The Sihpol acquittal yesterday focuses attention on an important aspect of the current wave of criminalizing merely questionable business transactions — that is, the government’s destruction of good reputations in its quest to obtain convictions and prevent juries from hearing testimony that is favorable to unpopular defendants.
In this excellent Chicago Tribune op-ed (free registration req.), David Hall — a former editor of the Cleveland Plain Dealer and Denver Post who covered Arthur Andersen as a Chicago reporter in the 1960s — decries the cultural climate and the lack of prosecutorial discretion that led to the destruction of Andersen:

Andersen’s head on the U.S. Justice Department’s dish, with unjust charges regarding Enron Corp. and the connivance of a slow-witted judge, is a parallel in today’s political-legal-news culture–blame quickly, accuse broadly and dare the accused to defend. Bloody heads on plates satisfy the evening news and pundits looking for the easy prey of righteousness.
The Justice Department, eager to demonstrate its conservative stance would not be cowed by big business, maliciously destroyed a fine American company, a contributor to orderly commerce for eight decades. Andersen stumbled amid the stampede of cliffside accounting in the ’90s, particularly regarding Sunbeam Corp. and Waste Management, but nothing deserved a judicial death sentence. . .
Many institutions, private and public, must feel under such siege, must fear the plow and the salt and the unjust destruction of Andersen. Every good-faith act should not be turned into an inquisition–by politicians polishing campaign ads, prosecutors primping for the boss, or reporters intent on bringing the first head on a dish.

Meanwhile, as the defense in the ongoing Enron Broadband trial proceeds with putting on their case, an interesting development is taking place. As the Chronicle’s Mary Flood reports, Lawrence Ciscon, a former Enron Broadband systems engineer, is testifying on behalf of his five former Enron Broadband colleagues despite the fact that prosecutors have told him that he is a target of the Enron criminal investigation and could be indicted himself.
Mr. Ciscon’s decision to testify brings into focus an abominable governmental tactic that ensures that the jury will never hear much of the favorable testimony for the defense. In both the Enron Broadband case and the earlier Nigerian Barge case, the prosecutors have identified dozens of former Enron executives as either targets of the Enron criminal investigation of unindicted co-conspirators of the defendants. As a result, the government has effectively prevented many witnesses with favorable testimony for the defendants in both the Broadband and Nigerian Barge cases from testifying because those witnesses would waive their Fifth Amendment privilege and probably face further perjury charges if they chose to tesfify contrary to the government’s position in those cases. Indeed, in the case against former Enron CEO Jeff Skilling, former Enron chairman Kenneth Lay, and former Enron chief accountant Richard Causey, the Enron Task force has identified 114 unindicted conspirators in an effort to chill as much favorable testimony for the defendants as possible.
Thus, the “Justice” Department is not really interested in “justice” at all, or even in having a jury fairly evaluate all evidence relating to its charges against unpopular business figures. Rather, our “Justice” Department is much more interested in indulging public bias against unpopular businessmen, regardless of the reputations of citizens that it destroys in the process. Something is seriously wrong with the administration of justice in America when it takes the uncommon courage of someone such as Lawrence Ciscon for a jury to hear favorable testimony for businessmen who are facing their government’s overwhelming power to imprison them for most of the rest of their lives.

As anticipated in this post from earlier this week, John Houldsworth, a former high-level executive of the Cologne Re Dublin unit of Berkshire Hathaway Inc.’s General Reinsurance Corp., implicated four other senior General Re executives while pleading guilty on Thursday in Alexandria, Va. to conspiring to commit securities fraud. Mr. Houldsworth is the the first person to be indicted from the various governmental investigations into finite risk insurance transactions between General Re and American International Group Inc. Here are the previous posts on the investigations into AIG and Berkshire.
According to the criminal complaint, Mr. Houldsworth, Ms. Monrad, Mr. Napier, and another unknown executive in late 2000 conspired to structure a reinsurance contract to allow AIG to pass its auditor’s “smell test” and to create a paper trail to make the transaction appear legitimate.
The other executives identified in a parallel SEC civil suit who are referred to by title in the the criminal complaint are former General Re CEO Ronald E. Ferguson, former CFO Elizabeth Monrad, current senior VP Richard Napier (who is expected to plead guilty to similar charges today), and Chris Garand, an underwriter in General Re’s international finite division. The complaint also cites another General Re “senior executive” whose identity is unknown to Mr. Houldsworth.

A New York state court jury acquitted former Bank of America Corp. broker Theodore C. Sihpol today on 29 criminal counts relating to alleged improper trading of mutual-fund shares. The jury deadlocked 11-1 in favor of acquittal on four additional counts, and the judge declared a mistrial on those counts. Here is a previous post on Mr. Sihpol’s case.
The acquittal was a bitter blow for New York Aspiring Governor Eliot Spitzer, whose office tried the case against Mr. Sihpol as the first criminal trial emanating from Mr. Spitzer’s crackdown on what he characterizes as abusive trading practices in the mutual fund industry. As is his custom in such matters, Mr. Spitzer bludgeoned settlements out of several major fund firms by threatening them with devastating criminal indictments, but the young Mr. Sihpol refused to back down. Thus, even though he threatened Mr. Sihpol with an absurdly harsh 30 year sentence in prison if he were to be found guilty of the charges, Mr. Spitzer was forced to try the case and, in the end, had his hat handed to him.
Couldn’t happen to a nicer guy.

In an interview yesterday with Wall Street Journal columnist Alan Murray, New York AG (“Attorney General” or “Aspiring Governor,” take your pick) Eliot Spitzer observed that he agreed with the recent Supreme Court decision in Arthur Andersen LLP v. United States and that a criminal indictment of a company often is the wrong way to proceed in an investigation because of the risk of destroying the company. Comparing his investigations to those of the heavy-handed Enron Task Force, Mr. Spitzer made the following comment:

“I’ve always said Andersen was an improper indictment, because it wasn’t proportionate. We use a scalpel, not a meat ax.”

If what Mr. Spitzer is using on American International Group Inc. is a scalpel, then he must own one helluva meat ax.
Meanwhile, this NY Times article reports that Mr. Spitzer’s immunity deal with former AIG executive Joseph Umansky was not coordinated with other ongoing investigations into AIG and effectively removed Mr. Umansky as a realistic target of those investigations.

This Telegraph.com article updates the Enron-related case of the “NatWest Three,” the three former National Westminster Bank PLC bankers based in London who are charged in Houston with bilking their former employer of $7.3 million in a scheme allegedly engineered by former Enron CFO Andrew Fastow. Here are the previous posts on the NatWest Three.

Yesterday, the three bankers — David Bermingham, Giles Darby, and Gary Mulgrew — filed their appeal to England’s High Court of the decision last month of Charles Clarke, the Home Secretary, who upheld an earlier decision by a judge at Bow Street Magistrates’ Court in central London to extradite the three bankers to Houston to face the charges.

The case has been undergoing increasing scrutiny in the English media because the U.S. is attempting to extradite the three men under the 2003 Extradition Act, which has been criticized in English legal circles for allowing British courts to extradite British citizens without proper evaluation of U.S. prosecutors’ charges and evidence.

Of particular interest is the article’s analysis of the three bankers’ procedural options in the foreign courts if they lose their current appeal:

If [the NatWest Three] lose, they will take the matter to the House of Lords and then, if necessary, on to the European Court of Human Rights. The process could take over five years.

Five years?!

The thought of the Enron Task Force remaining in business for another five years is definitely not comforting.

George Melloan is deputy editor of The Wall Street Journal, where he is responsible for the editorial pages of The Wall Street Journal Europe and The Asian Wall Street Journal and writing a weekly column called Global View. Mr. Melloan has won the Gerald Loeb Award for excellence in financial journalism and two Daily Gleaner awards from the Inter-American Press Association for writings about Central America.

In this column in today’s Journal ($), Mr. Melloan takes dead aim at the government’s abuse of the rule of law to pursue currently unpopular businesspeople:

The Supreme Court has now ruled that it was excessive prosecutorial zeal and inadequate jury instruction that destroyed Arthur Andersen in 2002, not the merits of the federal obstruction-of-justice case. . .

For some years now, U.S. business corporations have been caught between the Scylla of predatory class-action lawyers and the Charybdis of overzealous prosecutors, regulators and lawmakers on the prowl for “white-collar crime.” . .

In a democracy, arrogance or misbehavior by public figures with important responsibilities invites popular resentment.

Then, Mr. Melloan superbly summarizes how we got to this point:

Sensing the public mood, a Congress never reluctant to make work for fellow lawyers whooped through the Sarbanes-Oxley bill, proclaiming it an antidote to corporate corruption. In fact, it’s a law that for proper compliance would require every assistant vice president to have a lawyer seated on his left and an accountant on the right to monitor his every movement, including trips to the WC. CEOs must now sign their annual reports with a trembling hand, knowing full well that a transgression by some anonymous drone in Walla Walla might cost a severe penalty. Corporate board members shiver for the same reason.

The sour public mood has had other effects. Staffers at the Securities and Exchange Commission and other regulatory agencies have been able to break free of adult supervision by appointive commissioners and have set about to regulate everything that moves. U.S. attorneys have endeavored to make their reputations pursuing big names in the business world. Martha Stewart went to jail for fibbing to investigators about what she had told her stockbroker, a misdemeanor at best.

The now-renowned Eliot Spitzer of New York and other state attorneys general began calling press conferences to denounce “crimes” never before known to man. Mr. Spitzer so terrorized the board of AIG, the global insurance giant, that it dumped CEO Maurice R. Greenberg. Among Mr. Greenberg’s sins was “smoothing” quarterly reports, a common practice in industry that probably gives investors a better idea of a company’s condition than letting the numbers bounce around from quarter to quarter. In a further act of appeasement AIG has now restated its profits for the last five years, lopping off $4 billion, which will surely cause confusion among tax collectors.

Read the entire piece. One of the most disturbing aspects of the recent trend of government using its enormous power to criminalize merely questionable business transactions has been much of the public’s acquiescence to this abuse of power. The business-oriented media and blog commentators such as Professor Ribstein and Professor Bainbridge have decried the trend, but prosecutors — with the help of compliant politicians — continue to appeal to the general public’s animus toward wealthy businesspeople in pursuing dubious business-related prosecutions.

As we have seen in the Martha Stewart case, the sad case of Jamie Olis, and the Enron-related Nigerian Barge case, the personal loss to individuals and their families resulting from this abuse of power is enormous. Sadly, the damage to the rule of law may be even greater.

The Chronicle’s Mary Flood reports that Lea Fastow — who served a longer sentence under harsher conditions because of her marriage to former Enron CFO Andrew Fastow — was released to a halfway house from the Federal Detention Center in downtown Houston today. She is scheduled to be released from the halfway house on July 11.

Although U.S. District Judge David Hittner’s handling of the Lea Fastow case has received the most media attention, the case is really a prime example of the Enron Task Force’s lack of prosecutorial discretion and heavy-handed plea bargaining tactics.

In reality, Judge Hittner simply never appeared comfortable with the Task Force’s indictment of Mrs. Fastow. The indictment was a blatant move to place pressure on Mr. Fastow to cop a plea and cooperate with the prosecution, which he eventually did.

During Mrs. Fastow’s sentencing, Judge Hittner harshly criticized prosecutors for vacillating between an original indictment of six felonies and a final charge of just one misdemeanor, suggesting that justice may not have been served in either instance.

“Such maneuvering as is present in this case might be seen as a blatant manipulation of the justice system,” Judge Hittner stated on the record.

Yale law professor John Langbein, who has written extensively regarding prosecutorial abuse of the American plea bargaining system, identifies the problem in the following manner:

“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.

Ellen Podgor over at the White Collar Crime Prof Blog points us to two documents that raise important issues relating to the federal government’s questionable policy of attempting to regulate business through criminalization of what it deems to be questionable business practices.

Frank Quattrone’s appellate attorneys have based his appeal squarely on last week’s Supreme Court decision in Anderson. The following is the hard-hitting first paragraph from that brief:

The government’s brief is an effort to weave a rope of sand, and to imbue a trial with evidentiary substance and procedural fairness when it was sorely lacking in both. With regard to the evidence, the prosecutors dutifully characterize the defendant as plainly guilty, and describe their proof as “strong” or even “compelling.” [record reference omitted]. This is standard rhetoric for those who write the red-covered briefs in criminal cases. But if this was a “strong” case, then there is no such thing as a weak one. Notwithstanding the government’s cavalier description, this case turned on a “threadbare phrase,” United States v. Mulheren, 938 F.2d 364, 370 (2d Cir. 1991) — Quattrone’s one-line e-mail urging his colleagues to “follow [the] procedures” contained in a standard corporate document retention policy. As the Supreme Court reminded the government only recently, “[i]t is, of course, not wrongful for a manager to instruct his employees to comply with a valid document policy under ordinary circumstances.” Arthur Andersen LLP v. United States, No. 04-368, 2005 WL 1262915, *5 (U.S. May 31, 2005).

Moreover, Professor Geraldine Szott Moohr of the University of Houston Law Center has written this law review article — Prosecutorial Power in an Adversarial System: Lessons from Current White Collar Cases — in which she points out that the increasingly common prosecutorial tactic of bludgeoning white collar defendants into plea bargains undermines the deterrent purpose of such prosecutions. Here is the synopsis for the article:

Successful disposition of the cases against Arthur Andersen, Martha Stewart, high-level Enron officers, and scores of mid-level executives testifies to the authority of federal prosecutors. A review of these cases identifies the sources of prosecutorial power and traces their effect in the investigation, charging, and sentencing phases of white collar crime.

A comparison of the roles of American federal prosecutors and their European counterparts in investigating, charging, and sentencing corroborates the judgment that our present system has a decidedly inquisitorial cast. The power of inquisitorial prosecutors is constrained by inherent safeguards that impose formal and informal limitations on their discretion. In contrast, federal prosecutors exercise greater power in the investigation and charging phases and exercise even more authority in sentencing and plea bargaining. The combination belies adversarial values.

Retreat from the adversarial trial can undermine the goal of deterring business misconduct in several ways. Inconsistent sentences that result from plea bargains can forfeit the moral authority of criminal law in the business community, the very group one wishes to deter. In contrast, public trials provide a rationale for sentences and educate the business community about the illegality of specific conduct, a requirement for optimal deterrence that is especially relevant in white collar crimes. Public trials also strengthen shared social norms of the business community against fraudulent practices. In sum, disposing of criminal cases through quasi-inquisitorial investigation and plea bargaining forfeits an opportunity to reinforce the standards of lawful business conduct and thereby strengthen deterrence.

In that connection, note Professor Langbein’s related comments in this post.