The Criminal Lawyer

The news is full of reports today about the hung jury in the Blagojevich trial — they found the governor guilty of a single count of lying to federal agents something like five years ago, and hung 11-1 in favor of conviction on the remaining counts.  All kinds of pontificators are pontificating about why this happened.  Scott Turow, for example, says it’s because corporations have too much freedom to contribute to political campaigns, so bribery becomes perceived as the norm. 

That’s a bit of a stretch.  It’s hardly likely that the jurors were considering such things as the corrupting consequences of the extension of First Amendment protections to corporate campaign contributions.  Like most commentors, Turow seems to be slapping his own politics on top of a more prosaic observation — that to some, the governor’s actions just don’t seem criminal.  This observation, without all the other nonsense attached to it, was actually quite astute.  According to the jury foreman, the holdout appears to have thought Blagojevich’s actions were “just talk,” and nothing criminal.

From what we’ve seen in the newspapers, that’s not an insane perspective here.  It sure reads as if Blagojevich was just thinking out loud sometimes, or bouncing stupid ideas off people that never got carried out.  And the forman says the other jurors respected the holdout’s right to her position here.  It doesn’t seem like an unprincipled, irrational vote.

But other reports highlight a different take on the holdout’s position.  Another juror is on record saying that the holdout wanted more clear-cut evidence, tantamount to a videotape of a murder, before she’d ever have convicted.  And if, as is likely, the holdout was Jo Ann Chiakulas, then she had already made up her mind weeks beforehand that the governor was innocent.

Both takes ring true to us, and are not mutually exclusive.  It seems probable that the holdout had decided weeks ago, after the close of the prosecution’s case, that the government hadn’t given her that whatever-it-is she would have needed to vote to convict.  Jurors vote to acquit all the time, in even the most solid rock-crusher cases, and the most common reason given is that “there just wasn’t enough evidence,” or they “needed more.” 

Jurors can never articulate what “more” they would have needed.  That’s because this is humanspeak for (more…)

It looks like we spotted the trend.  Unfortunately.

Last week we noted that, when faced with an ambiguous statute, some on the Supreme Court are now willing to read new language into the statute, rather than toss it back to Congress to do it right.  And we wondered if that might be a harbinger of what was to come in the “honest services” cases of Black, Weyrach and Skilling.

Well, those cases came down this morning, and sure enough the majority decided to read in new language, rather than toss out the statute for being vague.

It’s great for the defendants, whose honest-services convictions got tossed.  But to get there the Court had to change the rules.  Now, judicial invention is a perfectly acceptable method of statutory interpretation… so long as the new language is what “everybody knows” the statute really meant to say.  And that’s bloody dangerous. 

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We’ve been paying close attention to this issue (see other posts here, here, here and here), as have many others, because the feds love charging people with honest services fraud.  It’s so vague and open-ended, that it potentially criminalizes any activity that’s outside one’s job description.  That makes it a great catchall when you can’t prove something more substantive.  But it’s also not at all what Congress intended.

“Honest services” fraud was originally a judge-created law.  There wasn’t any statute criminalizing it, it just sort evolved via common law, accepted in all the Circuits.  But we don’t do common-law crimes in this country, for one thing, and the mail fraud statute didn’t say anything about intangible rights, so in 1987 the Supreme Court threw out the common-law version of honest services fraud.  If Congress wanted to criminalize it, then that was up to Congress.

The idea was pretty simple: If you had a position of trust, and you abused that position for private gain (say, by taking bribes or kickbacks), then you were depriving people of the services you ought to have been giving them had you been honest.  You were getting paid under the table to do your job wrong.  So in 1988 Congress came up with 18 U.S.C. § 1346.

But the language didn’t say anything about abusing a position of trust.  Instead, it just said that (more…)

There are four Mondays left in June.  Four more days in which the Supreme Court is expected to announce its decisions in the 27 or so cases still out there this term.  That’s about one case per day from now till then.  We’re picturing the Justices pulling all-nighters, stacks of empty pizza boxes in the halls at 2 a.m. next to the burn bags (do they still use burn bags there?), and sleepy zombie-like clerks dropping in their tracks every now and then.

Some of those cases have to do with boring old civ pro or shipping or labor law.  But a whole bunch are about the cool stuff, criminal law.  Here are a few of the criminal cases we’re watching particularly closely:

Black v. United States
Weyrauch v. United States
Skilling v. United States

This trio of cases attack the “honest services” fraud law.  18 U.S.C. § 1346 was supposed to prevent political corruption, but Congress wrote it so sloppily that it’s become a catch-all crime for federal prosecutors.  Anyone can get charged with it, and nobody knows what it means.  The Court telegraphed its dislike of the statute during oral arguments of all (more…)

What’s with all the lawyers getting arrested these days, being charged with financial frauds, Ponzi schemes and the like?  Is this a new trend?  It sure seems like one.

The latest news is the announcement about an hour ago that the SDNY is charging one Kenneth Starr (no, not that one, this one), money manager for a bunch of celebrities, with yet another Ponzi scheme, funnelling $30 million of investors’ money into his own pockets.  He’s a lawyer in New York.  (You can read the complaint here.)

Then there’s the former law firm partner Michael Margulies, charged the other day with embezzling $2 million from his firm and clients in Minneapolis over the past 16 years.  Coincidentally-named lawyer James Margulies of Cleveland was charged the other day in a $60 million stock swindle.  A couple of weeks ago, two lawyers were charged with a mortgage-rescue fraud involving stripping $3 million in equity.   A lawyer went to prison a little before that for rigging tax-lien auctions.

That’s just a handful of headlines from this month alone.  But it’s been going on for several months now.  We’ve been noticing lawyers getting charged with increasing frequency ever since last July when Marc Dreier got sentenced to 20 years for hedge fund swindles totaling God knows how many hundreds of millions of dollars.  It really kicked into high gear, however, in December, after Scott Rothstein was arrested for a $1.2 billion Ponzi scheme.  And now there are several cases being announced every month.

What’s going on here?

Sure, these kinds of schemes tend to get noticed all at once, when the economy goes south, and the market’s gains no longer mask the fraud.  So we’re not wondering why all of a sudden there’s a bunch of financial-fraud arrests.  Our question is how come so many of these cases involve lawyers.

Has the profession changed?  Is it something new about how lawyers are getting more involved as investment managers and financial advisors?  Or is there a new focus by law enforcement?  We really don’t know.

But it sure looks like something’s going on out there.  What do you think?

Lanny Breuer, the DOJ’s Assistant Attorney General for the Criminal Division, gave a speech today announcing a “new era of heightened white-collar crime enforcement — an era marked by increased resources, increased information-sharing, increased cooperation and coordination, and tough penalties for corporations and individuals alike.”

You can read his prepared remarks here.  We did, and we find them very troubling.

This is, of course, part of a larger trend back towards more white-collar enforcement. For much of the post-WWII era, through the early 1990s, white-collar cases didn’t get much attention. They were hard to spot in the first place, taking place behind closed doors in boardrooms and offices, not really part of any policeman’s beat. And allegations were challenging to investigate, and ever harder to prove to a jury. Agents and prosecutors lacked the knowhow and the tools to do the job.

And white-collar crime just wasn’t worth the effort — the law classified these crimes at the less-serious end of the spectrum. This wasn’t murder, it was just money. The crooks weren’t burglars or muggers, they were college-educated productive members of the community, involved in charities and otherwise living “normal” lives. Their crimes weren’t violent; they were almost administrative. Victims weren’t in your face, with visceral injuries and tangible losses; they were anonymous and diffuse. Devoting a lot of resources to prove minor offenses you didn’t really understand, with hard-to-identify-with victims, with easy-to-identify-with defendants, just wasn’t a big priority.

This all started to change in the mid-90s. By then, we’d gone through the junk-bond crisis and S&L meltdown of the (more…)

The SEC and DOJ’s investigations of Goldman Sachs have been big news for a couple of weeks now. We tend not to post right away on stories like that, because we don’t want to be yet another one of those blogs that just tries to jump on the bandwagon, simply repeating news without adding anything of value to the conversation. So we like to wait until we have some analysis to add.

In the Goldman Sachs case, as pretty much everyone reading this is aware by now, the SEC says Goldman created a mortgage-based investment, sold it to investors, and then bet against it by shorting it themselves. They also say Goldman messed up by letting hedge fund manager John Paulson pick some of the assets, despite the fact that his fund was betting heavily against the housing bubble (and ultimately made a killing when it burst). The SEC filed its suit about 2 weeks ago. Then during this past week, they referred it to the DOJ for criminal investigation. The fine folks at the Southern District are now looking into whether any criminal acts took place.

We’re sure the SDNY is going to be a lot more careful than, say, the Eastern District was with the Bear Stearns case. [Full Disclosure: We represented one of the BSAM fund managers in that case, who was ultimately not indicted.] You know, maybe actually reading emails in context, actually figuring out how hedging is supposed to work, stuff like that?

Nevertheless, it’s a tough job. So as a good citizen, unaffiliated with the case in any way, we’d like to make their job easier. We’ve pored over the factual allegations that have been made, and delved into the facts that have been publicly disclosed so far. And after a great deal of legal analysis and number-crunching (yes, we do this for fun), here is a complete list of all criminal activity that we have been able to identify at Goldman Sachs here:

1).

You’re welcome, guys. Hope this helps!

SEC Rule 10b-5 is one of the main securities fraud laws. It says you can’t mislead people in connection with the purchase or sale of a security. You can’t make an untrue statement of a material fact. And you can’t fail to state a fact, when without that fact the statements you just made would be misleading.

That seems simple enough. But federal prosecutors in New Jersey seem to be having a hard time figuring out what that means.

In June 2005, the feds in New Jersey indicted Frederick Schiff, the CFO of Bristol-Myers Squibb, for failing to disclose material facts to investors. Allegedly, Bristol-Myers (a drug company) was paying wholesalers to order more drugs than they really needed, so Bristol-Myers could report higher sales numbers and inflate its stock value. Schiff allegedly didn’t tell investors about it during conference calls and in SEC filings. (See the indictment here and the DOJ’s press release here.) That indictment got thrown out for a grand jury leak, so they got a second one in May 2006, and finally a third one in April 2007 that dropped allegations of accounting violations.

With respect to the omissions, the government kept changing its tune. First, they said the company had a duty to correct misleading statements of others, based on a “general fiduciary duty.” The district court helpfully pointed out that there is no such duty in the law. So then the feds said there was a statutory duty under SEC regs S-K, which might actually have worked, but then they changed their mind and put on the record that they weren’t pursuing that theory. There was a “theory of duty based on falsity of reported sales and earnings,” which the District Court said wouldn’t fly. Then they tried to say the stuff left out of filings is a material omission that is misleading if you include the earlier analyst calls in the context (calling it “all of a piece”). The district court ruled that, no, there is no affirmative duty under either the “falsity” or the “all of a piece” theory. “It defies logic,” the court ruled, “to charge as a crime that an utterance in an analyst call must have other words written in a later SEC filing in order to make the utterance in the prior phone call ‘not misleading.’” Thanks for playing. The feds appealed.

In a unanimous decision today (opinion here), the Third Circuit slammed the DOJ for constantly changing its theory of the case, for playing “musical chairs” with its theory of how Schiff’s conduct counted as an unlawful omission under Rule 10b-5.

More importantly, the Circuit said the DOJ’s ultimate theory of liability here — that Schiff had a “general fiduciary” duty as a “high corporate executive” to disclose the inventory issue — was simply overbroad. “This argument reaches too far.”

This is a big setback for the feds, who now are left with a much narrower (more…)

Try this on for size:

For the purposes of this chapter, the term “scheme or artifice to defraud” includes:

(1) a scheme or artifice by a government official whereby the government official’s position is used for the private gain of any person or entity; or

(2) a scheme or artifice by an officer of a corporation, partnership, nonprofit organization or labor union, whereby the officer’s position is used for the private gain of any person or entity and not for the benefit of the officer’s shareholders or members.

If Congress had half a brain, this is what 18 U.S.C. § 1346 would look like. The whole point of the section is to prevent official corruption. A politician or bureaucrat who steers a contract to a buddy, or a corporate CEO who enriches himself instead of his shareholders, or a union boss who mismanages the pension fund — basically anyone who breaches a trust to act on behalf of those he represents.

But instead, Congress wrote this nonsense:

For the purposes of this chapter, the term “scheme or artifice to defraud” includes a scheme or artifice to deprive another of the intangible right of honest services.

For one thing, anyone can commit this crime, not just people who owe a duty to a constituency. Moreover, instead of a straightforward definition, this is hopelessly vague. Nobody knows what “the intangible right of honest services” means. Does it include an employee who’s playing solitaire instead of reviewing a file? Does it include a politician making promises he can’t keep?

Nobody knows.

And that’s just how federal prosecutors like it. Actual corruption charges, like bribery and extortion, are notoriously difficult to prove. But a mail/wire fraud charge, based on deprivation of “honest services” — that could mean anything, and so anything they can prove could count. Actions that don’t fit any particular category get to be called “fraud.”

Unethical behavior is now criminal. Contractual breaches, especially in the employment arena, also seem to count.

The courts have had a hard time applying this statute, differing widely on what counts and on how to instruct juries. Earlier this term, the Justices on the Supreme Court sounded like they have real problems with the statute. They seem even to wonder whether it’s void for vagueness. Criminal laws have to be specific enough to put you on notice that certain conduct could land you in jail, and a law where nobody even knows what it means certainly could be unconstitutionally vague. The Court hasn’t decided those open cases yet, presumably because they were waiting for one more to be argued.

And that gets us to today’s Supreme Court arguments in the case of Enron’s former CEO, Jeff Skilling.

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Enron was the nation’s 7th-largest company in 2001, when it suddenly came to light that its net worth was zilch. Bright people who had no clue what they were doing had created a bizarre house of cards that came tumbling down in an instant. The city of Houston, Enron’s headquarters, was devastated for years to come. Some people had clearly done wrong — CFO Andy Fastow and friends had profited hugely from schemes that broke the rules. It was less clear, however, whether CEO Jeff Skilling had acted improperly, or whether he even knew of any shenanigans. It was hard to say that he or the directors misrepresented anything to investors, as the company’s activities were pretty well documented. (For an excellent account of what happened and didn’t happen, see Kurt Eichenwald’s definitive “Conspiracy of Fools.” Malcolm Gladwell did an excellent piece in the New Yorker, as well, called “The Talent Myth,” about the culture there, and another one called “Open Secrets,” about the paradox of too much disclosure.)

Jeff Skilling was convicted in 2006 by a federal (more…)

We’re on vacation starting tomorrow, and that means we’ve been extra-busy trying to get as much work done as possible beforehand. So we’re not taking the time to post anything particularly thoughtful today. Maybe while we’re on vacation, but not today.

Still, we were pleased to see we were quoted in Crain’s this morning. Essentially, we were asked to comment on a recent USA Today article claiming that white-collar prosecutions plummeted even as the economic crisis worsened. First of all, USA Today’s stats exaggerate things. As the actual statistics (shown below) show, the drop wasn’t that big. And it’s easily explained by the shift in the FBI’s focus after 9/11. And once the political pendulum started to swing back to financial crimes in 2007, more investigations got started, and we’re now beginning to see plenty more white-collar cases.

We weren’t quoted as accurately as we’d have liked, and they said we used to be a federal prosecutor when we were really a state prosecutor, but they did spell our name and firm correctly, so we’re not complaining.

Anyway, it occurred to us that we’ve been getting some good press lately. And that gave us a great idea for a post. Instead of writing anything of substance, we’d just post some links to the various articles, and call it a day. So here’s some shameless self-promotion:

How Dirty Are Hedge Funds? (Forbes, Oct. 20)

Galleon SEC, FBI Informant Roomy Khan Worked at Intel (Bloomberg, Oct. 22)

Galleon Wiretap Defense Not ‘Hopeless,’ Experts Say (Bloomberg, Oct. 28)

Bear Stearns Defense Holds Lessons For Execs (Forbes, Nov. 17)

After Lull, Financial-Crime Prosecutions Seen Set to Rise (Crain’s, Dec. 22)

And for those who need some useful CLE credits, here are the lectures we gave this year (CLE credit good for most states):
Hope for Hopeless Cases I: Defending an Internet Pornography Case

Hope for Hopeless Cases II: Defending Wiretaps and Tape Recordings

Hope for Hopeless Cases III: Better Loss Calculations for Lower Sentences in Financial Crimes

Hope for Hopeless Cases IV: Your Client Confessed! Now What?

Enjoy!

We apologize to our loyal readers for the unusual delay between posts. We’ve been on trial, and you know how that goes. Trial is all-consuming. And then there’s all the work that piles up in the meantime. And the wife and kids need a token appearance from us once in a while. So the blog just isn’t happening while we’re on trial.

And that’s how it should be, of course.

So yeah, we’ve been on trial since November 2. We keep predicting that it will end soon, but it never does. With any luck, we’ll have closing arguments tomorrow. But we said the same thing yesterday, and on Friday, and on Thursday… And we’re going to have to take Thursday off if the jury’s still not back with a verdict then, because we’re giving our next “Hope for Hopeless Cases” lecture for West Legal Ed Center that day. So yeah, this case could easily last through Friday.

To tide you over until we finally get a chance to blog again, here’s a link to our latest article in Forbes magazine.

Link

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Excerpt:
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Expert View
BEAR STEARNS DEFENSE HOLDS LESSONS FOR EXECS

Going on offense is the best defense in white-collar cases.

It didn’t take long after the housing boom turned bust and trillions of dollars of wealth had gone poof that the public was out for blood. The government needed to “do something” about the mess.

An obvious point of focus were the securities firms Bear Stearns (now a part of JPMorgan Chase) and Lehman Brothers (now a part of Barclays) which blew up in quick succession. From there, it does not take a huge leap of logic to understand how federal prosecutors set their sights on Ralph Cioffi and Matt Tannin, two former managers of Bear hedge funds who were plucked out of obscurity, paraded through a perp walk and unceremoniously read their rights as criminal defendants.

As their Nov. 10 acquittals attest, they didn’t actually commit any crimes. But that didn’t spare them from two years of hell during which they were investigated, indicted, vilified, prosecuted and put on trial. If they’d lost, that would have all been a picnic compared with the 20 years of prison time they would have faced.

If the case teaches us anything, it’s that such ordeals can befall executives–innocent and otherwise. If enough things go wrong on their watch, it’s not all that rare for bosses to find gung-ho prosecutors eager to indict them before all the facts are in.

That leads to the question: What can you do to protect yourself if you fall under the eye of a suspicious prosecutor? Here, the Bear Stearns case is instructive.

Lesson One
You’re on your own. If you ever find yourself on the receiving end of an indictment related to your professional activities, don’t count on your…

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Colleagues joke that we ought to be peeved that neither Raj Rajaratnam nor any of his codefendants even called us. After all, we’re one of the few white-collar defense attorneys who also know how to defend wiretap cases. But because we’re not on the case, we’re now free to comment on it. (And we have been doing so, getting quoted this week by Forbes and Bloomberg, among others.)

And we think the feds could easily lose this case, if the defense attorneys do their job well.

You’d think that this would be a slam dunk. First of all, it was a case investigated by the fine folks at the SDNY, who are without exception bright, hard-working and of sound judgment. They tend to make sure they’ve built a rock-crusher case before they bother filing charges and issuing press releases. Unlike some other prosecutor’s offices we could name, the Southern District is definitely not amateur hour. When one defends a case they’ve built, one where they’ve ensured that all the potential holes are plugged, the bulk of the defense attorney’s role is simply fighting for a better plea offer.

Secondly, this was a freaking wiretap case. The defendants are on tape, we are told, using their own phones, committing the crimes in their own voices. How much more of a slam dunk could this be?

Well, from where we sit, it’s anything but a slam dunk. In fact, from the defense point of view, we actually think this case is winnable.

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What are we talking about? Two things.

First, this may be the biggest insider trading case in history, but so far as insider trading cases go, this one ain’t the strongest.

Second, this may be the first time a securities fraud was investigated using wiretaps (and now that Spades have been broken, you can bet your sweet bippy that wires are going to start happening a lot more in these kinds of cases), but there are ways that a good defense attorney can fight that kind of evidence and win. Believe it or not, but it’s the truth.

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First, let’s talk about the alleged insider trading.

Insider trading is a relatively new crime, only added to 18 U.S.C. during the new millennium. (We’re not so sure it should be a crime in the first place — it prevents those with relevant market information from acting on that information; it is an artificial yoke on market forces that affect not only share prices but also the flow of such information, causing inefficiencies and black markets in info; it prohibits those who worked to create a gain in share prices from realizing their fullest profits from their work; it prohibits the best and truest information from being a basis for share price; it encourages and protects the holding back of information that by rights should have been public in the first place. If we had our way, not only would insider trading not be a crime, it would be a requirement. But apart from Adam Smith and the Japanese, we’re not sure too many folks agree with us on this one.)

The crime of Insider Trading is committed when, first, there is some secret, non-public information. Next, there has to be someone (like an executive or director) who has a fiduciary duty not to disclose that information, a duty owed to the owner of the information (like the shareholders). Next, the secret info has to be shared in violation of that fiduciary duty. Finally, the person who uses that information had to know that it had been shared in violation of that fiduciary duty.

That’s a lot of steps. That’s a lot of room for reasonable doubt.

Look at this Galleon case. You’ve got some insiders, who allegedly spilled the beans to an informant, who then passed on that information to the Galleon crew. How the heck does one prove — prove — that Rajaratnam knew in his own mind that this second-hand information he got came from a breach of a third party’s fiduciary duty? He didn’t deal with the insiders, he dealt with someone else who had spoken with the insiders. Even if the informant said point blank that this was inside info, that doesn’t mean Rajaratnam knew it to be so. It’s like a big game of “telephone.” It’s hearsay by the time the info gets to him.

And once the secret info has been shared, is it even secret any more? The cat’s out of the bag. Maybe the insiders and the informant should be charged, but when the informant passed that no-longer-secret info on to Galleon, how is that insider trading any more? (Oh, and what hay we could make with the fact that the insiders themselves don’t seem to have been charged in the first place. That is verrrrrry suspicious.)

From what we’ve seen in the papers released by the DOJ, the evidence does not necessarily show actual subjective knowledge on the part of Rajaratnam that the information had really been shared in violation of a specific fiduciary duty owed by particular people to particular others. “Knowledge” is not the same as “probably” or “it must be so.” That’s the mental state of “recklessness,” not “knowledge.” The feds cannot prove this case by a kind of res ipsa loquitur argument.

The case just isn’t that straightforward on the merits. In addition to the arguments I just mentioned, and about half a dozen others off the top of my head right now, a good defense attorney is going to raise all kinds of doubt with the convoluted nature of the alleged schemes. How can one prove knowledge about the original state of the fiduciary breach when the information is supposed to have followed such a tortuous path, even going backwards in one instance, before being acted on?

And what was Rajaratnam’s job? What was the hedge fund’s job? Their job was to gather information. Every stock trader’s job is to gather information. You keep your ear to the ground, listen to the rumors, find out what the scuttlebutt is. And it seems like everyone and their mother has a tip. A rumor. A sure thing.

None of that is insider trading. That’s just Wall Street. The trick to being a successful trader is figuring out which “sure thing” is likely to be right. The decision may be based on a lot of number crunching, or on a gut instinct, but it’s always a judgment call. The successful trader’s judgment calls are just a little better than others’ are, that’s all. And Galleon was one of the successful ones.

The press has raised eyebrows at Rajaratnam’s “relentless pursuit of data,” as the WSJ puts it. Well, duh, that’s his freaking job. If he wasn’t relentlessly pursuing data, he wouldn’t be in the business. If the prosecution tries to make that look incriminating, like he was seeking or desperate for illegal info, a good defense attorney will defuse it with a simple dose of reality.

And the prosecution needs to convince all 12; the defense only needs one to be unsure. The defense would like to convince all 12, but they don’t need to. There is plenty of room for argument on the merits alone.

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And while we’re talking about the merits of the case, this may be an opportunity for defense counsel to go to the prosecutors and convince them not to seek an indictment. It’s tough, when the prosecutors have made statements to the press and put their own integrity on the line. But a prosecutor of real integrity will always put that aside and do the right thing.

The trick is getting them to see that their present position is wrong. Stupid defense attorneys just whine and beg and plead, but that only works on stupid prosecutors. A halfway-decent prosecutor has made up his mind based on the evidence he’s got. That may only be a thin sliver of reality, and it may well be completely out of the proper context, but it is what he understands reality to be.

The only way you’re going to change a prosecutor’s mind is by either giving them new information that they didn’t already have, or by giving them a new way of looking at the evidence before them.

That is advocacy. And in a case like this, it may behoove defense counsel to advocate fiercely for a rethinking of the charges. Strategically, it may not be the best choice, because of all the press this case has garnered, meaning that the prosecution might just as well be presumed to be inflexible. But we did precisely this in the Bear Stearns subprime hedge fund case, and the manager we represented did not get prosecuted. And that case had just as much, if not more, publicity at the time. It’s an option, here, at the very least.

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But what about the wiretaps? How do you get around that? Isn’t that pretty much the defendants convicting themselves out of their own mouths?

No way.

Wiretap evidence is anything but a sure thing. We know. We did wires for years in the Rackets Bureau of the Manhattan DA’s office, and now we defend them. We’ve taught a nationwide CLE on how to successfully defend them for West LegalEdCenter. Wiretaps are not a sure thing.

They can be defeated with technicalities. Eavesdropping is probably the greatest invasion of privacy that the government can inflict, and so we make law enforcement jump through all kinds of hoops before they are allowed to get an eavesdropping warrant. There are so many i’s to dot and t’s to cross, that the feds hardly use wiretaps in the first place. You’d think otherwise, but it’s so. Plus, they have to go through so many steps in the chain of command to get permission to apply for a warrant, that by the time they could have done so the need or probable cause has evaporated. State prosecutors do way more wires than the feds do.

Because the feds rarely do them, they’re not necessarily as on the ball as certain state-level offices might be. And except for those few high-caliber state offices, the locals can be even more error prone.

That’s big, because little errors in wiretaps have big consequences. Usually, they mean the government loses the case. A little oversight leads to the suppression of all the evidence derived from that point forward in the case, and a multimillion-dollar investigation just went down the toilet. No bullshit.

What kinds of technicalities are there? Tons. Some are just stupid. One particularly stupid requirement is the “sealing” requirement. The idea is that we don’t want to risk having the tapes or CD-ROMs of the intercepted conversations tampered with. We don’t want Nixonesque 17-minute gaps in the evidence. We want the assurance that the evidence never had a chance to be fucked with, and is as pristine now as when it first came in. And so the law requires that the tapes or CDs be sealed immediately, which usually means having them wrapped in evidence tape and having a judge sign and date the tape with a Sharpie.

But “immediately” doesn’t mean “immediately.” Instead of sealing the tapes right after they were recorded, the law says they have to be signed within 24 hours after the expiration of the warrant. Warrants are typically good for 30 days. So the whole month’s worth of tapes or CDs have to be assembled and sealed no later than 24 hours to the minute after the expiration of the wire. And that can be a tough deadline to meet. Especially when, say, it’s 5:04 on a Friday afternoon and all the judges are on their way out of town for the weekend. Or when, out of the hundred or so tapes for that month, one of them by accident didn’t make it into the group to be sealed, which can easily happen. Or when the judge took forever reading that 160-page renewal application, and the deadline passed when he’d only signed half the tapes.

This 24-hour rule is not a “good faith” or “close enough” rule. 24 hours and one minute means the evidence on those tapes cannot be used, and any evidence that resulted from what was heard on those tapes must be suppressed. The case is over. It’s technicalities like these that make prosecutors sweat and cross their fingers and hope the defense attorney won’t be paying attention.

Another technicality, believe it or not, is who signed the warrant application in the first place. The law is very particular about who is allowed to sign the application. Only certain enumerated DOJ officials, or the elected head of the DA’s office, are allowed to do it. We once had to work pretty hard when a very good defense attorney named Marty Adelman noticed that we’d had a substitute sign on behalf of Mr. Morgenthau when the boss was out of town. We had to prove that he really was legitimately unavailable, not merely at a function or indisposed, and that the substitute was the legitimate second-in-line. We’d done it right, of course, but others don’t. At one point, about a gazillion wiretaps had to be thrown out because the U.S. Attorneys in D.C. were having them signed by someone not on the authorized list.

The big thing, of course, when trying to controvert an eavesdropping warrant, is not the technicalities but the probable cause.

There has to have been probable cause to believe that a particular crime, listed in the wiretap statute, was being committed. That evidence of that crime would be found by listening in on a particular phone. That a particular named person would be using that phone, whose conversations would be evidence of the crime. And traditional investigative methods like surveillance, undercovers, informants, subpoenas, etc. wouldn’t get the job done.

That’s a lot to prove. The warrant applications have a heavy burden to meet. A good defense attorney is going to look for chinks in the armor, weaknesses in the alleged probable cause, and is going to fight hard to get the warrants and all their fruits thrown out.

And doing that work, and making the prosecution work hard to defend itself, and letting them know that they’re going to be working this hard for the rest of the case, can convince them to rethink their plea position at the very least.

When looking at probable cause, a decent attorney is going to notice whether the warrant application sections laying out the arguments are just boilerplate, cut-and-pasted from earlier applications, or whether they actually are tailored to the investigation as it then stood. Boilerplate, if it doesn’t really apply here, is a fraud on the court! That warrant and everything thereafter just got thrown out.

-=-=-=-=-

Well, what if the defense litigated the eavesdropping, but it’s all still coming in? They’ve got a trial on their hands. What do they do now? They can’t fight the tapes in front of a jury can they? How can you possibly cross-examine taped evidence?

It ain’t easy, but a smart lawyer can do it.

First of all, you have to realize how wires get started. They don’t come out of the blue. Probable cause does not land in some cop’s lap.

There’s an easy way, and a hard way, to start a wire. The hard way is to have all this suspicion, based on historical intel about your players, surveillance of their movements, and scuttlebutt from the community. Then you track down their phone numbers, and subpoena tons of call records to see who they’re calling and when. Then you look for patterns, and see what you can dig up about the people they call. And you try to put together a res ipsa argument that this criminal activity must be going on over that phone. That ain’t the easy way.

The easy way, like with any investigation, is to flip an informant. Someone screws up, and now needs to work off a likely sentence. The only way they can do that is by getting someone else in trouble. So they agree to wear a body wire, or introduce an undercover, or (usually) consent to the recording of their own phone calls with the target.

Bang. Right there, we’ve got all kinds of arguments for reasonable doubt. Arguments to piss the jury off at the government and want to acquit our client.

Because what is the informant trying to do? He’s trying to get our client in trouble. He’s trying to elicit an incriminating statement over the phone that’s going to let the government tap that number. That doesn’t just happen.

No, that call is going to be scripted. Or rehearsed. Or both. That call is going to have a purpose, and Mr. Informant is going to do whatever he can do to manipulate that conversation so he gets the incriminating words he wants. Or at least words that sound incriminating.

You see where this is going, don’t you? You may never use the word “entrapment” itself, but by golly you’re going to plant that concept in the jury’s mind. That informant was out to save his own skin. That informant did not tell our client the truth. That informant lied about what that conversation was about. Those lies were scripted and rehearsed with the agents beforehand. This whole case is built on lies. And the conversation didn’t go according to plan. Our client was not about to incriminate himself. So that informant manipulated him, changed the subject, hounded him, cajoled him to say things he otherwise never would have said. Throw some in-check indignation, and you can have one pissed-off jury.

And you fight the recordings themselves. “But look at the transcripts, they’re cut and dried,” you say? Poppycock. Those transcripts are nothing but interpretation. Any defense lawyer who sits back and relies on the government’s own interpretation of what is on those tapes needs to find another line of work.

Because everything on those recordings is open to interpretation. Nobody in the real world speaks in clear prose, with footnotes explaining their jargon and inside references. Nobody talks like that.

People throw ideas around. They talk things through. They change their mind. Taken out of context, a statement on Day 1 can sound really incriminating. But in context with a statement on Day 2, it’s perfectly innocent.

People talk in code. Not just spies and crooks, but everyday folks. Nobody spells it all out, that would infuriate the listener. Stuff that the other person also knows goes unsaid. People use jargon that outsiders can easily misinterpret. Phrases like “you’re going to put me in jail” could really be a schtick between friends for “my boss isn’t going to like this,” rather than the literal meaning. But taken out of context, perfectly innocent words can sound damning. Any one of us could face prosecution if our own conversations were selectively lifted out of context.

So it is critical that the defense listen to all of the intercepts, not just those highlighted as the prosecution’s greatest hits. The defense needs to get the whole context, and be able to explain ostensibly incriminating conversations as being perfectly innocent. The client should help as much as possible.

Other room for interpretation is what the freaking words were in the first place. We had plenty of occasions where we listened to a tape and heard one phrase, our detectives heard at least two different phrases, and our trusted paralegals heard it yet another way. Nobody enunciates every consonant. Speech is casual. It’s rushed. It’s muddled. It’s amazing that our brains can separate out as much as we do. But in doing so, we often see patterns where they don’t exist, and hear words and meanings that were never said. It’s like optical illusions for the ear, and they happen all the time. Have an inaudibility hearing if you have to, and get the statement tossed altogether if need be.

So any fool who relies on the government’s transcripts deserves to be called a fool. Make your own dang transcript, and make sure you can sell it to the jury. You want to be the voice they trust.

There are tons of other ways to tear the intercepts apart. These are just a starter. But this post is already getting far too long and we’re getting sleepy.

-=-=-=-=-

The point is that the Galleon case is built on wiretaps, and the “greatest hits” released by the DOJ in its press releases seem eminently attackable. The rest of their recordings are probably even more open to attack. And the merits look pretty darned shaky to begin with. They have to prove actual knowledge, that doesn’t seem to be all that obvious. The ties to the people with the actual fiduciary duty are second-hand at best, and the tie is a lousy rat out to save their own skin. And the insiders are suspiciously not even being prosecuted themselves?

Based on the little that has been released, this case seems to be a prime candidate for reasonable doubt. It just doesn’t look like a slam dunk. The defense has a pretty good shot at winning.

We’ll keep watching, and wish the best of luck

We’ve asked it before, but what the heck is going on with some of these federal prosecutors nowadays? There was the whole Ted Stevens fiasco over the winter, when the feds actively withheld exculpatory evidence and witnesses in their rush to convict the former Senator. Then the 7th Circuit directed an acquittal after the feds blatantly misrepresented the facts in a food labeling case. The W.R. Grace case was screwed by federal prosecutors who withheld exculpatory evidence and gave the judge reason to say he has “no faith in anything the Government says” any more.

And now we get yet another case of the feds blatantly misrepresenting the facts. This time, the 9th Circuit reversed and ordered a new trial, though it’s doubtful that there will be another one.

The case is U.S. v. Reyes, decided this morning. This was one of those options backdating cases that were all over the news for a while back in ’06 and ’07. (“Backdating” is when a company retroactively picks an effective date for stock options, so as to maximize the potential value of those options. It’s a crime when the extra value isn’t accounted for as an expense, because then the books give investors a false image of the company’s finances.)

Gregory Reyes was the CEO of Brocade Communication Systems. In August 2006, Reyes was charged with securities fraud and related crimes for backdating options without properly accounting for them. At trial, his defense was that he had no intent to deceive. He just signed off on the options in good-faith reliance on his company’s Finance Department.

High-ranking Finance Department employees had given statements to the FBI, describing how they knew all about the backdating scheme. But they didn’t testify at trial. Instead, the prosecution called a Finance Department employee who said she didn’t know about the backdating.

The prosecutor was well aware of the fact that others in the department knew all about it. But during closing arguments, he told the jury that the Finance Department employees “don’t have any idea” that backdating was going on.

After several days of jury deliberations, Reyes was convicted. He was sentenced to 21 months in prison with $15 million in fines. That was stayed pending appeal.

This morning, in an opinion byJudge Schroeder, the 9th Circuit held that this was prosecutorial misconduct, and reversed the conviction, ordering a new trial. Reyes argued that he didn’t know the Financial Department wasn’t accounting properly for the backdating, and the feds argued that the Financial Department didn’t know about the backdating. So that was a key question for the jury to decide. And the feds had lied to the jury.

And this wasn’t just a simple little throwaway line, either. The prosecutor did not even limit his argument to the testimony of the witness he’d cherry-picked to give the false impression that nobody in the Finance Department knew about it (which might actually have been permissible). No, the prosecutor:

asserted as fact a proposition that he knew was contradicted by evidence not presented to the jury. In direct contravention of the statements given to the FBI by Finance Department executives that they did know about the backdating, the prosecutor asserted to the jury in closing that the entire Finance Department did not know about the backdating, and further that the government’s theory of the case was that “finance did not know anything.”

“Our theory is that those people didn’t know anything. . . . [The cherry-picked witness] says finance didn’t know. Did you need everybody in the Finance Department to come and tell you that they didn’t know?”

The government even displayed for the jury a diagram explaining the prosecutor’s position that the Finance Department did not know of the backdating. The prosecutor asked the jury to assume other employees of the Finance Department would testify that they did not know about Reyes’ backdating procedure, when the prosecutor knew they did.

Federal prosecutors have “a special duty not to impede the truth.” As the 9th Circuit pointed out today, there is good reason to hold prosecutors to a higher standard: Their words carry the weight and imprimatur of the government itself, which can be very persuasive to a jury.

The 9th Circuit didn’t go so far as to direct an acquittal or dismiss the indictment, because the defense had also played it pretty aggressively. Instead, they ordered a new trial. It is anyone’s guess whether the feds will be up to the task of trying the case all over again, years after the fact. But we’ll go out on a limb and predict that this case will never see a jury again.

For crying out loud, feds! And for shame.

No law today. Let’s have a police procedural for a change. We’re in the mood for some white-collar stuff, so here goes.

Forget about the Madoff case. Most financial crimes are nowhere near as headline-worthy, nor do they involve such massive amounts of other people’s money. But smaller scams are just as likely to get prosecuted, and they’re just as much a felony as the big ones. And though the news may not report it, people get caught and convicted all the time.

And like Al Capone, the smaller scammers aren’t caught by the gun-toting detectives so much as by the green visor-wearing accountants.

It’s usually a case of self-incrimination. Defendants usually create the very evidence that puts them behind bars, in their financial books and records. Of course, most of them aren’t doing it on purpose. They’re not creating blatant records that flatly proclaim “here there be crimes.” Most take pains to avoid creating records of improper doings, and to conceal or camouflage the rest. But it is often those very attempts to hide their activities that wind up calling attention to them.

-=-=-=-

Every law enforcement agent knows that, to catch the “bad guys,” you need to follow the money. Who wound up with the cash or the assets? How did the money get from person A to person B, and so on to Mr. X?

One easy way to start is to look at public documents. Lots of records get publicly filed, for anybody to look at, and they can be good leads. Does Mr. X own a house? Pull the deed from the county clerk’s office. There’s going to be information that leads to the mortgage itself, and then Mr. X’s bank records are just a subpoena away. Probate records lead to the estate, which leads to more bank records and real estate records. Does someone have a rap sheet already? Maybe they had to post bond in an earlier case. That’s going to show the source of the lien, and lead to more assets. Dun & Bradstreet and similar records can tell whether someone has a lien against Mr. X — such people are often more than willing to give more information to law enforcement. Heck, even newspapers can be a source of leads to get an investigation started.

Paper begets paper. Or computer data. It is nigh impossible to have dealings of any significance without some record being kept somewhere, in some form.

When following leads, the investigator ought to have an idea of what he’s looking at. What kind of business is this company in? Where are they located? What do they spend money on? The investigator can’t tell whether something is unusual unless he knows what the usual looks like.

Maybe this is a kickback scheme. If I am demanding kickbacks from you, or bribes, or extortion payments so I allow you to keep doing business with me, then maybe I don’t want that money coming directly to me. And maybe you don’t want it coming directly from you. So perhaps I set up a “consulting” company to receive payments from you. Or maybe you set up a “customer” company to make payments to me. Or perhaps we do both. Maybe we have lots of shell companies, or only one. If the investigator figures it out, though, our cautions might turn around to condemn us.

Maybe you pay me with a no-show job. If so, you’d better be careful about who is holding back my payroll checks or delivering them to me. And is my pay typical of my job? A steady, constant paycheck is more typical of an office worker than a blue-collar worker, after all. These are possible tipoffs to an investigator. And paper begets paper.

-=-=-=-

So how else do they get the paper, apart from going to public records?

Subpoenas are the main stock-in-trade of the white-collar investigation team. Smart teams won’t subpoena the world, of course, because that just makes for far more work than necessary, while increasing the odds of tipping off Mr. X to the existence of the investigation. Instead, they’ll just limit their subpoenas to what they really need. Narrow requests also make more subpoenas necessary down the road, which keeps open a line of communication.

A shotgun subpoena followed by a narrower one just tips off defense attorneys like us. We see something like that, we have a chat with the client, and figure out what the investigators are probably looking for. We get all that extra time to prepare our defense.

When in doubt, utility bills are a common lead-generator, to figure out how someone is paying for their phone, cable, electricity, etc.

One thing they’ll probably want to see are old tax returns, especially for a business. Tax returns can be a mine of useful information, such as who formed the business, who the officers are, how much they get paid, who their accountant is (always a good person to interrog… ah, interview). And if the tax returns don’t match reality, well that’s another charge for the grand jury to hear, isn’t it?

The company’s accountant often did the tax returns for the owners and officers, too. Investigators can request the accountant’s retained copies of those returns, and find out all kinds of information about assets, mortgages, sources of income, etc.

Canceled checks are a high-want item. They’re one way of seeing who’s paying money to whom.

Bright investigators don’t settle for photocopies, but insist on originals. Critical information could have been whited out before copying. Photocopies are often illegible, and may not include the all-important information on the back of checks showing who deposited it and to what account.

In general, subpoenas are going to be issued to non-targets. There’s little point in asking the suspect to provide the evidence that will hang him. All it does is raise him up. And a savvy defense attorney is going to bring that client in to present the documents to the grand jury — because here in New York, for example, it is far too easy for the prosecutor to slip up and confer total transactional immunity on the client right there in the grand jury. (That’s a topic for a whole nother post.)

No, suspects aren’t usually the ones who get subpoenaed. They get searched.

-=-=-=-

Search warrants are a unique chance for the investigators to get all that stuff they never would have gotten from a subpoena. The “second set of books,” rather than the official set they keep for the IRS and other outside eyes. The secret records. (Although these can sometimes be viewed by an undercover posing as a legitimate potential buyer of the business.)

That’s what the investigators are hoping for: a “smoking gun” document of some kind. Original documents with all the info that got whited out in the subpoena response. Records of illicit payments made, cash skimmed, investors gypped. Evidence that customers were told one thing, but reality was something else entirely. It may be buried somewhere in all those boxes of docs and all those hard drives, but they can’t wait to find it.

These records may be as simple as a notebook or a wad of scratch paper. They could be as detailed as anything. Maybe there’s evidence of a cash payroll — which leads to questions of where that cash came from (the bank? really?) on top of issues of tax and benefits evasion. Maybe there’s a little black book recording paid bribes, or extortion payments received.

Search warrants are often a fine way to gain evidence of embezzlement. Maybe those personal expenses were paid for with the business’s money, or with investors’ deposits. A good search warrant team will have agents who know what they’re looking for, others speaking to the subject. Others will be busy talking to witnesses, family members, employees and others at the location, letting them think the cops know exactly what’s going on, so they’d better come clean.

In a suspect’s home, the search team might see pictures of that really nice boat, or expensive collections, or the like. Investigators love to see things like that, especially when the checkbook doesn’t show those expenses. A lifestyle and possessions beyond one’s official means is going to make them poke around for illegitimate sources of cash.

Obviously, the execution of a search warrant means the investigation ain’t a secret any more. So these usually come at the end of an investigation.

-=-=-=-=-

So how about some examples. Let’s say I have ABC company. Law enforcement subpoenaed or seized a bunch of payroll checks. Every week, my company is cutting a few dozen checks to employees. They all look totally legit, until one of the forensic accountants notices that Joe Blow tends to deposit four or five checks at a time, all on the same day. That means he’s probably not getting them each week like a normal employee, but is receiving a bunch of them once a month. That is typical of a no-show job. Joe Blow and I are now just that much closer to getting caught. Thanks, Joe.

Meanwhile, my manufacturing company DEF sends out invoices every month or so to Jack Nimble, charging tens or hundreds of thousands of dollars for all kinds of different products being delivered. Payment is due on receipt, send the check to my headquarters at 1405 Blank Lane, Suite 120. Unfortunately, the forensic accountant noticed that each month’s invoice number is one more than the previous month’s. Do I only have one customer, for all these things I’m selling? And Suite 120 turns out to be a mail drop box number. Suspicious. They’re going to watch that box and I.D. who uses it, and maybe figure out who’s paying for it. And due on receipt? Someone’s standing on the loading dock with a check for a couple hundred grand? No way. And anyway, how come there are no bills of lading, shipping records, or anything else indicating this really happened? This looks like Jack Nimble is paying me some kickbacks through a shell company.

Original checks are a treasure trove. I’m cutting tons of them to small suppliers, nothing more than $9500 or so. Oddly enough, however, they all tend to get cashed at the same check-cashing joint. They’re not deposited to anyone’s accounts. Looks like I’m laundering some money. Investigators are going to check up on these companies to see if they’re legit, maybe subpoena invoices, bills of lading and purchase order forms to see what’s going on.

Remember the Lori Drew case? She’s the mom who was convicted last Thanksgiving for creating a fake MySpace persona, which she then used to harass a teenaged girl until the girl committed suicide.

After she was convicted, we argued that her conviction stretched the meaning of the statute too far. Here’s what we wrote:

The underlying statute, the Computer Fraud and Abuse Act, is a federal law intended to prevent hacking. Drew created a fictitious MySpace account, which was used to harass the girl. In doing so, Drew violated MySpace’s terms of service, though she apparently never read them. By violating the terms of service, Drew got unauthorized access to MySpace’s servers, and the prosecution went out on a limb to argue that this technically violated the CFAA.

But does it really?

Plenty of pundits are now doubting that the verdict will survive an appeal. Congress clearly intended the law to criminalize hacking into someone else’s computer. That’s different from creating a fictitious screen name — a very common and socially acceptable occurrence.

Terms of service are conditions imposed by websites which govern permissible use, and which almost always prescribe penalties that may be imposed for violations. These penalties normally range from warnings and temporary disabling of access, to permanent denial of access. The relationship is essentially contractual.

But if the prosecution’s theory is upheld on appeal, then breaching such conditions would have criminal consequences.

Criminalizing this kind of behavior isn’t exactly far-fetched. Crime is essentially that behavior which society considers so threatening that the guilty must be punished with a restriction on liberty or a loss of property. The existence of a civil remedy does not preclude something from being criminal — a thief is civilly liable to return what he stole, but still faces jail regardless. And there may be something to an argument for criminalizing the false personas on social networking sites frequented by minors, to protect society from predators.

But that’s clearly not what Congress was trying to do here. Furthermore, the prosecution’s stretched interpretation is just too overbroad. Rather than being narrowly tailored to focus on those who violate the TOS of a child-used site for the purpose of committing a nefarious or dangerous crime, the prosecution’s theory simply criminalizes all violations of any site’s TOS agreement. A court of appeals is likely to find that an improper application of the law.

Lori Drew was scheduled to be sentenced today. (Well, technically yesterday. Thursday. We’re still working, so it’s still Thursday to us.)

But she wasn’t sentenced. Instead, Judge Wu threw out her conviction. According to CNN, he refused to uphold the jury’s verdict because the guilty verdict would set a bad precedent that anyone who violates a site’s TOS could also be found guilty of a misdemeanor. Criminalizing all violations of a site’s TOS agreement is not what the law is designed to do. Because it technically allows such improper application of the law, it is probably unconstitutional for vagueness.

This was just an oral decision. Wu is expected to issue his written decision soon.

Great minds think alike!

When we started law school back in ’93, we felt that white-collar criminals just weren’t punished that harshly in this country. The Dilbert strip above, from about the same time, shows that we were not alone in thinking this. It seems that this was a common perception going at least as far back as our early childhood — click on the audio button above to listen to an early ’70s National Lampoon skit called “Prison Farm.”

Like many, we felt that there was some serious injustice going on here. Socioeconomic elites were getting off lightly, even though they may have victimized far more people, far more seriously, than street-level crooks who were doing hard time. A mugger takes one person’s money, and gets a long sentence in a high-security prison. Meanwhile, a Wall Street scammer wipes out thousands of families’ savings, erases their years of labor and planning, and gets a slap on the wrist. It seemed absurd, like something from Alice in Wonderland.

And we weren’t wrong. As late as the early ’90s, we had guys like Mike Milken serving less than two years, even after the sentencing judge (Kimba Wood) had said such things as “You were willing to commit only crimes that were unlikely to be detected…. When a man of your power in the financial world… repeatedly conspires to violate, and violates, securities and tax business in order to achieve more power and wealth for himself… a significant prison term is required.”

The lesser sentences were of course due in no small part to the difficulty of spotting white-collar crime in the first place, and then proving it to a jury. Also, the law itself classified these crimes at the less-serious end of the spectrum. So you had to expect significant plea bargaining in difficult-to-prove cases, and the plea sentences were being discounted from relatively short terms in the first place.

Another important factor was the socioeconomic status of the white-collar defendants. These were not street thugs, they weren’t skeevy bottom-feeders. They were college-educated, productive members of the community, involved in charities and otherwise living “normal” lives. Their crimes weren’t violent, they were almost administrative. Victims weren’t in your face, with visceral injuries and tangible losses; they were anonymous and diffuse, with paper losses of mere money. These middle- and upper-class defendants weren’t people who belonged in prison — their loss of status, their shame, did more to rehabilitate and deter than any time behind bars. Judges felt this, and acted accordingly.

But by the time we graduated law school, this had all started to change. By then, the federal Sentencing Guidelines had gone into effect. The Guidelines had three major effects on federal cases. First, they increased the penalties for white-collar crimes, especially where the dollar amounts were high and there were many victims. Second, judges lost most of their discretion to sentence lightly based on the defendant’s socioeconomic status, and were not all that willing to put such reasoning on the record. Third, the Guidelines took away much of the plea-bargaining leeway, only permitting two or three levels of departure for taking a plea.

The biggest change happened when the tech bubble burst in 2000. In the late ’90s, Americans became investors like never before, with even cops and construction workers becoming day traders at home. Tons of our money went into IRAs, brokerage accounts and 401(k)s. And then the bubble burst, the markets dipped, and the average Joe saw his investments tank. As always happens, this revealed financial frauds that had escaped unnoticed in the up market. The middle class was outraged, and began to demand severe penalties for the fraudsters.

Prosecutors and judges got the message, and the exposed fraudsters got slammed. WorldCom’s Bernie Ebbers got 25 years. Enron’s Jeff Skilling got 24 years and 4 months (Andy Fastow, reported to be the primary Enron fraudster, cooperated and got six years). Adelphia’s John Rigas got 15 years. In state court, Tyco’s Dennis Kozlowski got 8-1/3 to 25 years.

This pattern repeated itself in the recent economic downturn. After several boom years, a credit crunch and market dip exposed many white-collar offenses (most of which we are told are still in the pre-indictment phase). Voters had lost a lot, and their voices were heard.

So now we get yesterday’s 150-year sentence of Bernie Madoff. As we’ve explained before, we’ve avoided writing about the Madoff case, because everyone else is already talking about it, and we don’t feel like we have anything new to add.

But this 150-year sentence… we’re going to go against the grain here and wonder out loud if perhaps it’s too harsh.

* * * * *

Whoa. How can we say that, when we just got done saying how unjust it seemed when white-collar types were getting off lightly? Isn’t this exactly what we wanted?

No, it isn’t. We wanted the punishment to fit the crime, and to fit the policies underlying criminal punishment. This sentence doesn’t do that.

For one thing, Madoff took a plea to avoid trial. And yet he still got the worst sentence that he could have gotten had a jury convicted him. What was the point of taking a plea? This sends a strong message to white-collar defendants now: you might as well just go to trial, because you’re going to get the same sentence if you lose — and juries being what they are, you might just win. The system could see a lot fewer pleas — pleas it relies on to keep working.

For another thing, Madoff got a bunch of consecutive sentences. Normally, even after trial, they’d mostly run concurrently. He’d have gotten about 30 years — still a life sentence for a 71-year-old guy. Judge Chin said he did so for “symbolic” reasons, to make the victims feel better. But is that a valid purpose of sentencing?

Of course it isn’t. The purpose of sentencing is not to make victims feel better, or give them closure, or anything like that. The criminal justice system does not serve the function of making victims whole. That’s the job of the civil courts. A criminal court can order restitution as a condition of sentencing, but that’s about it. The purpose of sentencing is not reparation, but punishment. Punishment is supposed to deter future crimes, retaliate against the offender, rehabilitate the offender so he doesn’t do it again, or remove a threat to society.

But maybe Judge Chin is on to something here. Perception is important. Few of the purposes of punishment work unless there is some perception. Deterrence doesn’t work, unless people get the impression that crimes are probably going to be punished, and that they will probably be punished harshly enough to make them not worth your while. (This raises an interesting thought experiment — would the criminal justice system work just as well if we could give the public the impression that crimes are punished, without actually incurring the expense and hassle of, you know, punishing them? Discuss.)

Another problem we have with this sentence is that his scam wasn’t directed at Joe Retail out there. It was a secretive investment fund that did not disclose what it was doing, as it would have had to if it had been sold to the average person. It could be secretive because it was sold to sophisticated investors. These sophisticated investors saw an unusually high and steady rate of return, and instead of investigating to see what was going on, simply told Madoff to cut them in.

Sophisticated investors have a duty to check these things out. Are we blaming the victims here? Yeah, a little. They had the size or experience to know that something that sounds too good to be true probably isn’t. And yet they shoved their money into the fund anyway. And for those who shoved all of their money into the fund, ignoring basic investment principles of diversification, they were victimizing themselves just as much as if they’d invested in Pets.com. And for those who invested beyond their discretionary income, but actually sent Madoff the money they needed to live on, that’s the epitome of dumb. These weren’t blue-collar workers, these were investors with enough dough to get in the game, and enough savvy to have known better. The law just doesn’t need to afford them the same protections as ordinary folks.

So the law doesn’t need to impose punishments harsher than those imposed on victimizers of ordinary folks.

What is needed is parity. Yes, white-collar sentences should reflect the seriousness of the harm done, just as sentences for violent crimes and street crimes need to be proportionate to the offense. A white-collar offense that causes as much harm as a back-alley mugging probably deserves a similar punishment, all else being equal. Maybe a little less, actually, as there is more likelihood of deterrence or rehabilitation. White-collar crimes are usually calculated, they aren’t crimes of the moment, and offenders usually have the smarts to take punishment into account. And white-collar offenders aren’t as likely to re-offend once they’ve gone through the system. So sure, maybe they don’t need quite as much punishment. But it ought to be about the same.

Giving 150 years here, though, is not at all proportionate. Murderers don’t get that much. Kidnappers don’t get that much. And taking someone’s life or liberty is just not the same as taking someone’s property. White-collar victims only lose money. It’s only money. It’s a big deal, but it should not be punished more severely than crimes that are obviously more severe.

The pendulum has swung too far.