Sociation Today

Sociation Today
®

ISSN 1542-6300


The Official Journal of the
North Carolina Sociological Association


A Peer-Reviewed
Refereed Web-Based 
Publication


Spring/Summer 2016
Volume 14, Issue 1



From East of Eden to the Pyramids:
White-Collar Crime in the North Carolina Context: The 2016 Presidential Address

by

Steven E. Gunkel

Wake Forest University

Introduction

    How many of us begin our day with a doughnut or oatmeal, quickly brush our teeth, log-on to the internet, or maybe run a logistic regression using SPSS?  Many folks often engage in several of these routine activities yet fail to consider the way these habits unwittingly connect us to a long list of firms that are guilty of white-collar crime.  Our doughnut, if courtesy of the Winston-Salem based Krispy Kreme, is sold by a company found guilty of fraudulently stating profits in SEC filings. Nearly a decade ago, the company inflated its quarterly and annual earnings, thus misrepresenting a prime benchmark of its historical performance (SEC 2009).  Our oatmeal, if Quaker Oats, was produced by a company that teamed-up with the Massachusetts Institute of Technology in the 1940s and 1950s and used cognitively challenged and unsuspecting subjects to test the effects of radioactive oats. The case was settled for $1.85 million, with the majority paid by MIT (Hussain 1998).  Celanese Corporation, which manufactures the polymers found in many of our toothbrushes, is responsible for one of the most contaminated Superfund sites in the nation. This site, located in Shelby, North Carolina, was placed on the U.S. EPA Superfund National Priorities List in 1986 and Celanese was ordered to undertake a $3.7 million clean-up of contaminated groundwater and soil at the site (U.S. EPA 1989).  Our internet provider, if Time Warner Cable, has also been found guilty of corporate misconduct.  TWC overstated revenue, misrepresented subscribers and engaged in securities fraud; the company was ordered to pay a $300 million fine (U.S. Department of Justice 2008:1.25-1.26).  Lastly, the software used by many sociologists, the Statistical Package for Social Sciences (better known as SPSS),  is owned by IBM, a company that once partnered with Nazi Germany to provide the tabulation of Jewish concentration camp prisoners (see Bakan 2008:88-89; Friedrichs 2010:160). 

    Lest we regard these five instances as anomalous or the byproduct of selection bias, consider another set of corporations that are woven into the fabric of our lives: Boeing, Westinghouse, General Electric, General Motors, Johnson & Johnson, and British Petroleum.  In brief, Boeing, the aerospace giant, was linked with contractor and procurement frauds victimizing the federal government; Westinghouse and GE participated in a multi-million dollar price-fixing scheme; General Motors and Johnson & Johnson have produced unsafe automobiles and pharmaceuticals, respectively; and the BP/Deep Water Horizon oil spill of the Gulf Coast ranks among the worst environmental crimes in U.S. history. 

    These as well as hundreds of other cases provide an important reminder that white collar-crime remains pervasive and costly, imposing devastating burdens on individuals and communities.  Despite these costs, neither the general public nor political leaders adequately acknowledge the problem that corporate crime represents.  The mismatch reflected in our limited awareness of white-collar crime despite its exorbitant costs motivates this address. The analysis of corporate crime which I will provide is guided by a threefold purpose.  First, I will examine two recent cases of white-collar crime in North Carolina: the Duke Energy coal ash spill, an environmental crime that ranks among the worst such cases, and the ZeekRewards Ponzi scheme, an economic crime also of vast proportions.  Second, I situate these cases with respect to consequences, typologies, and sanctioning of white-collar crime; and finally, I trace productive paths for moving forward with our understanding and control of white-collar crime.

Framing White-Collar Crime in North Carolina: Sutherland's Intellectual Legacy

    In order to situate the complexities underlying white-collar crime in North Carolina, it is important to first establish the evolution of the concept.  In the 1940s, Edwin Sutherland's (1985) pioneering efforts linked criminal offending with the legitimate production of goods and services.   With this work, Sutherland hoped to discount poverty-based explanations for crime, redirect the efforts of criminology to focus on white-collar crime, and establish support for his theory of differential association (Sutherland 1940).  To this end, he examined corporate misconduct among a large sample of 70 leading corporations.  Using this sample, he empirically established the prevalence and incidence (recidivism) of white-collar crime across a period that spanned a half-century (1890-1944) (Sutherland 1985:13-25).  All corporations studied had at least one adverse decision for corporate misconduct registered against them with an average of 14 adverse decisions for the sample (one corporation garnering 50 such decisions).   Sutherland's analysis also clarified the importance of a more expansive definition of white collar crime to include not only cases that resulted in criminal sanctions but also those that resulted in regulatory (administrative) and civil remedies. Importantly, only about 16% of the adverse decisions uncovered in his analysis were actually rendered by the criminal courts with the vast majority being "administratively segregated" into the civil and regulatory courts (a pattern which persists to the present day).  His legacy and sociolegal outlook continue to inform the efforts of criminology and, in my interpretation of the case studies, I borrow from both his emphasis on corporate offending and the sanctioning of these offenses (i.e., to include not only the criminal sanction but also regulatory and civil remedies). (1)

Environmental White-Collar Crime in North Carolina: East of Eden

    On February 2, 2014, a massive coal ash spill occurred at a Duke Energy plant located approximately 10 miles east of Eden.  This spill has become widely defined as one of the most significant environmental white-collar crimes nationally as well as locally, given Duke Energy's dominant status as a company, the political and economic dynamics contributing to this misconduct, and the scope of the damage done. Duke Energy, headquartered in Charlotte, is the largest electric power company in the U.S. as it employs over 28,000 individuals, and services an area that covers some 95,000 square miles with 7 million customers in the Southeast and Midwest.  As a Fortune 250 Company, Duke holds over $120 billion in assets, with total annual profits of approximately $2.7 billion (see Henderson 2014; Duke Energy 2014). 

    The Duke Energy spill dumped 39,000 tons of coal ash into the Dan River which ranks as the third largest coal ash spill in U.S. history. (2)   The bottom of the Dan River was coated with coal ash for 70 miles downstream, posing a carcinogenic threat to drinking water and aquatic life.  Experts like Lynn Ringenberg with Physicians for Social Responsibility emphasize "Coal ash contains the deadliest heavy metals on the planet earth… it's mind boggling" (Camp 2014).  Specifically, the metals found in coal ash -including arsenic, chromium, mercury, cadmium, and selenium - can cause cancer, liver damage, neurological disorders and other health problems.  Even so, the U.S. EPA doesn't classify coal ash as a hazardous material further complicating the regulatory oversight of these production practices (see Gang, 2013).
 
    The spill was not an isolated incident with at least three other documented instances which established a pattern of noncompliance with the Clean Water Act (CBS News/AP 2015).  Duke Energy's illegal pollution dates back to 2011 and demonstrated a pattern of negligence.  The NC Department of Environmental and Natural Resources (NCDENR) was also widely faulted for not effectively responding in this case.   In part, the agency was struggling with budget cuts that left officials with limited resources.    In addition, pro-industry bias at the highest levels within the agency contributed to a failure to enforce and promulgate regulations that would minimize the risk of coal ash spills.  Many agency employees became fearful they would be fired if they advocated for more stringent environmental enforcement (Gabriel 2014).

    Experts agree that it will take years to accurately assess the costs of the Duke Energy coal ash spill.  One analysis pegged the financial cost of the spill at $295.5 million within the first six months, as a result of harm done to the environment, human health, and business (see Wireback 2015).  As in other cases of environmental white collar crime, the damages are most immediately borne by a set of economically vulnerable communities.  In this case, the coal ash spill threatened the revitalization of an economy that once depended on textiles and tobacco.   According to Joe King, City Manager of Danville, Virginia, which sits 20 miles downstream from the breached coal ash pond and arguably faces potentially the greatest cost, the spill "hurt our momentum" in rebuilding the economic vitality of this former manufacturing center.  "We're trying to sell Danville as a great place to live and do business.  We've invested in the river district" (Adamson 2015).  But a new marketing campaign to draw people and business to the area was put on hold as a result of the spill.   Some local businesses that depended heavily on burgeoning tourism (such as boating outfitters) cited losses of as much as 40% in the year following the spill (Wireback 2015).   Local farmers who depend on the Dan River to irrigate crops and water livestock faced uncertainty until NC State University scientists issued a report declaring the water safe for these purposes.  They cautioned farmers, however, that conditions could change as the coal ash remained on the river bottom.  A recreational water advisory was also in effect for four months, cautioning against use of the Dan River for boating, swimming and other activities that could result in contact with the coal ash (Dalesio 2014).  More than a year after the spill, an advisory issued by the Department of Health and Human Services remained in effect, warning that a potential fish and shellfish consumption hazard still exists immediately downstream of the release.   In Danville as well as other localities fed by the Dan River, fears about the water supply persist among many residents who refuse to drink the water, skeptical of tests that declare this source to be "problem free" (Wireback 2015). 

    On May 14, 2015, Duke pled guilty to nine (misdemeanor) counts of violations of the Clean Water Act.  As part of their plea, Duke Energy was ordered to pay $102 million in criminal fines and restitution to the federal government and the company, placed on five years federal probation, was also ordered to pay a $6.6 million civil fine to North Carolina. 

    While this environmental white-collar crime occurred some 45 miles east of today's conference, another kind of corporate misconduct, in this case involving a massive pyramid scheme, recently played out in a town just 20 miles south of Winston-Salem. Orchestrated by a former nursing home magician, I turn now to an overview of the tricks and subterfuge underlying this case.

Economic White-Collar Crime in North Carolina: To the Pyramids

    The ZeekRewards case, which originated in the once thriving textile and furniture manufacturing town of Lexington, involves a far-flung, internet-based, pyramid scheme combined with a classic Ponzi scheme, promising profits that seemed "too good to be true" (Weis 2013).  ZeekRewards, via its companion website Zeekler.com, was promoted as an online investment "opportunity" which allowed participants to bid for items (such as iPhones) in a penny auction format.  ZeekRewards was touted as invitation-only for its participants who could earn incentives for promoting ZeekRewards on other websites and, importantly, by recruiting additional members (i.e., its pyramidal, multilevel marketing, and unstable aspect).  The scheme involved 2.2 million individuals with customers numbering 220,000 in the U.S., including 47,000 North Carolinians (Craver 2016).  The scheme raised approximately $850 million, pledging to provide investors returns of 125% within 90 days and 500% annually which was tied to a purportedly freely fluctuating rate of return but was, in fact, unilaterally and arbitrarily set by the founder so as to give the appearance of profitability and stability for investors (see Craver 2015; SEC v. Burks et al. 2012).  ZeekRewards followed the classic arc of a Ponzi scheme.   The bustling headquarters at 803 W. Center Street was teeming with baskets stuffed with investor's checks while the illusion of stability (and profitability) was maintained as investors requesting payments were paid (unbeknownst to them) from monies collected  from new investors' funds (Weiss 2013).  (3)

    ZeekRewards ran for nearly three years, from January 2010 until regulators shut it down on August 17, 2012. Interestingly, complaints regarding the fraudulent nature of ZeekRewards were filed with the NC Attorney General's Office and the NC Secretary of State as early as November 2011. However, regulators failed to heed these warnings -- which allowed the scam to run for almost another year (Weiss 2013).  It is estimated that approximately 800,000 investors lost money in the scheme (Craver 2015).  According to Sarah Chavez, who invested $7000 in the scam, "It's hard to believe in something like that. But everyone told us it was a sure thing," Sadly, Ms. Chavez had invested in ZeekRewards hoping to secure additional funds to help cover the costs of her daughter's hospital treatments for leukemia (Weiss 2013).

    The founder, Paul Burks, was charged with mail- and wire-fraud (and conspiracy to commit) and tax fraud.  While Burks has agreed to pay a $4 million dollar penalty (and cooperate with the receiver appointed to recover funds in the case), his criminal trial is pending and the total counts could lead to a 65-year prison term and fines in excess of $1 million (see Weiss 2013; Craver 2015). Other co-conspirators in the scheme include Dawn Wright-Olivares (who served as COO), her stepson Daniel Olivares (who served as Chief Technology Writer and architect of the computer database used in the fraud), and her fiancée, Alex de Brantes (who served as Internet Marketing Manager).  Dawn Wright-Olivares pled guilty to securities fraud, has disgorged $8.1 million in unlawful profits and could receive a ten-year prison sentence; while Daniel Olivares has also pled guilty to securities fraud, disgorged $3.2 million in profits, and could net a five-year prison term (SEC 2013; Dunn 2014).

    Having provided an overview of two of the historically largest and most recent cases of environmental and economic white-collar crime in North Carolina, I turn now to examine their fit with general themes underlying our understanding of white-collar crime.

Broader Themes and Lessons Illustrated in the North Carolina Cases: Red Herrings, Typologies and Sanctioning

    The Duke Energy coal ash spill and the ZeekRewards pyramid scheme clarify several broader themes and lessons emphasized in white-collar crime scholarship that should guide further analysis, debate and policy.  First, these two cases counter two red herrings commonly associated with white-collar crime – the crimes only do financial harm; and the harm of the offenses is not as great as common crime ("street crime").  Clearly, in the case of the Duke Energy coal ash spill, this offending created massive environmental damage and physical harm remains a possibility (due to the carcinogenic substances released).  This comports with the widely accepted consensus among scholars that white-collar crime should be properly classified as violent -- and often much more so than street crime (see Friedrichs 2010: 68-77; Reiman and Leighton 2013:65-117). The second red herring, which treats the costs of common crime as greater than the costs of white collar crime, is similarly countered by these cases.  Any single case of white-collar crime may eclipse the most expensive case of street crime and white-collar crime is always more costly than all street crime combined within any reporting period (and these are for the white-collar crimes of which we are aware).  Considering the fiscal and physical costs, importantly, the Duke Energy case and the ZeekRewards case rank among the most costly crimes recorded in North Carolina as well as nationally. 

    The two case studies also illuminate the value of emerging typologies used to describe white-collar offending (see Friedrichs 2010 for an overview of these "hybrid" typologies).  In both cases, we might make use of a hybrid form of white-collar crime - "state-corporate crime" - which links dynamics common to governmental crime and corporate crime.  This typology suggests white-collar crime reflects a synergistic relationship between the government, on the one hand, and the corporation on the other in that the crime in question cannot be accounted for solely by looking to the corporation or the government (as in the case of the IBM/Nazi regime cited earlier).  In the coal ash spill, we can point to the extremely lax and "defanged" NCDENR furthering and/or exacerbating the offending and its consequences (Gabriel 2014).  Interestingly, the defanging of this regulatory agency (which was once regarded as among the strongest in the Southeast) has been attributed to the actions of Governor Pat McCrory who worked for Duke Energy for almost three decades before taking office.  Similarly, the ZeekRewards case points to lax regulation and the failure to step-in when state actors had the opportunity to do so thereby allowing the fraud to run for almost another a full year and compounding losses. 

    A second typology that we might consider is that of "contrepreneurial crime" which is also a hybrid that links professional crime with white-collar crime.  Here, the blurring of the boundaries between legitimate investment opportunities (and agents promoting them) can be seen by the con(fidence) men promoting pyramid and Ponzi schemes.  Thus, in the ZeekRewards case, we see these elements of "confidence" men and women, such as Paul Burks and Dawn Wright-Olivares engaging in professional crime in which they effectively pose as agents of a legitimate business venture (ZeekRewards) affording investment opportunities.  Interestingly, one of North Carolina's newest residents, Bernie Madoff, is now serving a 150-year sentence for the securities (and other) frauds underlying his massive $65 billion Ponzi scheme that serves as yet another exemplar of the "contrepreneurial crime" typology (see Friedrichs 2010:204-207; Gunkel 2013). A third typology, "technocrime" uniquely describes the ZeekRewards case in that computer technology itself has expanded the opportunities for both occupational and organizational forms of white-collar offending (Friedrichs 2010:211-217).  Indeed, the investment opportunities were touted extensively within and proliferated in cyberspace and investors were recruited and informed of their earnings in an internet-based investment vehicle (and, ironically, the computer-based nature of the fraud may have enhanced its perceived legitimacy among its customers).  Showing the elasticity of and room for growth in our use of these typologies, ZeekRewards illustrates how perpetrators can actually pursue the dual aims of Ponzi and pyramid schemes (and Burks gradually relied upon his multilevel marketing experience to prop-up the Ponzi scheme) while using technology that state actors may not fully understand or regulate in a timely fashion.  

    The two cases also highlight important sanctioning mechanisms used in white-collar crime cases.  Interestingly, the two cases were selected for their North Carolina context and currency but they represent a rather exceptional and extraordinary sanctioning pattern that may serve as a model for other cases nationally.  That is, the outcomes (to date) represent the "road not taken" typically; each culminated in the rarely used criminal sanction (see Shapiro 1985; Schlegel, Eitle and Gunkel 2001).  Duke Energy, as a corporate entity, was ordered to pay substantial criminal fines for their misconduct, even though the company was found guilty of only misdemeanor offenses. Individual actors within the ZeekRewards case have been convicted (or will face criminal trial) for their actions with some actors required to disgorge profits earned and face possible incarceration terms for their role in the fraud.  In important ways, the enormity, visibility, duration, culpability, and blameworthiness evident in each case contributed to this rather punitive response to these environmental and economic crimes – itself a recurring theme in the white-collar crime literature that focuses on the factors that shape sanctioning.  (4) 

    Having examined the ways in which the two cases reflect on misperceptions, typologies, and sanctioning of white-collar crime, I will close by examining the ways we might move forward in our understanding of and efforts to control white-collar crime.  

Moving Forward

    As my opening statements indicated, numerous goals motivated the focus on white collar crime in this address.  First and foremost, I hope to push white-collar crime to center stage in debates and discussion of crime, punishment and restitution more generally, highlighting its pervasiveness and costs, the conceptual tools sociologists offer to clarify its dynamics and, in turn, guide policy to more effectively counter corporate crime.   To begin, we must spearhead more deliberate efforts to recognize the scope of the problem in this state as well as nationally.  While most conference attendees had probably heard about the coal ash spill (as it received widespread and national media coverage), perhaps fewer had heard of the Ponzi and pyramid scheme launched right here in North Carolina.  This, like so many other white collar crimes, has too often been made invisible by official narratives focusing on street crime.  The failure to see white-collar crime for the crime it is and the harm it does represents a problem and an opportunity at once.  Sociologists can and should play a key role uncovering this crime and its costs as well as serving as a resource for individuals and communities victimized by this corporate misconduct. 

    Indeed, a recent conversation with a colleague (with the pseudonym of "Fred") inspired this address with this in mind.  First, this conversation provided a powerful reminder that white collar crime, even when it hits close to home, is rarely recognized as such.    Fred, my colleague, hailed from a town in the U.S. in which a large corporate fraud (totaling hundreds of millions of dollars) had recently unfolded, the fraud became the focus of a Frontline documentary and yet he had never heard of this scheme!  In so many ways, we have a local, state, regional, national, and global "blindspot" when it comes to white-collar crime.  Fred's experience and that of the general public is significantly shaped by the "social reality of crime" which is largely reflected in and reinforced by the media itself.  In current media representations,  street crime, terrorism, and sex crimes receive about 90% of attention while accounts of white-collar crime amount to less than two-percent (2%) of all media coverage (see overview in Brown, Esbensen and Geis 2015: 12-13).  In an applied sense, sociologists need to make ourselves available to media outlets or engage in "newsmaking criminology" (5) so as to reverse the profound disparities in crime coverage which treat street crime as posing  the greatest risk and harm while simultaneously ignoring the far greater problems posed by white-collar crime.  My hope is that this address and our work as sociologists might help redress the ignorance of the vast harm done by these criminal offenses.  Whether my phone rings or my inbox is filled with media inquiries, we as sociologists can play a critical role shifting news coverage from its current fixation on street crime to recognize the greater impact of white-collar crime.

    We can also play a critical role as victim advocates, and in so doing perhaps engage in the kind of "activist criminology" Joanne Belknap (2015) has recently encouraged.  I was presented with precisely this opportunity in another conversation with my colleague Fred, whose friend was victimized not too long ago by a Ponzi scheme that cost him over $60,000.   As I listened to Fred's account, I quickly understood the nature of his friend's victimization and provided some detailed guidance regarding possible strategies to recoup losses and alert the authorities.  My years of training and research have convinced me that too many victims of white-collar crime face a common set of challenges in securing justice: they are often unaware of the harms suffered; they are often ignored by the system; they typically do not know where to turn for help; and they generally lack support in their efforts to seek redress for the harms they suffer.    Fred's friend was engaging in self-blame for his victimization (a common response for those falling prey to fraudsters), was not sure who he should turn to in order to report the victimization, what source(s) he should consider to determine if others have been victimized by the same perpetrator, was not sure if he had a legal case, and was unable to locate legal counsel.  In fairly short order, I was able to convey to the friend (via Fred) that: the victim should resist the temptation to blame himself over the large sum of money that was taken; reporting to local, county, and state police (and State Attorney General) was critical; consulting the Securities and Exchange Commission, Consumer Financial Protection Bureau, State Attorney General and Secretary of State could prove useful; and contacting a legal aid clinic and retaining counsel was essential.  Sadly, while well-intentioned, Fred was attempting to gather much of the information in a painstaking and cumbersome manner and was very grateful for the advice given (and sources to be pursued) and the victim was able to retain legal counsel.  The case is pending but it appears that the criminal activity was not an isolated incident and perhaps a portion of the financial losses can be recouped in the future.
 
     Whether Fred's friend and other victims of white-collar crime receive justice remains to be seen. However, if we can advance a critical re-examination of routine activities associated with our typical (hypothetical) day and their intersection with white-collar crime;  (6) glean an even deeper appreciation of what these two cases of white-collar crime in North Carolina represent and where they can take us; and step-up to the challenges associated with "newsmaking criminology" and "activist criminology", perhaps the prognosis is brighter for meaningful control of these offenses.

Footnotes

(1)  The seminal efforts of Clinard and Yeager (1980) use a "modified legalistic" framework advanced by Sutherland in which they identify illegality using criminal, civil, and regulatory sanctioning of the 477 largest corporations studied. I have often relied on this style of inquiry in my own empirical efforts examining white-collar crime (see Wahl, Gunkel and Sanchez 2000; Wahl and Gunkel 1999; Gunkel 1996).

(2) The largest spill occurred in Kingston, Tennessee on December 22, 2008 -- dumping 5.4 million cubic yards of coal ash which was more than the amount of oil released in the BP/Deepwater Horizon spill cited earlier (see Gang, 2013).

(3) For a fascinating account of the ways in which Charles Ponzi cultivated the aura of profitability and stability among his victims, see Zuckoff (2006).

(4)  Interestingly, at my presidential address, some attendees questioned whether the environmental offenses were actually crimes despite the successful application of the criminal sanction.  Most criminologists side with Sutherland’s position that the "administrative segregation" of white-collar offenses creates a low probability of criminal conviction and the need to take into account civil and regulatory sanctioning for a meaningful representation of the realities of white-collar offending (see Sutherland 1940).  The exchange sparked by this address speaks to the tensions identified by Sutherland. And yet, we often fail to see white-collar crime as a crime based on the type of sanction it typically receives, even when it does merit and has actually received criminal sanctioning.

(5) For cautionary tales regarding his experiences with newsmaking criminology (since coining the term in 1988) and specific strategies for promoting a media presence, see Barak (2007).

(6) The use of the term "routine activities" is purposive as this theoretical model holds considerable promise for explaining the causes of white-collar crime in that the "crime triangle" linking motivated offenders, suitable victims, and an absence of effective guardianship fits remarkably well with the dynamics cited throughout my presentation (see Friedrichs 2010:234).

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The Editorial Board of Sociation Today

Editorial Board:
Editor:
George H. Conklin,
 North Carolina
 Central University
 Emeritus

Robert Wortham,
 Associate Editor,
 North Carolina
 Central University

Board:
Rebecca Adams,
 UNC-Greensboro

Bob Davis,
 North Carolina
 Agricultural and
 Technical State
 University

Catherine Harris,
 Wake Forest
 University

Ella Keller,
 Fayetteville
 State University

Ken Land,
 Duke University

Steve McNamee,
 UNC-Wilmington

Miles Simpson,
 North Carolina
 Central University

William Smith,
 N.C. State University