Crime and Punishment 2012

Posted 1/29/12

YOU THINK YOU’RE UPSET?

Criminologists demand that kingpins be held criminally liable for the financial mess

     By Julius (Jay) Wachtel.  “White-Collar Criminology and the Wall Street Occupy Movement,” Henry Pontell and William Black’s sharp-tongued missive in the current issue of The Criminologist, accuses the criminal justice system of an inexcusable failure to hold top financial executives accountable for the current mess:

    The global meltdown of 2008 was influenced by flawed financial policies, law-breaking, greed, irresponsibility, and not an inconsiderable amount of concerted ignorance and outright stupidity...Control fraud [fraud by executives] has played an integral part...In the end control fraud will persist as long as the kleptocratic corporate culture remains entrenched...This [arresting and denigrating Wall Street protesters] stands in stark contrast to the virtual absence of indignation, moral outrage and effective law enforcement that would have stopped those whose real crimes have led many law-abiding citizens around the world into the streets.

     Henry and William are in good company.  Here’s what President Obama recently had to say:

    Too often, we’ve seen Wall Street firms violating major antifraud laws because the penalties are too weak and there’s no price for being a repeat offender. No more. I’ll be calling for legislation that makes those penalties count so that firms don’t see punishment for breaking the law as just the price of doing business.

     Well, the barn door’s been open for a while.  More than 1,000 savings and loan institutions collapsed during the S & L crisis of the 1980’s and early 1990’s.  Then the worst financial calamity since the Great Depression, it cost taxpayers a cool $124 billion to resolve. Studies place much of the blame on risky investment strategies, inadequate regulation and poor oversight, factors that now seem depressingly familiar.  Whether crime played a significant role is a matter of debate; the FDIC and many economists said no, while Pontell and Black said yes.  Regardless, the Feds staged a massive law enforcement response.  According to the New York Times 839 persons were ultimately convicted for their roles in the debacle.

     Most of those brought to account were relatively low-level employees. But a few top executives also got hammered.  Perhaps the best known is Charles Keating.  A wealthy banker and real-estate developer, Keating had five U.S. Senators  in his pocket.  While “The Keating Five” did their best to hold regulators at bay, their generous friend eventually earned ten years in a California prison for selling worthless bonds to ordinary folks. But his conviction was thrown out before the term was half up.  A Federal appeals court later ruled there was no proof that Keating, who never had personal contact with buyers, knew that the representations made by his sales force were false.

     Irate, the Feds then tried and convicted Keating for fraud and racketeering.  Once again the conviction was reversed, this time because jurors had taken the state conviction into account. A civil judgment that ordered the septuagenarian to recompense the Government to the tune of $4.3 billion was also reversed. Knowing that the Feds were determined to bring him down whatever the cost, in 1999 Keating pled guilty to four counts of fraud in exchange for time served.  A parallel case against his son was also dropped.  The Justice Department nonetheless declared victory.  “What we get out of this is, Keating admits for the first time criminal culpability.”

     It’s true, as Pontell and Black point out, that the current crisis has spawned far fewer prosecutions than the old.  But the time is still young, and the FBI says that it has 3,000 investigations underway.  In “Fighting the Wall Street Mob” we looked into the case of Raj Rajaratnam, a hedge fund magnate whose success was all but guaranteed by a steady flow of tips from corporate insiders. Rajaratnam, who pled guilty and got eleven years, was part of a web of collusion involving tipsters, traders, and so-called “research” firms that brought those who knew and those who wished to know together.  The most recent target to come out of that case, former Goldman Sachs director Rajat Gupta, is the 56th. Wall Streeter charged with insider trading in the past two years. A remarkable fifty-one have been convicted.

     What’s really remarkable is that it happened at all.  Unlike ordinary crimes, white-collar offenses typically require proof that a defendant knew or suspected that what they were doing was illegal.  Mens rea is seldom an obstacle when going after the little fish. Corrupt mortgage brokers who flip homes using straw buyers and pocket the proceeds – a crime that was commonplace during both crises – leave such a trail of slime that once their shenanigans are discovered all they can do is plead guilty.  Such cases are relatively easy to investigate (straw buyers are themselves easy to “flip”) and yield multiple defendants, promising the obsessively numbers-oriented Feds bragging rights on the cheap.

     On the other hand, there’s preciously little to distinguish legal from illegal trading. When a friendly someone passes on a tidbit from a boardroom meeting, who’s to know?  Rajaratnam and his buds would still be up to their old tricks had a wily FBI agent not turned to the tool that helped neuter the mob.  Thousands of hours’ worth of wiretaps produced a bounty of mens rea, with enough crook talk to satisfy the most demanding juror.

     Rajaratnam and Gupta (who is still to be tried) were fairly high up in the food chain.  Still, they were more opportunists than shot-callers, and while their self-serving acts gave them an unfair advantage it didn’t threaten to bring down the house. What Pontell and Black are really screaming for is the head of a Keating, someone whose skullduggery cost ordinary citizens real money.

     The Feds almost got two.  In 2007 several Bear Sterns hedge funds that invested in mortgage-backed securities collapsed, costing investors a tidy $1.6 billion. In what was considered a “slam dunk” case Federal prosecutors charged managers Ralph Cioffi and Matthew Tannin with holding back news that the ship was sinking, effectively throwing their clients’ life preservers overboard.  As proof the Government offered e-mail exchanges between the two. One, which said “the entire subprime market is toast,” was followed up days later with a cheery “we’re very comfortable” note to investors.  But the managers also speculated that since prices had tanked maybe it really was a good time to buy. “There was a reasonable doubt on every charge,” a juror explained.  “We just didn’t feel that the case had been proven.”

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     In January 2011 the Justice Department announced they would not be prosecuting Angelo Mozilo, former kingpin of Countrywide Financial, the mortgage lender whose spectacular belly-flop helped propel the meltdown. Like his lesser counterparts at Bear Sterns, Mozilo also penned facially incriminating e-mails. Here’s how he privately described a bundle of unsecured subprime mortgages that Countrywide was offering for sale: “In all my years in the business, I have never seen a more toxic product.”  Yet the prospective buyers were all highly sophisticated investors, and if they thought the product viable, who’s to say that it wasn’t? (Mozilo did pay about $70 million in civil penalties and restitution, chump change considering what taxpayers have shelled out.)

     Well, if not Mozilo, who? In 2001 the U.S. Senate formally referred Goldman Sachs, the poster child of the recession and its top cheese Lloyd Blankfein to the Justice Department for prosecution. Should that really happen – and most observers would bet heavily against it – the Government will need to prove beyond a reasonable doubt that Blankfein knew his firm, which remains in business, was a house of cards.  Well, good luck with that.

     Cioffi and Tannin are the only major-firm financial denizens to be prosecuted in connection with the recent meltdown. It’s for such reasons that Pontell, Black and others smell a conspiracy to let kingpins skate. But when a jury of ordinary people turns away an opportunity for revenge, we ought to pay attention.   Our system requires proof that white-collar defendants have evil in their hearts. But the big boys’ distance from corrupt transactions and the ambiguities and contradictions of the market can make it impossible to demonstrate their state of mind to the necessary certainty.

     Of course, if we’re displeased with the present way of doing things because it gives culpable one-percenters a free pass we could always change the law.  Then when we get in trouble it’s a cinch that Mozilo and Blankfein would send us their lawyers to help out.

     Right?

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Fighting the Wall Street Mob     A Nation of Liars     Who’s Guarding the Henhouse?  Part I   II


Posted 1/22/12

FROM BRADY TO THE CONFRONTATION CLAUSE

Continuing our roundup of Supreme Court criminal cases in a very busy term

     By Julius (Jay) Wachtel.  If you’re reading this, crime and justice are your bag. And if so, the Supreme Court’s current term, chock-full as it is of important criminal cases, should be of great interest.

     Two months ago, in “From Eyewitnesses to GPS,” we prognosticated about five cases. One,
Perry v. New Hampshire, was recently decided.  Perry, a convicted thief, argued that eyewitness testimony is so unreliable that he should have been entitled to a pretrial hearing on its admissibility. As we predicted (well, not just us) the Supremes disagreed. Unless police purposefully bias the ID process – and in Perry there was no such evidence – it rightfully falls on the jury, not a judge, to determine how much weight an identification deserves.

     So far we’re batting a thousand.  Dizzy with success,1 we’ll offer predictions on two more pending cases. But first let’s review a new decision on a case that wasn’t on our radar.

Withholding evidence from the defense

     Every law enforcement professional knows of Brady, a landmark Supreme Court case that says prosecutors must disclose potentially exculpatory evidence to the defense. In Smith v. Cain (decided 1/10/12) the Supremes reaffirmed the rule, striking down a murder conviction where the only evidence was testimony by a single eyewitness that the accused shot and killed five persons during a home invasion.  Their reason wasn’t that evidence was lacking: it was because prosecutors withheld a detective’s notes quoting the witness as saying that he could not identify any of the intruders and “would not know them if [he] saw them.”

     In their defense, prosecutors argued that that the witness’s well-founded fear of retaliation would have nullified the contradictory statement had it come to light. No sale. In a brief and pointed 8-1 opinion, the justices held that the state trampled the defendant’s due process rights as clearly articulated in Brady.

     Now let’s turn to two cases still on the burner.

Police immunity to Federal lawsuits

     Malley v. Briggs (1986) established the doctrine that police officers are only entitled to qualified immunity, not the absolute immunity that prosecutors and judges enjoy. When cops are sued in Federal court it’s up to the judge to examine the record and decide whether their actions were consistent with what reasonably well-trained officers would do.  If the answer is “yes,” immunity is granted and the lawsuit is dismissed; if “no,” the case proceeds to trial.

     Just how courts evaluate “reasonableness” is the central issue in Messerschmidt v. Millender.  Officers protecting a woman who was moving out of a residence were called away on an emergency.  While they were gone the woman’s boyfriend allegedly chased and shot at her with an illegal pistol-grip shotgun. Detectives obtained a search warrant for all firearms and firearms-related materials and all indicia of gang membership (the subject was reportedly a hardcore gangster.)

     SWAT then hit the house – hard. It was occupied by ten persons.  An extensive, highly intrusive search turned up nothing other than a legal shotgun belonging to the owner of the residence, the boyfriend’s elderly foster mother. She and the others sued for search and seizure and due process violations.  A Federal judge denied the police qualified immunity and the Ninth Circuit concurred.  In its opinion, the warrant’s objective was overbroad, as there was no evidence that the boyfriend possessed anything of evidentiary value other than a single illegal firearm. Justices faulted the issuing judge for signing a warrant that was invalid on its face, and the officers for not using “their own reasonable professional judgment” when seeking permission to search.

     In their appeal, the cops insisted that they acted appropriately, as both the judge and their superiors had approved the warrant.

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     What’s our call?  To portray the officers’ actions as wildly inappropriate seems a stretch. We’re going with the two dissenters, who pointed out that it wasn’t unlike past situations in which police goofed but were still granted immunity. One suspects that the Supremes are likely to agree, that is, to overrule the Ninth, as what the cops did doesn’t seem to warrant crafting a possibly confusing cure that might be worse than the disease.

   Outcome: Officers entitled to qualified immunity (Messerschmidt v. Millender, no. 10-704, 2/22/12)

Right to confront one’s accusers

     Just when we thought that the Supreme Court had made its feelings about the confrontation clause clear here comes Williams v. Illinois.

     In this case, on appeal from the Illinois Supreme Court, a private laboratory (Cellmark) typed DNA from a rape kit while a state police laboratory typed the suspect’s blood. At trial a state police analyst testified that she compared the profile generated by Cellmark to the one generated by her lab and concluded they matched to a high certainty.  Cellmark’s report was not introduced as evidence and no Cellmark employee testified. Williams protested that his sixth amendment rights had been violated because he didn’t have an opportunity to confront Cellmark about their methods and findings. But Illinois courts said there was no breach as Cellmark’s report was not offered “for the truth of the matter asserted” but only served as a basis for the analyst’s opinion.

     Whew. That’s some awfully fine hair-splitting. What are the precedents? In Crawford v. Washington (2004) the Supreme Court ruled that the recorded statement of a wife who asserted the marital privilege was improperly introduced at trial.  Whether or not they seem reliable, “testimonial statements” – those made with the understanding that they can be used in court – cannot be admitted unless defendants are afforded an opportunity to cross-examine their makers.

     Exactly what is “testimonial” is a matter of controversy. Massachusetts prosecutors had taken to introducing laboratory reports instead of analyst testimony in drug cases. Not so fast, said the Supreme Court. In
Melendez-Diaz v. Massachusetts (2009) justices ruled that such reports met the definition of “testimonial,” thus requiring that their authors be made available at trial.

     And wait, there’s more! In-between Crawford and Melendez-Diaz there was Bullcoming v. New Mexico.  A lab analyst took the stand to introduce a blood-alcohol report that had been prepared by an absent colleague.  Somewhat weakly, prosecutors asserted that the real examiner was only a “scrivener” who did little other than write down what a machine spat out.  But the Supremes didn’t buy it. No examiner – no case.

     Back to Williams.  Tom Goldstein, publisher of the SCOTUS Blog, is skeptical about Illinois’ position.  “As a practical matter,” he writes, “it is hard to say that the underlying DNA report is not being used for its truth.”  That end-run is exactly what worried Justice Scalia.  Here’s what he said during oral arguments:

    Mr. Dreeben [amicus appearance for Illinois] that seems to me -- I mean, we have a Confrontation Clause which requires that the witnesses against the defendant appear and testify personally. And -- and the crucial evidence here is the testing of the semen found on the swab. That is -- that's the crux of this evidence. And you’re telling me that this Confrontation Clause allows you to simply say, well, we’re not going to bring in the person who did the test; we’re simply going to say this is a reliable lab.  I don't know how that complies with the Confrontation Clause.

     Still, a lot of DNA is being typed by commercial firms. Bringing in analysts is expensive and disruptive.  So Mr. Goldstein may be on to something when he says that Williams may “pass the end of the line to which five Justices are willing to extend the Confrontation Clause.”

     But we’re of a different mind.  Having come this far in support of the Clause, the Supreme Court is unlikely to pivot on such thin grounds.  Williams really does feel like a distinction without a difference. So our money is on it being overturned.

     Incidentally, two fascinating cases on the limits of punishment are also on the agenda. Miller v. Alabama and Jackson v. Hobbs, both set for oral argument on March 20, will decide whether sentencing 14-year old murderers to life without parole is cruel and unusual.  Stay tuned!

1 First reader to accurately attribute the “dizzy” comment gets an “attaboy” in the blog. For a hint, check out the title of your blogger’s forthcoming novel in the “About” section.

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