How Feds collar white-collar criminals. Zeroing in on defense firms, brokers, insiders requires fresh, tight cases

If Bonnie and Clyde were here today, they might well be wearing pin stripes. With an average take of $3,300 a heist, robbing banks the old way doesn't pay anymore. But elaborate fraud schemes, that's another matter.

Take E. F. Hutton & Co. During a 20-month period the brokerage firm earned millions in extra income by systematically overdrawing its checking accounts. Hutton pleaded guilty to 2,000 counts of mail and wire fraud May 2 and is paying a $2 million fine, plus $750,000 to cover the cost of the government investigation. Hutton estimates it may have to pay up to $8 million to the defrauded banks, but the Justice Department thinks the figure will be much higher.

Less than a week after the Hutton settlement, former Deputy Defense Secretary Paul Thayer was sentenced to four years in prison and fined $550,000 for covering up an insider-trading scheme that may have netted associates $3 million.

And a week ago, General Electric pleaded guilty to defrauding the government of $800,000 on a Minuteman missile contract and was fined the maximum penalty of $1.04 million. Two days later, a House committee challenged $109.8 million in billings by seven defense contractors.

These illustrate three fertile areas for corporate crime today: finance, insider trading, and defense contracts. Attorney General Edwin Meese III has announced an all-out war, stating that ``white-collar crime will not be tolerated.''

But government bloodhounds have more trails of business crime than they can possibly follow, so they are being selective. Despite some celebrated cases, this selectivity has raised questions about whether this government, which has tapped several Fortune 500 board rooms for its talent, is serious about prosecuting corporate crime.

``The business world sees itself operating in a favorable environment,'' says Michael Murray, a lawyer and professor at De Paul University in Chicago. Business people ``are adopting a cavalier attitude, thinking they won't be prosecuted. That is a misconception.''

Rather than pulling in its claws, the government, and specifically the Securities and Exchange Commission (SEC), the most aggressive of the watchdog agencies, is ``drawing the lines more narrowly in what it chooses to go after,'' says Theodore Levine, a former associate director of the Enforcement Division at the SEC, which polices the stock and bond markets. Mr. Levine now defends clients prosecuted by the commission.

Before the 1980s, he says, the SEC took a broader view of its authority, because the courts were more liberal in interpreting securities laws. With today's more conservative courts, SEC lawyers ``go after the `core' violations, and fewer cases on the edges'' of the securities law. ``To maximize the effectiveness'' of those cases, he says, ``the SEC tries to get as tough a conviction as possible.''

The Justice Department has a stated list of priorities within the area of white-collar crime. According to William Weld, US attorney for Massachusetts, these include fraud against the government, especially the Defense Department, in which the government is billed for work not done or receives shoddy goods; securities fraud, particularly insider trading (using information that is not available to the public about, say, an impending merger); ``boiler room'' commodities sales operations (using high-pressure tactics to sell products over the telephone); narcotics and money laundering; and bank fraud.

But some priorities are more equal than others, and the kinds of business crimes the government focuses on often fluctuate with public opinion -- and sometimes with the government's perceived excesses.

During the Carter years, a period of generous welfare payments, prosecuting welfare fraud was a top priority. Under the Reagan administration, which has built up the military while trimming other programs, defense contractors have come under the microscope. As banks feel their way in a new deregulated world, and as some collapse, lawyers have started to tackle bank fraud. Amid the blizzard of hostile takeovers, government prosecutors are cracking down on insider trading.

The SEC's priorities weigh in as heavily as the Justice Department's, analysts say. Because the SEC can investigate any company whose stock is publicly traded, its influence is widely felt. Under Stanley Sporkin, the SEC went after, among other things, management fraud in Fortune 500 companies, says Susan Shapiro, a New York University professor and author of ``Wayward Capitalists: Target of the Securities and Exchange Commission.'' Today, under the guidance of John Shad, the SEC is hunting down insider trading. It's ``looking for the individual bad apple and making less trouble for the large corporations,'' she says.

Ms. Shapiro attributes the shift in part to personal priorities. ``My sense is that [Mr. Shad] finds insider trading reprehensible. It's a symbolic issue,'' she says. She points out that Shad, who worked at E. F. Hutton before taking over the SEC in 1981 (during the interest abuse), knows firsthand that ``the [stock] market has to be based on fairness.''

When funds for staff and investigations are limited and caseloads grow heavier, selective enforcement becomes a fact of life. Between 1974 and 1984, the number of cases received by US attorneys' offices jumped 77 percent, to 135,000, according to the federal budgets for fiscal years 1976 and '86. But the staff in those attorneys' offices increased only 42 percent in that time.

The situation is more dramatic at the SEC, according to a March report by the General Accounting Office. As trading on the New York Stock Exchange tripled between fiscal years 1977 and '83, so did the chances for securities violations, the SEC says. During the same period, the staff in the Enforcement Division shrank by 3.6 percent. This division investigates such activities as insider trading, market manipulation, and sales of unregistered securities.

Given a desk overflowing with cases, which ones does an investigator at a regulatory commission light on?

Shapiro, who spent a year working at and studying the SEC for her book, says there are often two criteria: how fresh the case is, and how much evidence the investigator has to go on. The average SEC case has been going on for a year and is stale; the two companies have already been merged, for example, and the insider traders have already made their money. If possible, she says, ``the SEC goes after cases where they can nip the crime in the bud and actually save people money.'' And to move quickly, the investigators need strong evidence in hand.

Since regulatory commissions such as the SEC cannot prosecute criminal cases, they must hand them over to the Justice Department. This encourages some self-screening by the agencies. ``If the agencies know we're interested in certain areas, they'll look at the area more closely,'' says US Attorney Weld. ``They'd be foolish to give us cases'' that are out of that sphere of interest, he says.

Government lawyers may choose to go after large companies to get more bang for the Justice Department buck. While the publicity aroused by going after the likes of the Bank of Boston is not an end in itself, Weld says, ``general deterrence is a legitimate form of law enforcement.''

While there is more evidence of corporate crime, it is difficult to say whether there is more of it.

``There's a lot more prosecution and defense activity,'' says Stanton Wheeler, a Yale Law School professor editing a Yale series of studies on white-collar crime. ``Whether that is a result of a higher incidence of crime is unclear.''

What is clear, however, is the three major areas that are feeling the government's close gaze: finance, insider trading, and defense contracting.

The most recent headline-grabber is E. F. Hutton. By overdrawing its checking accounts at some 400 banks from July 1980 through February 1982, Hutton obtained the use of some $10 billion without paying interest. This resulted in millions of dollars in extra income.

Whether intentionally or not, Hutton's bonus policies encouraged this kind of scheme. Employees received bonuses not only for income from brokerage sales, but also for interest income.

Hutton's reputation has been tarnished. But the $2.75 million fine and the $8 million or more in restitution to the defrauded banks will not send the $2.8 billion brokerage into bankruptcy. As for the personal penalty, it is thus far small or nonexistent: Though government prosecutors said there were some 25 people involved in the Hutton scheme, no individual has yet been named.

Another pillar of the business community to be disrupted is the Bank of Boston. The nation's 16th-largest bank pleaded guilty Feb. 7 to a felony charge of ``willfully and knowingly'' failing to report $1.22 billion in cash transactions, incurring a $500,000 fine, the largest ever meted out for a currency law violation.

Since the Bank of Boston ordeal, the Treasury Department has received letters from 30 to 40 banks reporting past currency transaction violations, says Robert Stankey, financial crime and frauds adviser at the department. The White House is doing a little more arm-twisting. Last week it said it would propose legislation to combat money laundering which would include 20-year prison terms and multimillion-dollar fines for individuals.

The tremors going through the banking industry -- the collapse of government securities firms such as E.S.M. and banks such as Penn Square -- have also galvanized government investigators.

After a 15-month investigation of the banking industry, a congressional subcommittee concluded that half of all bank failures between 1980 and '83 were caused by criminal activity by insiders (officers, directors, and insiders at the bank or savings-and-loan institution). ``But unless a bank fails, insiders aren't prosecuted,'' a congressional aide says. ``Banking agencies don't even take civil action against them.''

In an era of financial deregulation, government regulators have generally left financial institutions alone, figuring they should let the board of directors run its own business. And given its workload, the Justice Department has no incentive to investigate questionable banking practices. This may be changing, as last week's hearings indicate.

Unlike most business crime, it is difficult for an inside trader to hide in the anonymity of a corporate cloak, as with Hutton and the Bank of Boston.

The sums of money and personalities involved with such crime often give it a glamorous mystique. The world watched as the layers of Paul Thayer's private life -- which involved leaking corporate secrets when he was chairman of LTV Corporation and having a ``private personal relationship'' with a former LTV receptionist -- were unpeeled by the media. Top political and business leaders -- including former President Ford -- rallied around Thayer, urging the judge to be lenient. Though Thayer had already agreed to pay $550,000 in restitution, the judge gave him an unexpectedly stiff sentence to serve as a deterrent to others.

Thomas Reed, a former Reagan national-security official, faces charges of securities and wire fraud for allegedly using insider information from his father to parlay $3,000 into a $431,000 profit in two days.

Dr. Murray at De Paul University says that these abuses and the public demand for a crackdown are only the tip of the iceberg. The American people became disillusioned with the military during Vietnam and with government during Watergate, and now they are turning their gaze on business.

In the defense field, critics of military spending got a whole new magazine of ammunition last week. The House Armed Services Committee questioned $109.8 million worth of billings, including a $11,750 bill by Boeing for sponsoring the World Paper Airplane Championship and a $12,333 bill by Rockwell International for costs of two seats at the Los Angeles Forum, claimed in part as a legitimate business expense tied to improving employee morale.

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