Perfect Crimes, Flawed Punishment

My government employee Hero of the Week is J. Thomas Rosch, a commissioner at the Federal Trade Commission. He was the dissenter in the FTC 3 to 1 decision last week that settled its case with Facebook (Nasdaq: FB) over wrongdoing.

In November, the FTC accused Facebook of deceiving consumers by assuring them that their personal information would be kept private. What, Facebook argued, us leak any of the revealing stuff you were foolish or stupid enough to post on Facebook pages, as if you were talking to your priest or shrink? No way. Not us. You must be kidding to even think we'd do such a thing.

On examination, the FTC majority ruled the Facebook assertions of innocence were not supported by the facts. The FTC then threw the book, such as it is, at the social media company. It was required to sign a consent order saying that it would not do such a thing again for the next 20 years.

In his dissent, Commissioner Rosch said it was not enough of a deterrent to allow miscreants to get off the hook by signing such consent orders. He further raised questions about the standard "neither admitting or denying guilt," the bedrock of government settlements. "I can live with 'neither admit nor deny.' That's what we did in the old days."

But he worries about the implications: "We're inviting denials of liability in every case in the future."

His fears about the efficacy of FTC policy are justified. Why, just a day before the Facebook settlement, the FTC allowed Google (Nasdaq: GOOG) to protect its integrity by agreeing to pay a $22.5 million fine to settle charges that it bypassed privacy laws using Safari browser on Apple Inc. (Nasdaq: AAPL) computers. It turns out Google was violating a 2011 consent decree with the FTC in which it agreed not to do that sort of thing again.

"The commission has allowed Google to buy its way out of trouble for an amount that probably is less than the company spends on lunch for its employees with no admission it did anything wrong," observed John Simpson of Consumer Watchdog.

Letting companies settle while not admitting nor denying guilt -- the equivalent of a "Get out of Jail Free" card in Monopoly -- is a privilege not only exercised by little fish like Facebook and Google. The Justice Department, for example, allowed GlaxoSmithKline to pay $2 billion to settle civil charges it had swindled the government in drug sales. In corporate jurisprudence, this is known as the "We Are Not Guilty, Of Course, But We Are Paying the $2 Billion Anyway Defense."

Reading the papers these mornings, the law appears to be flouted so regularly it would seem we are in the midst of a financial crime wave. Even a tsunami. Banks are being accused of laundering money for terrorists, interest rates are being manipulated, multi-billion dollar trading losses are occurring, and investors are being hoodwinked by respected pillar of the financial community.

Government regulatory agencies are like one-armed paperhangers trying to keep up with alleged infractions as alleged perps are laughing all the way to the bank.

As a result, our watchdogs appear to bee less like Cerberus than lap dogs.

Clearly, the deterrents are not strong enough. Why not jail time? It often serves as an inducement to follow the laws with people.

Corporations are people, according to the Supreme Court in the Citizens United decision. Treating them as people not only in protecting freedom of political expression but in respecting the law might be another way to exercise another duty of citizens.

In the past, I have recommended, say, a three-day weekend at New York City's beautiful Riker's Island as a possible way to make miscreants think twice or three times before violating our laws.

Today I am going out on a limb with a better idea. Why not use a federal facility to incarcerate corporate law-breakers? Not the Club Feds, but another under-utilized correctional institution. Gitmo currently has a high vacancy rate.

Who at a corporation would go to Guantanamo Bay to serve the time for breaking the laws of the country? The obvious choice is the CEO or whoever is behind the desk where the buck is supposed to stop. If no one voluntarily agrees to take one for the company, the drawing of straws has worked in the past.

This may not be exactly what Commissioner Rosch had in mind, but a stretch up the river would be more of an argument for encouraging adherence to the law than consent decrees or fines.