Senator HATCH. Thank you, Mr. Ball. I am not going to ask any questions. I will turn the time over to Senator Biden. Senator BIDEN. I have three short questions, Mr. Ball. First of all, the Bell report, as you know, characterizes you from 1980 through 1982 as the leading advocate of, quote, increased interest, end of quote, income. Were you one of the leading advocates? Mr. BALL. Yes, Senator. If I can just expand in one sentence. Mr. BALL. Interest income, yes; of lower costs, yes; and yes, to higher security sales revenues. Senator BIDEN. The Bell report also finds that you did not know that the interest program was being run illegally; that is, zeros being added. I assume that is what he means by illegally, and the chaining. Is that true? Mr. BALL. Yes, sir. Senator BIDEN. Should you have known, in retrospect, as a good manager and communicator? Mr. BALL. I do not believe so. It is a question I have asked myself a number of times. The control mechanisms were in parts of the firm that did not report to me. Now, I am not trying to lay the fault or the blame off on somebody else, but the oversights-the internal audit, the bank reconciliation, the money mobilization departments did not report to me directly or indirectly. So other than by finding a needle randomly in a haystack, I do not know how I could have. Senator BIDEN. What could you have done differently that would have permitted you to know, or what policy could the corporation have instituted or had in place that would have permitted you to know? Mr. BALL. We all tend to fight the last war and not to know what is going to go on in the next one. I would say in the 1982 period that neither I nor-that I certainly did not have any idea that there could be abuses in drawdown systems, period. Senator BIDEN. One of the things we are driving at is that I am one of those people who believes that, in one sense, corporate America has to get bigger if we are going to compete internationally. I am one of those folks who thinks that our antitrust laws, not as your basic security industry, but our antitrust laws have to be looked at again. I will tell you what worries me, quite frankly, is the increasing incidence of the inability of 19th century law relating to accountability being applied to 21st century organizations. All of you guys and women who are, and I am not being facetious, high-powered corporate executives come and tell me, hey, Joe, I cannot possibly know. Now, one of the purposes of this hearing, again, is not to-had I been a prosecutor, I would have been on your ear more than I think they were, but that is another question. That is over. One of the purposes I have now, how do I resolve the dilemma? Corporate America on the one hand says yes, Joe, we need to move along, we need to get more power in terms of economic power, ability to compete, ability to get bigger; and at the same time they say, Joe, lessen my personal responsibility, whether it is treble damage, whether it is personal responsibility, whatever it is. And, see, I hope you in the corporate community, and maybe this message can be extended to anybody in the corporate commu nity that is going to listen to these hearings and anything I have to think about it, I hope you begin to address for me, especially if, God forbid, we end up taking over this committee and I become the chairman. Because I want to tell you, I am going to be very, very necessary to deal with in doing this. And unless you in corporate America can answer for me how you are not only going to need more latitude in competition, but how you are going to produce the prospect of greater responsibility to the public, I am going to have difficulty giving more latitude, to the extent that I play a part. I mean, that is really the context. It is hard in these kinds of hearings to sometimes keep in focus the forest. We concentrate on a tree. The adding of zeros is the tree. The forest, for me, is what do we do about it from here. That is the reason why I ask you the question. So if you, in an editorial sense, and you specifically cannot answer for me how you would create a corporate structure that would know whether or not someone is adding zeros, to use that euphemism now, then what happens is your aggressive management plans--and you, in an editorial sense Mr. BALL. I understand. Senator BIDEN [continuing]. Which says that, hey, we are going to base you, the branch manager's income on your ability to increase profits. We do not care how you do it; do not let me know. Basically that is the message. So you have what your attorney knows better than I, having gone through the years here and counseling and many people involved and many situations, you have the plausible denial defense that is one which, in my view, does more to undermine the legal system and the confidence of the American people in their Government and their major institutions. And lastly to this, you know my whole thinking; not that you care about it, but I predict to you if the answer is not forthcoming, if we cannot resolve this, we will go from a very probusiness climate which exists now to, when things turn around, you will see the vengeance of the populace visited upon corporate America in a way that you will wish you had cooperated with me and others like me to provide a system of accountability which I would argue is not non-existent, but is, at best, a shadow in corporate America. Do you understand my rationale? In light of that, would you answer for me, and I will not say any more, Mr. Chairman, can you tell me either now or for the record how you would organize or reorganize E.F. Hutton so the man in your position with your authority would be able to know about those folks adding the zeros? Mr. BALL. Perhaps I can best answer, in fairness and directly, by talking about Prudential Bache, the firm to which I moved. And if I could philosophize for 8 seconds and no longer. Senator BIDEN. No, take your time. You listened to me. Do not think because of my exasperation with the former witnesses that I am reluctant to let people answer fully. I just thought they did not want to answer my questions. But go ahead. You are answering them. Mr. BALL. It is an increasingly complex society of business. It is difficult for people like Bob Fomon or me because we have to rely more and more on others. All right. That is one of the conundrums. You cannot know it all yourself. You have got to have smart people. In the case of Prudential-Bache, what I did eventually when I moved there was appoint a chief administrative officer and say to him, a very high level person, please pull the control systems together so that if something goes wrong we catch it fast, and so that there are checks and balances. That will never work perfectly. You see, even as I say it, I know that the best control systems like the Challenger space shuttle are going to fail occasionally. But if one does not expect perfection, but rather an honest attempt, then I think mechanically, organizationally, that is the right way to do it. There is one other element. I am not a lawyer so I really cannot help you on that side of it. The question of ethical responsibility in business needs to be addressed by all of us. Teach it, preach it, act it, comport it. And it is something that we are not unaware of, and I am not going to say that we can get it with ease. But probably it is something that has not been as highly and actively espoused by all of us as it ought to be. We have got to change that, or the laws are going to come down on our heads. But we have got to do something to keep the avalanche from deservedly falling on our heads. Senator BIDEN. Well, I would just conclude by saying to you that the same argument can be made about the difficulty of high level elected political officials. We have no reluctance of imposing laws which require severe accountability upon them. I realize the function of the economy and the job my father and brother has depends a lot less on whether or not I function well than on whether or not the chairman of the board of DuPont and Morris functions well. But nonetheless, I hope the business community from this experience is somewhat chastened by the fact that, A, when they are judgmental about those of us who have similarly elongated responsibilities, but we can still go to jail for them or be held accountable for them. And a similar kind of psychology exists within the community. Maybe it has occurred, but I am waiting for the first series, the first resolution to come out of the Business Roundtable that calls for a major symposium on ethics in business and one that is held biannually or annually. I am waiting for that to occur. I think it would be a nice sign. If you were smart and I were your lawyer, I would know how to make you all look a lot better, you, the business community. I think it is time to respond before other people respond. Mark my words: The house of cards is going to fall, and it will hurt all of us in the country. It will hurt our economy, and you all will be the reason for it for not acting. Mr. BALL. I work for the current chairman of the Business Roundtable. Senator BIDEN. Give him my advice. Mr. BALL. And I will see if I can get your idea turned into action, sir. Senator BIDEN. Thank you. I have no further questions. Senator HATCH. Thank you, Senator Biden. I believe that corporate America should make a greater effort to ensure that ethics in business really is taught. I also believe that our business schools need to do a better job of promoting ethics. I also agree that matters like these are very difficult to ferret out, and just because a man is a senior executive officer or top executive officer, it does not mean he knows every little jot and tittle that goes on in those corporations. And you and I both know there is much to be desired in every entity in our society, not just business. I can tell you there is a lot to be desired around here. And we do not very often impose the same restrictions on ourselves that we do on everybody else, even though I think there are some very severe restrictions on Members of Congress. To make a long story short, I think these hearings are important because I think they bring everybody's attention to how important it is to be on top of what is right and what is wrong in corporate America and our society today. I am just sorry I missed the first part of the session with the Justice Department. Joe tells me he was brilliant, but I would expect nothing less. All right. But I would only add this: That if the Democrats do take over, regardless of how good Joe is and fair and evenhanded he will be, you can count on corporate America being under a much greater onslaught than they are right now. There is no question about that. Senator BIDEN. I want to assure you that if the Democrats take over, I am voting for Ted Kennedy for chairman of the committee. Senator HATCH. There is a very good reason for us to stay in power. [Laughter.] Senator BIDEN. As Huey Long said, "I lied." I am joking. I said I had no more. Mr. Chairman, I sent to Mr. Ball, Mr. Fomon and Mr. Ritterreiser identical letters dated April 1, 1986, that asked them to respond to certain questions. I wonder if you have had a chance to respond to that letter yet. Have you? And if not, are you willing to? Mr. CUTLER. Mr. Chairman, Mr. Ball did not receive such a letter. But we have seen the one addressed to Mr. Fomon, and we would be very happy to answer it. Senator BIDEN. Good. I would ask that they be incorporated into the record. Senator HATCH. Without objection, we will incorporate them in the record, and we hope that all witnesses who have received these letters will respond. [Information follows:] I write to you in advance of the Judiciary Committee's scheduled hearing on the White-Collar crime hearings, in which you have been invited to testify, because I wanted you to have the opportunity to think over at least one question before your appearance. In 1961, General Electric and 29 other electrical equipment manufacturers, who, together, controlled 95 percent of the market, were convicted of conspiracy to fix prices. The middle level executives, who were charged and convicted, said price-fixing in the industry was established practice. The company presidents, who were neither charged nor convicted, said they were unaware of the practice. an Following the convictions, a number of civil suits were brought against the principal executives of the companies that charged mismanagement. One of the more prominent of the suits was Graham v. Allis-Chalmers Mfg. Co., 41 Del. Ch. 78, 188 A2d 125 (1963). In Graham, the Court held that the executives were not civilly liable to the corporations for the damage done to the corporation by the conduct of their subordinates in fixing prices in the absence of a showing that they knew of the activity and failed to act. Similarly, they had no duty to institute a program within the company to uncover wrongdoing unless they had grounds to be suspicious that wrongdoing might be occurring. followed the lead of the Supreme Court's decision in Briggs v. Spaulding, 141 U.S. 132,145-42 (1891). Graham The Briggs decision of course, was handed down at the end of the 19th century, and it reflected the wisdom of an era of laissez-faire capitalism and caveat emptor. My thought is to test its contemporary vitality with you in light of recent events and a new era with more concern for responsible conduct. Repeatedly, studies have shown a disturbing pattern of corporate recidivism. In his classic study, in 1940, White-Collar crime, Edwin H. Sutherland examined seventy of the largest manufacturing mining and mercantile corporations in this country. Over an "individual life career" of fortyfive years, the seventy corporations had an average of four criminal convictions each. Subsequent studies have found no difficulty in replicating Sutherland's findings. See e.g. M. Clinard, Illegal Corporate Behavior (1979). Indeed, I note that G.E. has only recently plead guilty to defrauding the United States in connection with the Minuteman missile program. In light of these studies, I wonder how valid it |