WHITE COLLAR CRIME

Lecture 8: Enterprise Crime, Contrepreneurial Crime, and Technocrime (More “Hybrid” White Collar Crimes)

Hybrids of:

(1) White Collar Crime, and

(2) Enterprise Crime

or

Contrepreneurial Crime

or

Technocrime

Enterprise Crime

• Refers to the interrelated dealings oflegitimate businesspeople, political officials,and syndicated racketeers.

• Most common example: the Mafia

Substantive RICO Provisions

• What constitutes a RICO violation?

o In plain English, section 1962(a)generally makes it unlawful for a personto use an enterprise to launder moneygenerated by a pattern of racketeeringactivity.

oSection 1962(b) makes it unlawful for aperson to acquire or maintain an interestin an enterprise through a pattern ofracketeering activity.

Ex.: A stereotypical violation of section1962(b) occurs when a victimbusiness owner cannot makepayments to a loan shark. Upondefault, the loan shark says:"you're either going to die oryou're going to give me yourbusiness."

Given the threat to this life, thevictim transfers control of hisbusiness to the loan shark. Usually,the victim business owner remainsthe owner on paper but the loanshark controls the business andreceives all income from thebusiness.

Thus, the loan shark has acquiredand maintained interest or controlover an enterprise (i.e. thebusiness) through a pattern ofracketeering activity (i.e., loansharking and extortion).

oSection 1962(c) prohibits any defendantperson from operating or managing anenterprise through a pattern ofracketeering activity.

oSection 1962(d) makes it unlawful for aperson to conspire to violate subsections(a), (b) or (c) of the RICO Act.

Understanding RICO

Although the RICO Act can be used in manycontexts, the statute is most easily understoodin its intended context: the Mafia.

In the context of the Mafia, the defendantperson (i.e., the target of the RICO Act) is theGodfather.

The "racketeering activity" is the criminalactivities in which the Mafia engages, e.g.,extortion, bribery, loan sharking, murder,illegal drug sales, prostitution, etc.

Because the Mafia family has engaged in thesecriminal actions for generations, the criminalactions constitute a pattern of racketeeringactivity.

The government can criminally prosecutethe Godfather under RICO and send him to jaileven if the Godfather has never personallykilled, extorted, bribed or engaged in anycriminal behavior. The Godfather can beimprisoned because he operated andmanaged a criminal enterprise that engagedin such acts.

Moreover, under section 1964(c) of the RICOAct, the victims of the Mafia family (i.e., theextorted businessman, the employers whoseemployees were bribed, debtors of the loanshark, the family of a murder victim) can suethe Godfather civilly and recover theeconomic losses they sustained by reason ofthe Mafia family's pattern of racketeering.

As a practical matter, the closer a plaintiff'scase is to the Mafia scenario described above,the better chance the plaintiff has insucceeding under the RICO Act.

Contrepreneurial Crime

• E.g., professional criminals, career criminals

• Examples:

o“Get-rich-quick” schemes

oLand swindles

oPonzi and Pyramid schemes

The Ponzi Scheme

Carlos Ponzi

In approximately 1918, Carlos Ponzidiscovered that he could exchange anInternational Postal Reply Coupon (IRC)issued in one country for stamps to cover thecost of postage in the country of redemption.

If the values were different, there was apotential profit. For instance, an IRC could becheaply purchased in Italy and exchanged forU.S. postage stamps at a higher value. Ponziwould then sell the stamps, collecting a profiton the transaction.

Ponzi convinced friends and associates toinvest in his scheme and promised a 50%return on investments in 45 days or “doubleyour money” in 90 days. Early investors werethen paid large sums as returns, whichallowed Ponzi to attract additional investors.

Ponzi started his own company, the SecuritiesExchange Company, to promote the scheme.Ponzi hired agents and paid them generouscommissions for every dollar they brought in.

By February 1920, Ponzi's total take was$5,000 USD, a large sum for the time. ByMarch 1920, he had made $30,000. By May1920, he had made $420,000. By July 1920,he had made millions.

Ponzi was bringing in cash at a fantastic rate,but the simplest financial analysis would haveshown that the operation was running at alarge loss. As long as money kept flowing in,existing investors could be paid with the newmoney, but colossal liabilities wereaccumulating.

On July 26, 1920 the Boston Post started aseries of articles that asked hard questionsabout the operation of Ponzi's moneymachine.

The Post contacted Clarence Barron, thefinancial analyst who published the Barron'sfinancial paper, to examine Ponzi's scheme.Barron observed that though Ponzi wasoffering fantastic returns on investments,Ponzi himself wasn't investing with his owncompany.

Barron then noted that to cover theinvestments made with the Securities ExchangeCompany, 160,000,000 postal reply couponswould have to be in circulation. However, onlyabout 27,000 coupons were actually circulating.

The United States Post Office stated that postalreply coupons were not being bought inquantity at home or abroad.

The gross profit margin in percent on buyingand selling each IRC was colossal. But, theoverhead required to handle the purchase andredemption of these items, which were ofextremely low cost and sold individually, wouldhave exceeded the gross profit.

On November 1, 1920, Ponzi pleaded guilty tomail fraud, and was sentenced to five years infederal prison. He was released after three and ahalf years to face state charges. He was againfound guilty and sentenced to nine years.

Technocrime

• A subset of white collar crime in whichtechnology is used to commit illegal activity.

• Most common form: computer crime (e.g.,hacking, software piracy, sabotagingprograms)