After three violent inmates escaped from an Arizona private prison in July 2010, prompting a two-week, multi-state manhunt, state corrections officials demanded improvements and stopped sending new inmates to what they called a "dysfunctional" 3,300-bed facility.
Less than a year later, the company that runs the prison, Management & Training Corp., threatened to sue the state. A line in their contract guaranteed that the prison would remain 97 percent full. They argued they had lost nearly $10 million from the reduced inmate population.
State officials renegotiated the contract, but ended up paying $3 million for empty beds as the company continued to address problems, according to state documents and local news accounts.
Far from the exception, Arizona's contractually obligated promise to fill prison beds is a common provision in a majority of America's private prison contracts, according to a public records analysis released today by the advocacy group In the Public Interest. The group reviewed more than 60 contracts between private prison companies and state and local governments across the country, and found language mentioning quotas for prisoners in nearly two-thirds of those analyzed.
The prison bed guarantees range between minimums of 70 percent occupancy in a California prison to 100 percent occupancy requirements at some Arizona prisons. Most of the contracts had language mandating that at least 90 percent of prison beds be filled.
Experts argue that such requirements create an incentive for policymakers to focus on filling empty prison beds, as opposed to pursuing long-term policy changes, such as sentencing reform, that could significantly reduce prison populations. In short, many states are effectively obligated to continue to incarcerate people regardless of crime rates and public safety needs, or otherwise hand over taxpayer dollars in order to satisfy private profit-making companies.
"It's really shortsighted public policy to do anything that ties the hands of the state," said Michele Deitch, a senior lecturer and criminal justice expert at the University of Texas School of Public Affairs, who has researched the rise of private prisons. "If there are these incentives to keep the private prisons full, then it is reducing the likelihood that states will adopt strategies to reduce prison costs by keeping more people out. When the beds are there, you don't want to leave them empty."
Private prison corporations emerged in the 1980s and 1990s, at a time when crime rates were soaring and states were scrambling to keep up with surging prison populations. Lawmakers needed quick alternatives, and looked to private prisons as an overflow valve to house inmates who were overcrowding the existing state systems.
But as state prison populations have started to decline in recent years, advocates point to occupancy guarantees as long-term obligations that raise core questions about who benefits from the service: the state, or the prison contractor?
"You can't project years into the future what your prison population is going to look like," said Shahrzad Habibi, research director with In the Public Interest, who authored the study on prison bed guarantees, which the group calls "lockup quotas." "If there is a reduction in the prison population, instead of closing these private prisons first, there is an incentive to keep funneling inmates there, to keep giving them business."
Private prison operators point out that many contracts offer termination language in contracts that give government agencies the option to back out if necessary.
Company spokesmen also argue that occupancy quotas in contracts allow contractors to offer better rates to government agencies. Most prison contracts are structured on a per-day, per-inmate basis, where states pay contractors a designated fee based on a daily count.
Issa Arnita, a spokesman for Management & Training Corp., said the bed guarantees lead to better rates because of the "stability it provides to operators," who don't have to factor in the risk of fluctuating inmate populations and "empty beds."
A spokesman for Corrections Corporation of America, the nation's largest private prison chain, said government agencies sometimes request the bed guarantees to ensure the company won't sell the beds to another agency.
"This helps them ensure that they have the space they need to safely and effectively house inmates," said company spokesman Steve Owen.
But industry critics argue that the contracts are structured such that states have difficulties holding prison companies responsible for mismanagement. In the case of the prison escape in Kingman, Ariz., follow-up audits by the state found an institution in disarray.
Prison officials didn't alert the local sheriff's office until nearly two hours after the escape. It took more than two weeks for authorities to apprehend two of the escapees, both of whom were subsequently charged in connection with the carjacking and murder of an Oklahoma couple who were driving through New Mexico.
Malfunctioning alarms repeatedly blared throughout the prison, and the state concluded that most guards had become "conditioned" to the false warnings and simply ignored them. The company hadn't performed maintenance on the system in nearly a year, audits found.
Five months after the escapes, the director of the Arizona Department of Corrections wrote that he still had "serious concerns about myriad chronic operational deficiencies." Yet MTC still argued that the state was bound by the 97 percent occupancy clause.
According to documents cited in the Arizona Republic, the state agreed to start paying the private contractor the 97 percent rate three months before the prison population reached that level.
"There are so many barriers to actual accountability in these cases," said Caroline Isaacs, a program director for the American Friends Service Committee, a Quaker organization that advocates for prison reform.
Arnita, the MTC spokesman, wrote in an email that the company renegotiated the contract with the state after the disagreement "to ensure no future losses." He said the company has "a very strong partnership" with Arizona.
Doug Nick, a spokesman for the Arizona Department of Corrections, said the compromise with MTC ultimately saved the state from facing much higher charges of potentially $16 million for back payments.
He said the department prefers bed guarantees because they allow the state to get the best deal from private prison operators, who otherwise might charge higher rates if there were monthly fluctuations in the size of the prison system.
"This protects the taxpayer," Nick said. "If you don't have a guarantee of occupancy, the operator of the prison is really going to want a much higher per-diem rate. There are fixed costs that any operator, public or private, has to meet."
In the Public Interest, the group that did the analysis of bed guarantees, argued that the most prudent contracting scheme would involve payments based only on the number of inmates in a facility for any given day. States such as Texas do not have specific bed guarantee clauses in private prison contracts, pegging payments to the number of prisoners counted every night at midnight.
"When entering a contract to operate a prison, a private company should be required to take on some risk," the report concluded. "Private prison beds were intended to be a safety valve to address demand that exceeded public capacity. It was never intended that taxpayers would be the safety valve to ensure private prison companies' profits."
This article has been updated with a response from the Arizona Department of Corrections.
1. Martin L. Grass
> Company: Rite-Aid<br> > Current status of the company: Still active<br> In 1999, Rite-Aid (NYSE: RAD) CEO Martin L. Grass, the son of company founder Alex Grass, was forced to resign from the post he had held for just four years. Grass was formally indicted in 2002, along with several other high-ranking executives at the drugstore chain, for conspiracy to defraud, making false statements, as well as accounting fraud. In 2004, Grass pleaded guilty and reached a plea agreement to serve at least eight years in prison and pay a $500,000 fine, as well as waive $3 million in owed salary. In 2009, Grass moved into a halfway house and was subsequently released in 2010.<br> <a href="http://247wallst.com/2012/05/17/top-ten-ceos-sent-to-prison" target="_hplink">Read more at 24/7 Wall St.</a>
2. Joseph Nacchio
> Company: Qwest<br> > Current status of the company: Acquired<br> In March, 2005, telecommunication company Qwest's CEO Joseph Nacchio and several executives were indicted by the SEC. The charges included inflating revenue estimates, lying about nonexistent forthcoming government contracts, and illegally profiting from the run-up in the stock price. In 2007, Nacchio was sentenced to six years in prison. He was also ordered to pay a $19 million fine and forfeit an additional $52 million he had made through illegal trading. Nacchio appealed several times, losing his final appeal in the U.S. Court of Appeals for the Tenth Circuit. He began serving his term in February, 2009, but even now his legal team is petitioning to be heard in the Supreme Court.<br> <a href="http://247wallst.com/2012/05/17/top-ten-ceos-sent-to-prison" target="_hplink">Read more at 24/7 Wall St.</a>
3. Walter Forbes
> Company: Cendant<br> > Current status of the company: Split up<br> In 1998, Hospitality Franchise Systems, a platform used to purchase hotel chains, merged with direct marketing company Comp-U-Card International to form Cendant. The new corporation soon discovered, however, that Walter Forbes, CUC's former CEO and the CEO of the newly formed Cendant, had grossly misrepresented the financial status of CUC. He reported at least $500 million in nonexistent profits. Forbes, who insisted he knew nothing about the situation, was forced out. By 2002, the ex-CEO was indicted under fraud charges, and in 2007, after years of appeals, he was sentenced to 12 years in prison and $3.28 billion in damages. In 2005, Cendant split up and spun off into several different companies.<br> <a href="http://247wallst.com/2012/05/17/top-ten-ceos-sent-to-prison" target="_hplink">Read more at 24/7 Wall St.</a> Read more: Top Ten CEOs Sent to Prison - 24/7 Wall St. http://247wallst.com/2012/05/17/top-ten-ceos-sent-to-prison/#ixzz1vEd1RweC
4. Richard Scrushy
> Company: HealthSouth<br> > Current status of the company: Still active<br> Richard Scrushy, former CEO of HealthSouth (NYSE: HLS), has 20 years of illicit practices to his credit. Scrushy authorized the firing of whistle blowers, bribed and threatened HealthSouth execs and was complicit in illegal accounting practices. In November, 2003, Scrushy was indicted on charges of conspiracy, securities fraud, money laundering and mail fraud. However, the slippery Scrushy was acquitted on all charges in June, 2005. Less than four months later, he was indicted once again, this time on 30 counts of extortion, obstruction of justice, money laundering, racketeering and bribery. In June, 2007, Scrushy was finally sentenced to six years and 10 months in prison.<br> <a href="http://247wallst.com/2012/05/17/top-ten-ceos-sent-to-prison" target="_hplink">Read more at 24/7 Wall St.</a>
5. Bernard "Bernie" Ebbers
> Company: WorldCom<br> > Current status of the company: Bankrupt and acquired<br> The fall of Bernard "Bernie" Ebbers, former CEO of WorldCom, began once the telecommunication company's proposed merger with Sprint (NYSE: S) fell through in June 2000 due to antitrust laws. WorldCom's stock subsequently plummeted and Ebbers and his executive team continued to rearrange the books to the tune of $11 billion in a desperate attempt to cover up losses. In 2002, the fraud was discovered by internal auditors and Ebbers ousted. In March 2005, Ebbers was convicted of conspiracy, securities fraud and seven counts of filing false reports with regulators. He's currently serving a 25-year sentence in a Louisiana jail.<br> <a href="http://247wallst.com/2012/05/17/top-ten-ceos-sent-to-prison" target="_hplink">Read more at 24/7 Wall St.</a>
6. Jeffrey Skilling
> Company: Enron<br> > Current status of the company: Dissolved<br> Along with Chairman Kenneth Lay, former Enron CEO Jeff Skilling was instrumental in the Enron mega-scandal. Skilling encouraged the use of mark-to-market accounting, which appraises holdings based on expected values. In Enron's case, the lack of concrete pricing data for energy allowed it to act on overly optimistic forecasts. This accounting tactic resulted in Enron grossly overvaluing its holdings and sometimes even reporting gains on contracts that resulted in losses. Adding to his rap sheet, Skilling signed off on Chewco, a subsidiary of Enron that essentially served as a closet in which the company could stuff any debt it was trying to conceal. When Chewco's accounting practices were discovered, Enron was forced to adjust the company's books to reflect $405 million in additional losses; it was the beginning of the end. In May, 2006, Skilling was convicted of conspiracy, securities fraud and making false statements to auditors. He was sentenced to 24 years and four months in prison.<br> <a href="http://247wallst.com/2012/05/17/top-ten-ceos-sent-to-prison" target="_hplink">Read more at 24/7 Wall St.</a>
7. John Rigas
> Company: Adelphia<br> > Current status of the company: Paying creditors before dissolving<br> In 2002, John Rigas was forced out of his position as CEO of cable provider Adelphia after being indicted of securities, bank, and wire fraud. Six other executives were also charged in the incident, including his two sons, Timothy and Michael. It became apparent during the trial that Rigas and his sons had used corporate funds for personal expenses. They had also concealed several billion dollars in owed loans. In 2003, a year after the incident began, Adelphia was still a member of the Fortune 500 companies. By 2006, the scandal had finally caught up with it, and the corporation had spiraled into bankruptcy as a direct result of the scandal. Rigas was sentenced to 15 years in federal prison, and is scheduled to be released in 2018.<br> <a href="http://247wallst.com/2012/05/17/top-ten-ceos-sent-to-prison" target="_hplink">Read more at 24/7 Wall St.</a>
8. Dennis Kozlowski
> Company: Tyco<br> > Current status of the company: Still active<br> In 2002, CEO Dennis Kozlowski and chief financial officer Mark H. Swartz, were accused of illegally siphoning off roughly $600 million from Tyco (NYSE: TYC). Kozlowski is mostly famous for his unabashed opulent spending of the monies he stole, shelling out for $6,000 shower curtains, expensive artworks and lavish corporate parties. He also threw private parties at the company's expense, including a Sardinia bash that included ice sculptures and a performance by Jimmy Buffett. Kozlowski was charged for receiving bonuses he claimed were paid at the direction of Tyco's board of directors. A judge disagreed and in June, 2005, convicted Kozlowski of theft. He was sentenced to serve a minimum of eight years and four months and a maximum of 25 years.<br> <a href="http://247wallst.com/2012/05/17/top-ten-ceos-sent-to-prison" target="_hplink">Read more at 24/7 Wall St.</a>
9. Sanjay Kumar
> Company: Computer Associates<br> > Current status of the company: Still active, renamed<br> Sanjay Kumar, former CEO of Computer Associates, led a $2.2 billion fraud at the company almost entirely via cooking the books. He and his fellow execs utilized sometimes comically simple tactics such backdating contracts and adding an extra week to the financial reporting period -- "the 35-day month." Kumar escaped prosecution for more than five years. His fraud started before 2000, but it was not until 2006 that he was finally indicted on charges of obstruction of justice and securities fraud. He was convicted and is currently serving a 12-year prison sentence.<br> <a href="http://247wallst.com/2012/05/17/top-ten-ceos-sent-to-prison" target="_hplink">Read more at 24/7 Wall St.</a>
10. Martha Stewart
> Company: Martha Stewart Living Omnimedia<br> > Current status of the company: Still active<br> Implicated in the ImClone insider trading scandal, former Martha Stewart Living Omnimedia (NYSE: MSO) CEO Martha Stewart is the most famous entry on this list. Stewart's troubles began Christmas Day, 2001. That is when Samuel D. Waksal, CEO of ImClone Systems, found out that the company's experimental cancer drug Erbitux had been denied Food and Drug Administration approval. Waksal passed the information to friends and family, including his broker, Peter Bacanovic. He, in turn, tipped off Stewart, who dumped her shares before the news became public knowledge. Stewart was charged and ultimately convicted -- not of insider trading, but of perjury. She was sentenced in July, 2004, to five months prison time and two years probation.<br> <a href="http://247wallst.com/2012/05/17/top-ten-ceos-sent-to-prison" target="_hplink">Read more at 24/7 Wall St.</a>