial court found the defendant guilty. The court of appeals reversed. The case was appealed to the U.S. Supreme Court.

ISSUE: Can corporate executives be criminally liable for failing to ensure a company’s compliance with the law?

REASONING: The Supreme Court has noted that the only way corporations can act is through their individual employ-ees. The act in question, the Federal Food, Drug, and Cos-metic Act, requires stringent, affi rmative actions on the part of corporate executives, but these standards are justifi ed by the public interest in food safety. We expect executives such as Park to exercise appropriate authority and demonstrate

supervisory responsibility. There is considerable evidence that Park had a duty to ensure sanitary conditions and that he violated that duty by failing to ensure that those to whom he delegated responsibility did their jobs. The Court said: “[T]he requirements of foresight and vigilance imposed on responsible corporate agents are beyond question, demand-ing, and perhaps onerous, but they are not more stringent than the public has a right to expect of those who voluntarily assume positions of authority in business enterprises whose services and products affect the health and well-being of the public that supports them.”

DECISION AND REMEDY: The U.S. Supreme Court reversed the appellate court’s reversal of the trial court’s con-viction, fi nding that corporate executives can be criminally lia-ble for failing to ensure a company’s compliance with the law.

SIGNIFICANCE OF THE CASE: This case signaled to corporate offi cials that they could no longer use ignorance as a defense, because a court will hold high-level corporate actors responsible for their company’s failure to comply with the law, even if they were unaware of what was going on within their company.

CASE 2-24

CRITICAL THINKING

Given the rule laid down in this case, would there have been any evidence that the defendant could have presented that would have led to a different decision?

ETHICAL DECISION MAKING

Suppose you were in Park’s position in this case. You allegedly allowed food in your warehouse to be exposed to rodent contamination. If you were guided by the public disclosure test, what would you decide to do?

Confirming Pages



PRETRIAL PROCEDURE Prior to an arrest, grand juries may conduct criminal investigatory proceedings or issue a grand jury subpoena for company records. Criminal proceedings generally begin when an individual is arrested for a crime. A law enforcement offi cer must perform the arrest. This offi cer is often a police offi cer but may also be an agent of another government agency, such as the Bureau of Alcohol, Tobacco and Firearms; the Federal Bureau of Investigation; or the Immigration and Naturalization Service.

A law enforcement offi cer should obtain an arrest warrant before an individual is taken into cus-tody. Ordinarily, to obtain an arrest warrant, the law enforcement agent must demonstrate that there is probable cause, or a likelihood, that a suspect committed or is planning to commit a crime. A magistrate, the lowest-ranking judicial offi cial, issues the arrest warrant. In certain circumstances, however, courts have recognized that law enforcement agents can arrest a suspect without a warrant if the offi cer believes there is probable cause but not enough time to obtain the warrant.

When law enforcement agents arrest individuals, the offi cers must inform the individuals of their Miranda rights. If they fail to do so, any information a defendant offers at the time of the arrest is not admissible at trial. To comply with the Supreme Court’s requirements for protecting a citizen’s rights, a law enforcement offi cer must inform the defendant of the following facts before questioning:

1. “You have the right to remain silent and refuse to answer any questions.” 2. “Anything you say may be used against you in a court of law.” 3. “You have the right to consult an attorney before speaking to the police and have an attorney

present during any questioning now or in the future.” 4. “If you cannot afford an attorney, one will be appointed for you before the questioning

begins.” 5. “If you do not have an attorney available, you have the right to remain silent until you have

had an opportunity to consult with one. ” 6. “Now that I have advised you of your rights, are you willing to answer any questions without

an attorney present?”

The Miranda rights are not absolute. In fact, the Supreme Court has several times created exceptions to the Miranda rights. For example, in New York v. Quarles, 5 the Court created a 5 467 U.S. 649 (1984).

arrest The action in which the police, or a person act-ing under the law, seize, hold, or take an individual into custody.

arrest The action in which the police, or a person act-ing under the law, seize, hold, or take an individual into custody.

probable causeAny essential element and/or standard by which a lawful offi cer may make a valid arrest, conduct a personal or property search, or obtain a warrant.

probable causeAny essential element and/or standard by which a lawful offi cer may make a valid arrest, conduct a personal or property search, or obtain a warrant.

Miranda rights The rights that are read to an arrested individual by a law enforcement agent before the indi-vidual is questioned about the commission of a crime.

Miranda rights The rights that are read to an arrested individual by a law enforcement agent before the indi-vidual is questioned about the commission of a crime.

AMENDMENT PROVISIONS

Fourth • Protection from unreasonable search and seizure.• Restrictions on warrants.

Fifth • Prohibition of double jeopardy.• Right not to incriminate oneself.• Right to due process.

Sixth • Right to a speedy and public trial.• Right to a trial by an impartial jury of one’s peers.• Right to be informed of the accusations against oneself.• Right to confront witnesses.• Right to have witnesses on one’s side.• Right to counsel at various stages of the proceedings.

Eighth • Freedom from excessive bail.• Freedom from excessive fi nes.• Freedom from cruel and unusual punishment.

Fourteenth • Extension of the right to due process to all state matters.• Extension of most constitutional rights to defendants at the state level.

Exhibit 2-6

Constitutional Provisions That Safeguard Criminal Defendants’ Rights

Confirming Pages



“public safety” exception to the Miranda rights. This exception allows statements to be used at trial, even if a person was not informed of his or her Miranda rights, if the need to protect the public is served by the admissibility of the statements in question.

After being arrested and read their Miranda rights, defendants are taken to the police sta-tion for booking, a procedure during which the name of the defendant and the alleged crime are recorded in the investigating agency’s or police department’s records. After the prosecutor fi les the complaint, the defendant makes the fi rst appearance, which is the appearance before a magistrate who determines whether there was probable cause for the arrest. If the magistrate ascertains that probable cause did not exist, the individual is freed.

If the defendant committed a minor offense and pleads guilty, the magistrate sentences the individual. However, if the defendant claims innocence, the magistrate ensures that the defendant has a lawyer, or appoints one, if necessary, for an indigent defendant, and sets bail. Bail is the amount of money defendants pay to the court on release from custody as security that they will return for trial.

Next, the prosecutor has a choice: Should the case be prosecuted? The Principles of Federal Prosecution, established by the U.S. Department of Justice, suggest that at the federal level the decision to prosecute depends on two primary factors: (1) whether the evidence is suffi cient to obtain a conviction and (2) whether prosecuting the case serves a federal interest. If the prosecu-tor decides not to go forward with the case, the defendant may still be liable for his or her actions in civil court.

If the prosecutor chooses to proceed with a criminal action, the prosecutor must demonstrate the likelihood that the defendant’s actions and intent meet the elements of a crime by charging the defendant with a crime through an information or an indictment. For a misdemeanor, the prosecutor must present to the magistrate evidence suffi cient to justify prosecution of the defen-dant. This is done through a written document called an information, a formal accusation stating the facts and specifying the violation of criminal law.

However, for a felony, the prosecutor must present a grand jury with evidence adequate to jus-tify bringing the defendant to trial. If the grand jury agrees that the evidence is adequate, it issues an indictment, a written accusation of the crime allegedly committed by the defendant.

Note that the grand jury does not determine guilt. It is simply a group of citizens who consider evidence of criminal conduct presented by the prosecutor and then determine whether there is enough evidence to try the defendant for the crime.

In federal cases, a defendant accused of a felony has a constitutional right to a grand jury indictment. However, a felony prosecution may proceed by information if the defendant waives that right. For instance, in a high-profi le case in which the defense attorney is trying to work out a deal with the prosecution, the defendant may ask that the case proceed by information. Federal misdemeanor cases may proceed by indictment or information.

If the criminal trial takes place in state court, the defendant may or may not have access to a grand jury. The U.S. Supreme Court has held that indictment by a grand jury is not a fundamental right, and thus states are not required to offer grand juries. About half the states still require that felony prosecutions be initiated by grand jury indictments; most of the rest use information as the method for commencing prosecution.

If the grand jury issues an indictment, the defendant appears in court to answer the indict-ment in a proceeding called the arraignment. At this time, the defendant enters a plea of guilty or not guilty. A defendant may also enter a plea of nolo contendere, whereby the defendant does not admit guilt but agrees not to contest the charges. The advantage of a nolo contendere plea over a guilty plea is that the former cannot be used against the defendant in a civil suit. If the defendant pleads not guilty, his case will be heard before a petit jury, which is a fact-fi nding jury.

At any time, the prosecutor and defendant can make a plea bargain, an agreement in which the prosecutor agrees to reduce charges, drop charges, or recommend a certain sentence if the defendant pleads guilty. Plea bargaining benefi ts both parties. The defendant gets a lesser sen-tence, and the prosecution saves time and resources by not trying the case. Businesspeople who commit crimes that affect business often engage in plea bargaining to avoid the publicity associ-ated with a trial and the risk of a severe sentence.

booking After an individual is arrested, the procedure during which the name of the defendant and the alleged crime are recorded in the investi-gating agency’s or police department’s records.

fi rst appearance The initial appearance of an arrested individual before a judge who determines whether there was probable cause for the arrest. If the judge ascertains that probable cause did not exist, the individual is freed.

booking After an individual is arrested, the procedure during which the name of the defendant and the alleged crime are recorded in the investi-gating agency’s or police department’s records.

fi rst appearance The initial appearance of an arrested individual before a judge who determines whether there was probable cause for the arrest. If the judge ascertains that probable cause did not exist, the individual is freed.

bailA thing of value, such as a money bail bond or any other form of property, that is given to the court to temporarily allow a person’s release from jail and to ensure his or her appearance in court.

bailA thing of value, such as a money bail bond or any other form of property, that is given to the court to temporarily allow a person’s release from jail and to ensure his or her appearance in court.

information A document prepared by the prosecutor and pre-sented to the magistrate, demonstrating that there is enough evidence to charge the defendant and bring him or her to trial.

information A document prepared by the prosecutor and pre-sented to the magistrate, demonstrating that there is enough evidence to charge the defendant and bring him or her to trial.

indictmentFinding by the grand jury that there is adequate evidence to charge the defendant and bring him or her to trial.

indictmentFinding by the grand jury that there is adequate evidence to charge the defendant and bring him or her to trial.

arraignment The fi rst appearance in court by the defendant, at which the defendant is advised of the pend-ing charges, the right to counsel, and the right to trial by jury and he or she enters a plea to the charge.

nolo contendere A plea in which the defendant does not admit guilt but agrees not to contest the charges.

petit jury A group of 6 or 12 citizens who are sum-moned to and sworn by the court to hear evidence presented by both sides and render a verdict in a trial.

arraignment The fi rst appearance in court by the defendant, at which the defendant is advised of the pend-ing charges, the right to counsel, and the right to trial by jury and he or she enters a plea to the charge.

nolo contendere A plea in which the defendant does not admit guilt but agrees not to contest the charges.

petit jury A group of 6 or 12 citizens who are sum-moned to and sworn by the court to hear evidence presented by both sides and render a verdict in a trial.

Confirming Pages



TRIAL PROCEDURE If the case goes to trial and the crime is a felony or a misdemeanor punishable by six months or more in prison, the defendant has a constitutional right to a jury trial. In most states, if the defen-dant waives the right to a jury trial, the judge will hear the case. When a judge is the fact fi nder in a case, the trial is called a bench trial.

In a criminal trial, the prosecutor has the burden of proof and the defendant does not have to prove anything. The burden of proof has two elements: the burden of production of evidence and the burden of persuasion. To meet the burden of production of evidence, the prosecution must produce any tangible evidence and testimony that prove the elements of the crime that the defen-dant allegedly committed. Along with producing evidence, the prosecution also has the burden of persuasion: The prosecutor must persuade the jury beyond reasonable doubt that the defendant committed the crime. The burden of proof, then, is higher in a criminal case than in a civil case, because in a civil case the burden of persuasion requires only that the claim be supported by a preponderance of the evidence.

The prosecution presents the government’s case fi rst, introducing evidence and examining wit-nesses to prove beyond a reasonable doubt that the defendant committed the crime. Once the prosecutions rests its case, it is the defendant’s turn. The defendant either (1) can show, through examination of witnesses and introduction of evidence, that the prosecution did not meet its bur-den of proof or (2) can present an affi rmative defense. An affi rmative defense is a reason why the defendant, even though he or she did the physical acts alleged by the prosecution, should be excused from responsibility for those actions. Exhibit 2-7 lists some common affi rmative defenses.

After the jury hears the case, it deliberates and tries to reach a verdict. A jury that is unable to reach a verdict is known as a “hung jury.” If the jury fi nds the defendant not guilty, the accused is acquitted and released. If the jury returns a guilty verdict, the judge sets a date for sentencing.

POSTTRIAL PROCEDURE If the petit jury returns a verdict of not guilty, the government cannot appeal the acquittal. How-ever, if the verdict is guilty, the defendant may appeal the verdict by claiming that a prejudicial error of law occurred at the original trial. If there is no appeal, the defendant will be sentenced after the judge has received additional information relevant to sentencing. Figure 2-1 provides a review of the steps of a criminal procedure.

bench trialA trial before a judge, with the judgment decided by the judge rather than a jury; occurs when the defendant has waived his or her right to a jury trial.

bench trialA trial before a judge, with the judgment decided by the judge rather than a jury; occurs when the defendant has waived his or her right to a jury trial.

burden of proofThe duty of the plaintiff or prosecution to estab-lish a claim or allegation by admissible evidence and to prove that the defendant committed all the essential elements of the crime to the jury’s or court’s satisfaction beyond any reasonable doubt, in order to con-vict the defendant.

burden of proofThe duty of the plaintiff or prosecution to estab-lish a claim or allegation by admissible evidence and to prove that the defendant committed all the essential elements of the crime to the jury’s or court’s satisfaction beyond any reasonable doubt, in order to con-vict the defendant.

Infancy A person who is not yet a legal adult may use this defense to defuse the guilty-mind requirement of a crime.

Mistake The defendant says his or her honest and reasonable mistake negates the idea of a guilty mind.

Intoxication The defendant says he or she took an intoxicant without awareness of its likely effect, mistook its identity, or took the intoxicant under force.

Insanity The defendant had a severe mental illness that substantially impaired the defendant’s capacity to understand and appreciate the moral wrongfulness of the act.

Duress The defendant says he or she was forced to perform an act against his or her will.

Entrapment The defendant would not have committed the crime or broken the law if not induced or tricked into doing so by law enforcement offi cers.

Necessity The defendant was acting to prevent imminent harm, and there was no legal alternative to the action he or she took.

Justifi able use of force Use of force was necessary to prevent imminent death or great bodily harm to the defendant or to another or to prevent the imminent commission of a forcible felony.

Exhibit 2-7

Affi rmative Defenses to Crimes

plea bargainAn agreement in which the prosecutor agrees to reduce charges, drop charges, or recommend a certain sentence if the defendant pleads guilty.

Confirming Pages



Tools for Fighting Business Crime While there are clearly a signifi cant number of business-related crimes that can be committed, there are certain federal laws that help fi ght such crime. Three federal laws that have been some-what successful in this battle are RICO, the False Claims Act, and the Sarbanes-Oxley Act of 2002. While these laws are currently extremely powerful white-collar-crime laws, RICO and the False Claims Act were created with different purposes in mind. Sarbanes-Oxley, however, was created to specifi cally combat white-collar crime.

RICO One of the most important tools for fi ghting white-collar crime is Title IX of the Organized Crime Control Act of 1970: the Racketeer Infl uenced and Corrupt Organizations (RICO) Act. Although the statute was originally enacted to combat organized crime, in effect it prevents legitimate businesses from serving as covers for racketeering. This statute prohibits persons employed by or associated with an enterprise from engaging in a pattern of racketeering activity. Anyone whose business or property has been damaged by this pattern of racketeering activity can sue to recover treble damages and attorney fees in a civil action.

Demonstrating a claim under RICO requires proof of a pattern of racketeering. Courts have defi ned a pattern as more than one action. Thus, a one-time violator could not be prosecuted under RICO because there could be no pattern as yet. Some courts additionally have found that a pattern requires continued criminal activity over a “substantial” period of time. Although pattern is restricted to more than one act, racketeering has been defi ned broadly to include almost all criminal actions, such as acts of violence, fraud, bribery, securities fraud, and the provision of illegal goods and services. Therefore, RICO is an extremely effective tool in combating white-collar crimes.

Racketeer Infl uenced and Corrupt Organi-zations (RICO) Act A U.S. law that provides extended penalties for criminal acts performed as part of an ongoing criminal organization.

Racketeer Infl uenced and Corrupt Organi-zations (RICO) Act A U.S. law that provides extended penalties for criminal acts performed as part of an ongoing criminal organization.

Arrest

Booking

First Appearance

Information indictmentby a grand jury

(for misdemeanor)(for felony)

Arraignment

Trial

Appeal

Figure 2-1

Steps in a Criminal Procedure

LO 8

Confirming Pages



In addition to being held civilly liable under RICO, a violator may also be subject to RICO’s criminal penalties. A person found to have violated the act may be subject to a fi ne of up to $25,000 per violation, imprisonment for up to 20 years, or both.

THE FALSE CLAIMS ACT Since 1986 private citizens have been using the False Claims Act to sue employers on behalf of the government for fraud against the government. For example, an employee in a health care facility might realize that his employer is submitting fraudulent claims to Medicare. The employee can bring a suit against the employer on behalf of the government for fraud against the government.

If an employee realizes that her employer is committing fraud against the government, she must fi rst notify the government of her intent to fi le the case on behalf of the government. If the government chooses to intervene and prosecute the case itself, with the help of the employee, the citizen would receive 25 percent of the amount recovered. If the government opts to not get involved, and the citizen continues with the case on behalf of the government, she receives 30 percent.

Certainly, an employee who brings a suit against his employer might be worried about retali-ation, such as being fi red or demoted. Thus, the act provides protection for those employees who use the law. If an employer is found guilty of retaliation, the employer may be forced to pay the employee twice the amount of back pay plus special damages.

The biggest reward thus far under the act was the approximately $51 million share that four whistle-blowers and their attorneys received for blowing the whistle on a Swiss drug company, Serono, for participating in a marketing scheme that resulted in physicians’ illegally prescribing over $11.5 million worth of a drug that was paid for by Medicaid. The government settled the case against the company for $704 million. The reward in this case, however, was far above the norm. The Justice Department estimates that the median award in all the 425 cases settled between the act’s inception and July 2001 was around $150,000. Between 1986 and the fi rst quarter of 2006, the total amount of money recovered by the government was over $17 billion.

Despite the fact that some of these cases might not have been pursued had it not been for the False Claims Act, there are many people who are opposed to the act. Some argue that the whistle-blowers are receiving money that should belong to the taxpayers, while others say that the act prompts people to not report fraud right away but wait until the value of the case grows. Still others complain that the act results in frivolous lawsuits as employees try to fi nd an “easy” way to make money.

Defenders of the False Claims Act point out that the act has led to some signifi cant cases of fraud being reported that otherwise might have cost the government millions of dollars. They also point out that when an employee does report a fraudulent employer, it is going to be very diffi cult for that employee to get a job in that fi eld in the future, and thus a signifi cant incentive needs to be offered to get employees to report such fraud.

A number of False Claims Act cases have been fi led against universities, including an inter-esting case fi led in 2006 against Chapman University. In this case, three faculty members alleged that the institution for years encouraged early dismissals, resulting in many students’ not getting the minimum classroom training required in several subjects. If the college had admitted that it had engaged in this practice, it would never have been accredited and thus never have received millions of dollars in federal grants and student aid, which the lawsuit claimed it took under false pretenses.6 The case had not been resolved at the time this book went to press.

6 Martin Van Der Werf, “Lawsuit U.: The Growing Reach of the False Claims Act Has Lawyers Fearing Trouble Everywhere,” Chronicle of Higher Education, August 4, 2006, available at http://chronicle.com/weekly/v52/i48/48a02301.htm.

False Claims ActAn act that allows employees to sue employers on behalf of the federal govern-ment for fraud against the government. The employee retains a share of the recovery as a reward for his or her efforts.

False Claims ActAn act that allows employees to sue employers on behalf of the federal govern-ment for fraud against the government. The employee retains a share of the recovery as a reward for his or her efforts.

Confirming Pages


34

THE SARBANES-OXLEY ACT Unlike RICO and the False Claims Act, the Sarbanes-Oxley Act of 2002 was intended to curb white-collar crime. Congress passed Sarbanes-Oxley largely in response to the business scandals of the early 2000s, such as Enron, WorldCom, and Global Crossing, as well as the accounting fi rm Arthur Andersen. While much of the act consists of new rules and regulations for accounting fi rms, part of the act specifi cally addresses the issue of white-collar crime.

Sarbanes-Oxley makes it illegal for registered public accounting fi rms to provide nonaudit services to an audit client. Section 201 of the act specifi cally names as illegal:

1. Bookkeeping or other services related to the accounting records or fi nancial statements of the audit client.

2. Financial information systems design and implementation. 3. Appraisal or valuation services, fairness opinions, or contribution-in-kind reports. 4. Actuarial services. 5. Internal audit outsourcing services. 6. Management functions or human resources. 7. Broker or dealer, investment adviser, or investment banking services. 8. Legal services and expert services unrelated to the audit. 9. Any other service that the Board determines, by regulation, is impermissible.

In addition to criminalizing the activities listed above, Sarbanes-Oxley has amended the penal-ties associated with other white-collar crimes. Under Sarbanes-Oxley, it is now a felony to willfully fail to maintain proper records of audits and work papers for at least fi ve years, and the punish-ment for not maintaining these records is up to 10 years’ imprisonment. Also, the destruction of documents received updated punishments. The destruction of documents involved in a federal bankruptcy investigation is now a felony with possible sentences of up to 20 years’ imprisonment. Similarly, the punishment for securities fraud has been increased to 25 years’ imprisonment.

In addition, Sarbanes-Oxley has extended the statute of limitations regarding the discovery of fraud. The statute of limitations now extends to two years from the date of discovery of the fraud and fi ve years from the criminal act. The old statute was one year from discovery and three from the act. Also, much like the False Claims Act, Sarbanes-Oxley has taken affi rmative steps toward further protecting whistle-blowers.

Sarbanes-Oxley ActAn act that criminalizes specifi c nonaudit ser-vices when provided by a registered accounting fi rm to an audit client; also increases the pun-ishment for a number of white-collar offenses. Also known as the Pub-lic Company Accounting Reform and Investor Protection Act of 2002.

Sarbanes-Oxley ActAn act that criminalizes specifi c nonaudit ser-vices when provided by a registered accounting fi rm to an audit client; also increases the pun-ishment for a number of white-collar offenses. Also known as the Pub-lic Company Accounting Reform and Investor Protection Act of 2002.

CONNECTING to the Core

Income Taxation Accounting: The Impact of Disallowance Provisions of the IRS CodeIn one of your tax or accounting courses, you probably learned about disallowance provisions of the IRS.* An important disallowance in the tax code is the one for pay-ments considered to be in violation of public policy, such as bribes or fi nes. Initially the courts developed the prin-ciple that a payment that is in violation of public policy is not a necessary expense and therefore should not be deductible. While allowing deductions for fi nes or bribes

might help a business’s bottom line, it would clearly di-lute the effect of any criminal penalty and would be, in effect, subsidizing a taxpayer’s wrongdoing. So, when you think about it, you really learned about one of the tools for fi ghting white-collar crime in your tax or ac-counting class: the disallowance provision of the tax code that fi ghts white-collar crime by not allowing criminals to deduct the amount they must pay for fi nes from their tax liability.

* William Hoffman, Jr., et al., Individual Income Taxes 2006 (Thomson, 2006), pp. 6–11.

Confirming Pages



SUMMARY4 Business ethics is an application of ethics to the special problems and opportunities experienced by businesspeople.

The social responsibility of business consists of the expectations that the community imposes on fi rms doing business with its citizens.

Business ethics builds on business law. The law both affects and is affected by evolving ethical patterns. But business law provides only a fl oor for business ethics, telling business leaders the minimally acceptable course of action.

Who are the relevant stakeholders? This question determines which interests (consumers, employees, managers, owners) are being pushed and prodded.

What are the ultimate purposes of the decision? This question determines which values (freedom, effi ciency, security, and justice) are being upheld by the decision.

How do we make ethical decisions? This question leads us to apply general ethical guidelines:

1. Golden Rule: Do unto others as you would have them do unto you. 2. Public disclosure test: If the public knew about this decision, how would you decide? 3. Universalization test: What would the world be like were your decision copied by

everyone else? The elements of a crime are:

• Actus reus: Wrongful behavior (guilty act). • Mens rea: Wrongful state of mind or intent (guilty mind).

Crimes are classifi ed into three categories:

• Felonies: Serious crimes punishable by imprisonment for more than one year or death. • Misdemeanors: Less serious crimes punishable by fi nes or imprisonment for less than

one year. • Petty offenses: Minor misdemeanors punishable by small fi nes or short jail sentences.

White-collar crimes include :

1. Bribery. 2. Extortion. 3. Fraud. 4. Embezzlement. 5. Computer crimes (destruction of computer data, unlawful appropriation of data or

services).

Both corporations, as legal entities, and the corporate offi cers and managers can be held liable for crimes committed on behalf of the corporation.

Pretrial procedure: The arrest, booking, fi rst appearance, indictment, and arraignment.

Trial procedure: Jury selection, trial with burden of proof on prosecution, jury deliberations, jury verdict, and (if guilty) sentencing hearing.

Posttrial procedure: Appeal.

RICO: Prohibits persons employed by or associated with an enterprise from engaging in a pattern of racketeering activity. Anyone whose business or property has been damaged by this pattern of activity can sue under RICO to recover treble damages and attorney fees in a civil action.

False Claims Act: Allows employees to sue employers on behalf of the federal government for fraud against the government. The employee retains a share of the recovery as a reward for his or her efforts.

Sarbanes-Oxley Act: Criminalizes specifi c nonaudit services when provided by a registered accounting fi rm to an audit client; also increases the punishment for a number of white-collar offenses.

Business Ethics and Social Responsibility

Business Law and Business Ethics

The WPH Framework for Business Ethics

White-Collar Crime

Corporate Criminal LiabilityCriminal Procedure

Tools for Fighting Business Crime

Confirming Pages



Point/Counterpoint4

LESS SEVERELY THAN VIOLENT CRIMINALS

Street crimes are different in kind from white-collar crimes. Whereas white-collar crime affects only indi-viduals’ property, street crime threatens individu-als’ lives and health. The law ought to recognize that protecting lives is more important than protecting property.

Moreover, white-collar crime tends to affect higher-income individuals, whereas street crime tends to affect lower-income individuals who lack the resources to protect themselves. Street crime disproportionately affects lower-income individuals who cannot afford the private security measures that higher-income indi-viduals use to protect their persons and their property. The law ought to protect those who lack the power to protect themselves.

A third reason to punish white-collar crime less heavily than street crime is that white-collar criminals are more likely to engage in careful cost-benefi t analy-sis when determining whether to commit white-collar crime. If the severity of the punishment, discounted by the chance they will get caught, is less than the expected payoff from the white-collar crime, rational individuals won’t see the crime as a profi table enter-prise. It seems less likely that street criminals engage in the same kind of careful cost-benefi t analysis before deciding, for example, whether to use illegal drugs. Thus, the most effective punishment for undeterrable street crime is likely to be severe punishment that incapacitates the criminals so that they are unable to commit more street crime. White-collar crime, on the other hand, can effectively be curbed by setting the punishment just high enough to make the crime unprofi table.

MORE SEVERELY THAN VIOLENT CRIMINALS

It is far from clear that white-collar crime has less seri-ous consequences than street crime. For example, individuals who defraud the government in effect steal taxes paid by all members of society, whereas individ-uals in possession of small amounts of marijuana may never adversely affect other members of society.

Indeed, white-collar crime affects all groups in soci-ety in both direct and indirect ways. Companies victim-ized by white-collar crime often must raise the prices of their goods to recoup the costs of the crime. Everyone in society feels the effects of the higher prices. Street crime, while by no means negligible, tends to affect smaller circles of people. Thus, to get the biggest bang for our buck, we should punish white-collar crime more heavily than street crime.

Another reason to punish white-collar crime more heavily than street crime focuses on the underlying causes of crime. Much street crime has its roots in other social problems. Often, individuals commit street crime because of the poor environments in which they were raised. Much white-collar crime, however, is committed by well-off individuals out of avarice. The law ought to dole out more severe punishments for crimes caused by individual responsibility, and soci-ety ought to use other mechanisms to address crime caused by aleatory factors.

How Severely Should the Law Punish Individuals Convicted of White-Collar Crime?

As you are considering this issue, you might want to think about statistics that would help you resolve it.

Questions & Problems4 1. How do business ethics and business law interact

with each other?

2. How does the WPH approach to ethics respond to an ethical problem?

3. List and defi ne the primary affi rmative defenses used in criminal cases.

4. Explain the federal laws that are currently being used to try to fi ght white-collar crime.

Confirming Pages



5. Jarold Daniel Friedman worked as a temporary computer contractor for a pharmaceutical warehouse. The warehouse offered him a permanent position, but the warehouse required that he get a mumps vac-cine, grown in chicken embryos, as a condition of his permanent employment. Friedman, a vegan, believed that the vaccination would violate his religious beliefs and declined to be vaccinated. As a result, the ware-house withdrew its offer of employment. Friedman claimed that the warehouse discriminated against him on the basis of religion. Do you agree with Friedman? Do employers have a duty to respect the beliefs of their employees? If so, what happens when that duty confl icts with employers’ duty to provide a safe and healthy work environment? [Friedman v. Southern California Permanente Medical Group, 102 Cal. App. 4th 39 (2002).]

6. John Bigan owned a strip-mining operation in which he dug trenches to remove coal deposits. One of these trenches was nearly 20 feet deep and contained water about 10 feet deep. Bigan installed a pump in the trench to remove the water and asked Joseph Yania, the owner of another strip-mining operation, to help him start the pump. Bigan urged and taunted Yania, who could not swim, to jump from the edge of the trench into the water, where Bigan was working on the pump. Yania jumped and drowned. Yania’s widow sued Bigan, alleging that he failed to rescue her husband. Do you think Bigan should have rescued Ya-nia? Do you think the law should require that Bigan rescue Yania? Why or why not? What values are you employing in your argument? [Yania v. Bigan, 397 Pa. 316 (1959).]

7. Jennifer Erickson sued her employer, Bartell Drug Company, contending that its decision not to cover prescription contraceptives under its employee pre-scription drug plan constituted sex discrimination. Bartell argued that its decision was not sex discrimi-nation because contraceptives were preventive, were voluntary, and did not treat an illness. With whom do you agree? Why? What values did you use to reach your conclusion? [Erickson v. Bartell Drug Co., 141 F. Supp. 2d 1266 (2001).]

8. Entertainment Network, Inc. (ENI), a business that provided news, entertainment, and information via the Internet, sued government offi cials who pro-hibited the company from fi lming the execution of Oklahoma City bomber Timothy McVeigh and selling the footage of the execution online. The government offi cials argued that a Justice Department regula-tion prohibiting audio and visual recording devices at federal executions applied in the case at hand. ENI, however, argued that the regulation violated the company’s First Amendment right to free speech.

How do you think the court should have ruled in this case? Do you think ENI might have altered its deci-sion to broadcast the execution if it had applied the Golden Rule? [Entm’t Network, Inc. v. Lappin, 134 F. Supp. 2d 1002 (2001).]

9. Kevin Gray, was found guilty of mail fraud. He had attempted to convince a businessman, Frank Patti, who was on trial for tax evasion and faced substantial jail time, that for $85,000 he would bribe the jury, thus avoiding the threat of jail for the businessman. A letter sent to Patti contained false material representa-tions from the Gray. Patti’s reliance on the informa-tion contained in the letter can be inferred from, among other things, the fact that he was prepared to call Patti at the pay phone at the time and location specifi ed in the letter. Because the methods to be used by the Gray were hardly believable, Gray appealled his judgment on the ground that his fraudulent scheme was “so absurd” that a person of ordinary prudence would not have believed it, and therefore, his conduct fell outside the realm of conduct pro-scribed by the mail fraud statute. Should the appelate court overturn Gray’s conviction? [United States v. Gray, 367 F. 3d 1263 (2004).]

10. Grand Central Partnership Social Services Corpora-tion is a not-for-profi t organization. The organization provides counseling, referrals, clothing, showers, and mail access for the homeless. Additionally, the organization implemented a program known as Pathways to Employment (PTE), designed to assist in the development of vocational skills. The pro-gram provided workshops covering topics such as interviewing skills and résumé writing. Participants in the PTE program were assigned to fi ve areas: maintenance, food services, administration, outreach, and recycling. Each of these tasks related to the overall operation and goals of the center. Individuals participating in the PTE program were required to participate 40 hours per week and were paid between $40 and $60 per week. The plaintiffs, predominantly homeless and jobless individuals, alleged that the wages paid by Grand Central were below minimum wage and therefore unlawful. Grand Central argued that participants in the PTE program were trainees, not employees, and that the participants were learning valuable job readiness skills. Do you think that this is an appropriate distinction? What ethical issues should be considered? [Archie v. Grand Central Partnership, 997 F. Supp. 504 (1998).]

11. Robert Morris, a PhD student in computer science at Cornell University, designed a computer program known as a “worm” and released it onto the Inter-net. The worm spread and multiplied and eventually caused computers at various educational and military

Confirming Pages



institutions to crash. Morris argued that he released the worm to demonstrate to fellow graduate students the lack of security protecting computer networks. With what crime was he most likely charged? Was this prosecution successful? [United States v. Robert Tappen Morris, 928 F.2d 504 (1991).]

12. The Pasquantinos, while in New York, ordered liquor over the telephone from discount package stores in Maryland. They employed Hilts and others to drive the liquor over the Canadian border, without paying the required excise taxes. The drivers avoided paying taxes by hiding the liquor in their vehicles and failing to declare the goods to Canadian customs offi cials. During the time of the Pasquantinos’ smuggling operation, between 1996 and 2000, Canada heavily taxed the importation of alcoholic beverages. The Pasquantinos and Hilts were indicted for charges of federal wire fraud. They contest no wire fraud existed because the federal government cannot enforce the revenue laws of Canada, and this therefore pre-vents the existence in the United States of a fraud charge. How did the Supreme Court rule? Should the Pasquantinos and Hilts be able to succeed in their

legal argument? [Pasquantino v. United States, 125 S. Ct. 1766 (2005).]

13. Bernadette Sablan was fi red from her job at the Bank of Hawaii for circumventing security procedures when retrieving fi les. One night after drinking at a bar with a friend, she entered an unlocked door at the bank. She went to her old workstation and logged on to the mainframe by using an old password. She contends that she simply accessed several fi les and logged out. The government argued that she changed and deleted several fi les. Regardless, her actions damaged several bank fi les. Sablan was charged with computer fraud. She argued that the government had to establish the mens rea element of the crime—that is, the government had to prove she intentionally tried to damage the fi les. The district court ruled that the intention element applied only to accessing the fi les. Sablan argued that the legislation in question was intended to apply only to those who intention-ally damage computer data, and she appealed. How did the court of appeals rule? Why? [United States v. Sablan, 92 F.3d 865, 866 (9th Cir. 1996).]

Looking for more review material?The Online Learning Center at www.mhhe.com/kubasekess contains this chapter’s “Assignment on the Internet” and also a list of URLs for more information, entitled “On the Internet.” Find both of them in the Student Center portion of the OLC, along with quizzes and other helpful materials.

Confirming Pages


39

Ethical Relativism and Situational Ethics An ethical school of thought that may seem appealing on the surface is ethical relativism. Ethical relativism is a theory of ethics that denies the existence of objective moral standards. Rather, according to ethical relativism, individuals must evaluate actions on the basis of what they feel is best for themselves. Ethical relativism holds that when two individuals disagree over a question about morality, both individuals are correct because no objective standard exists to evaluate their actions. Instead, morality is relative, and thus no one can criticize another’s behavior as immoral. Many people fi nd ethical relativism attractive because it promotes tolerance.

Ethical relativism may appear attractive at fi rst glance, but very few people are willing to accept the logical conclusions of this theory. For example, ethical relativism requires us to see murder as a moral action as long as the murderer believes that the action is best for himself or herself. Once a person accepts the appropriateness of criticizing behavior in some situations, the person has rejected ethical relativism and must develop a more complex ethical theory.

Situational ethics is a theory that at fi rst appears similar to ethical relativism but is actu-ally substantially different. Like ethical relativism, situational ethics requires that we evaluate the morality of an action by imagining ourselves in the position of the person facing the ethi-cal dilemma. But unlike ethical relativism, situational ethics allows us to judge other people’s actions. In other words, situational ethics holds that once we put ourselves in another person’s shoes, we can evaluate whether that person’s action was ethical.

While situational ethics provides a useful rule of thumb to use when thinking about the ethical decision-making process, it does not offer specifi c-enough criteria to be useful in many real-world situations. Once we imagine ourselves in the position of a person facing an ethical dilemma, situational ethics does not tell us how to evaluate that person’s actions. An alterna-tive school of ethical thought, however, provides a much more judgmental approach to ethical dilemmas.

Absolutism Absolutism, or ethical fundamentalism, requires that individuals defer to a set of rules to guide them in the ethical decision-making process. Unlike ethical relativism and situational ethics, absolutism holds that whether an action is moral does not depend on the perspective of the per-son facing the ethical dilemma. Rather, whether an action is moral depends on whether the action conforms to the given set of ethical rules.

Of course, people disagree about which set of rules to follow. Why should we accept and act on any one absolutist set of rules? Absolutism cannot tell us, for example, why we ought to fol-low the doctrines set forth in the Koran and not Hindu doctrines.

Moreover, the unquestionable nature of the rules in most absolutist repositories seems overly infl exible when applied to different situations. For instance, “Thou shalt not kill” seems to be an absolute rule, but, in practice, killing in self-defense seems to be an acceptable exception to this rule.

Consequentialism In contrast to absolutism, consequentialism does not provide a rigid set of rules to follow regard-less of the situation. Rather, as the word consequentialism suggests, this ethical approach “depends on the consequences.” Consequentialism is a general approach to ethical dilemmas that requires that we inquire about the consequences to relevant people of our making a particular decision.

Utilitarianism is one form of consequentialism that business managers may fi nd useful. Like many consequentialist theories of ethics, utilitarianism urges managers to take those actions

Ethical relativism The ethical theory that denies the existence of an ultimate ethical sys-tem. According to this theory, a decision must be determined ethical on the basis of its own context.

Ethical relativism The ethical theory that denies the existence of an ultimate ethical sys-tem. According to this theory, a decision must be determined ethical on the basis of its own context.

situational ethics A branch of ethical relativism that urges us to envision ourselves in the shoes of others, yet allows us to judge the decisions of others.

situational ethics A branch of ethical relativism that urges us to envision ourselves in the shoes of others, yet allows us to judge the decisions of others.

absolutismAny set of ethics that is based on rules. These rules are considered moral regardless of per-spective or dilemma.

absolutismAny set of ethics that is based on rules. These rules are considered moral regardless of per-spective or dilemma.

consequentialismThe ethical theory based on consequences. It states that in considering what action is ethical, the only thing that mat-ters is its consequences.

consequentialismThe ethical theory based on consequences. It states that in considering what action is ethical, the only thing that mat-ters is its consequences.

utilitarianismThe ethical principle that urges individuals to act in a way that creates the most happiness for the largest number of people.

utilitarianismThe ethical principle that urges individuals to act in a way that creates the most happiness for the largest number of people.

APPENDIX 2A4 Theories of Business Ethics

Confirming Pages



that provide the greatest pleasure after having subtracted the pain or harm associated with the action in question.

Utilitarianism has two main branches: act utilitarianism and rule utilitarianism. Act utili-tarianism tells business managers to examine all the potential actions in each situation and choose the action that yields the greatest amount of pleasure over pain for all involved. For example, according to act utilitarianism, a business manager who deceives an employee may be acting morally if the act of deception maximizes pleasure over pain for everyone involved.

Rule utilitarians, on the other hand, see great potential for the abuse of act utilitarianism. Instead of advocating the maximization of pleasure over pain in each individual situation, rule utilitarianism holds that general rules that on balance produce the greatest amount of pleasure for all involved should be established and followed in each situation. Thus, even if the business manager’s decision to deceive an employee maximizes pleasure over pain in a given situation, the act probably would not be consistent with rule utilitarianism because deception does not gener-ally produce the greatest satisfaction.

Rule utilitarianism underlies many laws in the United States. For example, labor laws prohibit employers from hiring children to do manufacturing work, even though in some situations the transaction would maximize pleasure over pain.

One form of utilitarianism commonly applied by fi rms and government is cost-benefi t analy-sis. When a business makes decisions based on cost-benefi t analysis, it is comparing the pleasure and pain of its optional choices, as that pleasure and pain are measured in monetary terms.

As we have shown, consequentialism is not altogether helpful because of the extreme dif-fi culty in making the required calculations about consequences. Another issue raises an impor-tant additional objection to consequentialist thinking: Where does the important social value of justice fi t into consequentialist reasoning? Many business decisions could be benefi cial in their consequences for a majority of the population, but is it fair to require that a few be harmed so that the majority can be improved? Consequentialism does not provide defi nite answers to these questions, but an alternative ethical theory does.

Deontology Deontology is an alternative theoretical approach to consequentialism. When you see references to Kantian ethics, the analysis that follows the reference will be a discussion of the most famous of the deontological approaches to business ethics. Unlike a person espousing consequentialism, a person using a deontological approach will not see the relevance of making a list of harms and benefi ts that result from a particular decision. Instead, deontology consists of acting on the basis of the recognition that certain actions are right or wrong, regardless of their consequences. For example, a business leader might consider it wrong to terminate a person whose spouse has terminal cancer because a fi rm has an obligation to support its employees when they are vulner-able, period.

But how are business managers to decide whether an action is right or wrong? The German deontological philosopher Immanuel Kant proposed the categorical imperative to determine whether an action is right. According to the categorical imperative, an action is moral only if it would be consistent for everyone in society to act in the same way. Thus, for example, applying the categorical imperative would lead you to conclude that you should not cheat on a drug test, because if everyone acted in the same way, the drug test would be meaningless.

From the deontological viewpoint, the duties or obligations that we owe one another as humans are much more ethically signifi cant than are measurements of the impacts of business decisions. For example, a person using a deontological theory of ethics may see any business behavior that violates our duty of trust as being wrong. To sell a car that one knows will probably not be usable after four years is, from this perspective, unethical. No set of positive consequences that might fl ow from the production decision can overcome the certainty of the deontological recognition that the sale is wrong.

act utilitarianismStates that the morally right action is the act producing the greatest amount of happiness for the greatest number of people. Act utilitarianism requires the individual to assess the context for each decision, as opposed to relying on general rules.

act utilitarianismStates that the morally right action is the act producing the greatest amount of happiness for the greatest number of people. Act utilitarianism requires the individual to assess the context for each decision, as opposed to relying on general rules.

rule utilitarianism A subset of utilitarianism that proposes a number of rules for determining generally what creates the most happiness.

rule utilitarianism A subset of utilitarianism that proposes a number of rules for determining generally what creates the most happiness.

cost-benefi t analysisAn economic school of jurisprudence where all costs and benefi ts to a law are given monetary values. Those laws with the highest ratio of ben-efi ts to costs are then preferable to those with lesser ratios.

cost-benefi t analysisAn economic school of jurisprudence where all costs and benefi ts to a law are given monetary values. Those laws with the highest ratio of ben-efi ts to costs are then preferable to those with lesser ratios.

Kantian Ethics A deontological theory of ethics based on the teachings of Immanuel Kant, which has as a fun-damental belief the idea that a moral act is one that is based on a sense of duty. It is probably most well known for its principle of the categorical imperative, the idea that an action is moral only if it would be consistent for everyone in society to act in the same way.

deontology The ethical theory that states that an action can be determined ethical regardless of its consequences.

Kantian Ethics A deontological theory of ethics based on the teachings of Immanuel Kant, which has as a fun-damental belief the idea that a moral act is one that is based on a sense of duty. It is probably most well known for its principle of the categorical imperative, the idea that an action is moral only if it would be consistent for everyone in society to act in the same way.

deontology The ethical theory that states that an action can be determined ethical regardless of its consequences.

categorical imperativeThe principle that an act is ethical when we would wish for all people to act according to its dictates.

categorical imperativeThe principle that an act is ethical when we would wish for all people to act according to its dictates.

Confirming Pages



The duties that we owe others imply that human beings have fundamental rights based on the dignity of each individual. This principle of rights asserts that whether a business decision is ethical depends on how the decision affects the rights of all involved. This principle is founda-tional to Western culture: the Declaration of Independence, for example, asserts that everyone has the right to “life, liberty, and the pursuit of happiness.”

But just as consequentialism is incredibly complicated, deontology is diffi cult to apply because people disagree about what duties we owe to one another and which duties are more important than others when they confl ict. For example, imagine the dilemma of a scientist working for a tobacco fi rm who discovers that cigarettes are carcinogenic. She owes a duty of trust to her employer, but she also has a confl icting duty to the community to do no harm. Where would a business manager fi nd a list of relevant duties under the deontological framework, and why should we accept and act on any particular list?

In addition, as with absolutism, the absolute nature of many deontological lists of duties and rights seems overly rigid when applied to a wide variety of contexts. For instance, saying that we owe a duty to respect human life sounds absolute. In application, however, we might be forced to harm one life to preserve other life. An alternative theory of ethics, called virtue ethics, avoids this rigidity problem by providing us with abstract goals to pursue continually.

Virtue Ethics Virtue ethics is an ethical system in which the development of virtues, or positive character traits such as courage, justice, and truthfulness, is the basis for morality. A morally excellent (and thus good) person develops virtues and distinguishes them from vices, or negative char-acter traits such as cowardice and vanity. This development of virtues occurs through prac-tice. Virtues are the habits of mind that move us toward excellence, the good life, or human fl ourishing.

As a guide to business ethics, virtue ethics requires that managers act in such a way that they will increase their contributions to the good life. Virtue ethics tells them to follow the character traits that, upon introspective refl ection, they see as consistent with virtue. Identifying the rele-vant virtues and vices requires reasoning about the kind of human behavior that moves us toward the good, successful, or happy life.

A diffi culty with the application of virtue ethics is the lack of agreement about the meaning of “the good life.” Without that agreement, we are not able to agree about what types of behavior are consistent with our achievement of that goal. Even so, virtue ethics is useful in reminding us that ethics is grounded in a sense of what it means to be virtuous—we need some moral beacon to call us toward a more morally excellent condition. An alternative theory of business ethics, the ethics of care, offers a clear conception of what is virtuous.

Ethics of Care The ethics of care holds that the right course of action is the option most consistent with the building and maintaining of human relationships. Those who adhere to an ethic of care argue that traditional moral hierarchies ignore an important element of life: relationships. Care for the nurturing of our many relationships serves as a reminder of the importance of responsibility to others.

According to someone who adheres to an ethic of care, when one person cares for another person, the fi rst person is acting morally. When other ethical theories emphasize different moral dimensions as a basis for resolving ethical dilemmas, they rarely consider the harm they might do to relationships; thus, from the perspective of the ethics of care, alternative theories of busi-ness ethics often encourage unethical behavior.

Ethics-of-care theorists argue that when one individual, the caregiver, meets the needs of one other person, the cared-for party, the caregiver is actually helping to meet the needs of all the

principle of rightsThe principle that judges the morality of a deci-sion on the basis of how it affects the rights of all those involved.

principle of rightsThe principle that judges the morality of a deci-sion on the basis of how it affects the rights of all those involved.

virtue ethicsThe ethical system con-cerned with the develop-ment of character traits. This system proposes that a decision is ethical when it promotes posi-tive character traits like honesty, courage, or fairness.

virtue ethicsThe ethical system con-cerned with the develop-ment of character traits. This system proposes that a decision is ethical when it promotes posi-tive character traits like honesty, courage, or fairness.

ethics of careThe ethical theory that places its emphasis on human interaction. According to this theory, what makes a decision ethical is how well it builds and promotes human relationships.

ethics of careThe ethical theory that places its emphasis on human interaction. According to this theory, what makes a decision ethical is how well it builds and promotes human relationships.

Confirming Pages



At a Glance

Theories of Business Ethics

Ethical approach Description

Ethical relativism Asserts that morality is relative.

Situational ethics Requires that when we evaluate whether an action is ethical, we imagine ourselves in the position of the person facing an ethical dilemma.

Consequentialism Considers the consequences (i.e., harms and benefi ts) of making a particular decision.

Deontology Recognizes certain actions as right or wrong regardless of the consequences.

Virtue ethics Encourages individuals to develop virtues (e.g., courage and truthfulness) that guide behavior.

Ethics of care Holds that ethical behavior is determined by actions that care for and maintain human relationships.

individuals who fall within the cared-for party’s web of care. Thus, by specifi cally helping one other individual, the caregiver is assisting numerous people.

The strength of this theoretical approach is that it focuses on the basis of ethics in general: the signifi cance of the interests of other people. The urging to care for relationships speaks to the fundamental basis of why we are concerned about ethics in the fi rst place. Most of us do not need any encouragement to think about how a decision will affect us personally. But ethical reasoning requires that we weigh the impact of decisions on the larger community.

Let’s examine how these ethical theories are applied in real-world fi rms. Exhibit 2A-1 is an abridged version of the Johnson & Johnson Credo, or statement of shared corporate values. General Robert Wood Johnson, who guided Johnson & Johnson from a small, family-owned business to a worldwide enterprise, believed the corporation had social responsibilities beyond the manufacturing and marketing of products. In 1943, he wrote and published the Johnson & Johnson Credo, a document outlining those responsibilities. Does the credo depend more on ethical relativism, situational ethics, absolutism, consequentialism, deontology, virtue ethics, or the ethics of care for its ethical vision?

Exhibit 2A-1 Johnson & Johnson’s Credo

The Credo We believe our fi rst responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services. In meeting their needs everything we do must be of high quality. We must constantly strive to reduce our costs in order to maintain reasonable prices. Customers’ orders must be serviced promptly and accurately. Our suppliers and distributors must have an opportunity to make a fair profi t.

We are responsible to our employees, the men and women who work with us throughout the world. Everyone must be considered as an indi-vidual. We must respect their dignity and recognize their merit. They must have a sense of security in their jobs. Compensation must be fair and adequate, and working conditions clean, orderly and safe. We must be mindful of ways to help our employees fulfi ll their family responsibilities. Employees must feel free to make suggestions and complaints. There must be equal opportunity for employment, development and advance-ment for those qualifi ed. We must provide competent management, and their actions must be just and ethical.

We are responsible to the communities in which we live and work and to the world community as well. We must be good citizens—support good works and charities and bear our fair share of taxes. We must encourage civic improvements and better health and education. We must maintain in good order the property we are privileged to use, protecting the environment and natural resources.

Our fi nal responsibility is to our stockholders. Business must make a sound profi t. We must experiment with new ideas. Research must be car-ried on, innovative programs developed and mistakes paid for. New equipment must be purchased, new facilities provided and new products launched. Reserves must be created to provide for adverse times. When we operate according to these principles, the stockholders should realize a fair return.

Used by permission Johnson & Johnson.

Confirming Pages


Documents

Ethics Case