How the Protection of Law Was Lost


Published on VDARE.com – September 25, 2003

Speech given at the

Mont Pélerin Society
meeting in

Chattanooga, Tennessee,
on September 21, 2003.

The Enron-era accounting scandals have resulted in
new legislation, Sarbanes-Oxley, which imposes criminal
liability on the CEO and CFO of corporations with
incorrect accounting statements. This reform will have
unintended consequences, as have previous reforms.

A case can be made that the recent scandals are
themselves the consequences of past reforms. The
emphasis on quarterly earnings is the result of reform
that aimed to provide investors with more timely
information about the profitability and financial
condition of public companies. Stock options resulted
from reforms that sought to tie executive compensation
to shareholder return as measured by the company`s stock
price. Another reform capped executive salaries at $1
million. Compensation above this amount must be paid
from after-tax profits or justified by performance. The
practice of giving executives large options whose value
depends on driving

up quarterly earnings
(the measure of performance)
came from this reform. In the early 1990s the S.E.C.
itself launched fictional quarterly earnings reports
when that agency changed Rule 16b. Previously,
executives who exercised their stock options were
required to purchase the stock at the option price and
to hold it for six months before selling. The rule
change permitted executives to sell the stock the minute
they exercised their options, thus eliminating the
executives` exposure to the market.

Reform took its toll on the culture of accounting
firms. In a judgmental era, loose dealings ruined
reputations. Partners were paid according to seniority.
The accounting industry operated under self-imposed bans
on price competition and advertising. With charges that
the absence of price competition was anticompetitive,
the Federal Trade Commission and the U.S. Department of
Justice destroyed this accounting culture during the
1970s. Competition on the basis of reputation and
probity was replaced with price competition. Partners
ceased to be paid by seniority. Instead, they were paid
according to the business they brought to their firms.
Accounting firms began consulting with the corporations
that they audited, adding conflict of interest
ingredients to the more accommodating stance toward
clients that price competition had forced upon
accountants. Price competition brought pressure to make
the client happy. The need to make the client happy
undermined the independence of the auditors.

Reformers assume that rules can substitute for
character, and they ignore the unintended incentives
created by rule making. An accounting culture based on
probity was replaced by one in which sharp practices are
acceptable as long as they comply with SEC rules.

By making top executives criminally liable for
material errors, regardless of whether fraud is
intended, Sarbanes-Oxley violates two protective
principles of our legal system: mens rea (no
crime without intent) and actus rea (evidence of
a criminal act). Violating these legal principles is a
far greater offense than accounting fraud.

We often hear that "the rule of law" is an advantage
we have over our competitors, but the rule of law has
been replaced with the discretion of regulators and
prosecutors. Today Americans draw prison sentences for
unknowingly violating vague regulations, the meanings of
which are interpreted by the regulatory police who
enforce the regulations. Americans are indicted on the
basis of novel interpretations of criminal liability
created by the indictment. When felony was ruled by
intent, legal certainty was required in order that
people could be aware of acts that constituted criminal
violations. Now that

intent is no longer required
, certainty in law has
lost its relevance.

The U.S. Department of Justice`s criminal indictment
of Exxon for the Exxon Valdez oil spill and California`s
criminal indictment of Lincoln Savings & Loan owner
Charles Keating were path-breaking examples of
criminalizing accidents and civil liability in order to
interpret felony statutes without regard to intent
(Roberts and Stratton, 2000).

It is absolutely certain that Exxon did not purposely
run the Valdez oil tanker aground with the criminal
intention of polluting the water and

killing migratory birds
without a license. Yet, the
DOJ`s criminal indictment charged that Exxon did. The
indictment interpreted oil worth $150 million as
"refuse matter"
that was "thrown, discharged and
deposited"
by Exxon without a permit. Exxon was also
charged under the Migratory Bird Treaty Act for killing
birds without a license. By threatening Exxon executives
with prison, the DOJ guaranteed a big settlement.

In the Keating case, prosecutors with the connivance
of Judge Lance Ito criminalized the civil tort doctrine
of respondeat superior, which holds a "master"
economically liable for wrongdoings by his "servant."
This allowed Keating to be held responsible for alleged
wrongdoings by employees.

Recently Paul Rosenzweig in a Heritage Foundation
paper noted that accidents have become regulatory crimes
that subject the innocent to criminal liability
regardless of intent or even of fault (Rosenzweig,
2003). He illustrates the point with Edward Hanousek, a
manager with a railroad in Alaska. A worker, at the
worker`s own initiative, used a backhoe to move some
rocks from a train track and accidentally ruptured an
oil pipeline, causing a few thousand gallons to spill
into the Skagway River. Mr. Hanousek, who was off-duty
at the time, was

imprisoned
for

failing to supervise
the worker.

Law, once a shield of the innocent, has become a
weapon in the hands of government. Today anyone can be
criminally prosecuted for offenses created by the
indictment. What

William Blackstone
defined as law—"the
Rights of Englishmen"
—has been lost.

In the Anglo-American legal system, law consists of a
few basic principles: due process, the attorney-client
privilege, equality before the law, the right to
confront adverse witnesses, and the prohibitions against
crimes without intent, bills of attainder,
self-incrimination, retroactive law, and attacks against
a person through his property. Each of these protective
principles has been breached. Today prosecutors create
bills of attainder by tailoring novel interpretations of
law to fit the targeted defendant. A favorite tactic is
to criminalize civil infractions. Clark Clifford and
Robert Altman were indicted not for a statutory
violation but on a prosecutor`s "novel theory" that two
separate legal transactions comprised a "conspiracy."
Accidents and mistakes in filling out government forms
have been criminalized. The ancient legal principle of
mens rea has been obliterated.

The New Deal laid the groundwork for destroying the
tort/crime distinction and using criminal sanctions to
achieve public welfare goals. An important feature of
New Deal legislation was congressional delegation of
lawmaking power to regulatory agencies. Delegation
combined statutory authority and enforcement authority
in the same hands. The bureaucrats` ability to define
criminal offenses by their interpretation of the
regulations that they write gives regulatory police vast
discretion. A cooperative "offender" may get off with a
civil penalty, whereas a person who sticks up for his
rights or a person who presents a high profile
opportunity to an ambitious prosecutor may receive a
criminal indictment. The bureaucrats` ability to create
criminal offenses spontaneously by interpretation makes
law uncertain and incapable of fulfilling its purpose of
commanding what is right and prohibiting what is wrong.

The Enron era scandals produced the Benthamite
proposal that corporate lawyers be

required
to rat on their clients. Just as Hanousek`s
case follows from the Exxon Valdez, the proposal to
breach the attorney-client privilege has its precedent
in U.S. assistant attorney general Stuart M. Gerson`s
indictment in 1990 of the blue-chip law firm Kaye,
Scholer as "an abettor of crime" for not
divulging to thrift regulators information pertaining to
its client Charles Keating. The DOJ`s indictment of
Kaye, Scholer was based on presumption as Keating was
yet to be tried. But by freezing the law firm`s assets
and the personal assets of the firm`s 400 partners,
Gerson was able to force the law firm into a $41 million
settlement. Such actions by the DOJ smell of robber
barony, not of the rule of law.

Superfund took retroactive law back generations and
placed liability on people and organizations that never
contributed hazardous waste to a Superfund site. Child
abuse cases violate due process and the right to
confront one`s accusers. Anonymous allegations serve as
grounds for seizing children and placing them in the
hands of "therapists" who coax them into accusations.
The DOJ and HUD have coerced neighborhoods into
abandoning their rights under zoning ordinances to keep
commercially operated halfway houses and drug treatment
clinics out of residential areas.

The function of justice is to find the truth. This
function has been destroyed by plea bargains. Plea
bargains have corrupted the justice system by creating
fictional crimes in place of real ones. The practice of
having people admit to what did not happen in order to
avoid charges for what did happen, or is alleged to have
happened, creates a legal culture that elevates fiction
over truth. By making the facts of the case malleable,
plea bargains enable prosecutors to supplement weak
evidence with psychological pressure. Prosecutors pile
on charges, as in the Mike Milken case, until the
defendant or his lawyers throw in the towel. Many
innocent people cop a plea just to end their ordeal.
Legal scholar John Langbein compares "the modern
American plea bargaining system"
with "the
ancient system of

judicial torture
"
(Langbein, 1978, 8).
Confession and self-incrimination have replaced the jury
trial in about 95 percent of felony indictments (Maguire
and Pastore, 1995, 461–63, 483–86). Just as Bentham
wanted, torture has been resurrected as a principal
method of conviction. As this legal culture now
operates, it permits prosecutors to bring charges in the
absence of crimes.

How are firms to operate when managers face criminal
liability for accidents committed by employees and for
accounting mistakes in overseas subsidiaries? The
criminalization of error has turned the justice system
into a lottery that can assign criminal charges to
anyone. To compensate for this liability, executives
will be better remunerated. Operating expenses will rise
as ever more accounting safeguards are implemented and
audits are expanded. Corporate counsel will multiply as
executives strive to establish that they have taken
every step to prevent fraud and negligence. The
vulnerability of firms to indictments will prevent any
independence of voice as business executives seek
political protection.

Just as many defense attorneys are former prosecutors
and many corporate lawyers come from backgrounds in
regulatory agencies, future business executives might be
drawn from the ranks of regulatory bureaucrats as
protection of the firm and its management from
indictment becomes an important goal.

The vagueness of laws and undefined crimes, such as
insider trading, make it easy for prosecutors to bring
charges and coerce monetary settlements.

Alan Reynolds noted in the Washington Times

(May 25, 2003) that New York prosecutor Elliott Spitzer
managed to shake down Merrill Lynch without developing
any real evidence of fraud. Spitzer`s settlement
agreement with Merrill Lynch was reached without "the
court making any findings of fact or conclusions of
law."
Nothing in the settlement "may be deemed or
used as an admission of, or evidence of, the validity of
any alleged wrongdoing or liability."
As Reynolds
puts it, "the case against Merrill is officially one
with no accusation of fraud, no admissible facts, no
legal findings and no evidence of wrongdoing."

It is amazing that people still believe that the U.S.
is a country where property rights are protected. In
torts, what formerly were dismissed by judges as
"nuisance suits" are now settled for large sums. Asset
freezes and forfeitures have exploded. The Racketeer
Influenced Corrupt Organizations Act (RICO), which was
supposed to be targeted toward the mafia, has found its
way into divorce cases. Asset confiscations, which were
supposed to be targeted toward drug lords, take their
daily toll on a large number and wide range of totally
innocent parties. Grandparents lose their homes because
police suspect that grandchildren brought drugs into the
house. Elderly disabled people are evicted because their
care providers bring drugs on their premises. People are
confiscated of cash because police surmise that the
amounts imply drugs. Motels, cars, boats, and airplanes
have been confiscated as a result of police surmise that
they facilitated the commission of a crime or because
renters or passengers (including hitchhikers) possessed
drugs or premises were used for prostitution or to
solicit prostitution. California multimillionaire Donald
Scott lost his life, because Los Angeles deputy sheriff
Gary Spencer planned to confiscate his 200-acre Malibu
estate on the basis of false allegations that marijuana
plants were growing on his land.

In our book,

The Tyranny of Good Intentions
, Larry Stratton
and I devote a chapter to asset confiscations. I have
not kept up with forfeiture since the book was published
in 2000. According to the latest information we had at
that time, the 1984 forfeiture provision, which targeted
drug trafficking, had been expanded to cover 140 other
federal criminal offenses. Scores of similar state and
local forfeiture laws have been added to the books.
According to former House Judiciary Committee Chairman
Henry Hyde, Florida, Texas and other states permit civil
forfeiture for any criminal activity. New Jersey allows
forfeiture for any alleged criminal activity.

The innocent owner`s defense is extremely weak.
Police and prosecutors have taken advantage of it. Levy
reports that in 80% of forfeiture cases no charges are
filed against owners of confiscated property (Levy,
1996). In other words, the confiscations acknowledge
that the owners whose properties were seized are
innocent of the alleged criminal activity for which
their property was confiscated. As Rep. Hyde said,
Americans face "endless possibilities to be caught in
the snare of government forfeiture" (Hyde, 1995, 10).

The Patriot Act and follow-up proposals are
destroying habeas corpus and permitting warrentless
searches and spying. Supposedly, these police state
measures are directed toward terrorists, but they are
certain to expand, just as asset freezes and forfeitures
expanded.

On May 21 of this year the Washington Post
reported
that the Justice Department acknowledged in
a 60-page report to the House Judiciary Committee that
it has used many of the anti-terrorism powers granted in
the wake of September 11 to pursue defendants for crimes
unrelated to terrorism, including drug violations,
credit card fraud and bank theft. Some people say police
and prosecutors will protect the innocent by exercising
careful discretion. If asset forfeiture is the example
of police discretion, 80% of those incarcerated under
the new anti-terror laws will be innocent.

The grand jury is supposed to determine that a crime
has occurred and that an indictment of an individual is
justified. The trial jury is supposed to determine the
innocence or guilt of the indicted party. Just as the
trial jury has been displaced by the coerced plea
bargain, the grand jury has lost its function.

A recent Cato Institute paper
shows that the federal
grand jury is "a stalking horse for prosecutors to
bypass the constitutional rights of individuals and
organizations. . . .In truth, the government has been
using the facade of the `grand jury process` to subvert
the Bill of Rights—especially the Fourth Amendment`s ban
on unreasonable seizures of private papers and the Fifth
Amendment`s ban on compulsory examination under oath"
(2003, 1, 4).

Grand juries do not determine whether a crime has
occurred. They merely accept the prosecutor`s word for
it, who, in turn, accepts the police`s word. In two
Arlington, Virginia, child sex abuse cases that I
investigated, no evidence was ever presented that an
offense occurred. The same detective and prosecutor
simply lied to the grand jury that offenses had
occurred. Once they had the indictment, they proceeded
to convict the defendants.

In one case parents, concerned about the relationship
of their underage daughter with an older woman in their
apartment building, insisted on chaperoning their
meetings. To continue the relationship, the daughter
accused her father of sex abuse. No investigation was
ever made by the police. Child Protective Services
stepped in and forced the mother to abandon her husband
or lose custody of the child to CPS. This isolated the
father. The detective lied to the grand jury that the
father had confessed. Isolated and indicted, the father
was forced into a deal.

In the other case a
skateboard coach
took his team to New York City for
a competition. One of the boys wanted to purchase drugs.
Fearful that any rumor of drugs would destroy parents`
confidence, the coach threatened to tell the boy`s
parents. The boy struck first by accusing the coach of
sex abuse. Again, no investigation was made. The
skateboard team came to testify as to what really
happened. The trial judge, suspected by a clean
government group of being under the prosecutor`s thumb,
jailed one of the young witnesses on a trumped-up
technicality. This served both to intimidate the young
witnesses and to cast aspersion on the credibility of
the witnesses.

The reason that the vast majority of felony cases are
settled with a plea bargain and the vast majority of
civil suits are settled out of court is that no one has
any confidence in the justice system.

This lack of confidence should tell us something
about the fate of entrepreneurs and executives when
criminal sanctions are used in order to obtain "public
welfare" goals.

When felony no longer requires intent, criminal
conviction loses its moral condemnation. When error is
criminalized and third party criminal liability
assigned, people can be found guilty of felonies of
which they have no knowledge or personal connection.
When law is morally arbitrary, unknown and uncertain,
prosecutors escape all restraint.

Former U.S. attorney Robert Merkel says that
prosecution "is a result-oriented process today,
fairness be damned."
Merkle says prosecutors are
pressured to justify budgets with convictions, "and
that causes them to prosecute absolutely bogus cases to
get those statistics"
(Moushey, 1998, 3–4). Former
deputy U.S. attorney general Arnold I. Burns wrote in
the Wall Street Journal that "it is time for a
sober reassessment of the power we have concentrated in
the hands of prosecutors and the alarming absence of
effective checks and balances to prevent the widespread
abuse of that power" (Burns, 1998, A23). A law school
textbook, Prosecutorial Misconduct, is evidence that the
problem is not going away on its own.

In 1998 the Pittsburgh Post-Gazette summed up
its investigative reports of prosecutorial misconduct as
follows:

Hundreds of times during the past 10 years, federal
agents and prosecutors have pursued justice by breaking
the law. They lied, hid evidence, distorted facts,
engaged in cover-ups, paid for perjury and set-up
innocent people in a relentless effort to win
indictments, guilty pleas and convictions. Rarely were
these federal officials punished for their misconduct. .
. . Perjury has become the coin of the realm in federal
law enforcement (Moushey, 1998, 40).

The traditional prosecutorial ethic required
prosecutors to give the defendant the benefit of the
doubt and to strive for a fair trial. This ethic has
been lost. Today prosecutors strive for conviction at
all costs. Prosecutors try defendants in the media, not
in the courtroom. They overdraw charges in order to
elicit a plea. They withhold exculpatory evidence.

A recent case of withholding exculpatory evidence

was reported by Alexander Cockburn in the Los Angeles
Times
(May 26, 2003). Ed Rosenthal was
designated by the City of Oakland to be the legal
supplier of medical marijuana under the terms of
California`s Compassionate Use Act of 1996. Federal
agents arrested Rosenthal under federal anti-marijuana
law. At Rosenthal`s trial in U.S. District Court in San
Francisco, the prosecutor presented Rosenthal as a major
drug dealer. Judge Charles Breyer (brother of the U.S.
Supreme Court justice) prevented Rosenthal`s attorneys
from introducing the fact that he was supplying medical
marijuana to the City of Oakland under the terms of a
California state law. Misled by judge and prosecutor,
the jury convicted Rosenthal. When the jurors learned
that they had been deceived, they protested in front of
the U.S. courthouse. Do we want people who will
intentionally mislead jurors in order to obtain a
conviction serving as prosecutors and judges?

The mendacity of prosecutors knows no bounds. In
Stigler, Oklahoma, prosecutor Ron Boyer is

prosecuting
32-year-old Shannon Denney for the crime
of "outraging public decency and public morals." Denney
 is guilty of nursing another woman`s 3-month old baby
while caring for her in a daycare center. The baby could
not stop crying and refused the offered bottle, so
Denney , who was nursing her own baby, offered the
distressed infant her breast. For this act of kindness,
Denney  faces up to a year in jail.

The prosecution of Denney  epitomizes the complete
destruction of law. Denney  had no notice that her act
of kindness constituted a crime. Indeed, how could
wetnursing—a normal activity for thousands of years
prior to the invention of the baby bottle and infant
formula—be construed as a crime? Actus rea and
mens rea
are absent, and normal human behavior with
an ancient tradition has been criminalized without
notice.

Martha Stewart`s indictment by U.S. attorney James B.
Comey is

another example
of crimes invented by prosecutors.
Stewart is not charged with felony "insider trading,"
but with felony obstruction of justice for allegedly
trying to cover up evidence that might be construed as
insider trading (if a person without a fiduciary
relationship with the firm, ImClone, whose stock she
sold can be guilty of insider trading). How can a person
be indicted for covering up a crime for which one is not
accused?

In addition, Stewart is charged with felony
"securities fraud" for declaring her innocence publicly.
According to the prosecutor`s "new legal twist," her
declaration of innocence constitutes an illegal
manipulation of the stock of her own company, Martha
Stewart Living Omnimedia. By declaring her innocence,
the prosecutor says, she was attempting to prevent her
indictment from driving down the shares of her company,
which depends on her leadership. The prosecutor`s
invented charge ignores that in our legal system a
person is innocent until proven guilty. At the time she
declared her innocence, Stewart had neither been tried
nor found guilty.

Many people have the misconception that justice is a
function of the size of the pocketbook. In actual fact,
it is easier to frame a white-collar defendant than to
frame a poor member of a minority group. The common law
crimes associated with the poor—theft, assault, and
murder—are well defined. Frame-ups for such crimes
require prosecutors to suborn perjury, suppress
exculpatory evidence, and coerce false confession. To
frame a white-collar victim, a prosecutor need only
interpret an arcane regulation differently or with a new
slant.

As a result of past reforms, the bulk of executive
compensation depends on performance-related bonuses. It
is easy for employees to become dependent on bonus
income and to be tempted to fudge results when profits
turn down. To hold a CEO and CFO criminally liable for
accounting misstatements that cannot be detected in
advance is tyranny.

Many justifications have been used for past
tyrannies. We now have tyranny in the name of corporate
governance and the prevention of accounting fraud.

References

Burns, Arnold J. 1998. What By-the-Book Prosecutors
Can Get Away With. Wall Street Journal, March 23,
A23.

Dillard, W. Thomas, Stephen R. Johnson, and Timothy
Lynch. May 13, 2003.A
Grand Facade: How the Grand Jury Was Captured by
Government.

Policy Analysis. Washington, D.C. Cato Institute.

Hyde, Henry. 1995.

Forfeiting Our Property Rights: Is Your Property Safe
from Seizure?
Washington, D.C.: Cato Institute.

Langbein, John H. 1978. Torture and Plea
Bargaining
. University of Chicago Law Review
46 (October), 3-22.

Levy, Leonard W. 1996.

License to Steal: The Forfeiture of Property
.
Chapel Hill: University of North Carolina Press.

Maguire, Kathleen, and Ann L. Pastore, eds., 1995.

Sourcebook of Criminal Justice Statistics 1994
.
U.S. Department of Justice, Bureau of Justice
Statistics. Washington, D.C.: U.S. Government Printing
Office.


Moushey, Bill. 1998. Win at All Costs
. Pittsburgh:
PG. Stories reprinted from the November 22, 23, 24, 29,
and 30, and December 1, 6, 7, 8, and 13 issues of the
Pittsburgh Post-Gazette
.

Roberts, Paul Craig, and Lawrence M. Stratton. 2000.


The Tyranny of Good Intentions
. Roseville,
Calif.: Prima Publishing.

Rosenzweig, Paul. April 17, 2003.

The Over-Criminalization of Social and Economic Conduct
.
Legal Memorandum
. Washington, D.C.: Heritage
Foundation.


Paul
Craig Roberts is the author with Lawrence M. Stratton of


The Tyranny of Good Intentions : How Prosecutors and
Bureaucrats Are Trampling the Constitution in the Name
of Justice
.
Click


here

for Peter Brimelow`s

Forbes Magazine interview with Roberts about the
recent epidemic of prosecutorial misconduct.