Having It All, Then Throwing It All Away

By Stephen Koepp

Not since the reckless 1920s has the business world seen such searing scandals. White-collar scams abound: insider trading, money laundering, greenmail. Greed combined with technology has made stealing more tempting than ever. Result: what began as the decade of the entrepreneur is becoming the age of the pinstriped outlaw

J. Michael Cook is an enthusiastic collector of oxymora, among them such alleged contradictions as airline food, jumbo shrimp and postal service. But Cook, chairman of the Big Eight accounting firm of Deloitte Haskins & Sells, bristles when wags tell him about the latest one: business ethics. The unamused Cook maintains that most business people can still be trusted. Yet he admits, "We have all been embarrassed by the events that make the Wall Street Journal read more like the Police Gazette."

That is hardly an exaggeration. Not since the reckless 1920s and desperate 1930s have the financial columns carried such unrelenting tales of vivid scandals, rascally characters and creative new means for dirty-dealing (insider trading, money laundering, greenmailing). Consider these episodes, all hard to believe, all matters of record:

-- A widely admired investment banker with a yearly income said to exceed $1 million sneaks into Wall Street alleys to sell insider tips, for which he later collects a briefcase stuffed with $700,000.

-- Savings and loan officers in Texas, all with six-figure salaries and bonuses, loot their institution to buy Rolls-Royces and trips to Paris.

-- A defense contractor with $11 billion in annual sales charges the Government $1,118.26 for the plastic cap on a stool leg.

While questionable business practices are nothing new, the vulnerability of today's economy to rampant white-collar crime is setting off alarms. Particularly in the service industry, stealing has become easier than ever to pull off and to rationalize. White-collar workers are harried by competition, given new power by computers, tempted by electronic flows of cash, and possessed of a strong appetite for status symbols. Result: what began as the decade of the entrepreneur is fast becoming the age of the pinstriped outlaw, his prodigal twin. The white-collar crime wave is already spurring an antibusiness backlash, which could lead to a fresh dose of the regulations from which many industries have only recently won freedom. Says Michigan Democrat John Dingell, chairman of the House Energy and Commerce Committee: "I think the pressures on honest men have grown manifold, and they're leading them to mistakes they wouldn't have made before."

Of course, many of today's ethical transgressions go far beyond any gray area. Last week federal and New York City authorities cracked a phony tax- shelter scheme that allegedly bilked more than $115 million from at least 2,500 investors, including Comedian Eddie Murphy. The accused ringleader was John Galanis, 44, a hefty ex-con who managed to build a reputation as a financial wizard by spending lavishly on parties, automobiles and homes.

A day after Galanis was rounded up at his posh beach house in Del Mar, Calif., Wall Street's insider-trading drama again burst into the headlines when prosecutors suddenly sought to drop charges against three defendants -- Robert Freeman, Richard Wigton and Timothy Tabor -- who had been scheduled to face trial this week. U.S. Attorney Rudolph Giuliani claimed that his prosecutors have found a much wider conspiracy and intend to come back to court soon with new charges against the same men and others. But the defendants, who were handcuffed last February while Wall Streeters watched agape, said the move shows that the Government has a weak case and should never have arrested them in the first place.

Giuliani's hesitancy marks the first setback, perhaps only a temporary one, in the historic insider-trading crackdown that began a year ago last week with the arrest of Investment Banker Dennis Levine, who is now serving a two-year sentence in the federal penitentiary in Lewisburg, Pa. In most cases the threat of going to prison, even one with a tennis court, has inspired accused insiders to squeal on their colleagues. Levine got a relatively light term for his cooperation in bringing down Arbitrager Ivan Boesky (sentencing: Aug. 21), who in turn fingered Investment Banker Martin Siegel (June 11) and others. To some observers, the Wall Street criminals are worse than many industrial scoundrels of the past. At least the fabled robber barons of the 19th century left a legacy of railroads and successful industrial companies; today's financial crooks are only paper shufflers and money changers. Critics think ! they will be far more socially productive now that they are making license plates and furniture.

Yet Wall Street does not have a corner on the greed industry. White-collar crime is as diverse as the economy, ranging from income tax evasion to false advertising, from check kiting to boiler-room operations that sell nonexistent gold. While common street crime costs the U.S. an estimated $4 billion a year in losses, white-collar lawbreaking drains at least $40 billion -- and probably much more -- from corporations and governments, not to mention millions of consumers and taxpayers. Marvin Warner, a financier and former Ambassador to Switzerland, was sentenced in March to 3 1/2 years in prison for his role in the collapse of Cincinnati's Home State Savings Bank, which forced the temporary closing of 70 other thrift institutions in Ohio and cost that state an estimated $226 million. Business crime is just as insidious on a small scale: two tow-truck operators in New Jersey were convicted last year for pouring oil on a freeway ramp to cause accidents and boost their business.

Why a sleaze wave now? To some extent, it represents the dark side of President Reagan's emphasis on the free market and individual enterprise. A few entrepreneurs simply go too far. Says James Gattuso, a policy analyst for the Heritage Foundation, a conservative think tank: "We have more capitalism now, and it isn't always pretty." But Reagan deserves only part of the blame for America's current swing toward materialism, which has no doubt driven many status-crazed professionals over the line to meet the bills on their platinum cards.

If greed is the main motivator in the surge of white-collar crime, pressure to perform also plays a part. Many individuals and companies feel much more competitive stress these days. The flood of baby boomers into the job market has created a crowding effect as they squeeze toward the top. Observes Thomas Mulligan, an adjunct professor at the Duke University business school: "Unethical behavior is more the result of being too focused on their task than an overt intent to do something evil." At the same time, deregulation of industries from banking to broadcasting has made companies feel compelled to cut corners to keep up with rivals. Several U.S. airlines, notably Continental, have been accused of endangering passengers by cutting back on maintenance, a charge the carriers deny.

In any event, some of the worst ethical violations often result from the absence of conscientious naysayers rather than the presence of individual culprits. Manville's huge asbestos output and A.H. Robin's production of the tiny Dalkon Shield intrauterine device, both health hazards, might have been stopped earlier if employees had been encouraged to voice their misgivings. But whistle blowing is usually a high-risk business. Says Richard Boland, professor of accountancy at the University of Illinois: "People who try to ask the embarrassing question have a very, very dismal record in succeeding in their later careers."

Management experts think ethics should start at the top. That may have been what General Electric officials had in mind last week when they shook up the management at GE's Kidder Peabody investment division in the wake of insider- trading charges against two former employees and a third employee who is now suspended. Ralph DeNunzio, Kidder's chief executive for the past ten years, was ousted in favor of Silas Cathcart, former chairman of Illinois Tool Works, in a move that may be designed to inject a dose of heartland ethics into the Wall Street firm.

Already a new tide of more positive peer pressure appears to be coming to bear on the wayward Wall Streeters. Overreaching investment bankers are now widely lampooned for their herdlike compulsions, even their telltale yellow ties and red suspenders. Wrote Journalist Ron Rosenbaum in a blistering essay in Manhattan,inc., a business magazine: "Throw them out, fellas. Wearing red suspenders these days is like wearing a sartorial scarlet letter that says: I BELONG TO A SHAMEFUL PROFESSION. I AM PROBABLY A CROOK." Another possible sign of change: hardly anyone seems interested anymore in the Parker Bros. board game called "Go for It! The Game Where You Can Have It All." Last week one store in Manhattan slashed the price of that fantasy from $13.49 to $3.

With reporting by Harry Kelly/Chicago and Raji Samghabadi/New York