Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don't John Jr. (the dot read aloud .txt) 📖

the dishonesty of a few corporate executives. Despite the headlines generated by these scandals, however, it should be noted that the overwhelming majority of America’s 11,000-plus publicly traded firms are not run into the ground by their own corporate officers. Shareholders tend to find honest people to run their companies because it is in their own interests to do so.

This means they will be very hesitant to hire anyone with a criminal record. It is difficult enough to hide a criminal conviction, as probation or parole can last for years, and employers have to submit reports to an employee’s case officer. But it’s even harder for the wealthy to cover up a conviction; the richer and more powerful the man, the more publicity his trial is likely to receive, and thus the easier it is to discover his criminal past through something as simple as an internet search.

Even the relatively few rich ex-convicts who do secure a high-paying job after their conviction tend not to be successful. As Robert McCries, who studies the lives of indicted or convicted insider traders, notes, “Some of them do get back to [the securities industry], but they never shine with the luminance that they had during the time that they were previously operating. If they do re-enter the field, they find the community isn’t ready to support them. They just generally don’t do so well and after a period of time they tend to drop out ....People avoid them . . . .There are so many people to do business with, why must you do business with this person? That’s the kind of harsh questioning that is raised.”65

But how do we explain why rich ex-convicts’ incomes fall even lower than those of poorer ex-convicts? It’s because rich convicts not only get shut out of high-paying jobs, but they also have more difficulty finding lower-paying employment. Suppose that a successful lawyer is convicted of a crime and is disbarred. Unable to get hired to a different high-paying job due to his criminal record, he looks for a blue collar job. How would prospective employers view his application? Most likely, they’ll think he is vastly over-qualified, that he will quickly grow bored with the job, and that if he’s hired he will continue looking for a higher-paying job. The lawyer’s prestige and experience—the very things that made his resume so impressive—now work against him. If an employer of manual laborers had to choose between two convicted criminals, he would likely prefer one with a blue collar background to someone with vastly higher credentials. In the case of Robert Chest-man, a stock broker convicted of insider trading, his conviction made it so difficult to find work that he simply went to jail pending his appeal.66

Let’s look at the fate of Peter Bacanovic, a key player in what is perhaps the most highly-publicized white-collar crime prosecution of the last decade—the Martha Stewart case. Bacanovic was a stockbroker for both Martha Stewart and Samuel Waksal, the CEO of biopharmaceutical company ImClone. When the FDA refused to approve one of ImClone’s key drugs, Waksal and his daughter sold their own ImClone stock before the FDA decision became public. Informed by Bacanovic of Waksal’s stock sale, Stewart sold off her own ImClone stock. Although Waksal was eventually sentenced to over seven years in jail for insider training, neither Stewart nor Bacanovic were charged with any crime related to Stewart’s stock sale which, in the end, appears to have been legal. But they were both convicted of lying to regulators about the sale.

Bacanovic was sentenced to five months in prison and five months of home detention. This sentence was widely publicized in the press, which rarely explored the additional penalties Bacanovic had to suffer due to his loss of reputation. Bacanovic was fired by Merrill Lynch in October 2002, when he was first charged, and has been unemployed for the four years since then.67 Furthermore, there is no chance that he can re-enter his former occupation, as he is barred for life from even associating with stockbrokers or investment advisers. It is also doubtful that he can ever obtain any type of professional license. His criminal and civil fines totaled $79,645—for lying about a stock sale that earned him all of $510.68

Like the case of Bacanovic, it is common, indeed usual, for people to lose their job as soon as they are charged with a crime. This tendency is not confined to companies, as borne out by the 2006 lacrosse rape scandal at Duke University. Three Duke lacrosse players were charged in April and May 2006 with raping a stripper during an off-campus party. Despite the players’ vehement denials, conflicting stories by the stripper, negative DNA tests, and accumulating evidence of misconduct by District Attorney Mike Nifong, the university suspended two of the players. (The third player had already graduated.) This is a common procedure at Duke for students charged with felonies.69 The suspension looked to be long-term, as it was expected that the trial might not commence for a year after the charges were filed.70 Meanwhile, with such a tarnished reputation, the odds of another prestigious university allowing the suspended players to transfer were nearly zero. One of the players, David Evans, had a job offer rescinded from J. P. Morgan.71 In January 2007, after Nifong dropped the rape charge and the North Carolina State Bar filed a complaint charging him with misconduct, the university allowed the players to re-enroll.72 The salient point here is that universities, like companies, rush to divest themselves of disreputable students or employees even before their crimes have been proven in court.73

One does not have to be a rich stock broker or a student at a top-ranked university to suffer severe reputational penalties from conviction. Krishan Taneja, a civil engineer convicted of trading on illegal stock tips, spent six months in federal prison in 1979. After his release, his wife divorced him and his former employer refused to re-hire him. Broke and unemployed, he