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Analysis of Lehman Brothers’ Scandal From the Perspective of Classical and Critical Theories of Crime

Abstract

The criminal justice system is regarded as the best way of reducing and preventing incidences of crime in society. There are various types of crimes in a given community. The current essay sought to address corporate crime, which is one form of common crime. The author analyzed the financial improprieties committed by the Lehman Brothers. The analysis was carried out using two theories of criminology. Various aspects of classical and critical theories were highlighted about the crime committed by Lehman Brothers. The two theories helped in analyzing the crime in terms of how it occurred and whether or not it can be predicted and prevented in the future. Finally, the author recommended various responses to similar crimes in the future. The two theories were blended to shed light on corporate crime in general.

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Introduction

Overview

In any given society, an individual or a group of people may likely offend others. Such instances of conflict breed crime, which results in unrest within the community. According to Siegel (2010), an act that is committed contrary to existing laws, and to inflict harm on others, is called a crime. Societies have put in place institutions and mechanisms to mitigate such actions. Siegel (2010) refers to such structures as criminal justice systems. The current paper discusses two theories in the area of criminology. The theories are discussed in the context of the corporate crime committed by the Lehman Brothers.

Corporate Crime

In a societal setting, crime exists in various forms. According to Leap (2007), crime can either be violent or nonviolent. Rape, armed robbery, and terrorism are just but a few of the examples of violent forms of crime (Leap, 2007). Criminal activities can also be perpetuated in a non-violent manner. Siegel (2010) points out that the majority of financially motivated crimes are mostly non-violent in nature. According to Siegel, such criminal activities are referred to as ‘white-collar crime’ in academic and criminal justice circles. Corporate crime falls in the ambit of white-collar crime (Leap, 2007).

As the name suggests, corporate crime is the kind committed by companies and other entities. In such cases, the actual crime is assumed to be driven by a legal persona mandated by the company to oversee its operations (Hopkins, 2001). In other scenarios, corporate crime is committed by persons who are acting on behalf of a given organization. Hopkins (2001) is of the view that certain jurisdictions condone corporate crime. While making reference to Milton Friedman, Hopkins (2001) gives the example of instances where insider trading is not regarded as crime.

Corporate crime, like any other social ill, is not an act that can be singled out in society. There are multiple examples of acts that constitute corporate crime. The most common instances that highlight this nature of crime include bribery and embezzlement of funds (Landau, 2002). Insider trading and corporate espionage are emergent examples of corporate crime. The former involves the sale of stock based on prior information only known to a given party. On its part, the latter involves theft of information from an organization. The same is mostly done electronically by the use of hackers.

The nature and finesse of evolving criminal activities notwithstanding, Slattery (2003) argues that criminal justice systems should make use of existing theories to deter all forms of crime. The financial fraud committed by the Lehman Brothers in the United States falls within the domain of corporate crime. The classical and critical theories of criminology can be used to explain and possibly prevent similar crimes in the future.

Theories of Crime

Overview. Criminology is a phenomenon that is characterized by its own schools of thought. Over the years, philosophers have advanced theories that attempt to explain why and how crimes are committed. Theories of crime also seek to respond to the question of who takes the responsibility for a criminal act (Gardner & Anderson, 2011). Further, the theories are applied to prevent and minimize crimes in the future. Classical and critical theories are discussed in this paper as two examples of theories of crime.

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Classical theory. Gardner and Anderson (2011) suggest that an understanding of a given crime is realized only through an analysis of certain variables specific to the act. The classical theory of crime looks at criminal behavior from two perspectives. The first perspective is the purpose of committing the crime. The same theory examines the motivation behind a crime as its second variable (Gardner & Anderson, 2011). According to Siegel (2010), the theory can be traced back to the 18th century. It was advanced by two social philosophers, Jeremy Bentham and Cesare Beccaria (Siegel, 2010).

Slattery (2003) argues that the two philosophers viewed man as a creature with calculative abilities. Bentham and Beccaria argued that the criminal behavior of an individual is sourced from the said abilities. At the time, it was believed that individuals possessed a free will. Consequently, the only way to prevent a person from committing criminal activities was to ensure that extreme forms of punishment were put in place. As such, the classical theory presupposes that an individual will commit a crime only when the punitive consequences are not intimidating enough.

Critical theory. The critical theory seeks to determine the root cause of a particular crime (Landau, 2002). Further, the theory is used to ensure that natural justice is served on any person who commits a criminal offense. The underlying principle of this theory is the ‘oppressiveness’ extended to the masses either by a government or by a corporation. The theory was advanced by a group of philosophers who included Bonger, Quinney, Greenberg, Currie, and Colvin (Hopkins, 2001).

The critical theory assumes that the inequalities existing in a given society act as the breeding grounds for criminal acts (Landau, 2002). Within the classical theory, there is a school of thought that believes the capitalist nature of an economy is the cause of inequalities in society. The economic system relegates many people to poverty and provides economic opportunities to a select few in society.

Etiology

The Lehman Brothers’ Scandal

In the U.S., there was a boom in the real estate sector between 2003 and 2004 (Protess & Craig, 2013). Lehman Brothers was a leading financial outlet in the country at the time. The organization made plans to benefit from the boom by acquiring five mortgage companies. One of the most interesting credit facilities associated with the firm was the ‘Alt-A’ loan. According to Protess and Craig (2013), the said product was associated with one of the mortgage companies recently acquired by Lehman Brothers. The loan was advanced to clients with incomplete documentation, thereby increasing the risks associated with the credit.

Given the easy credit that the company advanced to the clients, the value of property markets shot up by more than 50% in the period leading to 2006 (White, 2013). As a result of this boom, the company increased its stock in the market to approximately $60 billion (White, 2013). However, the high value of properties worked against the company. Millions of property owners who have financed their real estate using credit failed to pay back their loans. The risk increased and reached a point where the company was unable to sustain the accruing bad debt (White, 2013). Eventually, the organization filed for bankruptcy, although the damage to the global markets was already done.

On the surface, it would appear like there was no actual crime committed by the said institution. The argument of a ‘good business gone bad’ would suffice in this case. However, as Protess and Craig (2013) put it, there were serious financial improprieties committed by the institution. One can then argue that the said improprieties constitute corporate crime since an offense was committed without violence (Koller, 2012). Interestingly, not a single individual from the Lehman Brothers has been prosecuted for the crimes. Concerning the British Finance Minister, White (2013) suggests that the blame lies with the regulatory institutions and the organization concerned.

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Why the Criminal Event Occurred

Overview. Slattery (2003) argues that a criminal event can be analyzed using specific theories in criminology. In the context of this paper, the Lehman scandal is examined from the classical and critical theories. The discussion that follows explains why the criminal event occurred from the two perspectives.

Lehman Brothers from the perspective of classical theory. According to Rogowski (2010), the classical theory suggests that crime is committed by an individual out of their own volition. In the case of Lehman Brothers, their Alt-A loan was against the financial regulations put in place by the U.S government. The Securities Exchange Commission stipulates that financial lending agencies must ensure that proper documentation is provided for a loan to be issued (White, 2013). In this case, the organization’s management chose to ignore the said regulation.

Protess and Craig (2013) suggest that the crime went on unabated given the low punitive measures regarding matters touching on financial impropriety. Protess and Craig argue that at the time, the Securities Exchange Commission did not have strong systems in place to regulate the operations of financial institutions. In addition, the U.S. Federal and State laws lack harsh punitive measures for such corporate offenders. For instance, if death penalty was the punishment for financial and economic-related crimes, the management of Lehman Brothers would have exercised caution.

Lehman Brothers from the perspective of critical theory. According to Koller (2012), corporate crimes thrive in a capitalist society. In the case of the Lehman Brothers scandal, the financial improprieties were intended to maximize the real estate boom. As illustrated by Landau (2002), the critical theory on crime is premised on inequalities in a society. The expectations in such a situation would be that the poor will commit crimes against the rich. However, the reverse is true at times (Koller, 2012). The wealthy financial institutions capitalized on the poor masses’ desire for decent homes. To this end, mortgages were issued without any ethical considerations.

The critical theory asserts that a state or an organization can commit injustices against the citizens (Koller, 2012). With regards to the current criminal event, both the American government and Lehman Brothers are culprits in the said corporate crime of financial impropriety. The government failed to rein in the Lehman’s managers. On its part, the Lehman organization was driven by the need to make money. The individuals managing the company never thought of putting a hold on the bad debt that was accumulating.

Interestingly, the government did not make any efforts to ensure that there is fairness as far as justice is concerned. As aforementioned, the classical theory on criminal behavior explains the root cause of crime. In addition, the theory makes a case for natural justice (Siegel, 2010). The Lehman scandal had a ripple effect on other financial institutions in the region. The effects were especially pronounced for those institutions that also had bad debt (White, 2013). It was against natural justice to bail out the said financial institutions and allow the management of Lehman to walk away unpunished.

Prediction and Prevention

Theories and Crime Prevention

According to Brandon and Farrington (2004), theories relating to crime enable the criminal justice system to prevent future occurrences of such acts. In this regard, classical and critical theories enable one to predict and even prevent corporate crimes. The crimes referred to in this case include those committed by financial institutions, such as the Lehman brothers. The criminal justice system is strengthened by the two theories.

Prediction and Prevention of Corporate Crime from the Perspective of Classical Theory

There are societies where the punitive measures on crime are extremely lenient. In such a society, an individual will most likely commit a crime deliberately. Such an individual is aware of the fact that the consequences of such acts are not too much to bear. Hollis-Peel, Reynald, Bavel, and Walsh (2011) point out that one can easily predict the occurrence of corporate crimes in instances where there are ‘soft’ punitive measures.

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An example of the relationship between soft punitive measures and crime is evident in the hypothetical scenario illustrated in this section. One can assume the existence of two companies, W and X, which are operating in a given society, Y. Within Y, there are laws and regulations similar to those in any other civilized society. The laws on corporate espionage in Y state that if one is found guilty of committing the said crime, the punishment is a fine of $1000. The fine can be fixed and does not vary with the value of the product stolen. In the event that there is a product worth $1,000,000 in company X, the cost of stealing the same by W is very low. According to Siegel (2010), the existence of such low punitive measures can enable one to predict whether a crime of such a nature will be committed or not.

The most effective way of deterring crime is to ensure that there are tough punitive measures in place (Hillyard, Pantazis, Tombs & Gordon, 2004). Going back to the example of society Y given above, punitive measures for corporate espionage may include death penalty and closure of the company sponsoring the theft. Such actions will discourage companies and individuals from engaging in such crimes. The same can be applied to Lehman-type crimes. In such instances, the chances of such crimes occurring in the future are reduced.

Prediction and Prevention of Corporate Crime from the Perspective of Critical Theory

Hollis-Peel et al. (2011) think that crime, from the perspective of critical theory, is perpetuated by an oppressive state or organization. In the case of the financial improprieties perpetrated by Lehman Brothers, White (2013) argues that the state was lenient on the financial institution. The implication is that the government is working together with the financial sector to precipitate economic crises against the masses.

One can predict the occurrence of a similar in a society where the state and the companies work together to oppress the citizenry. A similar consideration can be made in the hypothetical society Y discussed above. Friedrichs (2003) is of the view that capitalism is a major driver of crime in a given society. To this end, if Y is a capitalist society and the majority of the citizens are impoverished, the state likely relies on taxes to fund its operations. The Lehman scenario can be replicated if the government in Y purposefully allows the companies to perpetrate financial crimes. The government can encourage such crimes if it continues to bail out the organizations punishing the perpetrators.

The only way to avert such a scenario is to ensure that some checks and balances inhibit a capitalist state from oppressing the poor. It is important to note that it is not possible to completely eliminate poverty from society. However, Friedrichs (2003) argues that it is possible to minimize oppressive economic policies. According to the assumptions made by the critical theory, the absence of oppressive economic policies reduces the rates of crime in society (Slattery, 2003).

Corporate Crime from the Perspective of Classical and Critical Theories: Recommended Criminal Justice Responses

The Existence of Criminal Justice Systems

There are various reasons why criminal justice systems exist in society. One of the major reasons is to ensure that criminals pay for their acts (Siegel & Worral, 2012). Criminology theories can be used to advise stakeholders in the justice system on how to respond to crime. For example, the critical and classic theories of crime can be applied to provide suitable recommendations on how suspected criminals should be handled by the police, the courts, and by society at large. However, Siegel and Worral (2012) are of the opinion that regardless of the school of thought used to prevent and fight crime in a society, all people should be treated as suspects. It is only after being fairly tried in a court of law that an individual can be proven innocent or guilty of their crimes

Recommendations from the Perspective of Classical Theory

As mentioned earlier, the classical theory of crime operates on the assumption that individuals commit criminal offenses out of their own free will (Dale, 2011). It is assumed that one can decide to either commit or not commit a crime. However, there are cases where an individual is made to commit a crime by factors beyond their control. Such an individual is pushed into crime by certain threats in society. In such cases, it is the duty of the law enforcement agencies to conduct thorough investigations before making any arrests. The agencies should avoid victimizing individuals by arresting them without investigating the alleged crimes.

Dale (2011) points out that in the event that a suspect is arrested, the law enforcement agencies should process them systematically. For example, the police and the courts should ascertain whether the person is in their right state of mind or not. It will be unfair and a violation of human rights to prosecute a person who committed a crime due to a mental problem. In such instances, the assumption is that the individual was not to blame for their actions. If such individuals were sane, the authorities take that they would not have committed the crime.

However, it is recommended that the suspects should be detained and denied bail until their trial is concluded. The temptation to escape from the jurisdiction of arrest is high. Such individuals may violate their terms of bail and escape from the criminal justice system. A case in point is the financial scandal perpetrated by Lehman Brothers. The management would have skipped bail and possibly fled to a country that has no extradition treaty with the U.S. Under such circumstances, the courts would have been misled if they gave the Lehman management team bail.

The moment a suspected criminal is introduced into the criminal justice system, it is expected that they will be tried for their crimes against the highest punitive measures possible (Lobao & Regelio, 2002). According to the classical theory, a criminal carries out their activities after determining the insignificance of the consequences of their actions. As a result of this, the authorities should think of making such financial improprieties a capital offense. The crime committed by Lehman Brothers was so serious. It adversely affected not only the American economy but also the entire global financial market (White, 2013). The U.S financial market almost collapsed as a result of this crime. A life sentence (or even a death penalty) would be the best punitive measure in such cases.

Recommendations from the Perspective of Critical Theory

The underlying principle of the critical theory, as already mentioned in this paper, is the inequality emanating from capitalist economic systems. Despite this, Neubauer and Fradella (2013) argue that most countries in the world have embraced capitalism. Perhaps, this is the reason why corporate crimes are on the rise in the world. Consequently, it would be unfair to abolish the entire economic system just because a few individuals are benefiting from it at the expense of the majority. The author of this paper recommends that checks and balances should be put in place to ensure that the free market is not over-exploited by the economic elite. For example, the government should put in place measures to ensure that such crimes do not occur in the future. Such measures can be implemented through tough legislation.

With regards to the financial improprieties committed by Lehman Brothers, it would be in the best interest of the U.S. to empower the securities exchange to deal with errant financial institutions. According to Dale (2011), white-collar crimes are not easy to combat. The reason is that they are committed by people who are highly educated and who are capable of avoiding detection. As such, the police and other investigators should be trained on how to detect these crimes. To this effect, the author of this paper argues that the best way to deal with similar financial improprieties in the future involves putting in place impartial and firm regulatory agencies.

Conclusion

The financial crime committed by Lehman Brothers was a threat to many economies in the world. The Securities Exchange Commission failed to regulate the operations of this errant financial institution. The culprits of this crime include the Lehman Brothers, the Securities Exchange Commission, and a host of other financial institutions.

According to classical theory, crimes are committed without any coercion. However, for such an act to take place, one has to weigh the resulting consequences. A look at Alt-A products indicates that the profits to be made far outweighed any criminal consequences. An example is in the $60 billion equity that the company had acquired (White, 2013). By all means, this was a huge amount of money to walk away with after such a heinous financial crime.

The need for justice explains the application of the critical theory in this paper. The theory is supported by philosophical arguments borrowed from Marxism, feminism, and other schools of thought that are against oppression. An example of justice through this theory was witnessed in the United Kingdom where homosexuality was considered illegal. However, in 1967, persons above the age of 21 were allowed to engage in this sexual activity (Koller, 2012).

Societies are laden with instances of criminal activities. The criminal justice system must ensure that law and order are maintained at all times. The police must collaborate with prosecutors to ensure that the proper punitive measures are structured to minimize crime.

An analysis of the two theories of criminology introduces a notion of societal coexistence. According to Kim, LaGrange, and Willis (2002), crime is important in understanding how a society works. The classical theory attributes a crime to the desire for better things without having to work hard for them. The individual’s cognitive abilities are analyzed from the perspective of their actions. The theory examines the value system of a people.

Seiter (2013) suggests that criminal justice systems are put in place to ensure that persons are held to account for their criminal activities. It is hard to understand why none of the executives at Lehman Brothers was prosecuted for their misconduct. From the definition of corporate crime, it is apparent that the persons who should be held accountable are the agents who represent the interests of the company. The executives at Lehman had a case to answer with regards to the Alt-A loans.

The need for justice informs the invocation of the critical theory in criminology. According to this theory, offenses committed against an individual require some form of retribution. White (2013) reiterates that the effects of the Lehman scandal put the global economy in limbo. Natural justice dictates that a person who commits a crime must account for their actions in a court of law.

The punishment for white-collar crimes must be made harsh. Leap (2007) suggests that future criminals will rely little on violence as a result of the rise in technological growth. The only way to minimize such crimes is to ensure that the state does not oppress the citizens. It is a fact that crime is evolving. As such, there is a need to come up with new theories to address the challenges posed by this evolution. Research should be conducted on emergent social and economic crimes in a bid to minimize and prevent all criminal behaviors in society.

References

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