Conglomerate Blog: Business, Law, Economics & Society

Thanks Gordon and the rest of the Conglomerate for the opportunity to comment.

Bill [Bratton], your excellent post points out that de jure criminality rarely reaches corporate officials because of the diffusion of responsibility in the corporation. Thus we rely on “de facto criminality” to nab corporate bigwigs in corporate scandals. [By the way, I’d like to add that the concept of “de facto criminality” should be understood to include relatively Mickey-Mouse offenses that are de jure crimes but are charged as proxies for a non-de jure offense: the “Al Capone” approach we saw, for example, in Martha Stewart’s perjury and in all kinds of “terrorist” prosecutions, most recently Umer Hayat’s customs violations.]

The de jure criminal standards are unlikely to be changed, Bill argues, because to do so would discourage business risk taking. So why use de facto criminality? It also has the potential to discourage risk taking; maybe a greater potential, because it’s so hard to tell what a court will find illegal after the fact. I think the reasons have to do with political rent-seeking, not a desire to increase the efficiency of corporations or capital markets.

De facto criminality increases the power of courts, but, as you point out, Bill, it’s prosecutors who bring the charges after the smoke has cleared and they have the luxury of “sifting” through the facts. The de facto approach, as opposed to a revision of de jure standards, gives prosecutors greater discretion.

Legislators like this because it allows them to pass the political buck. Rulemaking is hard. The executive branch likes it because it enables selective prosecutions for political gain. The political gain is threefold—one, it wins populist votes by giving catharsis to angry citizens; two, it creates the misleading impression that fraud has been cleaned up and market risk has been reduced [yes, Bill, this is your argument from “Enron and the Dark Side of Shareholder Value,” which I ~~steal~~ borrow every chance I get], thereby restoring capital flows, increasing securities prices, and wining votes on Wall Street. And three, executive branch likes expanded discretion for its own sake. Pretty much every modern US President has tried (and mostly succeeded) to increase executive prerogative. The current Administration is particularly interested in and successful at this. I don’t mean to say the current Administration invented the de facto approach, or has used it more than usual in the corporate context, but the de facto approach is certainly symbolic of the current concentration of power in the executive branch.

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Thanks Gordon and the rest of the Conglomerate for the opportunity to comment.

Bill [Bratton], your excellent post points out that de jure criminality rarely reaches corporate officials because of the diffusion of responsibility in the corporation. Thus we rely on “de facto criminality” to nab corporate bigwigs in corporate scandals. [By the way, I’d like to add that the concept of “de facto criminality” should be understood to include relatively Mickey-Mouse offenses that are de jure crimes but are charged as proxies for a non-de jure offense: the “Al Capone” approach we saw, for example, in Martha Stewart’s perjury and in all kinds of “terrorist” prosecutions, most recently Umer Hayat’s customs violations.]

The de jure criminal standards are unlikely to be changed, Bill argues, because to do so would discourage business risk taking. So why use de facto criminality? It also has the potential to discourage risk taking; maybe a greater potential, because it’s so hard to tell what a court will find illegal after the fact. I think the reasons have to do with political rent-seeking, not a desire to increase the efficiency of corporations or capital markets.

De facto criminality increases the power of courts, but, as you point out, Bill, it’s prosecutors who bring the charges after the smoke has cleared and they have the luxury of “sifting” through the facts. The de facto approach, as opposed to a revision of de jure standards, gives prosecutors greater discretion.

Legislators like this because it allows them to pass the political buck. Rulemaking is hard. The executive branch likes it because it enables selective prosecutions for political gain. The political gain is threefold—one, it wins populist votes by giving catharsis to angry citizens; two, it creates the misleading impression that fraud has been cleaned up and market risk has been reduced [yes, Bill, this is your argument from “Enron and the Dark Side of Shareholder Value,” which I ~~steal~~ borrow every chance I get], thereby restoring capital flows, increasing securities prices, and wining votes on Wall Street. And three, executive branch likes expanded discretion for its own sake. Pretty much every modern US President has tried (and mostly succeeded) to increase executive prerogative. The current Administration is particularly interested in and successful at this. I don’t mean to say the current Administration invented the de facto approach, or has used it more than usual in the corporate context, but the de facto approach is certainly symbolic of the current concentration of power in the executive branch.

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