THE BLOG
11/12/2014 12:17 pm ET Updated Jan 12, 2015

Executives Who Trashed Evidence Must Go to Jail -- Otherwise More Will Die From Corporate Cover-ups

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Let me start with a warning. This is really going to piss you off.

Alarmed by a report a decade ago that one of its airbags had ruptured and spewed metal debris at a driver in Alabama, the Japanese manufacturer Takata secretly conducted tests on 50 airbags it retrieved from scrapyards, according to two former employees involved in the tests, one of whom was a senior member of its testing lab.

The steel inflaters in two of the airbags cracked during the tests, a condition that can lead to rupture, the former employees said. The result was so startling that engineers began designing possible fixes in preparation for a recall, the former employees said.

But instead of alerting federal safety regulators to the possible danger, Takata executives discounted the results and ordered the lab technicians to delete the testing data from their computers and dispose of the airbag inflaters in the trash, they said.

The whistleblowers were two former Takata employees with a combined four decades at the company. They have remained anonymous. The tests -- described by one of the whistleblowers as "hush-hush" -- were conducted in absolute secrecy at Takata's U.S. corporate hub in Michigan. They were done at night and over the weekends so as not to attract attention. When the results came in, the bosses abruptly said, "Pack it all up, shut the whole thing down."

And what has happened since this cover-up, and since these faulty airbags were installed in cars made by multiple manufacturers and sold across continents (16 million cars have been recalled)? Four Americans are dead. One of them is Hien Tran. She died just last month in Orlando, Florida, after a car accident. The accident, however, didn't kill her. Her car's malfunction did. Upon impact, her airbag didn't deploy as a cushion to protect her head and face. Instead it blew apart, and shards slashed her neck: "It looked like a stabbing."

Our government must thoroughly investigate the charges brought by the Takata whistleblowers. If they are found to be credible, I believe the executives who ordered the cover-up must face the charge of murder by negligent homicide. And the company must pay dearly as well (a class-action suit was filed against Takata and Honda just over a week ago, thus before news broke of the secret tests and cover-up), so that other CEOs will understand that creating an environment in which such behavior takes place will bring crippling penalties and hurt their corporate bottom line. Otherwise, these crimes and cover-ups will keep happening, and people will keep dying.

The larger point here is about holding white-collar criminals responsible for their crimes. In the wake of the financial crisis of 2008, which, as some may recall, plunged our country into the worst economic crash since the Great Depression, a few loan officers and a single investment banker went to jail -- but no top executives of financial firms. None of them even faced any serious attempts to prosecute them on criminal charges. Not one.

That's very different from what happened after the savings and loan scandals of the late 1980s. For a comparison, here's what William Black, who helped throw a bunch of the scoundrels involved behind bars, had to say:

The savings and loan debacle was one-seventieth the size of the current crisis, both in terms of losses and the amount of fraud. In that crisis, the savings and loan regulators made over 30,000 criminal referrals, and this produced over 1,000 felony convictions in cases designated as "major" by the Department of Justice. But even that understates the degree of prioritization, because we, the regulators, worked very closely with the FBI and the Justice Department to create a list of the top 100 -- the 100 worst fraud schemes. They involved roughly 300 savings and loans and 600 individuals, and virtually all of those people were prosecuted. We had a 90 percent conviction rate, which is the greatest success against elite white-collar crime (in terms of prosecution) in history.

In the current crisis, that same agency, the Office of Thrift Supervision, which was supposed to regulate, among others, Countrywide, Washington Mutual and IndyMac -- which collectively made hundreds of thousands of fraudulent mortgage loans -- made zero criminal referrals. The Office of the Comptroller of the Currency, which is supposed to regulate the largest national banks, made zero criminal referrals. The Federal Reserve appears to have made zero criminal referrals...And the FDIC was smart enough to refuse to answer the question, but nobody thinks they made any material number of criminal referrals [either].

In the aftermath of the Wall Street crash of 1929, the Pecora Commission's investigation resulted in the head of the New York Stock Exchange doing time. After the dot-com bubble of the 1990s, a number of top corporate executives ended up contemplating whether orange was, indeed, the new black. But not after 2008. On a related note, given the results of last week's midterm elections one can certainly ask if bringing to justice at least some of those who committed the frauds that led to the 2008 crash might have helped Democrats at the ballot box. We'll never know.

Whether it's auto executives covering up design flaws, or Wall Street executives lying about everything from their balance sheets to their exotic yet bogus mortgage securities, if they know they might end up in jail, fewer of them will end up committing crimes that destroy lives. Will white-collar crime disappear if we prosecute more of the criminals? Of course not. But just because homicide still exists doesn't mean it isn't a good idea to punish murderers.

White-collar criminals know what they are doing. They have made a calculated decision, they have weighed the costs and the benefits of lying. If they expect that the cost of getting caught is minimal, they are far more likely to lie. This is simple human nature, at least when we are talking about people without a real moral compass, people who would put the lives of their customers in jeopardy rather than risk bad news for their corporation.

Speaking more broadly, this is why government must vigorously regulate businesses and punish violations. When regulators are too lenient -- as is likely when so many of them are drawn from, and want to return to, the top ranks of the industries they regulate -- the rest of us get hurt. Not only that, but weak regulations mean that all businesses are then forced either to cut corners themselves or risk being destroyed by competitors willing to do so. Many corporate executives are no different from 5-year-olds. Give them an inch, and they'll take a mile.

Assuming the whistleblowers are telling the truth, sending these Takata executives away would be a matter of achieving justice for Hien Tran and the others killed and wounded by the criminals who threw their lives into the trash 10 years ago. Equally importantly, doing so would send a message to would-be white-collar criminals: It doesn't matter if you wear a suit and tie, if you break the law you will go to prison. Sending that message would make all of us safer.

But we haven't been doing that consistently enough in America in recent years. And that's got to change. Now.