Fraud Claims on the Rise, but CEOs Rarely Held Personally Accountable

Entities such as pharmaceutical corporations, banks, and defense contractors will pay the government an estimated $8 billion this year to settle fraud charges under the False Claims Act, according to industry analysts.

While the growing amount of money collected from fraud settlements can be seen as a victory for taxpayers, the whistleblowers who make these cases possible and the Justice Department, one question persists; if executives are making the big decisions at these companies responsible for defrauding the government, why are they not held personally accountable for their actions like any other criminal or scam artist?

“A lot of people on the street, they’re wondering how a company can commit serious violations of securities laws and yet no individuals seem to be involved and no individual responsibility was assessed,” said Senator Jack Reed (D – RI) in a recent hearing.

Senator Reed’s concerns are shared by many lawmakers, including President Obama, who has called for greater individual accountability when it comes to fraud. Successfully prosecuting company executives involved in fraud cases, however, has proven challenging at times. At the end of July, for example, a CitiGroup manager accused of selling peculiar securities (without telling investors that the company was simultaneously betting against the securities they were selling) was acquitted of charges by a federal jury.

The Justice Department is far more likely to go after companies rather than individuals for several reasons: First, the recovery is often bigger in civil cases against a company. Second, civil cases require less burden of proof than criminal charges against an individual, and CEOs are often protected by a chain of command decisions made by people working under them. Collecting civil fines and penalties against large corporations is also much easier than trying to locate and tap into an individual’s assets. Finally, many company executives are more willing to allow their stockholders to pay the costs associated with their fraud by allowing the company to enter into a Corporate Integrity Agreement, a large fine and short supervision by the government in exchange for the government’s promise not to take any action against them personally.

The New York Times reports that to date, the Securities and Exchange Commission (SEC) has charged 55 chief executives and other senior officers for fraud during the financial crisis. So far, the government has collected approximately $2.2 billion in fines and other monetary relief.

Still, critics continue to demand stricter accountability for company executives who essentially make decisions that lead to the defrauding of the government and the American people. That will only happen when the government focuses more on punishing this misconduct and the executives who perpetrate it and less on the desire to collect fines and penalties for the government. At the very least, a balance needs to be reached forcing personal responsibility on the executives and the corporate culture they create and the government’s desire to gain the public’s attention by collecting multi-million dollar fines.

“If you are an executive, you know that the chances of getting caught are infinitely small, and the chances of getting caught and prosecuted are even smaller,” said Dennis M. Kelleher, president of financial regulatory advocacy group Better Markets.

It is time for the government to make it a more likely consequence. This will only happen if whistleblowers continue to raise the issue by filing Qui Tam False Claim Act actions and naming those who, in addition to the company, created the schemes to defraud the taxpayers.


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