Remember when the Wall Street Journal characterized the Enron Task Force as having “a good record overall?”

Well, the latest development in that “good record” is that the Department of Justice Criminal Division — the successor to the disassembled Task Force — announced quietly on Friday that it does not oppose former mid-level Enron executive Christopher Calger’s withdrawal of his guilty plea to a highly questionable Task Force indictment and that the DOJ is dismissing the criminal case against Calger altogether.

That announcement didn’t receive the same level of publicity as the Task Force’s various “perp walks” of former Enron executives, now did it?

The indictment against Calger was dubious from the beginning — the judge who handled the hearing to approve the initial plea bargain was flabbergasted when the Task Force prosecutor handling the hearing could not even articulate what action of Calger constituted a crime. Later, this post noted that Calger’s attempt to withdraw his guilty plea exposed several dirty secrets of the Task Force’s multiple abuses of power in regard to its handling of the Enron criminal cases.

So, let’s take stock of the Enron Task Force’s slate.

It procured a deeply flawed conviction that put the nail in the coffin of one of the oldest and most respected U.S. accounting firms, costing tens of thousands of jobs in communities throughout the nation.

Then, the Task Force ruthlessly ruined the careers of four respected former Merrill Lynch executives and sent them to prison for a year before the Fifth Circuit overturned that atrocity.

After two inflammatory trials, the Task Force finally obtained a conviction against former Enron Broadband executive Kevin Howard, only to have that conviction tossed out before an appeal.

The Fifth Circuit — even before the appeal briefs have been filed — has opined that “serious frailties” exist in the conviction of former Enron CEO Jeff Skilling. Moreover, the stress associated with mounting a defense to the Task Force’s questionable case against former Enron chairman Ken Lay almost certainly contributed to his death.

For the past year and a half, DOJ lawyers have been attempting to patch something together to make a case against Howard’s former co-defendants in the Enron Broadband case that the Task Force has already lost once, and serious questions exist as the validity of the Task Force’s controversial prosecution of the NatWest Three.

Meanwhile, as noted earlier here and here, most of the Task Force lawyers who contributed to making this mess have moved on to lucrative careers outside of government.

If the foregoing is a “good record,” then what on earth would constitute a bad one?

This earlier post on the Conrad Black trial noted that syndicated writer Mark Steyn is blogging the trial and, if you haven’t been checking in on Steyn’s blog, you’re missing some rollicking good fun. Check out this post from Wednesday’s festivites in which he notes:

The government called its first witness this afternoon: Gordon Paris, Conrad Blackís successor as chairman of Hollinger International. In Homeric terms, heís the first Paris to turn out a Trojan horse. I sat behind Mr. Paris as he waited to take the stand and, to judge from the back of his neck, heís been working on his tan; his jet black hair was so luxuriously gelled I could see my face in it. For a man whoís taken his companyís share price from $21 to $4, he was looking good. If he felt sheepish about the most recent quarterly loss and the suspension of the dividend, his coiffure certainly betrayed no signs of it. The healthy glow led me to expect a performance as slick as his hair, but, in fact, he answered in a kind of semi-tranquillized drone, vaguely reminiscent of Eugene Levyís spaced out has-been folkie in A Mighty Wind. [. . .]
But the government attempted to introduce in evidence a chart showing Conrad Blackís share of ownership escalating up the chain from Hollinger International through Hollinger Inc to Ravelston Corporation and asked Mr Paris to testify that these figures were accurate.
Mr Paris did so, and the defence pounced. How did he know these figures were accurate? When did he see the chart?
Well, heíd been shown it a few days ago.
So had he verified the numbers from public records?
ìI certainly knew from my experience,î said Mr Paris, ìthat those numbers were reasonableÖî
ìReasonable or accurate?î asked the lead Black attorney, Edward Genson.
ìI was toldÖî
ìWho told you?î
Mr Parisí gelled hair strands seemed to wilt visibly. ìThe government,î he conceded.
Gotcha. Chicago Legal had suddenly morphed into just about every other Perry Mason episode between 1957 and 1972 where Perry gets the star witness to admit that heís testifying to the truth of something he only knows the truth of because the district attorney told him it was true.

Steyn’s summary post on the first week of the trial is here.

I thought I was entering some type of parallel-universe earlier today when I read who was taking the lead in proposing legislation to end the federal government’s shameful prohibition of internet gambling:

Rep. Barney Frank said on Thursday he will give details in the coming weeks on possible legislation to repeal a ban imposed last year on online gambling.

Of course, Rep. Frank goes on to say there’s no hurry about his proposed legislation. Guess he hasn’t spoken with any of these folks.
But to bring me back to reality, this NY Times article that Rep. Frank at the same time couldn’t resist taking one of his more typical stances toward business:

Senior Democrats in Congress, worried that the rising number of homeowners who cannot repay their mortgages could cause broader economic problems, have begun drafting legislation to curtail predatory lending practices. [. . .]
Representative Barney Frank, the Massachusetts Democrat who heads the House Financial Services Committee, said in an interview on Friday that he intended to move legislation in the coming weeks. He said the measure he was preparing would discourage abusive loans by imposing legal liability ìup the chain.î It would give borrowers and others the ability to sue the Wall Street firms that package those mortgages and then sell them as mortgage-backed securities, as well as the purchasers of those securities in the secondary market.
ìAnybody, including the original borrower, can make a claim, and the liability would go up the chain,î he said. ìPeople say it may discourage certain kinds of lending. But thatís precisely what we want to do. We will pass a bill that wonít allow companies to loan people more money than they can pay back or loans for more than the value of the house.î

Ted Frank sizes this one up adroitly:

This sort of deep-pocket/innocent-bystander legislation is dumbfounding. These mortgage-backed securities consist of hundreds or thousands of mortgages, and the banks receive only a transaction fee for their services. If the process of repackaging means that one is liable for alleged wrongdoing in each and every of the mortgages, it just means that repackaging won’t happen any more as due diligence requirements and the risk of litigation for the entire value of the mortgage (plus punitive damages?) make transactions costs skyrocket, which means the mortgage market will become less liquid, which means a tremendous shock to the economy.
Most upsetting is to see that one of the senators behind this is Chuck Schumer. It seems to have taken him less than two months to pull back from his observation that the litigation risks Wall Street faces are unduly damaging the economy, and that what is really needed is to expose them to more parasitic wealth transfers.

This earlier post highlighted the conference that John Hasnas put together last week in Washington at Georgetown Law School that brought together some high caliber talent to discuss the implications of the federal government’s increasing regulation of business through criminalization of merely questionable business transactions. This webcast of the conference is now available. I’m about half way through the program and it is top notch. Highly recommended.
By the way, on the subject of criminalization of business, Mark Steyn is blogging the Conrad Black trial in Chicago. This should be entertaining.

Matthew Bishop of The Economist, who has been writing recently on imposition of ill-advised regulation on business, has come up with a refinement to Larry Ribstein’s Apple Rule (see also here) — i.e., the exception from corporate criminal liability for a popular (as opposed to an unpopular) business executive who is involved in alleged wrongdoing at the executive’s company:

This suggests to The Economist the need for a new Apple rule to guide prosecutorsóat least in cases, such as backdating, where the main supposed victim is a companyís shareholders. Our rule: if a criminal prosecution is likely to hurt a companyís share price, then donít prosecute.
Are we serious? Well, we think it’s worth a discussion . . . Cost-benefit analysis is largely absent from Americaís approach to regulating business wrongdoing, not only in criminal prosecutions, and that is probably one of the main reasons why Americaís capital markets are indeed losing their competitive edge. At the very least, encouraging the Department of Justice and the Securities and Exchange Commission to employ a few less lawyers and a few more economists would be a step in the right direction.

But what about the Dell Rule? — the exception in which a popular chairman of a company gets a pass on criminal liability when the chairman steps back into the CEO seat with the company under the cloud of a criminal investigation. We already know what happens to an unpopular chairman when the Dell Rule does not apply.

Former Hollinger International chairman Conrad M. Black goes on trial in Chicago this week on various corporate criminal charges that he looted Hollinger. My post on the indictment from a year and a half ago is here, the NY Times article on the trial is here, and the WSJ’s Ashby Jones has a fun post on Black’s Canadian trial lawyer, Fast Eddie Greenspan. But Mark Steyn has the best analysis that I’ve seen to date on the case, which is another example of why the civil justice system is a better mechanism for allocating responsibilty for the alleged wrongs than the blunt force of the criminal justice system. Steyn concludes as follows:

Even if you concede that every charge against Black is true, it’s also somewhat disproportionate for the company to blow through a $200-million cost to the company of investigating it, for U.S. prosecutors to threaten him with a 95-year jail term, and for pusillanimous Canadian regulators to facilitate the collapse of Canadian companies.
Conrad and Barbara Black are easy targets — an orotund peer of the realm and his sinister Zionist trophy clothes horse. But they were good for readers, good for newspapers, and better for capitalism than a regime of arbitrary regulatory usurpation. What has happened to Hollinger is a disgrace. I hope Conrad Black is acquitted in Chicago. But there is much more at stake here than the fate of one man.

Given that the governmental onslaught against business interests over the past several years is still a relatively recent occurrence, my sense is that we’re still too close to it to be able to place it in the proper perspective.

However, with each passing week, new research on this dubious use of governmental power is bringing that perspective into focus.

With exquisite timing, John Hasnas, who has written extensively on the untenable corporate criminal liability standard, has organized an interesting conference for March 15th in Washington at the Georgetown University Law Center entitled Corporate Criminality: Legal, Ethical, and Managerial Implications.

Professors Ellen Podgor of the White Collar Crime Prof Blog and former Houstonian Christine Hurt of the Conglomerate blog will be among the participants, as will University of Houston Law Center Professor Geraldine Szott Moohr, who has written and spoken extensively on the injustice of the Martha Stewart prosecution. This is shaping up to be one of the most important criminal and business law conferences of the year, so if you are in or near the DC area on the 15th, don’t miss it.

Professor Hasnas’ inclusion of Professors Podgor and Hurt in the conference is prescient because both have recently authored important papers on two particularly troubling areas of the criminalization of business problem.

Professor Podgor’s timely Yale Pocket Part article entitled “Throwing Away the Key” examines the brutal nature of the prison sentences that have been handed down over the past several years to businesspersons.

What makes those sentences all the more appalling is that prosecutors often played on societal bias against wealthy businesspeople to obtain them even though the factual circumstances of many of the cases oozed with reasonable doubt of guilt.

Professor Podgor goes on to note that huge sentence disparities have given prosecutors enormous power to control the process, allowing prosecutors throughout the Enron criminal cases to display Jamie Olis’ 24+ year prison sentence as a symbolic head on a stake in a daunting example of the price of non-cooperation.

The severe consequences that Olis suffered for having the temerity to defend himself at trial was a key element throughout the Enron criminal trials as defendants were convicted largely on the basis of testimony from cooperating witnesses and the Enron Task Force threatened Olis-like treatment to pressure dozens of witnesses with exculpatory testimony for the defendants not to testify.

Professor Podgor squarely questions whether the sentencing disparities combined with plea bargaining places too much power in the prosecution’s hands, an issue that Yale Law Professor John Langbien addressed in the following passage years ago:

Plea bargaining concentrates effective control of criminal procedure in the hands of a single officer. Our formal law of trial envisages a division of responsibility. We expect the prosecutor to make the charging decision, the judge and especially the jury to adjudicate, and the judge to set the sentence. Plea bargaining merges these accusatory, determinative, and sanctional phases of procedure in the hands of the prosecutor.

Students of the history of the law of torture are reminded that the great psychological fallacy of the European inquisitorial procedure of that time was that it concentrated in the investigating magistrate the powers of accusation, investigation, torture and condemnation. The single inquisitor who wielded those powers needed to have what one recent historian has called ‘superhuman capabilities [in order to] . . . keep himself in his decisional function free from the predisposing influences of his own instigating and investigating activity.'”

I cannot emphasize too strongly how dangerous this concentration of prosecutorial power can be. The modern prosecutor commands the vast resources of the state for gathering and generating accusing evidence. We allowed him this power in large part because the criminal trial interpose the safeguard of adjudication against the danger that he might bring those resources to bear against an innocent citizen — whether on account of honest error, arbitrariness, or worse.

Meanwhile, Professor Hurt announced last week the SSRN publication of her important new paper on the criminalization of business — The Undercivilization of Criminal Law. In her paper, Professor Hurt examines the increased use of the criminal justice system to regulate business, particularly the corresponding increase in the inevitable cases in which a defendant is convicted of a crime over which reasonable doubt of guilt exists.

At the same time, Professor Hurt points out that legislators and judges have made the use of civil lawsuits to regulate business more difficult despite the fact that the negative effects of an erroneous civil judgment of liability on a defendant pales in comparison to the impact of a wrongful conviction of guilt in a criminal case.

In making this point, Professor Hurt channels an observation that her colleague Larry Ribstein has long maintained — that is, the civil justice system is a far superior mechanism for allocating responsibility than the criminal justice system, where criminalizing merely questionable business conduct guts the protection of the reasonable doubt standard.

A short blog post cannot do justice to either Professor Podgor’s article or Professor Hurt’s paper, so I highly recommend that you read both. There is no doubt that these scholars have seized on issues that are fundamentally important to the future of American business.

The huge human toll that cases such as the Olis case, the Nigerian Barge case and the Lay-Skilling case have on their participants and their families is bad enough alone to justify a change in the odious regulation of business-through-criminalization policy.

Similarly, the massive affront to justice represented by the prosecutors’ abusive tactics in obtaining tainted convictions of businesspersons also calls this policy into serious question, as others are noticing.

But apart from the human toll and the abuse of prosecutorial power, the increased regulation of business through criminalization is simply bad public policy that costs us jobs in communities and wealth in investments.

Apart from the direct loss of jobs and wealth that resulted from the Arthur Andersen debacle and the meltdown in the energy trading industry that occurred as a result of Enron’s demise, a devastating impact of these business prosecutions is that they obscure the true nature of risk and fuel the myth that investment loss results primarily from criminal misconduct.

As Professor Ribstein has often pointed out, do we really want to be sending a message to American investors that risk is bad despite the fact that it often leads to valuable innovation?

How does throwing creative and productive business executives such as Michael Milken and Jeff Skilling in prison do anything for educating investors about the true nature of risk and the importance of diversification?

By way of example, self-settled derivative prepay transactions are not particularly intuitive (no product actually changes hands) and are not well understood by even many smart businesspeople outside the trading business.

Nevertheless, such transactions provide the valuable benefit of hedging risk for companies, who pass along that benefit to consumers in the form of more competitive prices for their products and services.

Do we really need to allow prosecutors to paint such beneficial transactions as frauds and manipulate ignorance about them as a means to regulate questionable business conduct?

A truly civil society would find a better way.