Man Without Qualities

Friday, October 24, 2003

The Shape Of Stewart, Fastow And Kozlowski To Come?

A federal judge declared a mistrial today in the trial of Frank P. Quattrone, the former Credit Suisse First Boston investment banker, after jurors said they were hopelessly divided on his guilt or innocence.

There has been enormous political and media pressure on prosecutors to bring criminal actions against executives in the wake of the Enron mess. Sadly, the pressure has often been misdirected and the criminal actions ill conceived.

Consider the case against Mr. Quattrone, described this way by the New York Times:

The jury, which deliberated the case for six days in the four-week trial, tried to determine whether Mr. Quattrone intended to obstruct a government investigation when he sent an e-mail message on Dec. 5, 2000 endorsing a colleague's directions to "clean up those files" just days after learning of an inquiry into how the bank allocated initial stock offerings.

Seriously? Put that way, this particular charge against Mr. Quattrone seems all but Orwellian - and the fact that several members of the jury were inclined to convict him seems more an indication of gradually abating, media-aggravated public hysteria. Worse, the prosecutors did not do anything obviously wrong in this trial - so there's no obvious change of approach that would markedly improve the government's chances on re-trial.

The case against Mr. Quattrone was solid compared to what appears to be the government's case against Martha Stewart, which is threatening to develop into a seriously damaging political and legal disaster for the Justice Department.

The case against Mr. Kozlowski seems much stronger than some of the others - which is not without ironies, since Tyco itself is doing relatively well. relative to its past year (although not relative to its all-time highs).But now we're told that the Tyco board of directors may have had extensive knowledge of some the activities that Mr. Kozlowski allegedly engaged in without board consent. And there appear to be some key witness credibility issues. That trial has a long time to run - and it's too early for predictions. But will the Kozlowski prosecutors consider themselves to have won a great victory if Mr. Kozlowski is convicted only of taking money for earrings and has to serve time in prison for it - where his aggressive deal making skills turn out to have created billions of dollars in value for his shareholders? Is that a good result?

Contrary to much media and official pontification, corporate governance issues have correctly and traditionally been handled through civil actions - not criminal cases. After Enron, that largely changed. And the change is mostly for the worst. Corporate governance issues are generally complex even where they at first seem clear (Hey, he took the money - what's so complex about that?) and the individual motivations murky. All of that means that criminal law - with it's "beyond a reasonable doubt" standard and serious protections of the accused - is not generally appropriate or effective in this area. Too often these cases are resolved in settlements and plea baragins that too much resemble the results of medieval torture-time-on-the-rack, with the signing defendants doing so from the depths of serious nervous breakdowns and fractured marriages. Worse, the system places a perverse incentive on prosecutors to demonize the accused (see, eg, the campaign against Martha Stewart) in order to neutralize the advantage a well-regarded accused person such as Ms. Stewart has in criminal court. Yes, indictments can be brought. But an indictment absent a conviction too easily has the appearance of government harassment brought on by a public hysteria fueled by media opportunism. In the Enron aftermath, that appearance has often not been deceptive of substance. When the government case against Ms. Stewart fails - and it will almost certainly fail - what excuse will there be for savaging the reputation of one of the most successful, best-regarded women (an active Democrat!) in America?

It's time for the Attorney General of New York and the United States Attorney for the Southern District of New York to make long, hard re-evaluations of these post-Enron criminal cases and relegate these matters to the civil courts which are far better equipped to deal with them.

That is, it's time for the prosecutors to clean up those files.

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