Huge fines are a tax on illegal behavior

Several weeks ago I listened to a continuing education class presented by Sam Antar, current felon and formerly CFO of Crazy Eddie.

In the session, he made two comments that caught my ear. First, the fines we read about as a result of various financial scandals are just a tax on illegal behavior. Second, those fiascos are, he said, a cancer destroying capitalism.

After the session, I had opportunity to interview him by phone and follow-up on both of those ideas.

Fines are a tax on illegal behavior

He indicated that essentially no one has been implicated in any of the disasters we’ve read about, which I have discussed extensively on my blog.

He said corporations don’t commit crimes. People commit crimes.

And the people who committed crimes aren’t going to jail.

(I would argue rather strongly that corporations are legal persons and therefore can commit crimes in their individual capacity as a distinct person. I believe a number of large banks have personally committed crimes. We can debate at length which actions do or do not drop into the criminal category, but I think most people would agree that some of the fiascos in the headlines constitute crimes.  After that tangent of quibbling, I will still agree with his analysis after that point.)

Who is paying these multi-billion dollar fines? Even the ones that are merely a fraction of 1 billion – who is paying them?

Mr. Antar points out it isn’t the officers of the Corporation.

It isn’t the employees who committed the crimes.

It isn’t the board members who have fiduciary responsibility for the organization.

Who pays?

Investors.

Yes, the investors. The people most distantly removed from any crimes committed.

With the lack of effort from federal and state governments to pursue criminal charges against individuals committing crimes, let alone anything other than inconsequential efforts to pursue criminal charges against corporations, those financial settlements are in substance a fine on illegal activity.

Therefore Mr. Antar asserts it is a tax on illegal behavior.

He said this is basically legitimizing fraud.

I don’t think I am misstating Mr. Antar’s opinion to characterize the substance of the situation as follows:  The federal and state governments are content to levy their taxes, deposit the proceeds into the various general funds, get a cross-your-heart promise not to commit crimes in the future, see their names in the WSJ and NYT, and then move on.

Mr. Antar suggested we have arrived at the point where the administration of justice is strictly a business.

While we were visiting I thought of an analogy for the audit work I do in my CPA firm. If the audit world worked the way these fiascos have played out, here is what it would look like:  It is as if I had an audit failure in my practice and the California Society of CPAs paid the resulting financial settlement.

Not a bad deal, huh?

I am guessing that Mr. Antar and I have different definitions of which headlined fiascos would go into the category of fines as a tax. I would suggest a few (not many but a few) of the headlines are actually an injustice. But we would agree that many of them are essentially a tax on illegal behavior.

Next post: A cancer destroying capitalism