A lesson from not prosecuting the banks

Anyone who's been awake the past five years knows that the U.S. experienced its worst economic recession since the 1930s as a result of fraudulent manipulations by investment banks and other financial institutions. Equally galling has been the lack of criminal action against these Wall Street fraudsters by Barack Obama's Justice Department. Recently U.S. District Court Judge Jed. S. Rakoff denounced the feds for this omission (see here). While Judge Rakoff makes a worthwhile case with respect to the banks, his article also sheds light on public policy concerning pharma.

by Daniel R. Hoffman, Ph.D.

Published Dec. 31, 2013, 6:00 a.m. ET

According to Judge Rakoff, the Department of Justice (DOJ) has periodically invoked three excuses for not criminally prosecuting banking executives. The first two involve organizational matters peculiar to the DOJ such as the Bush administration advancing its plutocratic agenda for the country by literally decimating Justice's financial fraud staff, reducing it from 1,000 employees to 120. That goal of catering to the corporate rich was also augmented by moving responsibility for financial fraud prosecutions out of Washington to regional offices that lacked adequate expertise in those complex matters. Judge Rakoff does little to rebuke the Bush administration for its duplicity in these matters, perhaps because the Obama administration for the longest time did nothing to reverse its predecessor's policies.

Judge Rakoff then exposes the flimsiness of the Justice Department's third excuse for inaction and this one has direct application to pharma.

The federal government under both the Bush and Obama administrations decided to coddle the biggest financial institutions in the belief that their commercial banking arms would help lift the economy out of recession by continuing to lend money to businesses and individuals. If the executive branch and the Federal Reserve ever truly believed that, their faith was soon exposed as groundless when they pushed taxpayers' money on the banks, interest-free. The banks then refused to lend the money and, instead, used it to buy government bonds.

As part of this hope and supplication policy, the Justice Department shifted its approach away "from prosecuting individuals in favor of corporations in the belief that it would be easier to change corporate culture." As applied to banks, Judge Rakoff considers that nonsense, but the same thinking characterizes DOJ's approach to pharma.

In Judge Rakoff's words:

"An accused corporation can negotiate a settlement, pay a fine, promise not to sin again, then pass along the costs to consumers and shareholders and maybe fire a subordinate executive or two for public relations value. Meanwhile, the individuals responsible — who most benefited from willful ignorance — pay no penalty for their crimes."

One objective of any criminal prosecution lies in deterring others from committing similar violations. On this matter Judge Rakoff argues that the deterrent value of successfully prosecuting senior executives far outweighs the benefits from getting companies to impose "internal compliance measures that are often little more than window-dressing."

He also claims that going after a company makes no sense because prosecutors cannot win a conviction without proving beyond a reasonable doubt that "some managerial agent of the company" committed the crime. If that is provable, Judge Rakoff then finds it totally illogical not to indict the responsible managers.

Considering matters of plain ethics aside from jurisprudence, the Judge writes that "punishing a company and its many innocent employees and shareholders for the crimes committed by some unprosecuted individuals seems contrary to elementary notions of moral responsibility."

Substitute pharmaceutical companies for banks and Judge Rakoff's admonitions apply equally well. In 1999 the pharmaceutical industry paid approximately $100 million in penalties to federal and state governments for its various violations. By 2006, penalty payments for the year rose to almost $4 billion. In 2009 they were approximately $4.5 billion. Between November 2010 and mid-July 2012, industry financial settlements totaled $10.2 billion "with the first half of 2012 alone...representing a record year for both federal ($5.0 billion) and state ($1.6 billion) financial recoveries." (See here.)

So even though the amounts of fines and penalties have increased, neither the number of pharma's violations or their seriousness has declined. Pharma has just refined the form and style of its transgressions. For example, while routine palm greasing of U.S. physicians by reps has apparently waned, higher-level personnel at various companies started regularly bribing physicians, hospital administrators and health ministry officials in China. The situation is reminiscent of Lincoln Steffens' comment that the outcome of his muckraking was mainly to teach crooked poliicians and businessmen how to commit graft more stealthfully the next time.

The point was made in a previous posting here that even prosecutions and convictions of senior pharma managers won't necessarily restore overall integrity to the industry. The relationship between criminal sanctions and behavior is not always a simple one. But if fiduciary officers are continuously subjected to criminal liability over several years, the sight of their peers doing perp walks, together with the embarrassment their wives suffer at the country club, will convince the C-suites that only strict adherence to specified standards will maintain their careers and allow the excessive materialsm of their personal lives to continue. That certain knowledge, entirely absent now, will then work its way down the chain of command.

Such is the rueful state to which pharma has brought itself. An industry based on science and medicine, one dedicated to improving the length and quality of life, requires the prosecution and jailing of its leaders to restore law abiding conduct.