GlaxoSmithKline Gets A Slap On The Wrist

This story is interesting.  GlaxoSmithKline settled some civil and criminal charges for $3.1B.  It’s for abuses marketing drugs. They tried to convince doctors to prescribe a drug “off-label”, a use for which the drug was not approved.  They gave doctors kickbacks, based on the amount of each drug they prescribed.  According to that article, the $3.1B settles all criminal and civil offenses regarding these abuses.

What’s the problem?  According to Yahoo Finance, Glaxosmithkline (GSK) had gross profit of $33B last year, and $8B of net earnings.

A fool would say “$3.1B is a lot of money!  That’ll teach them!”  To the average slave, $3.1B is a huge amount of money.  To a large corporate State monopoly, $3.1B is less than 2 months’ earnings.

Suppose that 10k+ people got sick or died as a result of GSK’s abuses.  In effect, GSK was sentenced to two months in prison for all those crimes.

$3.1B seems like a lot of money, but in a class action settlement like this each victim may get $10k or even much less.  The only people who make money off big class action lawsuits are the lawyers.

There really should be a “corporate death penalty”.  If executives of a corporation commit severe abuses, then the corporation should be liquidated and the assets given to the victims.  In effect, the victims would become the new shareholders, and all other shareholders and bondholders should get $0.

Unfortunately, judges say that lawsuit damages should never be so big that they bankrupt the corporation.  That is false.  If the executives commit severe crimes, they should lose their corporation and job and career.

The $3.1B isn’t even paid by the executives who broke the law.  The $3.1B is paid by GSK shareholders, and not by the criminals.

$3.1B is only 2 months of profit, and probably less than the money GSK made by breaking the law.

In effect, this “settlement” says “It’s OK for executives to break the law.  If they get caught, the fine will be negligible compared to the amount of money you stole.”

That’s a clear established precedent.  When insiders get caught doing something wrong, the penalty is usually less than the money they stole.

Suppose you robbed a bank and stole $10k.  If you get caught, you have to give back $5k and you can keep the other $5k.  If that was the law, then wouldn’t you steal as much as you can?  In effect, that’s what these settlements say.

This is a very common pattern.  Drug corporation CEOs cover up negative side effects of drugs, or encourage harmful off-label use.  When they get caught, the fine is effectively a slap on the wrist.

There are two justice systems, one for insiders and one for everyone else.  Conrad Murray murdered Michael Jackson with a drug overdose, and he went to jail.  GSK executives made a lot of people sick by encouraging misuse of prescription drugs, and they got a slap on the wrist.

$3.1B seems like a lot of money, but it’s negligible compared to GSK’s total earnings and the amount they gained by breaking the law.  Whenever a CEO breaks the law, the fine is typically negligible compared to his corporation’s profits.  Even worse, the fine is not paid by the criminals, but rather by GSK shareholders.  With a fine equal to less than 2 months of earnings, GSK effectively spent 2 months in jail for all the people they hurt.

4 Responses to GlaxoSmithKline Gets A Slap On The Wrist

  1. Hi FSK. My first thought reading this was, ‘this is exactly why we do not need government.’ This is a sharp idea for a model of justice. Where do you get ideas like this from? This is really good.

    • I’ve mentioned this many times. It’s a common problem.

      CEO and executives break the law. The fine and lawsuit damages is less than one year’s profit. In many cases, the damages are less than the amount gained by breaking the law.

      In this case “breaking the law” correlates with “actually hurting people”. The drug corporation executives encouraged off-label use of drags, which may have hurt people.

      This happened before. Eli Lilly covered up “Zyprexa causes diabetes”, and drug sales reps were explicitly instructed to downplay the risk. The fine and settlement was less than 1 year of profits from Zyprexa.

      For another example, BP cut costs on safety, leading to the Deepwater Horizon accident. The amount they saved by cutting costs on safety may be more than the damages they paid to settle claims.

      For another example, Goldman Sachs and other banksters sometimes get caught breaking securities laws. They usually settle for less than the amount they stole!

      Wachovia laundered money for Mexican drug cartels, and got away with a slap on the wrist. (Actually, “money laundering” should not be legal. Those laws can come down hard on non-insiders, but insiders get away with it as usual.)

      “Corporate death penalty” was commonly invoked in the 18th and 19th century. It isn’t used any more. The legal principle now is “Damages from a lawsuit should never be so big to bankrupt a corporation.”, which lets executives get off scot free.

      Another problem is that the damages are paid by the corporation/shareholders, and not by the executives who broke the law. The Federal Reserve and inflation means that cash/bonds are a lousy investment. This forces people into the stock market, where they can get fleeced by CEOs and insiders.

      Limited liability incorporation is also a factor. That places a cap on potential damages.

      In a really free market, in incidents like this, the punitive damages should be so great to bankrupt the corporation and all the executives.

      I also like the way the mainstream media says “Wow! $3B! That’s a lot of money!” rather than “It’s a drop in the bucket, compared to GSK’s total earnings. It’s a slap on the wrist. It’s probably even less than the extra profit GSK made by breaking the law.”

  2. I hope you don’t mind me going back and resurrecting some of your old posts. You have a direct and penetrating way of looking at things that I really enjoy.

    Anyway, this is exactly what I thought should happen back during the DWH disasters, as well. Corporate death penalty. BP should not have been allowed to continue being an oil company after that.

    “Too big to fail” applies to many sectors of capitalism, not just the banking industry.

    • No, I don’t mind comments on old posts. That’s why the “Reader Mail” posts let people see comments, even on old posts. I’ve been busy with my new job, with less blogging time.

      If executives at corporations get caught committing fraud or hurting people, then there should be a “death penalty”. In the case of pollution or drug fraud, then the plaintiffs become the new shareholders.

      That’s one of the worst principles of the “justice” system, namely “Fines and lawsuit damages should never be so big that a large corporation is bankrupted.” Why not? If the crime is flagrant enough, then the shareholders and bondholders deserve to lose, for investing in a dishonest corporation. More importantly, the executives should lose their jobs.

      At one time, if a corporation went bankrupt due to gross incompetence, then the executives would never get a good job ever again. At one time, if executives committed crimes, they were prosecuted. Now, insiders have nearly absolute immunity. Jon Corzine gets to start a new hedge fund after stealing $1.6B from customers.

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