Psychology

Why the Rich Cheat: A Primer on Upper Class Criminality

Posted on Tuesday, December 7, 2010


A persistent puzzle about financial crimes is that they often involve fabulously rich executives or traders who risk everything to do even better. The rest of us can only wonder: Just what, exactly, are these people thinking?
That question came up often during the insider trading scandals of the 1980s, which brought down two insanely rich Wall Street superstars, Ivan Boesky and Michael Milken. It arose when billionaire Martha Stewart faced charges -- and eventually served prison time -- for acting on inside information to avoid losses of a few hundred thousand dollars. And the question is sure to be asked often in the months ahead as federal authorities round up more well-heeled suspects on insider trading charges.
This latest government crackdown on insider trading has already ensnared a number of very wealthy individuals. Most notable among them is the billionaire Raj Rajaratnam and the top IBM executive Robert Moffat. Joseph Skowron, the hedge fund manager involved in the FrontPoint case -- but not charged with any crime -- lived in 10,000-square-foot mansion in Greenwich, Connecticut and, according to news reports, "amassed a collection of luxury cars that has included a blue Ferrari 458 and a black Porsche Cayenne."
And just the other day, authorities arrested wealthy San Francisco tax attorney Arnold McClellan, a partner at Deloitte Tax LLP, on charges of insider trading. His wife Annabel was also arrested. The McClellans lived the good life in San Francisco, with a 6,000-square-foot home in Pacific Heights.
What's up with these people, and so many others like them? Why would they risk so much when they already have everything?
Well, as I argued in my book The Cheating Culture, a number of converging factors are usually at work when otherwise law-abiding people with lots of money turn into criminals.
One is a persistent focus among those who are wealthy and competitive on their relative, rather than their absolute, well-being. A 6,000-square-foot house may sound pretty big to most of us, but it may not feel that way if those in your peer group own 10,000-square-foot homes and vacation places in Hawaii to boot. Likewise, a hedge fund guy who makes $10 million a year would seem to be doing amazingly well -- except when he compares himself to the trader down the street in Greenwich who is making $100 million. Raj Rajaratnam was worth $1.5 billion in 2009 -- big money, but not compared to George Soros who was worth $13 billion.
As the economist Robert Frank points out in his book, Luxury Fever, the push to improve one's relative position is actually quite rational and may be hardwired in us. If you're the person with the smallest house in the neighborhood, even though you live in a big house, you may look less like you're going places and get fewer opportunities thrown your way. If you're the person wearing the $500 suit, you may lose out to the guy wearing the $1,000 suit, all other things being equal.
Of course, various Wall Steeters have put the point about relative position in simpler terms over the decades: Money is how people keep score on Wall Street. If you want to be a winner, you need to make more than the next person -- regardless of how much you make already. That imperative can lead people to do some pretty stupid, and illegal, things. Even small amounts of money, such as in Martha Stewart's case, can seem significant because highly successful people often believe that they are winners because they fight relentlessly to score each and every point.
Second, criminal behavior can be rooted in the ever rising bar of material expectations and the financial pressures that result. If you travel in circles where it is normal to have a spacious apartment on the Upper East Side and a place in the Hamptons, you're facing a heavy lift to achieve and sustain that standard of living yourself. In this situation, it does make a difference whether you make $5 million a year or $15 million. Throw in a private jet and a place in Aspen as part of the norm, as well as philanthropic commitments, and you're not going to be in the game without an income that is reliably in the mid-eight figures.
It is easy for anyone to get financially over-extended, and this happens to the rich all the time. There is a long history of wealthy people who have crashed and burned in scandal because they turned to criminal actions to sustain an unaffordable lifestyle. For a particularly egregious case, recall the suicide a few years back of Jeffrey Silverman, the Upper East Side financier -- with homes in Bridgehampton and Palm Beach -- who stole from his own company to make ends meet. He killed himself as the net began to close. New York magazine called him "The Man Who Had Everything." Unfortunately, he couldn't afford everything.
Finally, there is a more pedestrian reason why the rich cheat and break the law. Because they can -- or think they can. When you're part of a winning class which basically owns our political system, it can be easy to think that you're above the rules. Or that you can avoid punishment when you break the rules by pushing the right buttons.
Of course, this belief in impunity is largely correct. Most financial crimes do not result in punishment. The rich know the odds favor them when they cheat and the rewards can be vast. Until that calculus changes, big financial crimes will keep on coming. David Callahan Senior Fellow, Demos and Editor, CheatingCulture.com


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