Newsweek’s back-cover story a couple of weeks ago was about how corporate fines don’t work to enforce behavior, using BP, Godlman Sachs and mining company that recently killed so many. In discussing Goldman Sachs, the writer makes a comment about how small the SEC’s fines are compared to the size of the financial industry and suggests this as a reason for the recent crash.
OK, so we have three cases where fines were not sufficient to deter a company, but I’m hesitant to make the jump and generalize. Has any research been done to show whether fines are effective in deterring bad corporate behavior?
In the case of Baker v. Exxon, an Anchorage jury awarded $287 million for actual damages and $5 billion for punitive damages. The punitive damages amount was equal to a single year’s profit by Exxon at that time.[citation needed] To protect itself in case the judgment was affirmed, Exxon obtained a $4.8 billion credit line from J.P. Morgan & Co. This in turn gave J.P. Morgan the opportunity to create the first modern credit default swap in 1994, so that J.P. Morgan would not have to hold so much money in reserve (8% of the loan under Basel I) against the risk of Exxon’s default.[29]
Meanwhile, Exxon appealed the ruling, and the 9th U.S. Circuit Court of Appeals ordered the original judge, Russel Holland, to reduce the punitive damages. On December 6, 2002, the judge announced that he had reduced the damages to $4 billion, which he concluded was justified by the facts of the case and was not grossly excessive. Exxon appealed again and the case returned to court to be considered in light of a recent Supreme Court ruling in a similar case, which caused Judge Holland to increase the punitive damages to $4.5 billion, plus interest.
After more appeals, and oral arguments heard by the 9th Circuit Court of Appeals on January 27, 2006, the damages award was cut to $2.5 billion on December 22, 2006. The court cited recent Supreme Court rulings relative to limits on punitive damages.
Exxon appealed again. On May 23, 2007, the 9th Circuit Court of Appeals denied ExxonMobil’s request for a third hearing and let stand its ruling that Exxon owes $2.5 billion in punitive damages. Exxon then appealed to the Supreme Court, which agreed to hear the case.[30] On February 27, 2008, the Supreme Court heard oral arguments for 90 minutes. Justice Samuel Alito, who at the time, owned between $100,000 and $250,000 in Exxon stock, recused himself from the case.[31] In a decision issued June 25, 2008, Justice David Souter issued the judgment of the court, vacating the $2.5 billion award and remanding the case back to a lower court, finding that the damages were excessive with respect to maritime common law. Exxon’s actions were deemed “worse than negligent but less than malicious.”[32] The judgment limits punitive damages to the compensatory damages, which for this case were calculated as $507.5 million.[33] The basis for limiting punitive damages to no more than twice the actual damages has no precedent to support it. Some lawmakers, such as Senate Judiciary Committee Chairman Patrick J. Leahy, have decried the ruling as “another in a line of cases where this Supreme Court has misconstrued congressional intent to benefit large corporations.”[34]
Exxon’s official position is that punitive damages greater than $25 million are not justified because the spill resulted from an accident, and because Exxon spent an estimated $2 billion cleaning up the spill and a further $1 billion to settle related civil and criminal charges. Attorneys for the plaintiffs contended that Exxon bore responsibility for the accident because the company “put a drunk in charge of a tanker in Prince William Sound.”[35]
Greg Palast has been involved with the case directly, and has fulminated against Exxon (and BP, which is also concerned in the case, although its name has been kept out of the public eye) at considerable length. Here are a couple of cites:
I’m no economist or corporate legal expert, but I can tell you that if a company stands to make $100 million by breaking a law that carries a maximum fine of $10 million, the choice is fairly easy.
The fine itself may not be a significant financial burden, but the negative press, reactions from customers and/or suppliers, and employees may have far greater impact (economic and otherwise) than the economic impact the fine itself.
Or they may not. I think that Exxon spun the thing out so long that I suspect most people have either forgotten it, or simply assume the fine was paid.
Well, obviously, we can point to plenty of anecdotes and hypotheticals where fines were insufficient or avoided through legal means. The problem is to know whether these cases represent either 1) normal corporate disregard for fines and penalties or 2) exceptions to normal corporate desire to comply with regulation and avoid fines and penalties. We can’t determine this from just a few data points, especially when those data points are clearly cherry picked.
What I’m hoping for is some kind of comprehensive survey or study that looks at whether fines are effective overall or in general. Or, even better, a study that would show under which conditions fines are effective (for example, whether fines need to be assessed more quickly, or whether they need to be larger).