We have screwed this up big-time, boys. Big Time.
Mark, I don't disagree. I've made similar points about corporate fraud, most recently in the SEC's action against Goldman Sachs, on which I guess I turn out to be more of a prosecutorial dove than Larry Kudlow (see here and here).
There are good reasons for this. For most of my years in the Justice Department, I got to prosecute real bad guys — drug kingpins, gang-bangers, mafia dons, terrorists, etc. Also in my tenure, I was a deputy-chief of the appeals unit, a boss, and — in the last couple of years — handled a few corporate fraud cases based on accounting shenanigans. What I found, especially in mob cases under RICO (the 1971 Racketeer Influenced and Corrupt Organizations Act), is that most of the really bad precedents prosecutors have to work around result from judges trying to crack down on extravagant stretches of the statute in the civil context. That is, RICO was intended to be a powerful tool against the mafia and similar organized crime groups; but Congress included private, civil enforcement and treble damages, so every lawyer in a run-of-the-mill negligence case starts accusing the people he wants to sue of being an "association in fact" engaged in a "pattern of racketeering" (key elements of a RICO offense), with the result that the law gets applied to situations that have nothing to do with organized crime (or even crime).
When I was a supervisor, I had a young prosecutor once pitch me on a push-in robbery he wanted to indict. That's a state crime, not a federal one, but he had creatively suggested charging it as a federal extortion offense. Under U.S. penal law, extortion requires proof of an impact on interstate commerce, so I asked him what was the impact. He explained that the robbers had stolen money, and since U.S. currency is not printed in New York, it had to have moved interstate before being stolen. This theory would turn virtually every crime into a federal case. And that's a lot of what many young prosecutors (and some not so young) will do: use their supple minds to stretch criminal statutes to cover unsavory conduct that may or may not be criminal.
In the corporate fraud cases, I was very surprised to find that the applicable laws were unlike ordinary criminal statutes. Criminal statutes are required to be sufficiently clear and definite that people of ordinary intelligence are able to understand what is prohibited. But accounting fraud imports accounting standards, like the generally accepted accounting principles (GAAP) promulgated by the Financial Accounting Standards Board. These provisions are rife with wiggle room for judgment, discretion, and reasonableness. They can turn even Enron-dimension schemes into horse-races when they end up in criminal trials.
It's just a fact that there's a lot more room for a businessman to push the envelope than for a racketeer. That's as it should be: Most people have not yet accepted the notion that the pursuit of profit is something shameful. While I concede that I could have been over the hill by the time I started dealing with many white-collar cases, it just seems ridiculous to me, as someone who spent years dealing with really bad people, to suggest that most accused businessmen are bad guys in the same way that, say, John Gotti, was a bad guy — to say nothing of a mass-murdering terrorist. I thought it was pretty offensive that in the same courthouse around the same time, the WorldCom fraudster Bernie Ebbers got 25 years for fraud while Lynne Stewart got 23 months for providing material support to terrorism.
I think I'm pretty hardnosed when it comes to serious crime — to malum in se. But I'm instinctively a skeptic on malum prohibitum, especially on financial regulation and especially when, for all its hot air, government is a serial violator of every transparency provision it imposes on business. And laws that are intentionally (or even unintentionally) elastic to allow prosecutors and other lawyers to press their application far beyond whatever evil prompted their enactment are never a good idea.
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