Vic Fleischer over at the Conglemerate blog continues his campaign to increase the business of the white collar criminal defense bar with a couple of posts (here and here) in which he suggests that “financial engineering” of the type that KPMG was involved with in regard to its tax shelters should be criminalized. Vic differentiates such financial engineering from transaction cost engineering, which creates value by reallocating risk and, in Vic’s world, is just fine. Vic’s theory is really just an extension of one that was propounded by former Enron Task Force prosecutor-turned-law professor John Kroger in a law review article, Enron, Fraud and Securities Reform: An Enron Prosecutor’s Perspective.

Vic’s theory is a classic example of one that sounds somewhat appealing in theory but is a prescription for injustice in practice. As we saw in the previous Nigerian Barge case thread, implementation of Vic’s theory resulted in the conviction of four Merrill Lynch executives — among the dozens of Merrill executives who reviewed the deal — for doing their jobs in connection with Merrill’s purchase of a dividend stream that Enron, not Merrill, may have improperly accounted for, although even that issue has never really been proven. The give-and-take in that thread alone should establish that reasonable doubt exists as to the government’s charges against the Merrill defendants, and that fact is reflected by the lengths to which the government must go in order to obtain convictions. The Enron-related prosecutions have been rife with prosecutorial abuse, including the chilling of dozens of witnesses favorable to the defense and, in the Nigerian Barge case, dramatic prosecutorial statements to the jury that Merrill’s involvement in the relatively small deal played a meaningful part in Enron’s downfall.
Moreover, the transparent nature of Vic’s theory is even better reflected in the hypothetical case. Say a banker makes a much-needed loan to a longtime business customer that is clearly headed toward bankruptcy. The loan increased the amount of the bank’s lien on the debtor’s assets to the detriment of the debtor’s other creditors. There was no transaction cost engineering — it was clear that the debtor was going down the tubes and the loan would only delay the inevitable. There certainly is a financial engineering component to the loan because the value of other creditors’s claims are diluted as a result of the transaction. In the hands of a crafty prosecutor, such a transaction would easily fall under Vic’s definition of financial engineering that would call for a prosecution of the banker and the business owner. Indeed, under Vic’s theory, almost any set of circumstances that would give rise to an equitable subordination claim against a creditor in a bankruptcy case would serve as the basis for a criminal indictment. Does anyone really believe that American business interests could “stand upright in the winds” of abusive state power that would blow if such transactions were to be criminalized?
Larry Ribstein dissects Vic’s latest post and, in so doing, notes the following:

I’m concerned that the criterion is political rather than the social policies that should determine criminalization, . . . For example, based on the government’s indictment, did Ken Lay, who was basically out of the picture until the very end at Enron, do more harm to the the public and engage in conduct that was more obviously culpable than the principals at Krispy Kreme? I don’t know, but I do know that a government agency doesn’t get the same goodies from going after a donut maker that it does from going after these people in Houston who have had movies made about them. When indictment decisions depend on considerations like that, it starts to look like a lottery, at least from the defendants’ standpoint. . .
The difference is a matter of degree, but it’s a degree that matters. I don’t think that corporate conduct is getting worse. But the politicization of the corporation has increased, helped along by the media, in the wake of Enron. We need to take a hard look at what’s going on and make sure that it’s really crimes and not politics that is landing people in jail and putting whole organizations out of business.

Indeed, even something as indiscriminate as having good timing in going bust can determine whether one goes to jail these days.