MARKET SCAMS

[DueDillinger]

THE CEO DUNCE CARD By CHRISTOPHER BYRON

July 26, 2004 -- IT'S time to face facts, folks: The business of prosecuting white-collar crime in America is collapsing, manhandled toward ruin by clever, high-priced lawyers, inept and underpaid prosecutors, and the misuse and abuse of the basic principle of law known as scienter upon which the whole wobbly edifice rests.
It was damaging enough to the public's trust in the system when the media gave a soapbox to Martha Stewart, fresh from her sentencing in federal court two weeks ago, so that she could play her gender-victimization card and rail against the U.S. government for jamming her up with a rigged felony conviction on what she now insists was really nothing more than a "small personal matter."

But it was only days later when former National Security Adviser Sandy Berger moved the goalposts for prosecutors right out of the stadium. This happened when the news broke last week that Berger had gotten caught 10 months earlier pilfering top secret documents from the National Archives in Washington, following which the FBI was alerted.

Relying on Berger's preposterous claim that he had done nothing improper, the FBI has reportedly spent the last seven months quietly "investigating" whether Berger's theft amounted to a crime ? a conclusion that it still has not yet reached.

It is tempting to point to such outrages as yet more of Bill Clinton's legacy of warped Presidential leadership. But there is more at stake here than whether the difference between "oral sex and sex" is any greater than the difference between the theft of a fistful of top secret documents from the National Archives, and simply walking out the door of the building with the papers hidden in one's briefcase and coat pockets.

Of course it was a crime for Berger to do what he did. But the public has become so numbed to the rhetorical waltzing of its leaders in such situations that no one seems to notice what this all really means, especially when it comes to the criminal law.

What it means is just this: Given the direction in which the law has been proceeding in this area, one can now reasonably say that when it comes to the criminal behavior of those who wear suits and ties to work, the legal principle of res ipsa loquitur (the thing speaks for itself) no longer applies, meaning that a clever liar can now get away with just about anything.

In truth, the work of prosecuting white-collar crime in America has been in a state of disarray for years, with the experts unable to agree on what white collar crime even is.

THE only thing that re ally distinguishes white-collar crime from the other types is the tender treatment that white collar criminals receive from the judicial process by way of the concept of scienter or "criminal intent."

In white-collar crime cases, it is not the crime itself that matters, but the state of mind of the defendant: Did he have scienter, or guilty intent, when he committed the offense?

Whatever purpose scienter may once have served in white collar crime cases, the concept has by now become nothing more than a ploy by which a quick-witted defendant can beat a rap. It was former Secretary of Defense Clark Clifford who showed the way, employing what amounted to an "I'm stupid" defense to exonerate himself from criminal responsibility at the start of the 1990s in the infamous BCCI bank fraud affair.

One of the cleverest politicians in Washington, Clifford was acquitted of fraud and bribery charges after arguing in court that he had nonetheless been stupid and naive when the head of Saudi Arabia's secret intelligence service walked into his office dressed in the raiment of a Bedouin nomad and handed him a bag of cash money to serve as his mouthpiece in what turned out to be a criminal conspiracy to infiltrate America's banking system.

In the world of Wall Street, the "I'm stupid" defense has hogtied prosecutors from bringing countless numbers of the crooks and swindlers in the bull market in of the 1990s to justice, and the diversion of resources that has resulted from the attacks of 9/11 has made the problem even worse.

In Miami, a two-year undercover sting operation dubbed Bermuda Short netted 58 people on stock market charges of various sorts in the summer of 2002. One defendant in the case pleaded guilty and became a federal witness against the operator of a fraudulent $1 billion hedge fund, the Lancer Group, that was shut down by an emergency order of the SEC a year ago. But no charges have yet been brought against any of those involved.

Of the dozens of large and well-publicized cases that have been the focus of criminal investigations in the world of post-9/11 Wall Street, only three have ripened into cases that have brought courtroom convictions.

They are: investment banker Frank Quattrone of CS First Boston, for obstruction of justice; John and Timothy Rigas of Adelphia Communications for securities fraud, and Martha Stewart for obstruction and making false statements to federal investigators. Seven other individuals ? four from Qwest Communications, two from Adelphia, and one from Tyco International ? have been acquitted.

Twelve more individuals, including Sam Waksal of Imclone Systems and Martin Grass of Rite Aid Corp., have pleaded guilty to offenses of one sort or another, while a half dozen others, including Kenneth Lay of Enron, Bernard Ebbers of Worldcom, and Richard Scrushy of HealthSouth Corp. ? have pleaded not guilty and are awaiting trial.

The trials of two other defendants (Dennis Kozlowski and Mark Swartz, both of Tyco) have already resulted in hung juries, with both men now awaiting retrial.

Only three more cases of any importance are still to come. The first, in which Richard Scrushy, the former chairman and CEO of Alabama-based HealthSouth Corp. faces charges of fraud, conspiracy, money laundering, and other offenses involving $2.5 billion in accounting frauds, is set for trial in September.

More than a dozen of Scrushy's underlings have already pleaded guilty in the case, but Scrushy is hanging tough with his own version of the "I'm stupid" defense, and is claiming that any fraud at the company was the secret work of diabolical underlings like his ex-CFO, Bill Owens.

Both of the big guns in the other A-list cases remaining ? ex-chairman Kenneth Lay of Enron Corp. and his counterpart at Worldcom Corp., Bernie Ebbers ? are also copping the "I'm stupid" defense. Lay claims he was oblivious to the frauds that were erupting under his nose at Enron and that he had been duped by his ex-CFO at Enron, Andrew Fastow.

SIMILARLY, Bernie Eb bers of Worldcom says he too is not guilty by reason of stupidity, and is expected to point the finger of blame instead at his own CFO, Scott Sullivan, when the case goes to trial in January.

Bottom line: When it comes to restoring public confidence in the courts and Wall Street, all the guilty pleas on earth won't amount to much if their purpose is to gain evidence against CEOs who nonetheless wind up tap-dancing their way to freedom on a smile and a handshake and the assurance that they're really, really stupid.

When you run a red light, or assault your spouse, or shoplift something from The Gap, the cops don't look at you and ask, "OK, now tell us, what were you really intending to do?" Quite the contrary, they charge you with what you did plain-and-simple, because what you did was obvious, and why you did it was irrelevant.

Why should it be any different for people at the very pinnacle of the economic ladder? If you're smart enough to know that what you did was stupid, then you're smart enough to take responsibility for it. As they say in the law: res ipsa loquitur.

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