Featured Article

Why do they do it?

Inside the mind of the white-collar criminal

Harvard business professor Eugene Soltes is on a years-long quest to discover why topflight executives become white-collar criminals. His conversations with close to 50 convicted criminals so far have led to insights on hubris and humility — not just in them but in all of us.

Eugene Soltes was flipping through television channels late one night in 2008 when he came across the MSNBC reality show/documentary program, “Lockup,” which featured interviews with felons in prisons across the U.S. The inmates described their lives and circumstances — such as financial troubles, drug addiction and gang affiliation — that led to their brutal and violent crimes.

Soltes, a university business school professor, began to think about a different type of criminal — the white-collar variety — none of whom lived the harsh lives of the incarcerated who were profiled on “Lockup.” Many of these fraudsters lived extraordinarily comfortable lives, but their crimes adversely affected themselves, their families, employees, investors and companies. What would cause them to commit their crimes?

Driven by curiosity, Soltes began to write to several former executives who were serving sentences for fraud. He asked them the first dozen questions that came to mind. What were the most significant pressures they faced? How did the way they were compensated influence their decision making? What were their intentions once they were released?

A month later, he began to receive responses. One particularly poignant letter came from Stephen Richards, a former senior executive at Computer Associates (CA). “He sent this beautiful cursive handwritten letter joking how he doesn’t have Microsoft Word available in prison,” Soltes said during a recent interview with Fraud Magazine.

As global head of sales, Richards helped backdate contracts that clients signed after the quarters officially ended, Soltes says. Richards’ actions inflated quarterly earnings and temporarily propped up the firm’s stock price. Eight CA executives, including Richards, were convicted. “Unfortunately, the world is not black and white,” Richards wrote in his letter from prison to Soltes. “Senior managers spend most of their life in the gray regardless of their responsibility and that can be a dangerous and hard place to be.”

Soltes, now the Jakurski Family Associate Professor of Business Administration at Harvard Business School, eventually wrote a case study based on Richards’ letter that became a part of the MBA and executive education curriculum at Harvard Business School. (Academics at 60 business schools around the world now use the case study in their classes.)

Richards’ case history compelled Soltes to begin a quest to postulate theories about why white-collar criminals “did it.” He continued in earnest to correspond and visit with more than four dozen of the most senior executives who oversaw some of the most significant corporate failures in history, including Bernie Madoff; Andrew Fastow, Enron’s former chief financial officer; Allen Stanford, former chairman and CEO of the Stanford Financial Group; Sam Waskal, the former CEO of ImClone Systems; and Dennis Kozlowski, former CEO of Tyco.

The results of the prison correspondence and visits plus Soltes’ research on white-collar criminology resulted in his 2016 book, “Why They Do it: Inside the Mind of the White-Collar Criminal” (PublicAffairs). Soltes was a keynote speaker at the 28th Annual ACFE Global Fraud Conference, June 18-23.

Contract date pre-printing

Soltes writes in his book that Richards, the global head of sales at CA, would often sweat out the last days of each quarter because customers would wait until the last possible minute to try to get the best deals. But that would place tremendous pressure to sell millions of dollars of product in a short amount of time. Expected earnings and bonuses were riding on Richards’ efforts.

So, Richards and his sales force would prepare each impending contract by writing on the signature pages the company name, and the name and title of the person who’d be signing, and leave the signature box blank. They’d also stamp a date onto the contract, but it wouldn’t actually be the day the contract eventually would be signed.

“From my perspective,” Richards says in Soltes’ book, “the preprinting of dates was nothing more than a subtle reinforcement to the customer that something needed to happen before a particular time.” However, Soltes says, in preprinting the dates, Richards and his sales people effectively eased the end-of-quarter rush by artificially extending the quarter to include several additional days.

Eventually, millions in CA revenues were attributed to earlier quarters, earning targets were met or exceeded and the company’s stock price shot upward. “This is nothing more than a timing issue,” Richards was quoted in Soltes’ book. “I didn’t feel that I was doing anything wrong.” However, the Securities and Exchange Commission did. The agency said that from Jan. 1, 1998 through Sept. 30, 2000, CA prematurely recognized more than $3.3 billion in revenue from at least 363 software contracts that CA, its customer or both parties hadn’t yet executed, in violation of Generally Accepted Accounting Principles. In 2006, Richards was sentenced to seven years in jail. He served 44 months.

When we’re surrounded by people that have the same views and opinions, we’re less likely to actually have that dissonance.”

Some of the students in Soltes’ classes who studied the Stephen Richards’ case, many who are already business people, harshly criticized Richards for the ease in which he’d succumbed to institutional and market pressures. “Others appreciated that what he did was wrong but also imagined themselves facing similar challenges in their own careers,” Soltes writes. “It was easy to rationalize why Richards deserved to be punished for breaking an accounting rule, but whether a sales contract was dated Friday or Monday didn’t create a strong feeling of anger or indignation among many students. There was an uncomfortable disconnect between what all intuitively felt and what we intellectually believed was right and wrong,” Soltes writes.

Soltes, during his research, found some early criminologists who argued that criminality stemmed from psychological aberration, overconfidence, stress, greed or ambition, but he felt they offered little concrete evidence or support. He knew he had to dig deeper.

Over time, as Soltes interviewed more white-collar criminals, he says he realized that they failed to see the personal and professional consequences of their choices because they never deeply felt that their decisions were harmful to themselves or others. Richards, for example, felt that his backdating was actually helping his company. Soltes says that because they didn’t perceive this harm, they’d have little reason to pause and reconsider their courses of action.

He says that stealing money from a victim’s wallet involves a high degree of intimacy. But executives who manipulate corporate conduct never need to get close — physically or psychologically — to their victims. The victims of financial crimes often remain distant. Modern “arms’ length” transactions, Soltes says, have made it perilously easy to wander into Richards’ “gray zone” between right and wrong.

Uncomfortable dissonance

Soltes says that when you’re driving on the highway you might speed up to pass some cars and glance down at the speedometer and see that you’re going 75 miles per hour — 10 miles over the speed limit.

You probably won’t take your foot off the accelerator unless your spouse reminds you you’re speeding, you pass an accident or a police car is parked on the side of the road up ahead. It takes some kind of uncomfortable dissonance — an external influence or event that conflicts with your intuition — to motivate a behavioral change, Soltes says.

Executives, like freeway drivers, need to experience some dissonance “to stimulate a reevaluation of their initial intuitive judgments,” he says. Dennis Kozlowski, the former CEO of Tyco, was convicted for embezzling nearly $100 million by inappropriately forgiving loans owed to Tyco. In Soltes’ book, Kozlowski described how infrequently he experienced such dissonance as chief executive.

“When the CEO is in the room, directors — even independent directors — tend to want to try and please him,” Kozlowski says. “The board would give me anything I wanted. Anything.

“We believed our own press. … With myself and others — even the board — you become consumed a little bit by your own arrogance, and you really think you can do anything,” Kozlowski says.

Soltes believes that executives — actually anybody — would do well to periodically take the “spouse test.”

“Find someone that you respect deeply and that you can have an open conversation on a regular basis … to just describe what you’re doing, what you are working so hard for day-to-day,” Soltes says. “And if that person is able to say that’s the kind of person I respect, and I’m applauding what you’re doing — that’s the best check. You need someone that can push back on you.”

Barring the spouse test, executives need to be surrounded by people of diverse backgrounds and viewpoints, Soltes says. “When we’re surrounded by people that have the same views and opinions, we’re less likely to actually have that dissonance,” he says. “And therefore, we’re going to comfortably proceed without really taking a step back. That dissonance, when it rises, forces us to take a second look at something.”

Ben Horowitz reaches outside the bubble

In his book, Soltes focuses on Ben Horowitz, a prominent venture capitalist in Silicon Valley, and how he’d have become complicit in a backdating scheme had it not been for a discussion with an outsider — a little uncomfortable dissonance.

Moral hubris is a remarkably easy trait to acquire and not realize when one actually has it.

In 2002, Horowitz hired a talented chief financial officer who advised him to optimize stock option incentives for providing maximum benefit for its executives. Horowitz told Soltes that his new CFO had reported “that her previous company’s practice of setting the stock option price at the low during the month it was granted yielded a far more favorable result for employees than ours. She also said that since it had been designed by the company’s outside legal counsel and approved by their auditors, it was fully compliant with the law.”

However, before implementing the new plan, Horowitz discussed it with his general counsel, who told him, “I’ve gone over the law six times and there’s no way this practice is strictly within the bounds of the law.”

Two years later, Horowitz’s CFO was implicated for incorrectly recording the date that she and other executives received their options during her previous job. Soltes says she served nearly four months in prison for tax evasion related to the fraudulent backdating and was barred from serving as an officer or director of a public company. “The only thing that kept me out of jail,” Horowitz explained to Soltes, “was some good luck and an outstanding general counsel and the right organizational design.”

Soltes says Horowitz was “a brilliant individual but realized that his intuition might not always be perfectly on target when it came to finance and accounting decisions. He was smart enough to realize that he might not always make the right decision in that context, and so he always wanted to get a second opinion from someone outside the bubble that he was surrounded by in Silicon Valley.”

Horowitz avoided prison, Soltes says, but it wasn’t “because he had a better moral compass, was a more authentic leader or had better values — the reasons we generally come up with on why people don’t engage in fraud. What was so powerful in Ben’s example is that it shows that at least in some instances it has nothing to do with those things,” Soltes says. “Instead, it has to do with being a more humble leader and anticipating where we might potentially be compromised.”

Hubris and humility

Soltes says that many of his students ask themselves if they could ever succumb to the kinds of bad decisions and fraud that executives at Enron, WorldCom and Tyco committed. And most of them believe they could never do such things.

“But that’s not the right question to ask oneself,” Soltes says. “Instead, you have to consider the situation surrounded by their norms and incentives as well as growing up in a culture in which you were encouraged to behave in a particular way.

“Maybe the better question is why would I not behave as they did in that particular circumstance? Edwin Sutherland, the father of modern criminology, approached this in his theory of differential association — that we pick up the attitudes and values to engage in white-collar crime from spending time around others who engage in misconduct.

“If we approach the question of why by genuinely placing ourselves in their shoes, I think it leads to greater moral humility. We’re forced to think more deeply about the cultural environment that can subtly encourage misconduct,” Soltes says.

“This is something I think I took away personally from this project,” Soltes says. “I became a lot less confident about how I’d respond to every difficult situation. I think I’m more humble now that I’ve realized I have limitations much like anyone else, and I need to be diligent to watch those. Moral hubris is a remarkably easy trait to acquire and not realize when one actually has it.”

Fortunately, he says we wouldn’t necessarily behave the same way these top-flight fraudsters did if placed in their situations. “However, in our own small ways, we are all susceptible to making the same kinds of ethical oversights as these former executives.”

Soltes writes, “If we humbly recognize that we might not always even notice the choices that will lead us astray, we are more likely to develop ways to identify and control these decisions. But it’s only when we realize that our ability to err is much greater than we often think it is that we’ll begin to take the necessary steps to change and improve.”

Dick Carozza, CFE, is editor-in-chief of Fraud Magazine. His email address is: dcarozza@ACFE.com.

Read an excerpt from "Why They Do It: Inside the Mind of the White-Collar Criminal," by Eugene Soltes.