The Free Market 26, no. 8 (August 2005)
The US Supreme Court’s 9-0 decision overturning the obstruction of justice verdict against Arthur Andersen Company comes too late to save the firm or the jobs of thousands of employees who found themselves out of work when the government destroyed the firm three years ago.
Indeed, the Andersen decision—despite going against federal prosecutors—in itself is a verification of a larger truth, that being that there is almost nothing individuals can do in order to check the devastating power wielded today by the American political classes. Andersen might have had the law on its side, but that fact was not able to save the company from a government determined to break the law in order to make a political point.
Most commentators have missed the larger story. US attorneys have been busy since the fall of Enron in late 2001 prosecuting numerous individuals for what essentially are business failures, Frank Quattrone and Ken Lay being two of the most obvious ones. Martha Stewart spent time in federal prison for essentially not asking the government, “Mother, May I?” when she sold some of her stock. At the present time, Lea Fastow sits in a Houston federal lockup, her guilty plea taken in exchange for the feds not trying to give her husband Andrew a life sentence for his actions while at Enron.
(Who says the US Government does not take hostages? There is no other way to explain the questionable indictment of Lea Fastow except to say that the government essentially took her hostage in order to extract a politically-popular conviction of her husband, with federal agents reminding the couple that if they did not take the deal, their two young children essentially would be made orphans if the couple fought the charges in federal court.)
In the aftermath both of the 2001 recession and the September 11 attacks, it was clear that many large businesses were overextended, having predicted a much more rosy future than what actually came to pass. Furthermore, the previous business boom had followed the classic pattern as explained by the Austrian theory of the business cycle (ATBC), with the Federal Reserve System aggressively pumping up bank reserves, something that ultimately led to speculative bubbles, malinvestments, and the near-collapse of some business sectors most influenced by this artificial boom.
The vaunted “New Economy” was little more than the same Fed-induced, boom-fed delusion that ultimately brought us the gloomy economic climate of the 1970s and the disastrous Great Depression of the 1930s.
It is not surprising that many firms became highly-leveraged during this boom; indeed, it makes perfect sense for companies to increase their indebtedness during a time of easy money, since it permits them to pay back the debt in the future with cheaper dollars. Those associated with the Austrian School of economics do not endorse such behavior, and certainly condemn the Fed’s inflationary policies, but the response of firms to this situation is quite rational.
Furthermore, when Congress passed legislation (signed by President Bill Clinton) to deal with the so-called income gap by attempting to cap executive salaries at $1 million through tax laws, it de facto encouraged other forms of executive compensation, with stock options being the mechanism of choice for many firms. Federal Reserve policies ultimately created the stock market bubble, giving a false financial picture for these companies. When many firms collapsed earlier this decade, it gave federal prosecutors an opening to pin securities fraud charges upon executives, since the feds could claim that the executives, in seeking to find “gray-area” ways to prop up their firms’ stock prices, actually were trying to fatten their own bank accounts.
Many of the prosecutions—this especially is true with regard to Enron—that have been conducted in the wake of the business collapses were instituted for political reasons. Politicians were screaming for scalps and the Bush administration was all too happy to oblige, given that the prosecutions served as a means to further extend state power over the actions of business owners and managers. That these actions have dampened investment opportunities in the country—and have helped to drive US investors to look overseas—also works to the advantage of the political classes, as they can claim that investors and business owners are unpatriotic and should be even further regulated and prosecuted.
Granted, it would have taken courage for the Bush administration and Congress to call for cooler heads, and to have conducted a serious investigation as to why the stock market collapsed and why the Dot.com boom was built on a foundation of sand. To have done so, and to have dealt with the truth, also would have made it necessary for those in government to come clean with how government intervention into the monetary sector of the economy touched off what ultimately would become a financial disaster.
So, instead of truth, we have prosecutions in which truth is stretched out of proportion into unrecognizable shapes. Of course, to successfully prosecute individuals, one must have the legal mechanisms with which to work. Thus, we see the use of “obstruction of justice,” “conspiracy,” and “fraud” charges to railroad politically unpopular people into prison.
While having an ominous sound, “obstruction of justice” is nothing more than the accused not preserving all of their property and records after an alleged “crime” has been committed. However, as Martha Stewart and Frank Quattrone have found out, one can be convicted of “obstruction of justice” even if there was no justice to obstruct, given that in both of their cases, there was no underlying crime that they would need to “cover up.”
Furthermore, “obstruction of justice” runs only one way, as federal prosecutors and investigators are encouraged to lie, destroy evidence, hide the facts, or create wild tales all in the name of prosecuting crime. By the government’s definition, federal agents cannot obstruct justice, since they are justice.
(Yes, there are laws on the books supposedly prohibiting the hiding of exculpatory evidence or lying in court, but prosecutors generally do not like to indict themselves, so they are de facto immune from prosecution. On the federal side, no matter how outrageous the conduct of US attorneys, they almost always are successful in claiming immunity from any liability, civil or criminal, for their actions.)
In Andersen’s case, some senior managers who were involved in auditing Enron shredded some documents related to that company. However, the feds never established that those documents were germane to their investigation, or that the auditors were trying to destroy evidence that hinted to the commission of a real crime.
Basically, US attorneys told a jury that managers shredded some documents, but no one knew if those documents were important and, furthermore, no one is sure that those documents could have pointed to criminal activity, anyway. It was clear even at the trial that since the feds were not able to prove criminal intent on behalf of the managers involved, the mens rea doctrine should have prevailed. (Mens rea, or what the great English Jurist William Blackstone called a “vicious will,” has been the cornerstone of American criminal law since Colonial days.) That is what the Supreme Court ruled, but too late to save Andersen.
Charges like “conspiracy,” “money laundering,” and “fraud” are just as specious. If more than one person is involved in an action the feds say might be illegal, then “conspiracy” charges kick in. As in “obstruction of justice,” a real crime does not need to be committed for “conspiracy” to be a factor. One can conspire to perform an action that is never carried out and still be convicted in federal court.
The charging of individuals with “fraud” also is problematic, since most fraud cases do not fall into the category of what most of us would use to define fraud. In its dictionary form, fraud describes an action by one party to deceive someone else intentionally. For example, I receive almost daily emails from someone claiming to represent EBay, with the message telling me that there has been suspicious activity going on in my account. The message instructs me to download a website in which I give my name, Social Security number, bank account number, and credit card numbers.
It is clear once the site is downloaded that it is not an official EBay program. (I won’t go into details, but suffice it to say that even an amateur like me can sniff out this scheme.) Whoever has sent me the email is trying to obtain my financial information so he can steal from me. This clearly falls into the category of fraud, as the individuals involved in this scheme are misrepresenting themselves for the purpose of stealing from others who believe they actually are submitting information to EBay. The actions and intents of those who have launched such a scheme are quite clear.
Almost all of the fraud cases that the Bush Department of Justice have launched post-Enron, however, fall into a much murkier category. That is because many federal “crimes,” and especially those that fall into the “white collar” category, are much more difficult to define. In the previous example, it is clear that whoever engaged in this scheme was doing so with criminal intent, and that the act itself also was criminal. The question, then, is this: Who is committing this crime? Should a suspect be arrested, prosecutors would have to prove that the person in the dock was directly and knowingly involved in that scheme.
Many federal “white-collar” crimes involve actions that the accused openly admits doing. The question before the judge and jury is not whether the individual in the dock is the one who engaged in certain behaviors, but rather if the alleged action was illegal.
Take the Ken Lay case, for example. The feds are trying to claim that his sales of Enron stock in the fall of 2001 were part of a scheme to commit fraud. Lay admits to selling the stock, and that issue is not in dispute. However, he says that he was selling stock to raise cash to satisfy payments for margin calls on other investments. Furthermore, he also was purchasing Enron stock all the way to the company’s collapse.
Lay also encouraged Enron employees to purchase Enron stock, which the feds claim is proof of fraud. Yet, that proves nothing, since Lay was willing to put his money where his mouth was. Moreover, there is no way that Enron employees could have purchased enough stock due to Lay’s exhortations to artificially prop up the stock price, as the feds contend.
In other words, there clearly exists a mens rea problem here. In fact, most “white-collar” cases not only run into the issue of mens rea, but the even tougher issue of whether or not the disputed activity even can be defined as a crime. Furthermore, if the political classes are so concerned about “deceitful” business practices, then why is it legal for the government to carry literally trillions of dollars of unfunded liabilities, something that would be illegal in the private sector? Why is it legal for the US government to hide expenditures in “off-budget” entities? Why is it legal for the US Government and the Federal Reserve System to engage in activities to artificially prop up the value of the dollar while at the same time accusing managers and business owners of the “crime” of “artificially” propping up stock prices?
The issue here is not one of ethics; rather, it is one of power. The political classes permit themselves the luxury of engaging in deceitful activities because it sends a signal to the rest of us that they are above the law. In the aftermath of the Andersen debacle, it is clear that in terms of the dollar value of wealth, the government illegally destroyed far more wealth when it brought down Andersen than anything Enron could have done. When one brings in the government’s attempt to destroy Microsoft, not to mention the Fed’s actions to artificially inflate the currency, it is clear that the US Government obliterates prosperity on a regular basis.
The only difference is that Enron executives are in the dock, most facing lengthy prison terms, while the political classes are treated as heroes by the same mainstream news media that vilifies business executives. Thus, even when handed a rare defeat in the courts, as what happened with Andersen, the political classes still win. They already had made their point by demonstrating that they had the power to bring down a large and important business firm and create financial havoc in the process. They proved that they could destroy the lives of millions of people—and not lose a dime in the process, and even gain more power.
William Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University (banderson @mail.frostburg.edu).
