The Coming Corporate "Crime Wave"

In a recent appearance before Congress, Deputy Attorney General Sally Quillian Yates declared that the US Department of Justice is going to ratchet up its prosecution [18] of individuals employed in corporations as part of a larger push against “white collar crime.” There is no doubt that such prosecutions will be very popular to a large section of voters, given that presidential candidates like Bernie Sanders, Hillary Clinton, and Martin O’Malley, along with Massachusetts Senator Elizabeth Warren pretty much have declared that nearly all American businesses are part of a massive criminal conspiracy that must be brought down by federal authorities.

Within the next year, we should expect to see mid-level business and finance executives doing “perp walks” in front of the news media, as federal prosecutors will charge them with various “economic crimes” in hopes that they will implicate their superiors. All of us by now know the drill and in a time of anemic economic growth complete with business failures, it won’t be hard to find scapegoats.

Everyone Is “Guilty”

When famed civil liberties attorney Harvey Silverglate published his now-famous book, Three Felonies a Day [19], it caused quite a stir. Going through a number of very disturbing cases, Silverglate made clear that if federal prosecutors want to target an individual, it is very easy to fashion criminal charges against them.

To prove his point, he noted how the federal prosecutors in New York when Rudy Giuliani was US Attorney for the Southern District of New York regularly played a game in which they would see if various celebrities and others, including Mother Theresa, had broken federal criminal law. The result, unfortunately, was that for each person no matter how good his or her public character, a federal statue existed that would place them in prison.

Being that Giuliani’s prosecutors — and Giuliani himself — regularly committed felonies by selectively leaking grand jury information to favored journalists in order to damage the ability of accused people to defend themselves. He also did it to stoke the fires of the anti-business mobs, and these prosecutors were quite familiar with how to fashion the ever-malleable federal statutes to turn ordinary acts into crimes. During the 1980s, when Giuliani was at DOJ, the New York office engaged in a massive show of force against Wall Street firms and other business enterprises in large part to enhance the coming political careers of Giuliani and others who worked under him, and to appease the anti-business Democrats and Republicans who were anxious to declare to roll back what they called the “Decade of Greed.”

Is a New Wave of Crackdowns Coming?

Federal prosecution of business figures tend to come in waves. During the Great Depression, prosecutors tried to claim criminal behavior by businessmen was responsible for the lengthy economic downturn. During the 1980s, Wall Street rivals of Michael Milken and others who challenged the established financial firms were the quiet-but-effective engine of prosecution, combining their political connections with Giuliani’s ambition to nearly destroy the alternative capital funding machine that was overturning the corporate status quo with new startups and shakeups of existing firms.

Because Milken had become wealthy through his financial dealings, he became the symbol of “greed” by the Democratic Left, which at that time was facing a loss of influence during the Ronald Reagan years and was desperate to regain its former status of America’s “conscience.” Going after Milken mollified both the Left and the Republican establishment on Wall Street, as the “old money” firms were happy to see Giuliani eliminate the competition.

After the spectacular failure of Enron and other firms that depended upon Alan Greenspan’s Federal Reserve System policies of easy money, policies that ended in the Tech Bubble meltdown in 2000 and 2001, the George W. Bush administration went after people like Ken Lay and Jeffrey Skilling of Enron and others who had high-profile CEO jobs. In the lynch-mob atmosphere that inevitably follows the bust cycle of Fed-induced business cycles, it was not hard to convince Americans that the corporate bankruptcies and the subsequent recession were the handiwork of criminal executives.

I have written about federal criminal law and its abuses for more than a decade and have not changed my viewpoint. No matter how often writers and activists expose the consequences of expanding federal criminal law, the law expands anyway. People are elected to Congress on platforms of “being tough on crime,” and large crowds heartily approve when Bernie Sanders and Elizabeth Warren call for more business executives to be thrown into prison for unspecified “crimes.” (They demand the Beria approach. Beria, who was the head of the original KGB [20], famously stated: “You bring me the man, I'll find you the crime.”)

A Winning Political Strategy

The current public mood is ugly, and perhaps for good reason. Although the official rates of unemployment are relatively low, statistics clearly show that huge numbers of potentially-employable people have left the job market altogether because they know that finding meaningful employment is highly unlikely. We know that in percentage terms, labor participation in the workplace is at near-record lows. We also know that, economically speaking, the economy is stagnating and that individuals continue to be squeezed as real pay fails to keep up with creeping-but-real inflation. In short, people are angry, and they want someone to pay.

Many angry people have found a political home with candidates like Sanders and Donald Trump, both of whom speak to voter frustrations and who also find perfect scapegoats for vengeful Americans. Bernie Sanders blames businesses and entrepreneurs for “greed,” while Trump blames immigrants. Economically speaking, neither Sanders nor Trump is correct, but it doesn’t matter; angry voters don’t want facts, they want scalps.

Ever since sociologist Edwin Sutherland during the 1930s came up with the term, “white collar crime,” [21] politicians and the media have claimed that businesses often are little more than criminal enterprises. Certainly the current political climate reflects that sentiment and more. Furthermore, politicians are appealing to voters with proposals that would destroy capital formation, criminalize much of entrepreneurship, and make it much more difficult for business firms to engage in normal activities.

In a recent campaign speech, Democratic hopeful Hillary Clinton declared [22], “We’re going to go back to enforcing labor laws. I’m going to make sure that some employers go to jail for wage theft and all the other abuses that they engage in.” Few candidates of either party are willing to stand up for businesses and entrepreneurs, and as the campaign rhetoric becomes more inflammatory, federal prosecutors are going to find it increasingly easier to charge business owners and employers for law “violations” that might be called “criminal” even if they never were intentional [23], according to law professor John Baker.

Selective and Politically-Motivated Prosecution

Because there are so many business owners and executives, and because federal prosecutors cannot go after everyone, it will be a crapshoot as to whom prosecutors select for “the treatment.” For the most part, those targeted will not have political connections (such as many Wall Street executives), nor will they be people involved in “green energy” ventures, such as those businesses tied to people like Al Gore.

When people think of so-called business crimes, they think of embezzlement, firms falsifying information, tax evasion, or to engage in fraud while performing services under contract with the government. For example, say that Ajax Company is supposed to build tanks for the US Army and is paid on a cost-plus basis. The company then bills the army for a number of tanks it did not build or for phantom services, with the company CEO and his mistress putting the fraudulently-obtained money in a Swiss bank account.

This certainly would fall under anyone’s fraud statute, and if the government were to prosecute just those kinds of cases, few people would object. However, government fraud statutes are incredibly malleable and can apply to conduct that would seem to be legal. In an article I wrote for Regulation six years ago [21], I point out Enron’s practice of placing “non-earning assets” into “special purpose entities” was legal and also was made known to Enron stockholders, yet federal prosecutors decided to include those actions under the umbrella of “Honest Services Fraud.”

Prosecutors wanted jurors to believe that even though Enron’s activities met federal laws and regulations, nonetheless the company undertook those actions in order to present the company to stockholders and others in a false light, making the company’s financial condition seem better than it really was. Thus, it was left to the jurors to determine whether or not this action truly was a violation of the law, even though the original act did fall within the letter of federal statutes and regulations.

One can see immediately where there is a problem. Under most state laws governing crime, there often is no doubt that an actual crime was committed. The question is not whether someone broke the law, but rather who broke it, the defendant or someone else.

Federal Law Is Ambiguous Enough to Allow Prosecution of Nearly Anyone

In the federal system, however, jurors often are asked to decide whether or not someone actually broke the law and, thus, broke federal statutes. Jurors, who usually have no legal training, then are asked to determine whether or not a highly-complex deed that they may not understand was a legal violation, and more often than not, if jurors don’t understand it, or if they deem the defendants to be less-than-savory, they will vote guilty as a default position.

Furthermore, federal prosecutors have such leeway that they are able to pile on numerous charges that might be based from a single endeavor, thus creating a situation for defendants in which they either can chance going to prison for decades (and federal prosecutors almost always win at trial) or plead guilty. (I have a well-known friend who was charged with “Honest Services Fraud,” because the US attorney believed that the fees he negotiated with his clients were higher than they should have been. The prosecutor did not allege that he had defrauded his clients per se, since he charged the clients the fees upon which both parties agreed, but that because the fees were higher than fees other lobbyists charged their clients, then they simply had to be illegal. So, according to federal prosecutors, one can negotiate fees in daylight with all parties agreeing and still be breaking the law.)

Federal prosecutors also are notorious for appealing to the prejudices of juries. When the late Ken Lay and Jeffrey Skilling were on trial in Houston, Texas, prosecutors appealed to the fact that when Enron collapsed, a lot of people lost money. (That Skilling and Lay also lost most of their income and wealth in the same collapse apparently was irrelevant, and prosecutors claimed that any act of Lay and Skilling diversifying their own personal financial portfolios — although both men held most of their wealth in Enron stock — was an attempt to knowingly bail out of a sinking ship.) Because the trial judge also was openly hostile to the defendants, prosecutors pretty much were able to do and say what they wanted without fear of legal repercussions.

Rudy Giuliani once noted with amusement that people charged with “white-collar crime” were more likely to “roll over” than were hardened criminals. Part of the reason is that most people, and especially business owners and executives who do try to obey the law, are horrified at the prospect of being charged criminally and going to prison. Because federal prosecutors can easily fashion charges that often defy defense, it is not hard to understand why business people plead guilty.

If Barack Obama and US Attorney Loretta Lynch decide to target business people, prosecutors will find plenty of targets. Because violation of regulations can be rolled into the “fraud” and “conspiracy” statutes — even if the violations were unintentional or the “targets” were unaware of their existence — it is not hard to find subjects to prosecute. Being charged in such conditions is more like “winning” an “unlucky lottery” than engaging in actual criminal behavior.

That turning the business community into a wreckage of criminal charges will have long-term effects on the willingness of entrepreneurs to risk their own assets will be no deterrent to people like Obama and Lynch. Neither of them have a minute of business experience, and they truly believe that businesses themselves probably at best are unethical entities or at worst caverns of criminality, so they most likely believe they are doing Americans a favor by throwing more people into prison. One only can feel sympathy for people and their families who at the present time have no idea that someone from the US Department of Justice is planning to wreck their lives over at worst what might be a legal technicality.