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June 18, 2005

Observations on the Tyco verdict

The morning brings several interesting obserations regarding yesterday's guilty verdict in the trial of former Tyco International, Ltd. executives, L. Dennis Kozlowski and former Tyco finance chief Mark H. Swartz.

Over at Conglomerate, Professor Hurt (a former Houstonian, by the way) notes insightfully in this post that, on one hand, the case against Messrs. Kozlowski and Swartz differs from most other corporate crime prosecutions because of its relative simplicity, but that -- on the other hand -- such simplicity insures that no amount of regulation will ever prevent such actions from occurring again.

Meanwhile, over at the White Collar Crime Prof Blog, Professor Henning makes a key technical point about the way in which the prosecution handled the more recent prosecution after the first trial ended in a mistrial:

The government made its case in about 25% less time (13 weeks as opposed to 18 weeks in the first trial), and kept the accounting and reporting issues front-and-center. Going technical is usually a recipe for disaster (see the Enron Broadband Services prosecution for an example of mind-numbing detail), but in this case the Manhattan D.A.'s office concentrated on what was truly important.

Finally, in this remarkable analysis, Professor Ribstein questions the wisdom of unleashing the power of the state based upon the human frailties that drive most prosecutions of questionable business conduct:

Not merely envy (one's discomfort at comparing oneself with another), or wanting to have what another person has, but disliking that person for having it and believing that his good fortune is undeserved. The resenter wants to lower the envied person to his level.

This is the common element in Tyco, Martha Stewart, Mike Milken and many other cases of this ilk, despite the facial dissimilarity of the offenses being tried.

Resentment is pernicious enough in itself because it seeks to degrade human achievement. But it's worse when it leads to criminal prosecutions for what amount to agency costs -- failure to get the requisite corporate approval for expenditures. The marginal criminality of these offenses is what leads to months of hugely expensive trials.

The supposed social payoff is deterrence. But the Kozlowskis of the world probably will keep doing this stuff while the legitimate sorts will be ever more afraid of taking chances. Not that the conduct in Tyco was particularly worth encouraging, but Mike Milken was a different case, in my view, and I don't see much chance of politically ambitious prosecutors being able or willing to tell the difference.

So white collar prosecutions become a sort of lottery. If the prosecution can come up with something colorful, it wins, or maybe loses if it's too colorful (Sardinia). These are not the elements of a rational criminal justice system.

Nor is it rational to base corporate criminal prosecutions on the timing of going bust.

Posted by Tom at June 18, 2005 11:27 AM

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� Tyco and Compliance from The Wired GC
On Friday former Tyco CEO Kozlowski and CFO Swartz were found guilty on 22 criminal counts by a New York jury. After a six-month long trial ended in a mistrial last year, prosecutors simplified their case, and post-trial reports have the jurors focus... [Read More]

Tracked on June 20, 2005 07:33 AM

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