August 11, 2006
The Irreparable Harm of Prosecutorial Overreaching
Posted by Christine Hurt

The prosecutorial response to white collar crime post-Enron has had some setbacks.  In both the Arthur Andersen case and the Enron Nigerian Barge case, appellate courts eventually said that the fact pattern did not constitute the crime in question.  However, as welcomed as these decisions are, they cannot turn back time.  Arthur Andersen was destroyed by the investigation and conviction and, like a corpse after an autopsy, cannot be brought back to life.  The defendants in the Nigerian barge case will never get back the years they spent defending themselves and actually living in prison, not to mention the untold defense costs.  I am writing a paper on the relative burdens on the various parties in criminal and civil corporate misconduct cases, and I find it interesting that we have so many requirements and presumptions to save corporate civil defendants from vexatious litigation and exorbitant discovery costs, but we seem not to care about the corporate criminal defendant who must wait until a jury verdict or an appellate ruling to determine whether the prosecution was without merit.

I was reminded of this paradox when reading this story in the WSJ this morning about the decimation of BetOnSports.  As I blogged before, the DOJ arrested the CEO, who is not a U.S. citizen or resident, as he was changing planes in Dallas on his way from London to Costa Rica.  BetOnSports is not a U.S. company, is not listed on any U.S. exchange, and has no assets in the U.S.  BetOnSports is listed on a UK exchange and is headquarted in Costa Rica.  Mr. Carruthers is still in jail in St. Louis, separated from family and business in a foreign country.  Now, surely to try to appease the DOJ, BetOnSports has announced that it will take no more bets from Americans and will return their deposits.  Analysts say this will in fact mean the end of BetOnSports, who received 3/4 of its revenue from American bettors.  And by the time a U.S. court ever answers the question of whether prosecutors can actually make a case against Carruthers and BetOnSports under existing law, the damage will have been done.

Playboy is banned in many countries.  If the governments there found out that their citizens were able to order the magazine over the Internet or access its website, would the DOJ stand back if Hugh Hefner was arrested while traveling? 

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Comments (9)

1. Posted by Joan Heminway on August 11, 2006 @ 10:26 | Permalink

Interesting post.

You state: "we seem not to care about the corporate criminal defendant who must wait until a jury verdict or an appellate ruling to determine whether the prosecution was without merit." Although I am no white collar crime expert, as you know (and as many of us might admit), because of my interest in Rule 10b-5, I have been dragged kicking and screaming into criminal law and procedure by the recent fraud prosecutions. There are some, albeit not many (and they may or may not be meaningful in any given case), procedural protections for criminal defendants other than the obvious higher standard of proof.

Of course, at the indictment phase, the Grand Jury typically does vet the charges. Query how much this means, however. Many have written that the Grand Jury is just a rubber stamp for the government's case.

Also, post-indictment and pre-trial, defendants can move to dismiss the charges and/or can file a motion for acquittal. As you may recall, both were done in the Martha Stewart criminal tral, and Stewart was acquitted of the Rule 10b-5 charge when the judge granted her motion for acquittal. (My paper on the Stewart Rule 10b-5 charge just was released--65 Md. Law Rev. 380--and it deals with some of this.) Although these may be deep discount probabilities for the criminal defendant, I just wanted to make sure you knew they were there.

2. Posted by Christine on August 11, 2006 @ 10:48 | Permalink

I know there is a 12(b)(3) rule that allows for motions to get rid of stupid charges, but my sense is that they are not granted very readily. Let me know if you have a different sense. Also, in the Martha case, wasn't the "acquittal" after the presentation of evidence at trial? So, that remedy wasn't as great as say, the 12(b)(6) remedy that MSLO was able to achieve on a parallel charge in the derivative case? If I've gotten the facts wrong on the acquittal, let me know!

3. Posted by Joan Heminway on August 11, 2006 @ 11:00 | Permalink

You have the Martha facts on the acquittal motion correct. As I recall, the motion cannot be made until at least the end of the government's case. Of course, the motion to dismiss would be earlier made. One was made by Martha, but it was unsuccessful.

I hear you on the main point of your argument, however. Keep fighting the good fight!

4. Posted by Nicholas Branch on August 14, 2006 @ 1:33 | Permalink

I repeat hear the substance of a comment I recently posted on the WSJ blog, about what often happens while corporate criminals are "waiting";

To begin with, it can cost tens of millions of dollars to fight these things, and its not a fair fight. “Perp” walks and defamatory press conferences sponsored by the DOJ poison the jury pool of many defendants who might actually want to do so. Plea bargaining -- perhaps the most lethal of the prosecutors’ powers -- ensures that there aren’t many who do. See Yale Professor John H. Langbein’s “Torture and Plea Bargaining,” 46 U. Chi. L. Rev. 3 (1978-79), a frightening look at plea bargaining written at a time when that power was relatively muted. What percentage of the 1,000 corporate fraud “convictions” the DOJ brags about was the result of such pleas. 90%? 95%? The imposition of the hoped for but as yet uncertain more lenient sentence is often delayed while the pleaders “cooperate” with the prosecution vis-à-vis other “targets,” which cooperation many times means fabricating and/or putting a prosecution spin on “evidence” and/or simply staying silent and not providing exculpatory evidence. Perhaps the most effective use of the plea bargaining power is that prosecutors can silence or coerce testimony containing strained versions of the truth from witnesses who might otherwise have told a truth anathema to the often young and inexperienced but ambitious prosecutors’ “theory of the case.” At the few trials that are eventually had, prosecutors have many additional advantages, including the ability to frustrate a defendant’s right to face his or her accusers by use of the “coconspirator” exception to the hearsay rule, which allows the presentation of alleged statements by “witnesses” who never appear in court and who the defendant can’t compel to testify. There are many other arrows in the prosecution quiver, but add to them the more recent development whereby prosecutors force companies with the threat of indictment and bankruptcy to waive the attorney-client privilege and/or to cut off payment of defense costs. See, e.g., WSJ Blogger Lattman’s recent blog, “ABA Takes Aim at the Thompson Memo, Again.”

5. Posted by Steve Hassart on August 16, 2006 @ 9:38 | Permalink

To complicate matters even worse, prosecutors have ridiculous charges like "honest services" mail fraud, which brings absolutely any conduct within the gambit of fraud. No longer is property or money a requirement. Now a mere failure to keep a campaign promise can equal fraud.

6. Posted by Ronald X. Groeber, Ball State Univ on August 16, 2006 @ 21:00 | Permalink

The environment of the white collar defendant is no where nearly as coercive of that faced by the poor. Police often used incredibly vicious criminals as informants by giving them a break, if they will name someone/anyone they can charge a crime on. Oftentimes and honest but poor citizen will be swept off the streets and charged, held because he cannot make bail and given the services of an overworked & underpaid public defender. They may have children at home, and the disparity between what they will get if convicted compared to what they can settle for compels them to plea to a crime they didn't commit. Frontline had a great documentary (The Plea)on this back before the turn of the century. You can find it in the frontline archives through the site. So lets not talk about the relatively minor annoyances suffered by a few 1000 white collar defendants and deal with the more outrages Prosecutorial mistreatment experiences by millions of poor in this country. Please it is obscene to hear the whining of these overpaid greedy executives who have so blatantly ripped off American investors and Pensioners.

7. Posted by Nicholas Branch on August 17, 2006 @ 2:25 | Permalink

Yes, Professor Groeber, the criminal justice system is badly broken. But let’s not fight amongst ourselves, and instead at least unite behind the principle of the rule of law and the re-invigoration of a Constitution that has articulated some very important limitations on the powers of the state. To remark with outrage at a wrongful conviction can never be “obscene” or “whining.” And it is circular to justify saying so by claiming the wrongfully convicted “blatantly ripped off” anyone. The shared concern here is that innocent people are being locked up.

PBB’s “The Plea” was first broadcast on June 17, 2004, so is a timely product of this century. One of the participants was Yale’s John Langbein, whose 1970s “Torture and Plea Bargaining” I cite in my previous comment. Professor Langbein is concerned as we all should be with the abuse of this power vis-à-vis the poor. But he does not draw the line there, nor should he. For example;

“It's very important to understand that prosecutors have a number of incentives that are not necessarily in the public interest. Prosecutors are sometimes affected by sheer laziness; prosecutors are sometimes people who are very exposed to political and media pressure. … Our prosecutors are very often elected in the state system or they're politically appointed, and they are people who are on the make in the federal system, and as a result they have an interest in headline hunting, in notching victories, in winning, and that shows up in their pressures to bring unjust cases. My favorite example is Giuliani's prosecution of Michael Milken, and his use of abusive plea bargaining tactics to do so. …”


8. Posted by Mary Ashby Morrison on August 18, 2006 @ 17:20 | Permalink

The power of the prosecutor to do harm is totally unchecked.

Would it surprise you to learn that:

1) Enron's frauds were committed within off-balance sheet partnerships (SPEs), none of which were ever Andersen clients. All but one were audited by KPMG.

2) Enron Bankruptcy Examiners determined that the frauds were aided & abetted by numerous international banks which signed extensive documentation that they were "investing" in Enron's SPEs, while taking back oral promises of repayment. The banks recorded the same transactions on their own books as loans. The banks were Citigroup, JPMorgan Chase, Bank of America, CreditSuisse First Boston, Royal Bank of Canada, Toronto Dominion, Canadian Imperial Bank of Commerce, Royal Bank of Scotland, Barclays, BT/Deutsche & Merrill Lynch. Citigroup & JPMorgan Chase admitted to the govt. that they had helped at least 10 other corporations disguise loans using SPEs. Several of the banks helped disguise loans without use of SPEs & thus were part of the frauds at WorldCom & Parmalat.

3) The Securities & Exchange Commission (under the chairmanship of Arthur Leavitt)enabled Enron's frauds by exempting Enron from long-standing investor protection laws. Without the exemption, Enron would not have been allowed to set up the many SPEs.

4) The SEC granted Enron's exemption at the urging of the House Energy & commerce Commission (under the leadership of Rep. Billy Tauzin [R-LA], Rep. James Greenwood [R-PA] & Rep. John Dingell [D-MI]). It was these 4 individuals who led the attack on Andersen. Enron (& the various banks) are huge political campaign contributors.

5) On discovery of the fraud, Andersen immediately notified the SEC & Justice Dept., withdrew its audit opinion & required Enron to restate earnings.

6) Because Andersen was never the auditor where the frauds took place, the govt. could not bring charges for performing a bad audit. Because performing the routine audit step of destroying duplicate copies of memos, to do lists, reference points, etc. (after all relevant info has been documented in the audit workpapers) is perfectly legal before receipt of a subpoena, the DOJ could not charge Andersen with document destruction. So the DOJ charged Andersen with "witness tampering" on the novel theory that politely asking employees to follow a lawful policy was somehow a criminal act.

7) The statute on witness tampering requires that the DOJ prove that the defendant "knowingly" "corruptly" persuaded others to withhold information from an "official proceeding". Trial court echoed the DOJ's theory of the case when she instructed the jury that "knowingly" "corrupt" persuasion really meant that Andersen was guilty even if no one at Andersen knew that they were doing anything wrong. Further, the judge instructed the jury that an "official proceeding" meant any question posed at any time by any govt. agency regarding any topic or any client. The U.S. Supreme Court overturned Andersen's conviction based on the judge's misstatement of the law.

8) Because of the press of time, there were numerous other issues argued at the appellate level but not before the Supreme Court.

a) The judge did not allow the jury to know that Andersen had waived attorney/ client privilege & voluntarily turned over all papers to the SEC & DOJ.

b) The judge allowed testimony re the volume of extraneous papers destroyed (approximately 2 T.) but would not allow the jury to hear that approximately 70 T. of extraneous papers were preserved. This is in addition to the detailed audit workpapers whose numerous files filled about 400 boxes.

c) The judge ruled that it did not matter how many copies of a document were kept, if one copy were destroyed, it was witness tampering.

d) The judge instructed the jury that they did not have to find any Andersen individual guilty in order to convict the partnership.

e) The judge deleted the requirement of finding the accused guilty "beyond a reasonable doubt."

In addition, The DOJ admitted at trial that not only did they not bother to examine Andersen's audit workpapers for Enron, they didn't know what audit workpapers were.

The above facts were all found in the public domain. The true identity of the SPEs' auditor and the basic mechanics of the fraud were available to the public weeks before the indictment, even though Andersen was silenced by gag order.

The Andersen case is nothing other than a good old-fashioned public lynching. As a result, 85,000 jobs in 57 countries were destroyed. In the U.S. alone, 5,200 retirees lost all retirement benefits. Why? To distract attention from the fact that our government had sold out investors in exchange for political contributions. In the process, the profession of public accounting has been de-stablized and because of deliberate misstatement of the facts, the real problems have never been addressed.

9. Posted by Red Wing Shoe Store on January 11, 2012 @ 12:56 | Permalink

I follow you VIA GFC and I love your blog!

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