The Powell Memorandum’s 40th Anniversary: Impunity For Control Fraud

August 23, 2011 will bring the 40th anniversary of one of the most successful efforts to transform America. 40 years ago the most influential representatives of our largest corporations  despaired. They saw themselves on the losing side of history. They did not, however, give in to that despair, but rather sought advice from the man they viewed as their best and brightest about how to reverse their losses. That man advanced a comprehensive, sophisticated strategy, but it was also a strategy that embraced a consistent tactic – attack the critics and valorize corporations!

He issued a clarion call for corporations to mobilize their economic power to further their economic interests by ensuring that corporations dominated every influential and powerful American institution. Lewis Powell’s call was answered by the CEOs who funded the creation of Cato, Heritage, and hundreds of other movement centres.

Confidential Memorandum: Attack on the American Free Enterprise  System DATE: August 23, 1971 TO: Mr. Eugene B. Sydnor, Jr., Chairman, Education Committee, U.S. Chamber of Commerce FROM: Lewis F. Powell, Jr.

Lewis Powell was one of America’s top corporate lawyers and President Nixon had already sought to convince him to accept nomination to the Supreme Court before he wrote his memorandum. Powell was famous for his successful efforts on behalf of the Tobacco Institute. The Institute was desperately seeking to prevent the government from alerting consumers to the lethal effects of tobacco and to prevent its customers from holding the tobacco corporations legally responsible for their premature deaths. The Institute played the critical role in covering up the lethality and paying for junk science designed to mislead consumers about the lethal effects of tobacco products. They were literal merchants of death, selling a product that when used as intended was likely to kill the customer.

”For the past 45 years,” Attorney General Janet Reno said at a news conference, ”the companies that manufacture and sell tobacco have waged an intentional, coordinated campaign of fraud and deceit. As we allege in the complaint, it has been a campaign designed to preserve their enormous profits whatever the cost in human lives, human suffering and medical resources. The consequences have been staggering.”

Powell’s confidential memorandum explained why business  was losing the public debate. “The most disquieting voices joining the chorus of criticism come from perfectly respectable elements of society: from the college campus, the pulpit, the media, the intellectual and literary journals, the arts and sciences, and from politicians. In most of these groups the movement against the system is participated in only by minorities. Yet, these often are the most articulate, the most vocal, the most prolific in their writing and speaking.”

Ralph Nader’s Nadir: The Outrage of Calling for Criminal CEOs to be Jailed Among these articulate voices, the person that Powell most feared was Ralph Nader, who he described as “the single most effective antagonist of American business.” Powell cited a Fortune article to explain why Nader was the great danger.

“The passion that rules in him — and he is a passionate man — is aimed at smashing utterly the target of his hatred, which is corporate power. He thinks, and says quite bluntly, that a great many corporate executives belong in prison — for defrauding the consumer with shoddy merchandise, poisoning the food supply with chemical additives, and wilfully manufacturing unsafe products that will maim or kill the buyer. He emphasises that he is not talking just about ‘fly-by-night hucksters’ but the top management of blue chip business.”

One can understand why Powell felt so personally threatened by Nader. “wilfully manufacturing unsafe products that will maim or kill the buyer” describes the tobacco industry and Powell was that industry’s most prestigious apologist.

Why did Powell and Fortune view Nader’s statements as evincing “hatred” of the enterprise system? Fortune raged because Nader believed that the CEOs leading anti-consumer control frauds should be imprisoned where they (1) defrauded the consumer with shoddy merchandise, (2) poisoned the food supply, or (3) wilfully manufactured unsafe products that will maim or kill the buyer. Powell and Fortune assert that these beliefs prove that Nader is radical, dangerous, and hostile to what Powell refers to in his memorandum as the “enterprise system.”

Powell and Fortune’s assertions are nonsensical. A CEO that intentionally maims, kills, or defrauds customers is a criminal and criminals should be prosecuted. Indeed, the crimes that Nader described should be top prosecutions priorities.

Second, prosecuting criminal CEOs is not hostile to “free enterprise.” Powell conflates criminal CEOs with honest businesses. That is something a foe, not a supporter, of “free enterprise” would do.

Third, prosecuting criminal CEOs is not hostile to “free enterprise” – it is a sine qua non for successful “free enterprise.” That means that Powell, not Nader, posed a mortal threat to the survival of “free enterprise” when he claimed that any effort to hold CEOs accountable for the criminal acts they caused “their” corporations to undertake must be stopped.

Anti-customer control frauds target customers. The seller may deceive the customer as to the quality, quantity, or safety of the good or service or the legal authority of the seller to convey the good and/or the promised security interest in the good, e.g., the recurrent counterfeit infant formula scandals (which killed six infants and hospitalized 300,000).

Many anti-customer frauds do not routinely maim and kill. We call a terrible quality car a “lemon” and George Akerlof’s famous article on “lemon’s” markets was published one year before the Powell memorandum. It was this article that led to the award of the Nobel Prize in economics to Akerlof in 2001.

The Market for “Lemons”: Quality Uncertainty and the Market Mechanism. Akerlof, George A., The Quarterly Journal of Economics, Vol. 84, No. 3. (Aug., 1970), pp. 488-500.

The specific examples of the sale of goods that Akerlof discusses are anti-customer control frauds – frauds instigated by the person(s) controlling a seemingly legitimate entity where the primary intended victims were the customers. Akerlof did not discuss the variants of anti-customer control fraud that maim or kill – he focused solely on examples of economic injury due to fraudulent misrepresentations by the seller of the quality or quantity of the goods sold. More precisely, two of Akerlof’s examples – the fraudulent sale of defective cars and rice deliberately intermixed with stones – do maim and kill some customers, but Akerlof did not discuss this aspect. Akerlof had appropriately large ambitions in his article. He sought to provide a “structure … for determining the economic costs of dishonesty” (p. 488). Goods that maim and kill the customer impose the primary economic costs of dishonesty.

Why would prosecuting criminal CEOs be bad for “free enterprise?” Powell and Fortune don’t even attempt to explain why this would be true. It is self-evident to them that a world in which criminal CEOs do not enjoy impunity from the law is a world in which “corporate power” will have been “smash[ed]” and that absent hegemonic “corporate power” “free enterprise” is impossible. Their “logic” and rhetoric are revealing, but absurd. Wanting to prosecute criminal CEOs is not hostile to “free enterprise,” but rather essential to the success and continued existence of “free enterprise.” Akerlof explained why in his 1970 article. “Gresham’s law has made a modified reappearance. For most cars traded will be the “lemons,” and good cars may not be traded at all. The “bad” cars tend to drive out the good” (p. 489).

“[D]ishonest dealings tend to drive honest dealings out of the market. There may be potential buyers of good quality products and there may be potential sellers of such products in the appropriate price range; however, the presence of people who wish to pawn bad wares as good wares tends to drive out the legitimate business. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence” (p. 495).

When cheaters prosper, market mechanisms become perverse and can drive the honest from the marketplace. The market becomes dominated by cheats because they obtain a competitive advantage. The most common reason that firms can cheat with impunity is that their CEOs are cronies of powerful politicians. The defining characteristics of crony capitalism are that the cronies receive subsidies, favours, and immunity from normal rules and laws. The cronies dominate the big corporations and provide reciprocal benefits to controlling politicians. Managerial incompetence and wealth flourishes under crony capitalism. Merit and efficiency suffer, income inequality surges, and class and who one knows become the primary determinants of economic and political success and power. The elites become pervasively corrupt.

Crony capitalism is the antithesis of “free enterprise.” The best way to destroy free enterprise is to allow CEOs to commit control fraud with impunity because that maximizes the perverse Gresham’s dynamic.

“When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that glorifies it (Frederic Bastiat).”

Powell’s memorandum sought to glorify plunder with impunity, but he went beyond Bastiat’s warnings. Powell glorified CEOs who killed and maimed customers.

Powell could have, far more logically, characterised Nader’s position as “crusader against criminal CEOs” or “crusader on behalf of honest businesses.” Powell would never have referred to an individual calling for blue collar criminals to be prosecuted as a man determined to destroy liberty. He would have said that such an individual was increasing liberty – for criminals and crimes impair our liberty. Indeed, that was his rationale for his zealous advocacy for bugging and wiretapping street criminal suspects. President Nixon personally convinced Powell to accept the nomination to the Supreme Court to counter the decisions of the Warren Court, particularly the decisions adding to the constitutional protections of blue collar criminal defendants. Powell, as head of the American Bar Association (ABA), was famous for his campaign against street crime. Powell’s biographer, John Calvin Jeffries, wrote that:

“Powell argued that “a root crisis of the crime crisis which grips our country is excessive tolerance by the public generally – a tolerance of substandard, marginal and even immoral and unlawful conduct.” It had reached the point of “moral sickness.”

He worried that the pendulum may have swung too far in favour of the rights of criminals. Even Little Orphan Annie quoted the ABA chief: “There are valid reasons for criminals to believe that crime does pay, and that slow and fumbling justice can be evaded.” Justice Lewis F. Powell, Jr.,(2001: p. 210.

Powell, in his address to the ABA at the end of his term as President, argued that making Americans free from crime should be the nation’s “first priority” (Jeffries & Jeffries, p. 211). Had he shown any logical consistency in how he dealt with criminals, Powell would have praised Nader’s efforts to have criminal CEOs prosecuted. But Powell could not see beyond class and his own experience in aiding CEOs who were “wilfully manufacturing unsafe products that will maim or kill the buyer” do so with impunity. Can there be any greater betrayal by a CEO than using deceit to wilfully manufacture cigarettes that maimed and killed his customers and those exposed to their customers’ smoke – for the sole purpose of making the CEO wealthy through such sales? Powell showed more than “tolerance” for “immoral and unlawful conduct” – he provided them with aid and comfort. Through his famous memorandum he created a criminogenic environment in which control fraud “does pay” because he helped remove the regulatory cops from their beat and claimed that those who wanted to prosecute criminal CEOs posed such a threat to “free enterprise” that business must show “no hesitation” in marshalling its unmatched economic and political power to “attack” them and ensure that they were “penalised politically.”

It is a measure of how successful Powell’s strategy was in spreading the ideology of corporate dominance and impunity that some of his statements would now be anathema to business. He concedes in his conclusion that: “most of the essential freedoms remain: private ownership, private profit, labour unions, collective bargaining….” In 1971, even prominent Republicans hostile to unions considered the rights to join a union and engage in collective bargaining to be “essential freedoms.”


Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.