(Test Bank) Profit Without Honor White Collar Crime and the Looting of America

Rosoff, 7

Criminology & Criminal Justice

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7th Edition

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3 CONTENTS Chapter 1 Introduction 1 Chapter 2 Crimes against Consumers 11 Chapter 3 Unsafe Products 19 Chapter 4 Environmental Crime 27 Chapter 5 Institutional Corruption: Mass Media and Religion 38 Chapter 6 Securities Fraud 44 Chapter 7 Corporate Fraud 54 Chapter 8 Fiduciary Fraud 63 Chapter 9 Crimes by the Government 72 Chapter 10 Corruption of Public Officials 81 Chapter 11 Medical Crime 89 Chapter 12 Computer Crime 97 Chapter 13 Conclusions 105 4 Chapter 1 Introduction CHAPTER SUMMARY On April 25, 2008, a group of mostly wealthy men gathered at Greenwich Village restaurant for an evening of food, fun and wine – lots of high quality wine. The occasion was an auction of fine and rare wines, some of the best in the world, sold at prices that reached as high as $42,000 a bottle. The seller of the wines was a mysterious young man named Rudy Kurniawan who lived in California but who was thought to be from a wealthy family in Indonesia. He was a young entrepreneur who had burst onto the wine scene in the early 2000s and quickly became a major player in the rapidly growing market for fine wines. Everything began to change for Kurniawan after a 2008 auction when his wines were pulled. One of the major clues of the fraud? The adhesive used to label an 1857 bottle of French wine was Elmer’s glue, which was first produced in 1947. The FBI raided his home and found thousands of fake labels, hundreds of old and new corks, and rubber stamps with vintages and chateaux names of old wines. Kurniawan was eventually convicted in a Manhattan criminal court and in 2014 he was sentenced to 10 years in prison. Rudy was clearly a fraudster for our times and it seems as if we live in a world of “fakes”. This book surveys the forms, causes, and consequences of white-collar crime. THE HISTORY OF A CONCEPT The term “white-collar crime” was first used by Edwin Sutherland in 1939. Sutherland argued that this type of crime differed from other crimes in the administrative procedures used in dealing with offenders. He defined white-collar crimes as those committed by persons of respectability and high social status in the course of their occupation. Sutherland went on to state that, because of the political and financial power of white-collar criminals and the use of alternate response mechanisms, information on these crimes was lacking. The data that was available suggested that white-collar crime was far more costly than street crime. Sutherland’s recognition of the extent of white-collar crime forced a reexamination of the common theories for crime commission. Sutherland’s remarks came at a time when the United States had moved from a rural, agrarian society to an urban, industrial one dominated by powerful corporations. Journalists referred to as “muckrakers” were beginning to examine abusive corporate practices, and Congress had legislated against monopolistic practices. The Sherman Antitrust Act of 1890 was enacted to stop companies from fixing prices or pooling their operations under a single administration in order to eliminate competition. The corporation that came to symbolize the strategic use of mergers and trusts was the Standard Oil Company, headed by John D. Rockefeller. He ruthlessly destroyed competition and created an empire that controlled virtually the entire American petroleum industry. 5 The Roaring Twenties were a bonanza for white-collar crime. The feeding frenzy unleashed aby an exploding economy attracted bold predators. Ponzis Charles Ponzi had been an inept petty thief in his native Italy. His parents shipped him across the Atlantic to be rid of him and he settled in Boston in 1911. In 1919 he announced that his Financial Exchange Company of Boston would guarantee an incredible 50 percent return to investors within 45 days. He persuaded 20,000 investors to give him nearly $10 million. The secret of Ponzi’s smoke screen was that he paid off early investors with new investors’ money, thereby attracting more and more investors. “Ponzi” or pyramid schemes emerged. These schemes involved the payment of early investors with money from later investors. Ponzi schemes are still alive and well in the 21st century as evidenced by the proliferation of spam offerings on the Internet. The case study of R. Allen Stanford presents a modern example of the Ponzi scheme. Stanford was the founder of the Antigua-based Stanford International Bank, which in a relatively short period of time had sold over $8 billion in CDs to investors from all over the world. Stanford was a Texas native, owned a cricket team in Antigua, sponsored an international cricket tournament with a grand prize of $20 million, and was made a knight by Queen Elizabeth for all of his good deeds. Then federal agents raided his Houston home in February 2009 and sealed it off as a crime scene. The same day, the SEC filed suit against him alleging that he had “executed a massive Ponzi scheme” that resulted in losses of $7 billion to clients. Stanford was convicted on criminal charges. In June 2012 he was sentenced to 110 years in prison and his victims claimed the disgraced banker was guilty of “financial terrorism.” In October 2011, Nicholas Cosmo, of Long Island, New York, was sentenced to 25 years in prison for operating his firm, Agape Inc., as a Ponzi scheme. Prosecutors claimed he stole over $400 million from investors from all over the world who believed his promises of double-digit returns on their investments The Great Depression The Great Depression and its populist antiauthoritarian sentiment gave way to two decades of conformity and public confidence in the guidance of corporate America. The faith in corporate America was misplaced. Events in the late 1960s and early 1970s would make Americans suspicious and skeptical of private and governmental organizations. Scholarly focus on white-collar crime also increased. The 1980s spawned white-collar crimes of epic proportions. The case study of Barry Minkow, a 16-year old Los Angeles high school student who came to be known as “The $80 Million Kid,” describes the poster child of the greed decade. Minkow used a variety of criminal techniques to create a false impression of a successful company called ZZZZ Best. Shortly after his 21st birthday, Minkow met with Drexel Burnham Lambert, a Wall Street firm that agreed to promote an $80 million junk bond sale. Fortunately for investors, not long after that a Los Angeles Times article exposed Minkow. He was found guilty on 57 counts of criminal wrongdoing and sentenced to 25 years in federal prison. 6 Tax Fraud Tax fraud and embezzlement were problems made public during the 1980s and 1990s. The imprisonment of U.S. Treasurer Catalina Vasquez Villalpando on tax fraud charges is symbolic of the white-collar crimes during these decades. In 2005, KPMG, the nation’s fourth largest accounting firm, admitted to criminal wrongdoing and agreed to pay a $456 million fine for selling fraudulent tax shelters that helped wealthy clients evaide $2.5 billion in taxes in the 1990s. CASE STUDY “Prell for Ponies” A memorable scam in the 1990s involved horse-hair products. In the case study “Prell for Ponies,” Roger Dunavant sells his horse shampoo to people for human use. His partner Devon Katzev would eventually take exception to Dunavants tactics and use of company funds and sue him. “Breaking the Bank” is an illustration of bank officers’ and owners’ willingness to cheat friends, neighbors, and other bank customers. In the case study “Russian Roulette,” the tragic events of September 11 made public another tragedy—investors in First Equity Enterprises had nothing to show for their money. Measuring White-Collar Crime This is very difficult; definition is a problem, and so is the fact that most white-collar crime is never reported. Official recordkeeping was lacking because of the belief that white-collar crime was not as serious as street crime. Researchers have been forced to develop their own data collections. Researchers such as Sutherland (1949), and Clinard and Yeager (1970s), put together cross-sectional studies reflecting white-collar crime that involved many sectors of the economy. Industry-specific studies confirmed concentration of white-collar crime in certain industries. Defense industry, securities industry, and savings-and-loan industry statistics verified these findings. The Cost of White-Collar Crime Information from victimization surveys, Chamber of Commerce studies, and Congressional committees estimate damages from white-collar crime to be in excess of $40 billion in the mid-1970s. If anti-trust violations and fraud against the federal government is included, this figure rises to $100 billion. With inflation, the cost today would be closer to $250 billion. The monetary cost of street crime is a small fraction of this figure. In addition to the monetary cost there are social, political, environmental, and human danger costs. Public concern over white-collar crime is not as high as concern over street crime. White-collar crime is more difficult to understand, and there are no clear-cut victims and villains. Is the public’s concern starting to change in America today? 7 LECTURE OUTLINE Chapter Preview Use the story of the wine auctioneer, Rudy Kurniawan, and explain how this type of white-collar crime is allowed to exist in American society. I. THE HISTORY OF A CONCEPT A. Sutherland’s Definition Review the origin of the phrase “white-collar crime.” B. Events Leading to Problem Recognition Analyze the historical context for the focus on white-collar crime. C. Ponzis Explain pyramid schemes and their variations. 1. R. Allen Stanford—Stanford International Bank 2. E-mail scams investigated by the U.S. Postal Inspection Service E. The Great Depression Discuss the effect of the Great Depression and its aftermath. F. Populist Antiauthority Distrust Explore how American perception of business evolved in the years preceding and during the Great Depression. There was a populist spirit of defiance of big business and big government; the public was openly hostile to the economic elite. G. Conformity and Public Confidence in Corporations Examine the transition from distrust in business to two decades of belief in the positive aspects of corporate America. The dominant theoretical position was functionalism. H. 1970s Cynicism Formulate an explanation for the diminishing faith in business and the legitimacy of those holding power. I. 1980s Greed Describe the reasons for the 1980s being called the “greed decade.” The excesses of this era were often attributed to a cultural shift in which Americans became dominated by unbridled material ambition. J. Case Study: The $80 Million Kid Somehow a 21-year-old kid managed to convince a major Wall Street firm to float an $80 million junk bond offering. 8 K. 1990s Betrayal The public opinion pendulum swings back to distrust of business in the 1990s. 1. Tax Fraud a. Catalina Vasquex Villalpando b. Stew Leonard, Sr. c. Paul Bekins d. KPMG/Presidio Advisory Services 2. Embezzlement L. Case Study: Prell for Ponies? Roger Dunavant convinced retailers to sell his horse products for human use and employed this use to promote a company he didn’t own. M. Case Study: Breaking the Bank A small-town West Virginia bank can’t seem to locate millions of dollars in assets. N. Case Study: Russian Roulette The tragedy of September 11, 2001, exposes another human tragedy—a business in one of the Twin Towers used the attack to try to conceal theft of $105 million. II. MEASURING WHITE-COLLAR CRIME A. Difficulties with the Definition Explore how definitional problems affect the ability to quantify the extent of white-collar crime. B. Data Availability Unlike street crime, for which there are numerous data sources, there is little readily available data on white-collar crime. Examine the reasons for the paucity of data. C. Cross-Sectional Studies Studies confirm that numerous sectors of the economy are plagued by white-collar crime. D. Industry-Specific Studies Certain industries, such as defense contractors, securities firms, and savings-and-loan operations, may have a more serious problem than other business sectors. E. Victimization Surveys Only recently has this data-collection method been used to gather information. One-third of respondents had been fraud victims. 9 III. THE COSTS OF WHITE-COLLAR CRIME A. Victimization, Chamber of Commerce and Congressional Estimates Surveys done by various organizations examining only the monetary cost of white-collar crime show that white-collar crime is financially far more costly than street crime. B. Physical, Social, and Political Costs In addition to the monetary costs, the bill for white-collar crime gets higher when the additional negative aspects of white-collar crime are tabulated. The failure of Lincoln Savings and Loan and Enron are just two examples. IV. PUBLIC PERCEPTION OF WHITE-COLLAR CRIME A. The Eye of the Beholder Public perception and reaction varies depending on nature of the offense and the identity of the offender. The public views crimes they can relate to and understand as the more serious threat. It is difficult for many to understand how to “cook the books” of a billion-dollar corporation, but they can understand how to bounce a check at their local bank branch. V. ABOUT THIS BOOK A. Overview of Chapters Chapter 2 Crimes against Consumers Chapter 3 Unsafe Products Chapter 4 Environmental Crime Chapter 5 Institutional Corruption: Mass Media and Religion Chapter 6 Securities Fraud Chapter 7 Corporate Fraud Chapter 8 Fiduciary Fraud Chapter 9 Crimes by the Government Chapter 10 Corruption of Public Officials Chapter 11 Medical Crime Chapter 12 Computer Crime Chapter 13 Conclusions MEDIA RESOURCES Greed (1924) Wall Street (1987) Money Never Sleeps (2010) Minkow (2011) 10 STUDENT ACTIVITIES AND DISCUSSION The following items are designed to be used by students for small-group or class discussion. Some are suitable for research-paper assignments or essay questions. Students may also use them for oral presentations to the class. 1. Debate the harmfulness of white-collar crime versus street crime. Consider what it means to live in a civil society and the proper role of government in society. reference to Greek, Roman, English, and American political philosophers may provide enlightenment in this discussion. 2. Consider Sutherland’s definition of white-collar crime. Break down its components and analyze the correctness of the definition. 3. Explore the cyclical nature of public opinion in regard to corporate activity. How does public opinion in this area relate to public opinion in regard to other institutions? 4. In addition to The Jungle, review books or newspaper/magazine exposés of industry practices from the early 1900s. How did these pieces lay the foundation for a more critical examination of business practices? Do writings/activities by Vance Packard and Ralph Nader help explain government focus or negative public opinion in later decades? 5. Examine the history of Amway. Why would its activities be pertinent to topics covered in this chapter? Why are they not? 6. Research the Church of Scientology. Have there been other activities of the church or its members that have drawn the scrutiny of government regulators? 7. How is it that some white-collar-crime victims never know that they have been victimized? Provide examples from personal experience or other sources. 8. Why is white-collar crime concentrated in some economic sectors? What theories of street crime causation are also applicable to white-collar crime? 9. Do statistics suggest that there is now a greater incidence of child abuse than there was in decades past. Other social scientists argue that it looks that way because of governmental and media focus. Can this same argument be used to counter the proposition that white-collar crime is concentrated in certain sectors? Why or why not? 10. What is social capital? Does white-collar crime affect the amount of social capital in a society or culture? 11. What is the cause of the disconnect between the costs of white-collar crime and the disinterested attitude of much of the public? 11 Chapter 2 Crimes Against Consumers CHAPTER SUMMARY The beginning of the chapter illustrates the unfortunate results of combining elderly, gullible senior citizens and aggressive, deceptive sweepstakes promoters. The case study “’Family’ Values” profiles the very well-known Ed McMahon Publishers Clearing House sweepstakes and magazine-subscription promotion operated by American Family Publishers. Winner notification language in big bold letters and disclaimers in lighter tiny letters in obscure locations were combined to induce senior citizens to spend thousands of dollars in magazine subscriptions and travel fares to win prizes that never materialized. When government officials and private citizens eventually took the company to task, it filed for bankruptcy protection and eventually reached a class-action settlement. “Dial F for Fraud” outlines the use of 900 or international numbers to cheat consumers. Though many legitimate companies use 900 numbers to serve customers, alleged psychics, sex talk lines, travel scams, and fake bill collectors have used 900 numbers to bilk people. Live “sex lines” now account for an estimated 5 to 10 percent of all “900” minutes logged. A particularly devious form of predation involves the unauthorized use of these “phone sex” service by minors, which reportedly is now an epidemic. The myth of the free market, and caveat emptor or “buyer beware,” work in tandem to make consumers vulnerable to unscrupulous vendors. It has become apparent that some government regulation is necessary. Crimes against consumers carry a heavy social cost. It is worth recalling that to the tiny Lilliputians of Gulliver’s Travels, fraud was considered a far more serious crime than theft and was usually punished by death. Consumer fraud, false advertising, price-fixing, unsafe products, and quackery are all categories of crimes against consumers. The category of consumer fraud includes all the schemes used to separate consumers and their money using misrepresentations or outright lies. It is a general term used to describe consumer scams that do not fit neatly into other categories. Fake adoption services, phony finance companies, worthless land-sales schemes, and disaster scams are examples of consumer fraud—all with a core of meanness to them. The number-one offenders, according to a Harris poll of consumers, were auto repair facilities. While many of the facilities were independent shops, major companies were also included such as Sears, K-mart, Goodyear, and Firestone. The recent collapse of the home mortgage market, leaving millions of homes in foreclosure, has fueled a wave of rescue scams. Crooked companies agree to help pay the mortgage but get the owners to sign a hidden deed-transfer clause. This allows the company to borrow against the equity in the home while collecting rent from the owner. Thus, the property still goes into foreclosure and the homeowner has no equity left. 12 Auto repair was the landslide “winner” in a Harris poll when it came to people believing they were deceived or ripped off. However incredible it may seem, every day of the year in auto repair shops cheat Americans out of $57 million. Telemarketing fraud is widespread and is characterized by use of the telephone to get consumers to send money to the promoter for worthless or overvalued products or services. Once again the elderly, who represent 30% of all fraud victims, are a favorite target of telemarketing scams. The elderly population has money, is too polite, and is often lonely. By using the front, the drive, and the close, the mark or victim is evaluated for monetary resources, literature is delivered, the victim gets the hard sell, and finally, the sale is closed. Reload schemes are the ultimate example of repeat victimization—the perpetrators even go so far as posing as law-enforcement officers who are going to “help” fraud victims. In “The Attack of the Toner Phoner,” Mark Suckman used a telemarketing scheme to convince a public-school office manager to send him checks totaling $2 million for nothing, forcing her to embezzle funds when threatened for accepting a gift. Invoices for nonexistent office supplies were sent to the office manager, and she was then threatened with disclosure of wrongdoing if the invoices were not paid. Those who are already suffering financially are especially vulnerable to financial telemarketing schemes where the consumer is promised credit cards, second mortgages, or home loans. Disreputable vocational schools also use telemarketing to induce potential students to take out federal student loans when in fact the school and/or training is nonexistent. Higher education in the United States has seen an increase in the last 20 years. An increase in the number of veterans with educational benefits, deregulation of online education, and technical innovations that make online instruction feasible and economical, all contributed to the dramatic growth in for-profit higher education. One of the most significant “hidden” factors was the notable increased involvement of Wall Street in the for-profit education industry. The success of Phoenix University, in particular, caught the eye of Wall Street investors. In 1994, Phoenix, owned by parent company the Apollo Group, was one of the first for-profits to “go public,” or to sell shares in the company. Within five years enrollments at Phoenix campuses went from 10,000 to 100,000. The fundamental problem, the committee concluded, was that the financial interests of the owners of for-profit colleges did not align with the educational and career interests of the students. The owners made money whether the students succeeded or not. There is nothing new about false advertising. The Federal Trade Commission has classified ads as informative, puffing, and deceptive. Deceptive advertisements make misleading or untrue claims. Manufacturers and marketers of gasoline, over-the-counter medicines, foods, pantyhose, and diet programs have been the target of criminal prosecutions for false advertising. The nutrition-product sector has been increasingly aggressive in its claims of benefits; some of these companies have been ordered to pay fines and change advertising. Consumer advocates are also very critical of ads that target children. Bait and switch is a false-advertising technique used to lure customers into an establishment using ads for products that are never intended to be sold where the customer is then urged to buy a more expensive or profitable product. 13 Case Study: Robbed By A Stagecoach: Between 2011 and 2016, Wells Fargo employees created more than 1.5 million accounts, as well as issuing more than 500,000 credit card applications without the consent of customers, which resulted in $2.6 million in additional fees to the bank. In December 2013, the L.A. Times investigated actions of Wells Fargo employees and found that they faced “ethical problems” in meeting the bank’s “performance standards.” These problems involved opening “ghost accounts” unbeknownst to customers. Federal legislation such as the Sherman Antitrust Act of 1890, the Clayton Act, and the Federal Trade Commission Act, and state antitrust legislation, has been used to control monopolistic activity by American companies. Monopolies and price-fixing activity deprive consumers of a keystone of capitalism—competition. Enforcement of antimonopoly statutes has been erratic, depending on political regime and economic climate. The Clinton years were a good example of enforcement schizophrenia. Merger mania was in full swing, and yet the country saw stiff sanctions and record-breaking fines. The biggest companies in the United States and in the world have paid fines for monopolistic practices and have continued to do business. As we learn in the case entitled “Microsoft - Macro Monopoly?,” Microsoft Corporation is one of the large companies that has faced federal prosecution for practices that harm consumers. The company is described as brutally competitive and as having employed all the robber-baron methods except dynamite. Microsoft was taken to task for “bundling” its Internet browser with its operating system. It was alleged by prosecutors that this was an effort to eliminate Netscape as a competitor. The Justice Department argued that the browser could be uninstalled and had been sold as a stand-alone product. Bill Gates testified by deposition, and some say he became the prosecution’s star witness. Judge Jackson, the presiding judge, found that Microsoft was a monopoly and suggested the antitrust version of the death penalty—breakup of the company. Judge Jackson would go on to describe Microsoft as untrustworthy, unrepentant, and a lawbreaker. Microsoft hoped for a better result on appeal, and its hopes were realized. First the United States Supreme Court refused to fast track the case, leaving the litigation to proceed through the D.C. Court of Appeals. The D.C. appellate court discarded the option of splitting the company; however, it unanimously agreed that Microsoft was an illegal monopoly. The appeal proceeded to the Supreme Court. There is an old saying about it being better to be lucky than good. A Republican administration was now in place in Washington and in charge of the Justice Department. In a 2001 proposed settlement, parties were amenable to Microsoft being prevented from restrictive license agreements with personal computer manufacturers. Microsoft would agree to provide access to application programming interfaces (APIs) to make it easier for other software manufacturers to design products that would work with Windows and, finally, an independent expert group would monitor Microsoft compliance. When the settlement was finally approved, there was no independent group but a committee of Microsoft board members. An antitrust expert described the settlement agreement as an embarrassment for the Justice Department. In the case study “Wal-Mart: Everyday Low Prices—and Practices,” the seemingly benevolent happy-faced retail giant is portrayed as anything but. Consumers may be surprised to learn that Wal-Mart does more business than Target, Sears, K-Mart, J.C. Penney, Safeway, and Kroger combined and is the largest corporation in America. With sales of $250 billion, which exceeds the 14 gross domestic product of 161 countries, and annual profits of $8 billion, it is a giant indeed. Wal-Mart sells more in one month than Home Depot, the second-largest retailer, sells in a year. Wal-Mart’s low prices come at the cost of profit, killing concessions from suppliers, some of whom are forced to close factories with the attendant job loss. Domestic manufacturers are squeezed out in favor of foreign companies. Vlasic Pickles’ bankruptcy and Levi Strauss Jeans’ closing of its last two United States plants can arguably be laid at the feet of Wal-Mart demands. Kathie Lee handbags sold at Wal-Mart are made at a Chinese factory that exhibits horrific (using American standards) living and working conditions. Some employers affected by Hurricane Katrina gave employees 90 days’ pay—Wal-Mart offered 3 days’ pay. One Wal-Mart store manager gave new meaning to the word “grinch”—he removed toys that were donated by customers from a donation box outside the store and said the toys would be returned when receipts were produced, the likelihood of which was nonexistent. The 2001 average annual salary of a Wal-Mart employee was $800 below the poverty level, leaving taxpayers to foot the bill for health care and other living expenses to which employees were entitled to because of their low salaries. Employees were instructed in company documents on how to apply for public benefits. Wal-Mart is second only to the federal government in the number of lawsuits filed against it. There have been more than 50 class-action suits by employees alleging that they were required to work off the clock, subjected to humiliating reprimands, locked in to work, discriminated against if they were disabled persons and/or females, and subjected to violations of the youth employment provisions of the Fair Labor Standards Act. Undocumented workers were locked in the store and afforded no overtime or injury compensation. The company has also been accused of aggressive antiunion activities and has made a practice of taking out life-insurance policies on low-level employees. This “dead peasant” insurance allegedly funded executive retirement plans. The airline industry and the oil industry have been favorite targets of antitrust action. In some settlement agreements, only large corporations benefited. Corporate fines and administrative sanctions have been the favored method of resolution. Bid-rigging, however, has yielded criminal sanctions. This occurs most often when governments suffer as a result of bid-rigging. An example of the foregoing is profiled in “The Great Electrical Conspiracy.” When price wars ate into profits, electric companies resorted to conspiracy and cooperation to fix prices. A major target was the Tennessee Valley Authority (TVA), when General Electric, Westinghouse, and others decided that they could make more money as winning-bid contractors for lucrative government contracts. Describing their conduct as illegal but not criminal, executives got the proverbial slap on the wrist and made self-serving justifications for their actions. Fines levied were the equivalent of a $175,000 executive being given a $3 parking ticket. No matter what the color of the collar, actions, intent, and rationalization appeared the same. The dairy industry has also been tempted to cheat the government in supplying milk to schoolchildren. The insurance industry was not immune from temptation. American International Group (AIG) allegedly conspired to fix the excess casualty insurance market. Price-gouging occurs when entities take advantage of laws, monopolies, and real or contrived shortages to demand excessive payments. This may be opportunism at its most ruthless. Cereal manufacturers have also been accused of price-fixing. The United States is the only Western nation that does not control the cost of prescription drugs. This circumstance gave Mylan Pharmaceutical Corporation the ability to charge prices ranging from $6.20 for generic to $14 for the name-brand version of the same drug. When human usage for a sheep wormer was discovered, its price 15 increased by 10,000 percent. Since 1980 the price for prescription drugs has risen three times faster than prices for other products. The average Fortune 500 company has a 4.6-% profit margin; drug companies have a 15.5 % profit margin. Nineteen drug companies agreed to pay $176 million to settle allegations of price-fixing. Drug companies argue that research-and- development costs warrant the high prices; others say that marketing expenses are included in R&D to inflate those figures. Poor people are victimized by higher prices for insurance, redlining pawnshops and the rent-to-own industry. Knockoffs of brand-name products also serve to victimize consumers. Knock Offs and Rip-Offs: A special type of price gouging involves the covert substitution of low-quality counterfeit versions of brand-name consumer products—known as knockoffs. The MGM Grand Hotel in Reno, for example, once refilled 16,000 bottles with cheaper liquor over a 14-month period between 1978 and 1979. Worse still, any unmixed liquor left untouched by customers leaving the hotel’s Ziegfeld Showroom was “recycled”—that is, poured back into the bottle for the next customer. “Some of the drinks wound up with more mileage on them than the hoofers in the chorus line.” LECTURE OUTLINE Chapter Preview Introduce students to the variety of ways consumers can be cheated. Case Study: “Family” Values Publishers Clearing House, magazine subscriptions, misleading winner notifications Dial F for Fraud 900 numbers and their potential for abuse of consumers The Myth of the Free Market Government regulation necessary to prevent cheating of consumers I. CONSUMER FRAUD A. Misleading the Public to Make Money B. Targeting Vulnerable Consumers C. Case Study: Bad “Car”ma Discuss the auto repair centers of Sears Roebuck & Company, one of the country’s biggest retailers, and why it became the target of state investigations. D. Telemarketing Fraud Review with students how the telephone is used to target the poor and elderly; worthless land, nonexistent prizes, disaster victims, fake schools. E. Case Study: The Attack of the Toner-Phoner Explain how a phony office-supply salesman convinces an office manager to pay $2 million for fake invoices and to embezzle from a school district. 16 F. …And the Poor Get Poorer Explore how consumers already in financial difficulty are promised credit cards, home-equity loans, mortgages, and worthless trade-school training for a better job. G. Case Study: Broken by Brokers Explain how scammers acquire the phone numbers of elderly people and steal money from them. H. Case Study: Chased by Chase Explain how a $3,200 credit card bill can wind up costing $10,700. II. FALSE ADVERTISING A. FTC Regulates Ads Which Predate the Advent of Network Television a. Three categories of advertisement: informative, puffing, and deceptive. b. Deceptive ad examples: Anancin pain reliever, Beech-Nut Nutrition Corporation, Carrington Foods. c. False labeling on products such as “lite,” “low sodium,” or “natural.” d. Advertising toward children has generated public outrage. B. Bait and Switch Merchants offer products they never intend to sell and lure customers to buy more expensive or more profitable items. III. PRICE-FIXING A. Sherman Antitrust Act of 1890, Clayton Act, Federal Trade Commission Act, State Antitrust Legislation B. Big Companies Fined and Continue Business as Usual Pursuit of enforcement of companies involved in price-fixing and monopolies can be determined by the political party in power. Studies report that price-fixing is most apt to occur during Republican administrations. C. Case Study: Microsoft = Macro-Monopoly? Microsoft demonstrates why free isn’t really free. D. Case Study: Wal-Mart: Everyday Low Prices—and Practices Discuss with students Wal-Mart’s fame for underpricing its competitors, and how the case study illustrates some of the tactics that makes it possible for the retail giant to do so. E. Major Industries in All Sectors of the Economy Have Been Accused of Price-Fixing 17 F. Case Study: The Great Electrical Conspiracy Show how companies manage to cheat consumers and the government by using the “join them” rather than “fight them” philosophy. G. Price-Gouging Demonstrate how natural disasters and other circumstances enable companies to take advantage of vulnerable populations. H. Knockoff Rip-Offs Look-alike products can fool consumers if they ignore the very low price. MEDIA RESOURCES The Billion Dollar Bubble (1978) Tucker: The Man and His Dream (1988) Chinatown (1974) STUDENT ACTIVITIES AND DISCUSSION The following items are designed to be used by students for small-group or class discussion. Some are suitable for research-paper assignments or essay questions. Students may also use them for oral presentations to the class. 1. Are there examples of prize scams in your own e-mails? Print the e-mail. DO NOT OPEN ANY ATTACHMENTS TO THE E-MAIL. DO NOT CLICK ON ANY OF THE WEB ADDRESSES IN THE E-MAIL. DO NOT GO TO ANY OF THE WEB ADDRESSES IN THE E-MAIL. PRINT THE E-MAIL ONLY. (See how careful we have to be.) 2. Bring three examples to class of offers that sound too good to be true. Think about direct mail, telephone, e-mail, road signs, television, and classified ads. Why do you believe the offers are too good to be true? 3. Bring examples to class of the legitimate use of 900 numbers. What can these companies do to combat criminal use? 4. Research examples of con artists taking advantage of hurricane victims. Consult the newspapers that cover the areas affected by the 2005 and 2012hurricanes. 5. Provide examples of current telemarketing scams or abuses. What can legitimate companies do to combat this? 6. Outline examples of financial or debt-service advertisements on television. Which ones do you believe to be questionable? Why? What are the costs of the public being exposed to these techniques?