–Sebastian
This opinionjournal piece reminds me of one of the classic problems of law:
Although Mr. Greenberg was Chief Executive magazine’s CEO of the Year in 2003, we are not defending him. Rather we want to ask whether CEOs have a right to due process. Reflecting their dismay at the high-handed conduct of King George, the Founding Fathers created a judicial system with a stringent set of procedural safeguards to protect against overzealous or arbitrary prosecution. Yet in the atmosphere that Mr. Spitzer has helped create, the presumption is that CEOs are guilty–if Eliot Spitzer says they’re guilty.
In dispute in the AIG case are highly complex transactions that may have reduced the company’s shareholder equity of $82.9 billion by as much as 2%. It’s not yet known if the total losses will reach that level, nor if they were material to AIG as a whole. After Mr. Greenberg’s departure, the board ran up the white flag to Attorney General Spitzer and declared the transactions "improper."
Were they? One proper way to resolve this would be to create a policy framework with clear rules, which does not currently exist. Another way would have been for the Securities and Exchange Commission to negotiate an earnings restatement with AIG.
But Mr. Spitzer reportedly threatened a criminal indictment, which in effect would have put AIG out of business. Then he went on television to pronounce that the AIG transactions were "wrong" and "illegal," which some legal scholars say is unusual. It’s not yet clear what the charges are. Nor has Mr. Spitzer heard Mr. Greenberg’s side of the story.
So the New York attorney general both charges and convicts in the court of public opinion. This pattern of overcriminalization is of deep concern to many chief executives. The proper process is for judges or juries to convict defendants only after convincing themselves that a charge has been proven "beyond a reasonable doubt." Too much publicity can be deemed prejudicial.
I’m not qualified to figure out if what AIG did was either wrong or illegal. It would take me months of research just to get the knowledge base to even approach the issue. But that fact highlights the problem I want to talk about.
A good "rule of law" system is fairly predictable. You can limit your behaviour to things that are legal because the line between legal and illegal is knowable. Fraud was an intent crime. In order to prove it, you had to show that the accused took certain actions with the intent to deceive. This was often done by showing that the accused lied about something important to the deal. As life became more complicated, legislators decided to impute intent on certain types of transactions where intent to deceive was difficult to prove. In those cases fraud became a status crime. If you did certain things you were deemed a fraud no matter what your intention. In the beginning these transactions were well defined and few. By now, they are ill-defined and unapproachably numerous. Like tax law, there are thousands of pit-falls and it is almost impossible to know if you are about to fall into one. I understand the legislative desire to define certain things as fraud without requiring a prosecutor to prove intent. It is perfectly fair to do so when a reasonable person or business can hope to know exactly what these ‘certain things’ are. But I am very uneasy by the current state of things.
Once again, I offer no opinion whatsoever about whether or not AIG did anything wrong in this specific case. I couldn’t possibly know.
I see your ignorance of AIG’s business and raise you my ignorance of fraud law.
But something leaps out at me in this case: the company admitted guilt on its own initiative. They didn’t even try to defend their own actions – as soon as they had a convenient scapegoat, they freely admitted that what they had done was, in their own words, “improper”. Yet opinionjournal, immediately after quoting that word, asks “were they?”.
Even without knowing the facts of the case, I feel reasonably secure in responding – “Yes – they were improper.” How do I know? Because the company itself says they were. And we hardly need have sympathy for this poor, defenseless $89 billion company. Nobody from that firm was held without sleep for three days, lied to by the police, threatened with lurid tales of prison rape, denied a lawyer, and forced to sign a falsified, pre-written confession. They, as with all corporate defendants, were treated with sycophantic indulgence, had the most powerful legal representation $89 billion can buy, and voluntarily issued a confession written by their own lawyers – which stated that they were guilty.
And how, finally, is “rule of law” implicated in any of this? “So the New York attorney general both charges and convicts in the court of public opinion.” What does this mean? The AG announced an indictment. That’s what attorneys general do. Nobody from AIG even got to do the standard local-precinct perp-walk. Nobody’s wide-eyed overlit mug shot with booking numbers across the chest was released to the press. I doubt anybody was fingerprinted or inconvenienced in any way. They weren’t even indicted. He “threatened” an indictment and the company rolled over almost immediately and admitted their own guilt. But it’s some sort of gross abuse that the AG said so in public?
Why are the rules always different for the rich and for corporations? Why is the most minimal possible “threat” of perfectly ordinary criminal procedure out of bounds for corporate officers, while private citizens are held on unreachable bail, threatened, beaten, lied to, coerced, and paraded in every trash tabloid for months with no recourse? It’s actually illegal to treat corporate officers like ordinary citizens? I can’t dig up much sympathy.
OT, but every time I see the name of AIG, my first thought is that they’re talking about Answers In Genesis b(the creationist website). It’s especially disconcerting when I run across AIG ads in science magazines.
The board admission isn’t as dispositive as you might think. First, they were almost admitting guilt for someone else. Second, fighting about SEC rules in this kind of situation is almost always a losing proposition no matter how right you think you are–they are very specific in a million vague ways. It can cost you hundreds of thousands in fees and millions in market worries. The cycle is rule interpretation change, retroactive application, indictment on the change, admit the ‘error’, change the practice, repeat.
The intresting thing about the AIG case, to me, is that the SEC and Eliot Spitzer are trying to prosecute specific executives 9or scapegoats, depending on your pov) with an eye to allowing AIG to stay in business. Which is good. One of the tragedies of the Enron debacle is that so many rank& filers, who did not do anythingw ornga nd didn’t knwo anything about the crimes, lost their jobs and their retirement savings. AIG is a huge multinational. If it abruptly went out of business a lot of people would be on the street.
It’s interesting, also, the mention of King George. All reports indicate that Greenberg ran AIG in a rather imperial fashion.
First, as an insurance company AIG is largely NOT regulated by the SEC.
Second, far too much corporate conduct is entirely tax-minimization driven. A more fair interpretation of the cycle is something like this:
the rule starts that transactions must have an economic basis outside tax avoidance, and will be taxed based on a fair characterization;
corporations spend tremendous sums developing transactions which skate as close to the line as possible;
corporations pressure regulators for a favorable interpretation of the transaction;
regulators grant the requested tax status under pressure;
corporations use that precedent to press on the code even harder;
corporations use the ambiguity in the code to smooth out earnings statements through transactions that no longer have the economic basis that started this line of precedent;
Eliot Spitzer suddenly has enough.
So prosecutors are mean. Boo effing hoo. Too many fortune 5000 corporations have been screwing Uncle Sam out of tax revenue for too many years. Since civil penalties don’t seem to correct behavior, I applaud Spitzer for threatening jail time.
Corporate chieftains make astonishing amounts of money. If they can’t be bothered to stay well within the lines (and there are a number of ways of obtaining the govts advance approval of certain accounting methods), then their butts should be in slings.
Frankly, seeing corporate executives complain about not getting the presumption of innocence is just plain funny to someone married to a public defender. You should see the treatment that street punks get.
In this rant there is a simple point — corporations for years have thrived on and helped create the very ambiguities which they’re now complaining about. If corporate America actually wants a bright-line regulatory system, all it has to do is draft it.
I share the uneasiness, but I think Francis basically has it right. What we’re seeing now is not the way that enforcement would work in a perfect world. But it’s happening in a context of corporations and their advisers’ having gone way, way out of bounds in using hyper-technical readings of laws and rules to provide cover for positions that would be recognized as flat-out fraudulent if taken by players with less power. In that context, a bit of over-reaction in the other direction doesn’t tug at my heartstrings a whole lot.
Francis and DaveL make excellent points. Consider the complexity of the corporate tax code that you mention. A big part of the reason it’s so complex is that business has lobbied, successfully, for many years, for all sorts of special treatments, credits, exceptions, accelerated this and that, and so on.
So now it’s oh so complicated. Cry me a river.
Similarly with the other matters. Why do corporations have webs of subsidiaries and branches in the Caymans and who knows what else? What business purposes do these arrangements serve, other than allowing the company to fudge numbers? So the accounting gets complicated and they make mistakes. Whose fault is that?
I stand second to no one in my ignorance of fraud law. But I think it is easy to understand how this develops through a process of mutual back-scratching. The arcane technical code grows as a way of justifying the agency’s existence. While corporations complain about it (though, as Bernard notes, they are at the root of it), they become skilled in manipulating the system. Because the code is so involved, any company would be violating rules at some point. Then, the regulatory agency knows that if they do want to lower the hammer on some company, then just have to dig in because they know they will find something.
The interesting thing is that if this is left to grow, you end up with a powerfully conservative culture that operates on connections and back room deals, such that smaller organizations fear to do anything that has not already been done and bigger corporations, because they have developed longstanding ties, can get around it (until someone who is willing to knock over the applecart comes along) I think SH nods towards this culture when he notes that admissions of guilt in the sort of reviews that take place shouldn’t be taken as dispositive.
That same dynamic, multiplied to the nth degree, occurs in Japan. Large organizations, like universities, are reviewed every year, officials come from the appropriate Ministry to review every aspect of operations. When mistakes are found, the organization is asked to ‘teisei suru’, to make the necessary corrections. Many of the necessary “regulations” are issued as ‘guidances’ that are worded vaguely so that the lower level bureaucrats have the power of interpretation. You then create a situation where no one wants to do something that will attract the attention of anyone because that could bring the weight of the bureaucracy and everyone begins to internalize the strictures, saying that ‘oh, that’s a nice idea, but the ministry would never let us do that’ when a cursory inspection would show that the ministry wouldn’t even notice. This is why you will never ever see a Japanese Eliot Spitzer.
A good “rule of law” system is fairly predictable.
Yes, it is, and the old system was as well. Unfortunately, what you could predict was that powerful white collar criminals could steal millions, burn their shareholders, and walk away with nothing but cheers from Wall Street and a quiet look the other way from the SEC. If “Chainsaw” Al Dunlop had met up with Spitzer when he first began his series of crimes, I expect that we would have had a far more honest environment for Big Business for the past decade.
Now, Spitzer has to work with what he finds, a culture of entitlement by people who keep telling each other how valuable they are to the companies that they are setting up for failure. Sorry, the laws are clear enough that if you don’t approach it with the idea of “how can I engage in crime XXX and talk my way out of it” you won’t get in trouble.