Spring 2008 Mid-Term Exam

JS 135 B WHITE COLLAR CRIME SPRING SEMESTER 2008

Instructions

As those of you who have attended class already know, this midterm examination is open book and open note. (It is not, however, Aopen friend,@ so please do your own work.) The exam may be completed any time between April 4 and when it is due in class on Tuesday, April 15^th. Please note that, contrary to the Course Schedule, there will be no class session held on Tuesday, April 8^th, as I will be out of the country. (This exam takes the place of that class.)

Please type your answers, and note clearly the question to which the answer responds (e.g., AQuestion 6: Sentencing Guidelines@).

Please doublespace your answers, and use oneinch margins all around. Your answer should be no longer than the maximum length indicated for each question. (If you really cannot confine your answer to the limit, you may cheat down to 1.5 spacing, but please do not singlespace your answers.) Do not, however, feel that you have to Awrite to the limit.@ Brevity may not be the soul of wit, but a good short answer is preferable to a longer, but bad, one.

If you are quoting from the textbook, please use quotation marks and cite the textbook as APWH at [page number].@

Finally, before getting started, I apologize for the screwy formatting of the exam. I have tried, but this is the best I can do. Blogging is obviously not something I should pursue full-time.

Exam Questions

1. Discuss Professor Sutherland=s definition of white collar crime and compare it to the FBI definition we discussed in class (if you missed that class, Google the FBI definition). (maximum answer length: 1 page)
   

   
   

2. What is a Ponzi scheme? Why is it also called a Apyramid scheme@? Please provide an example of such a scheme, either from the textbook or from a class discussion. (maximum: 1 page)
   

   
   

3. Describe what kinds of white collar crimes may have contributed to the current subprime mortgage mess. Discuss the roles of buyers, Astraw buyers,@ brokers, and lending institutions in creating the problem. (maximum: 3 pages)
   

   4. Securities Fraud (maximum for all subquestions: four pages)
   

   A. What is Ainsider trading@?
   

   B. What is Astock manipulation@?
   

   -- Describe a Apump and dump@ scheme
   

   -- What is revenue recognition fraud?
   

   C. What is meant by a Afiduciary duty@?
   

   D. What is Astock options backdating@? Who is hurt by it?
   

   5. Corporate Fraud (maximum length: three pages)
   

   1. Describe how Enron used limited partnerships and
      

      socalled Aspecial purpose entities@ to manipulate their financial statements.
      

   B. How were these entities used to hide debt?
   

   C. Why did Enron want to hide debt?
   

   D. Explain the phrase, ABeyond a certain point, complexity is fraud.@
   

   6. Sentencing Guidelines (maximum length: three pages): Please prepare a sentencing guidelines calculation for Defendant Smith using the following fact pattern. Include the base offense level, your proposed upward adjustment for loss, and any other upward or downward adjustments you believe might apply.
   

   
   

   Defendant Smith works as a purchasing agent for Supplied Materials, a Santa Clarabased worldwide manufacturer of semiconductor chips. As part of his duties, Smith orders precious metals used in the fabrication process. Those orders can range anywhere from $100,000 to $10 million. Smith does not believe that his salary of $80,000 per year, plus stock options, adequately reflects either his intrinsic worth or the great value he brings to the company. He therefore decides to supplement his income by entering into the following conspiracy:
   

   
   

   Smith purchases a domain name, ASuppliedMaterialsInc.com,@ that is strikingly similar to the true domain name for his company (ASuppliedMaterials.com@). Smith, posing as the guy in the next cubicle, sends an email using the Aspoofed@ domain name to place an order for $2.8 million worth of gold and palladium with a precious metals supplier, PM Corporation (PMC). Instead of having PMC ship the product to Supplied Materials at its headquarters address, Smith tells the PMC representative that Supplied Materials has opened a new warehouse in Sacramento, and directs PMC to ship the product to that address.
   

   Meanwhile, Smith has recruited five friends to help with the scheme. One friend rents a warehouse in Sacramento and sets it up to appear to be a legitimate Supplied Materials address. Another agrees to sit behind a desk at the bogus warehouse on the day of the delivery and pretend to be a receptionist. Another friend agrees to act as a security guard, while two others agree to play the roles of truck driver and loading dock worker, so that when the truck arrives from PMC with the product it will appear that another delivery is also taking place (lending a greater appearance of legitimacy to the facility).
   

   A supervisor at PM Corp. reviews the transaction and decides that, because Supplied Materials is a new customer, PMC will not ship the product all at once, as originally agreed, but rather will break it up into four equal shipments of $700,000, and not make the second shipment until after the first has been paid for.
   

   This turns out to have been a wise move by the PMC supervisor as, on March 31, 2008, an armored truck delivers $700,000 worth of gold and palladium to the bogus warehouse. The Aloading dock worker@ signs for the shipment. After the PMC truck drives away, the conspirators close down the warehouse, remove all traces of their occupancy, and sell the precious metals to a Afence@ for $350,000.
   

   The five codefendants plead guilty. Two of them agree to cooperate and testify against Smith, the only defendant going to trial. Two weeks before trial, Smith sends an emissary to the two cooperating defendants, offering them $5,000 each to testify that Smith did not have anything to do with the conspiracy.