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.