Tuesday, November 17, 2009

Does rise in white-collar prosecutions stem from too-weak business regulation?

I've suggested before that white-collar crime prosecutions shouldn't be used as alternatives to industry regulation, but given how white-collar cases frequently play out in the real world, I can understand why that approach is politically and, to an extent, even practically justified.

Take the instance yesterday in which the state insurance regulator ruled that State Farm had overcharged its customers hundreds of millions of dollars over the last six years. Reports the Dallas News:

State Farm Insurance must repay its customers $310 million for charging them too much for homeowners coverage dating back to 2003, the state insurance commissioner ruled Monday.

The ruling by Insurance Commissioner Mike Geeslin, the latest in a years-long case, is for far less than the $1 billion that consumer advocates recommended, and one called it a "joke."...

Alex Winslow of Texas Watch, a leading consumer group on insurance issues, called Geeslin's ruling a "slap in the face," saying it cheats State Farm policyholders out of millions of dollars in excessive premiums.

"The commissioner has shirked his responsibility to Texas homeowners and proved that our current insurance market doesn't work," he said.

"Consumers had a right to expect a full and complete refund of all overcharges plus interest, and the commissioner chose to allow State Farm to pocket hundreds of millions of dollars rather than return that money to policyholders," he added.

A stronger regulatory system with teeth might have a) kept overcharges from happening in the first place or b) more completely compensated customers for the money State Farm charged them over the regulated rate. However, Texas' insurance commissioner is a political appointee and the big insurance companies in this state tend to get what they want, or most of it, from the political class - pretty much no matter which party is in power.

I know no more about this case than what's reported in the paper, but let's say it's true that State Farm overcharged its customers around $1 billion and now won't pay them back on the grounds that they'd go bankrupt. (The closing paragraph in the article says State Farm spent the money to pay back a loan to its parent company, so I don't see why that entity couldn't pay). Let's face it, if someone knowingly overcharges a customer then refuses to give the money back because they already spent it, that's tantamount to theft. And allegedly stealing a billion dollars is a big deal, even if it was stolen from thousands of ratepayers a few hundred dollars at a time.

To be clear, I don't think prosecuting insurance executives in rate disputes would benefit the ratepayers or, really, anyone at all. Historically American society hasn't dealt with that kind of corporate "theft" through the criminal justice system, which is designed to more effectively prosecute thefts by the poor - e.g., burglaries by druggies or the homeless guy for stealing copper wire from a construction site. Law enforcement isn't very effective at going after the guys who steal nine or ten-figure sums with a fountain pen instead of a gun, though in theory such offenses would merit life sentences in Texas (or 5-99) based on the amount of money stolen. Even when white-collar offenders are prosecuted and punished, rarely does that mean the crime victims get their money back.

The other option in such circumstances is civil litigation, but tort reform has made such large-scale class-action suits more difficult and less lucrative. Even when a suit can be pursued, attorneys regularly settle their cases for large fees but only symbolic compensation for the thousands of affected consumers - hardly a satisfying outcome.

In this case, reports the Dallas News, State Farm "was told to cut its rates 12 percent" in 2003. They "sued the state, and the case has been rolling around the courts since," but in the meantime they continued to charge customers the higher rates. So the company defied state regulators and knowingly continued to charge its customers more than state law allowed.

Regrettably, given a chance to order that they repay the full amount of the overcharge, Texas' one-man insurance regulatory body decided that State Farm needn't pay 70% of what they allegedly, improperly took. He had the chance to fix the problem on behalf of ratepayers, but instead created a situation where they apparently have no meaningful recourse through either civil or regulatory means to recoup 70% of what they were overcharged.

If ratepayers want justice, they clearly won't get it through the civil courts or state regulators - both have had their chance. So if they're not going to be fully compensated for what's taken from them, it's understandable why injured parties and the observing public would conclude that punishment in the criminal justice system is at least some justice if not the most preferable outcome, which would be recouping lost funds.

Such an environment of consumer/public frustration - where it appears government is incapable of fairly resolving middle-class disputes with corporate power - create a strong political motive for prosecutors to pursue white-collar crime cases, often over what used to be considered unfortunate, spectacular, but in the big capitalistic picture relatively routine, non-theft business losses.

There's a difference between a Bernie Madoff running an outright Ponzi scheme and a speculator who loses clients' money because the bubble they were hyping suddenly burst. (State Farm's case, to me, lies somewhere in the hazy middle on that spectrum.) And even Bernie Madoff should have been caught by regulators, it's just that the agencies in charge of oversight were lax, underfunded, incompetent and in some cases even corrupt.

In the wake of recent Wall Street debacles and bailouts, I'd harbored perhaps quixotic hopes that the coming months and years might find a more receptive environment for regulatory solutions regarding corporate misconduct, finding ways to resolve or (even better) prevent such imbroglios without the need for large-scale civil litigation, much less expensive, morally ambiguous white-collar criminal prosecutions aimed at satisfying an angry and vengeful public.

If state regulators and civil courts are too weak and disempowered to exact justice for consumers, it's only natural the public would turn to prosecutors for answers, since they wield enormous power - even if harshly punishing such "offenders" can't restore what's lost to victims. I'm just not sure who such an approach really benefits.

16 comments:

Pirate Rothbard said...

The state farm case is a strange example to bring up to support your assertion that we need more regulation.

Here's anothe article about it:
here

From that article:

"The order is the latest development in a 6-year-old case in which regulators ordered the company to cut its rates 12 percent.

That order followed major reforms to insurance regulation by state lawmakers in 2003 after years of record increases in home insurance rates. Mold and water claims prompted the rate increases."

They should never have been forced to lower their rates in the first place. We need to allow the consumer and insurance providers to negotiate rates, end of story. (And if that bothers you, don't get homeowner's insurance.)

So regulation caused this case.

Gritsforbreakfast said...

No, PR, State Farm's refusal to ABIDE by regulation caused this case. They have to follow the law, they chose to dispute the law and continue to overcharge their customers, who now seemingly will never recoup the money, or at least 70% of it.

Pirate Rothbard said...

Well now it seems like your engaging in a semantics game.

That's like saying a pot smoker's refusal to abide by the regulations caused the court case for his arrest on possession. True enough, but it was legal to smoke weed he wouldn't be arrested for possession.

So just as smoking weed is a consensual interaction, so is trying to charge as much as you can for home insurance. Both should be legal.

Gritsforbreakfast said...

PR, You keep beating the drums on behalf of price gouging insurance companies ... if that's the moral imperative you think I'm somehow violating, I'll own it.

Everybody has to abide by the rules, including companies. My argument is that weakening regulation because of beliefs like yours has increased reliance on criminal prosecution for losing investors' money or overhyping one's products. Personally I think the former is a better way to handle the problem than the latter, but given how many consumers are affected, doing nothing is not an option.

And yes, the pot smoker's refusal to abide by regulations IS what causes their court case. That's true of all crimes that if the laws being violated were taken off the books, there would be no offense. That's a tautology, but not a particularly helpful or useful one. Try to change the law if you don't like it - that's the democratic system - but don't complain if not following it gets you in trouble.

Anonymous said...

Grits,

Don't waste your breath trying to explain this rationally. Pirate lives in that libertard fantasy-land where common people have the power to single-handedly negotiate with large corporations, and get what they want. He also seems not to understand that having homeowner's insurance is mandated, not optional.

Pirate Rothbard said...

"He also seems not to understand that having homeowner's insurance is mandated, not optional"

Is that true? I'm happy to learn new things.

Even if it is, we should allow competition to drive down costs. Let the companies set their own prices.

If you force companies to lower their costs, they will skimp on customer service. Or they might end up not having enough assets to cover potential losses. And of course more people end up going to jail for white collar crimes.

I'm sorry you feel the need to have the government protect you from yourself, hope that works out for you.

Libertarian ideals may be a fantasy at the moment, but we Texans do a pretty good job of respecting free enterprise compared to the rest of the country. That's a reality. Companies are not clamoring for regulation, they are running from them. That's why our unemployment is low and people continue to move here. You can live in Philadelphia or Detroit if you like regulations so much.

EGR said...

I'm afraid the marketplace hasn't worked for insurance regulation in Texas. We have some of the highest homeowner rates in the nation.

Also, your homeowner insurance is not required by law - it's required by your mortagage company - and it's there it to protect them, not you.

... an aside... my college Texas government text made the observation that the regulatory agencies in Texas were there to ensure (insure) that the industries they regulated made plenty of money...

Chris H said...

If you feel that insurance rates are too high in Texas, why aren't you starting up an insurance company and offer a lower priced product? Surely the rational consumer will choose your insurance over the price gougers. You'll be set.

Pirate Rothbard said...

Funny, today an article appeared on Von Mises relating to this very topic.

Bottom line: price controls create shortages. The minimum wage creates a shortage of jobs. Rent controls create a shortage of housing. Setting a maximum price for homeowners insurance creates a shortage of insurance.

Gritsforbreakfast said...

Chris H, you aren't paying attention. Rates are regulated. State Farm is in trouble for overcharging BEYOND the regulated rate.

PR, nobody wanted to regulate AIG or Citibank either because it would have been anti-free market, but we're all paying for that lack of foresight now. There have been too many insurance scams and frauds over the years for your 100% laissez faire approach to be acceptable in a democratic society. Either they will be regulated, or they will be held liable in civil court, or they will be held criminally liable. Pick one, but you don't get to say businesspeople simply cannot be held accountable.

Pirate Rothbard said...

John Stossel, a mainstream guy on 20/20, put a bunch of economists on his show saying we could of just let the banks fail and it wouldn't have been a disaster.

So we wouldn't have paid a price if we'd the banks fail. A bailout and regulation are both anti-free market. So we may be paying a price, but it is the fault of anti-free market thinking.

Your point on democracy is well taken. That's why I'm against democracy, because it is by definition the many oppressing the few.

But if our democratic society demands we do something, my gut feeling is that prisons are a lesser evil than regulation for white collar crime.

Have you ever attempted to tally the costs of regulation?

Here is an example from California.

This study estimates that the total cost of regulation in CA is 492.994 billion! That's five times the state’s general fund budget.

So if there's evidence that regulation will be cheaper than prisons, I'm open to seeing it. But until I see evidence, I suspect prisons are cheaper than regulation because so far we imprison so few white collar criminals anyways.

Chris H said...

Grits, I am paying attention. The point is that rates shouldn't be regulated. All rate regulation accomplishes is raising the barriers of entry and exit. That prevents competition. Regulation is what allows these large companies to dominate markets in the first place.

The question on Citi and AIG is why are we paying for it? They committed fraud and we're paying the perpetrators of fraud? Yet, somehow that's okay in you're 'regulation solves everything' world. There was already regulations against fraud, and your regulators did nothing!

Enforcing contracts is the role of government. If they can't even accomplish that, what makes you think they can accomplish enforcement of other regulations? What you end up with is people believing that the government is regulating a market, so they enter into contracts without doing due diligence; they do no diligence. No diligence on price, on competitors, on reputation or performance.

Yes, man will always turn to plunder when plunder is easier than work. The goal should be to punish plunder, not reward it by protecting it from would be competitors.

TDCJ EX said...

John Stossel ,is not a mainstream any thing he is shill for the insurance industry and any other big bussness that does not want to be held accoubntable for it's actions . You can see him on Faux Noise

He thinks unregulated markets will solve all of our problems . It has not so far and never will.

I think he has read far to much Ayn Rand . Maybe he should be honest just say I've got mine now F.. U .


Stossel lives in a libertarian fantasty land that will never exist except in poorly written works of fiction .

BTW John Galt was not a real person he too is a work of fiction .

Grits is right. Bussiness people have to be held acoutable for thier behavior . Just like the averge citizen is. In TX you are held more than acoutable with the excessive sentances TX loves to dole out ,

Maybe These "nice bussinmen" should spend some time in a nice TDCJ or BOP " hotel " Wher they will find nothing but the finest in stainless steel accomadations .

They can also pay back what they stole to make thier victms whole as posible again

Anonymous said...

The arena of white collar and corporate crime cause more harms (deaths, injuries, lost income/ property) than all common street crimes combined.

In part this is because power economic interests get to shape the law before it becomes law in ways that keep harmful conduct from being seen, recognized or defined as crime. Yet, the harms still exist.

There is an area of criminology that focuses on white collar and corporate crime that focus on "avoidable harms" -- that is harmful conduct that may or may not be illegal but is often more destructive than commonly recognized street crimes.

Much of what has been discussed on this thread focuses on "avoidable harms" that corporations knew or should have known would or could cause harms but did nothing to avoid the harms.

All too often with these types of harms there are no laws, no officers on the beat, no courts, and no regulatory structure to minimize adverse impacts. The reason for this can be traced directly back to the ideological belief that market forces will invariably protect public interests. While this may be somewhat true of economic interests (and in recent years even this has been repeatedly disproved), it is clearly not true with respect to the non-economic arena of the society. When powerful interest can change the law before it is law to protect their economic interests at the expense of every other concern - we should not be surprised that scoundrels will abuse the freedom.

When will people matter more than the economy?

Pirate Rothbard said...

"The arena of white collar and corporate crime cause more harms (deaths, injuries, lost income/ property) than all common street crimes combined. "

Any citation?

I've seen these statistics before. If a company makes an unsafe car is it the company's fault or the consumer's? If the company did not give any false guarantees of the car's safety, I think it's the consumer. So I tend to think this statistic is baloney, but I would have to see the methodology of the report.

Anonymous said...

Pirate,

You want some sources - check out:

David O. Fredricks, 2004, Trusted Criminals: White Collar Crime in Contemporary Society. Wadsworth Publishing.

Gary S. Green, (1997) Occupational Crime. Nelson-Hall Publishers.

Stephen M. Rosoff, Henry N. Pontell & Robert H. Tillman,(2002). Profit Without Honor. Prentice Hall.

Jay S. Albanese, (1995). White Collar Crime in America. Prentice Hall.

Gilbert Geis, (2007). Masters Series in Criminology: White Collar Crime in America. Pearson/Prentice Hall.

Peter Grabosky (2006). Masters Series in Crimimology: Electronic Crime. Pearson/Prentice Hall.

Michael Blankenship (ed., 1995). Understanding Corporate Crime. Garland Press.

Maurice Punch (1996). Dirty Business: Exploring Corporate Misconduct - Analysis of Cases. SAGE Publications.

There are many, many more sources on this issue.

But just to provide an example - there are about 15,000 to 20,000 homicides each year compared to 300,000 plus deaths attributed to white collar and corporate crimes each (mostly due to deadly practices and faulty products). It may not be death by an individual but if you die because of corporate conduct you are just as dead as if had been someone with a gun.