Three Felonies a Day Page 2
If proof were needed that the Supreme Court’s asserted clarification of the statute provided no clarity at all, a dramatic example arose in December 2010. As Professor David Cole of Georgetown University Law Center, who unsuccessfully argued the Humanitarian Law Project case, pointed out in a New York Times op-ed, the wide-sweeping statute could be inadvertently violated, even by those who laid the groundwork for the current “war on terror.” Former Attorney General Michael Mukasey, former New York Mayor Rudolph Giuliani, former Homeland Security Secretary Tom Ridge, and former National Security Advisor Frances Townsend almost certainly committed “a federal crime…in Paris when they spoke in support of the Mujahedeen Khalq at a conference organized by the Iranian opposition group’s advocates.” The Mujahedeen Khalq had been dubbed a “foreign terrorist organization,” and so providing it with direct or indirect “material support” was a felony, Cole wrote. He continued:Chief Justice Roberts reasoned [in his majority opinion] that a terrorist group might use human rights advocacy training to file harassing claims, that it might use peacemaking assistance as a cover while re-arming itself, and that such speech could contribute to the group’s “legitimacy,” and thus increase its ability to obtain support elsewhere that could be turned to terrorist ends. Under the court’s decision, former President Jimmy Carter’s election monitoring team could be prosecuted for meeting with and advising Hezbollah during the 2009 Lebanese elections.14
Yet the true depth and persistence of the vagueness problem in federal criminal law was not fully demonstrated until three days after the release of the Humanitarian Law Project opinion, when the Court decided another highly contentious case, this one dealing with so-called “honest services” fraud. The 28-word statute had enabled federal prosecutors to go after all kinds of public officials and private businessmen for depriving those who elected or hired them of their “honest services.” 15 Remarkably, all nine justices agreed that the statute was unconstitutional as it was being enforced, because it failed to define the central term “honest services,” and what conduct the statute required or prohibited was hardly intuitive. The only difference among the justices, which caused them to divide into majority (agreeing on the reasoning and result) and concurring (agreeing only on the outcome) camps, was that the majority was prepared to effectively rewrite the statute by limiting prosecutions to cases involving bribery and kickbacks. In contrast, concurring Justice Antonin Scalia, joined by Justices Anthony Kennedy and Clarence Thomas, pronounced the judicial rewriting of the statute an improper foray into the legislative business of writing statutes, changing “a prohibition of ‘honest services fraud’ into a prohibition of ‘bribery and kickbacks.’”16
And so the very justices who claimed three days earlier that the average citizen could and should be able to understand what constituted the rendering of “material support” to a foreign terrorist organization now concluded that those same citizens could not be expected to fathom the meaning of “honest services” fraud.
Notwithstanding this disparity, the “honest services” ruling was a step in the right direction. It represented a recognition by the justices that, without violating a specific state or federal law, public officials and perhaps sharp-elbowed businessmen should not face federal prosecution merely because their performance subjectively offends someone in the U.S. attorney’s office. Time will tell, however, whether this recognition spreads beyond “honest services” fraud to the myriad other statutes that serve as traps for the unwary public official or private citizen who ends up in a prosecutor’s sights.17
While it’s true that politicians under indictment aren’t likely to garner much public sympathy, a healthy skepticism is due when federal authority is imposed on matters primarily of state and local concern. Nothing short of the proper functioning of democratic governance is at stake. A recent series of prosecutions of much-maligned state and local politicians in Massachusetts provides a case in point.
Dianne Wilkerson quite clearly broke the law when, as a Massachusetts state senator, she accepted a cash payment from a businessman turned FBI informant. U.S. District Judge Douglas Woodlock, in handing down a three-and-a-half-year sentence in January 2011, excoriated Wilkerson for being part of a seemingly intractable “Gordian knot” of corruption by a long line of state political figures.
Upon first glance, Judge Woodlock had a point. At the time of Wilkerson’s sentencing, Salvatore F. DiMasi, who was arguably more powerful than the governor during his four-year stint as Speaker of the Massachusetts House of Representatives, was under indictment for honest services fraud, conspiracy, and extortion. DiMasi’s predecessor, Thomas M. Finneran, had also been federally indicted, for perjury and obstruction of justice. Likewise, Charles F. Flaherty, who served as House Speaker from 1985 until 1990, pleaded guilty in 1996 to tax evasion growing out of his alleged unlawful acceptance of gratuities. The day before Wilkerson’s sentence, all three former Speakers appeared at the podium to greet and be cheered by the House members ringing in the new legislative session.
Timing was not on Wilkerson’s side, as Judge Woodlock’s incredulous tone made clear. Despite a decades-long series of federal political corruption prosecutions in the Bay State, “people go back to do it again,” Woodlock lamented. “It’s clear the sentencing imposed for criminal conduct here and, frankly, in other industrial states, hasn’t been sufficient.”18
Missing from the discussion was the possibility that recent Massachusetts House Speakers were not, in fact, so stupid, reckless, or obdurate that they committed serial felonies while unaware that the local U.S. attorney was still watching. As this book points out in Chapter One, Thomas Finneran was accused of perjury but ended up pleading guilty to the related crime of obstruction of justice, in no small part because he was promised probation, rather than prison time, if he admitted guilt. A close analysis of his testimony under oath demonstrated that he had not, in fact, perjured himself. Charles Flaherty’s plea to tax fraud was likewise controversial, with even the prosecuting U.S. attorney conceding that “he had no proof that the speaker’s extracurricular activities had affected any legislation.”19 And Salvatore DiMasi was indicted in part under the “honest services” section of the federal mail fraud statute that the Supreme Court later narrowed considerably. 20 Only a meticulous examination of the evidence in these cases could determine whether these former House Speakers in fact committed crimes, or whether Finneran and Flaherty pleaded guilty to violating amorphous statutes simply because of the threat of lengthy prison sentences in the event of conviction. Astute observers of the federal criminal justice system have long since given up believing that the guilty plea reveals true culpability. It’s all too common for such pleas to be the product of risk avoidance at the expense of truth. In this sense, the scripted plea colloquy has become a big part of the corruption afflicting the entire system.
The behavior of such legislators has been dragged into the ambit of federal statutes vague enough to arguably encompass all manner of lawful, if self-benefitting, financial dealings. What may appear to federal prosecutors and judges to be felonious conduct, however, is often in accord with state law and longstanding political culture. If such culture is to change, it is a matter to be left to the voters—who in Massachusetts have chosen, for reasons of their own, to establish longtime one-party rule in the legislature. The result is a self-perpetuating political culture that has become ugly and dysfunctional, but not necessarily felonious. Where disfavored practices appear to carry the day, citizens would do well to express their outrage at voting booths, rather than allow unelected federal prosecutors to dictate their political choices.
Much like indicted pols, those in the financial realm accused of crimes aren’t likely to engender public support. It’s far more likely that the media will act as cheering section, rather than watchdog, regarding government assertions of power over such individuals.
Consider the trajectory of the Justice Department’s high-profile campaign to put practitioners of “options
backdating” in the dock. It all started when Erik Lie, a University of Iowa finance professor, published a paper demonstrating a glaring coincidence: It was extraordinarily common for public companies to grant stock options to their executives very shortly before marked increases in the stock price.21 This, of course, made the options valuable—in the money—right away. Some news reporters, and then the Securities and Exchange Commission, began to delve into some of the examples. It turned out that, in fact, the options had been issued in many instances after the stock price increase, but were backdated to a period before the rise.
The news media, embodying the old adage that “dog bites man” is not news but “man bites dog” is, concluded that there must have been some species of fraud involved.22 Later, the author of the study that started it all admitted that “at the time we published the paper, it wasn’t clear that regulators would view the activity as illegal.”23 But view it as illegal they did, and with a vengeance—all without a statute or regulation clearly designating the widespread practice as fraudulent.
The campaign against options backdating reached its apex when Judge Jed S. Rakoff of the Southern District of New York sentenced James J. Treacy, the former chief operating officer of Monster Worldwide, to two years in prison for improperly accounting for backdated options on his company’s books. (Because prosecutors could not articulate a theory for why and how backdated options somehow cheated anyone—stockholders, tax authorities, nor anyone else—they focused on the notion that because the options were accounted for erroneously in corporate income statements, they were somehow fraudulent. Some journalists concurred.)24 Judge Rakoff blasted the defendant, saying, “It is disgusting that this practice went on.”
But other judges, as well as some journalists, took a step back. They realized that this method for compensating executives over and above their salaries—the purpose, after all, of stock options—could not be said to have cheated anyone, since those executives were going to be paid bonuses by one means or another for improving the company’s profitability (and thus lifting the stock price).25 Indeed, in some cases prosecutors relied on the fact that defendants, when questioned about the practice and given the impression that backdating was a fraud, were less than forthcoming. They were thus indicted for the ever convenient crime of lying to a federal agent .26
Judge Cormac J. Carney of the Central District of California, who presided over the high-profile criminal backdating case against former executives of Broadcom Corporation, can probably be credited with turning the tide in this Wall Street scandal du jour. Days after setting aside a guilty plea from one defendant,27 Judge Carney dismissed charges against two others in December 2009, finding that the case was built upon false or distorted testimony pried out of frightened (because threatened) cooperating Broadcom employees.28 During the course of reciting the litany of the Justice Department’s dirty-pool tactics to force witnesses to make the options practice sound secret and sinister, Judge Carney commented on the heart of the manufactured backdating scandal:The accounting standards and guidelines were not clear, and there was considerable debate in the high-tech industry as to the proper accounting treatment for stock option grants. Indeed, Apple and Microsoft were engaging in the exact same practices as those of Broadcom. 29
Needless to say, neither Steve Jobs nor Bill Gates had been called on the carpet for his company’s use of the same device that landed other executives in the hot seat.
Nearly a year later, in November 2010, Judge Otis D. Wright II sentenced Bruce Karatz, former CEO of KB Home, to probation, although the U.S. attorney’s office had recommended a six-year prison term. Judge Wright explained that he would not imprison a man who simply did not harm either his company or its shareholders.30 Thus even judges who could not get themselves to toss out such charges entirely were beginning to question why backdating was even a crime. The atmosphere, at least with regard to the backdating scandal, seemed to have begun to clear.
With an increased focus on financial fraud, vague prosecutions in this arena continued apace.31 Yet like Judge Carney, some on the federal bench refused to play ball. One of the most trenchant counterattacks came in December 2010 from Alex Kozinski, the libertarian-inclined chief judge of the Ninth Circuit Court of Appeals. The court was hearing an appeal of one Prabhat Goyal, former chief financial officer of Network Associates, Inc.32 The prosecution was based on a complicated government theory as to how Goyal supplied the firm’s auditor with misleading and false information that caused the audited statements to overstate income. The charges ranged from securities fraud to lying to the auditor. After an exhaustive analysis, the panel not only reversed the convictions on all fifteen counts, but declared Goyal innocent, thus prohibiting the government from trying again.
Not fully satisfied with this relief, Kozinski added a concurrence in rather blunt language:This case has consumed an inordinate amount of taxpayer resources, and has no doubt devastated the defendant’s personal and professional life.…And, in the end, the government couldn’t prove that the defendant engaged in any criminal conduct. This is just one of a string of recent cases in which courts have found that federal prosecutors over-reached by trying to stretch criminal law beyond its proper bounds.33
Kozinski’s opinion cited, among other cases, the infamous prosecution of Arthur Andersen LLP, discussed in Chapter Five of this book. There, a prosecution that destroyed the firm was found by the Supreme Court to have been based on behavior not criminal by any stretch of the law or the imagination. Kozinski continued:This is not the way criminal law is supposed to work. Civil law often covers conduct that falls in a gray area of arguable legality. But criminal law should clearly separate conduct that is criminal from conduct that is legal.
One wonders why such straightforward language is not more common among federal judges, even when courts reverse convictions on the ground that vague statutes have been stretched far beyond reason. The spirited protestations of Judges Kozinski and Carney are the exception rather than the rule.
But groups within civil society, not waiting for the federal bench, have launched an avowedly nonpartisan effort to rein in this species of prosecutorial abuse. In May 2010 an “odd couple” alliance of the conservative Heritage Foundation and the liberal National Association of Criminal Defense Lawyers (NACDL) published “Without Intent,” a coauthored report detailing a major shortcoming of Congress’s drafting of criminal laws.34 The report found that of the 446 nonviolent, nondrug-related criminal laws presented in the 109th Congress, more than half lacked a requirement that a defendant act with criminal intent. Whether by design or by mere consequence, Congress has been making it easier for average citizens who did not intend to break the law to be convicted in federal criminal courts.
Endeavors like that of Heritage and the NACDL—involving not only lawyers but also associations of businessmen, and latched onto from all points on the political spectrum—hold out hope for real reform of a system run amok.
The dangers in allowing the current trends to continue are illustrated vividly by a criminal justice system halfway around the world, where vagueness reigns supreme as a tool of social and political control. It was in late December 2010 that Moscow’s Khamovnichesky Court convicted and sentenced Mikhail Khodorkovsky to a prison term of six years, to be served after the expiration of an earlier eight-year sentence. Khodorkovsky had amassed a wildly profitable oil company during the immediate post-Soviet years, when entrepreneurs engaged in a “Wild West” type rush to accumulate corporate assets under the lax administration of Russia’s first president, Boris Yeltsin. But Khodorkovsky ran into legal troubles when he challenged President Vladimir Putin, a former Soviet secret police operative.
The arcane politics of the Russian state are debatable; the fact that Khodorkovsky was railroaded is not. His first case involved a charge that he and his partner, Platon Lebedev (also convicted twice), embezzled all of the oil—some 350 million metric tons—produced by their company, Yukos Oil, over a six-year period (1998�
�2003). This conviction was obtained despite the fact that no oil was found to be missing. In a separate case, Khodorkovsky was charged with failing to pay taxes on Yukos’s profits from selling the oil—the very oil that Khodorkovsky was convicted of embezzling. As a result of the tax conviction, Yukos’s assets were seized by the state, and then sold cheap to the state-controlled oil company Rosneft. Khodorkovsky was close to completing his eight-year sentence when the new conviction and additional sentence were handed down.
What was deemed most remarkable by observers of Khodorkovsky’s legal travails, as well as by his Russian lawyer, Yuri Schmidt,35 was that no observer of the proceedings could figure out what crimes, if any, were committed.36 The prosecutors went about piling up reams of “evidence,” the judge accepted the “evidence,” and defense counsel argued futilely that none of the proceedings made the slightest bit of sense since nothing alleged against the defendants could by any stretch be deemed criminal.
The Khodorkovsky experience demonstrated to the world that all the Russians need in order to put a target of the regime in prison and seize his assets is a statute into which any and all conduct can be squeezed, in a trial fit for a Kafka novel. There is, to be sure, a vast difference between the Russian and American systems: the organizations within American civil society have been able to operate here without fear of imprisonment, and occasionally American courts or presiding judges point out that the Justice Department emperor too often wears no clothes. But Russia’s difficulties constructing a criminal justice system in which clear statutes guide civil society, and fair trials decide whether a crime truly has been committed, furnish a warning to our society as to where we could be heading.