If You Can’t Explain it to a Jury

I recently blogged about the reduction in the number of federal agents and prosecutors devoted to pursuing white collar crime, particularly in those huge deals where billions may be at stake for complex violations of federal corporate reporting and disclosure laws. We all know about the Bernie Madoff scandal, but at least in that case, the feds at least have a down-and-dirty Ponzi scheme to prove, something prosecutors have been doing for many, many years. That’s not too tough to explain to a jury.

But what happens when zealous executives purposely overstate or understate assets, transactions or costs, misleading investors, banks and customers to a large financial loss? Maybe this was an easy task in the Enron case, but when you get into technical compliance issues, structures which require expertise and knowledge just to understand, the prosecutions can get bogged down, because there is no simple way to present the case to a jury, and a jury is a very difficult body to have to present technical compliance issues to.

Take for example the 2007 federal indictment of David Stockman (former President Reagan’s budget director) who was alleged to have concealed big problems in his auto parts company (Collins and Aikman – which collapsed four years ago) from his lenders and customers. After a massive effort, the charges were dropped on January 9. It was just too hard to bring this case before a jury.

Writing for the January 14, 2009 theDeal.com, editor Robert Teitelman explains why: “The original stories were relatively murky about why, after years of chasing Stockman, the feds backed off. Stockman and his attorney were adamant that he was innocent throughout, at one point hitting prosecutors with a 1221-page single-spaced defense, according to the AmLaw daily. At the very least, the complexities of this case -- it hinged on whether Stockman and three other execs inflated operating income by manipulating supplier rebates -- would challenge any jury. Stockman's attorney, Elkan Abramowitz, also told The New York Times that he blamed Sarbanes-Oxley for forcing independent directors to conduct a quick investigation and hasty judgment.

“A few days later, the blogosphere offered a few more fascinating wrinkles on what might have been happening behind the scenes. The Race to the Bottom blog suggested that the complexity of the case, with its 15 million documents, played a role, but also speculated that the ‘decision may have been influenced by a series of high-profile losses for the U.S. Attorneys Office in the Southern District.’ The Stockman case, the blog said, would consume resources just as the office was gearing up for Bernie Madoff. Add to this the fact that a new Democratic administration is taking power, the existing U.S. attorney, Michael Garcia, stepped down in December, and there's a general clearing of the decks.”

As we approach a ground-up rewriting of our entire financial regulatory schema, from statutes to regulations, it seems pretty obvious that no matter the intentions of the regulators, no matter what the public outrage, if our legislative and administrative bodies cannot draft clearly understandable provisions that might give rise to criminal prosecutions – where jury trials are a defendant’s right – they are wasting taxpayer dollars and a massive amount of time.

I’m Peter Dekom, and I approve this message.