Friday Rant: Should the Punishment for Fraud be Commensurate with Its Value?

Fraud and its perpetrators wreak havoc with business, government, society and can even -- as we've learned all too well -- disrupt the larger economy. According to D&B "on-the-job fraud cost[s] American businesses an estimated $652 billion each year. The typical occupational fraud will cost a company between $10,000 and $500,000." And that's just an estimation of direct costs. Fraud can also perpetuate incalculable damage costs toward reputation, credibility, sales and valuation. Yet incredibly, loss calculations are becoming the dominant factor in sentencing convicted white-collar offenders.

Tuesday's WSJ reported on the case of Bruce Karatz, former Chief Executive of "giant home builder" KB Home, who was convicted in April of "fraud and making false statements in connection with an options-backdating scandal ... to [attempt to] make nearly $11 million..." The Journal writes that "Under the sentencing guidelines, legal experts say, an executive of a large public company convicted of a crime like securities fraud could be sentenced to life imprisonment on a first offense." But "the U.S. Probation Office, an arm of the courts, has recommended that Judge Otis Wright give Mr. Karatz probation and eight months of home confinement." Somewhat more appropriately "the U.S. Attorney's office ... wants a 6.5-year prison sentence ... argu[ing] that confining Mr. Karatz in his '24-room Bel-Air mansion,' would suggest 'a two-tiered criminal justice system, one for the affluent ... and a second for ordinary citizens'."

James Felman, a Tampa, Fla., co-chairman of the American Bar Association's committee on sentencing is quoted saying "Loss calculations have become the single most significant driving factor in white-collar sentencing...[and] The ABA is looking at recommending guideline revisions to lessen the influence of such calculations." But despite the U.S. Attorney's suggested sentence, the Journal reported yesterday that "...Karatz was sentenced to eight months of home detention as part of five years of probation, ... 2,000 hours of community service and a $1 million fine."

At its most basic level, our legal system exists to maintain social order and administer justice that will hopefully deter criminal behavior -- the latter being of particular importance with felony fraud in business. The sentence Karatz received does neither.

William Busch

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