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The Quattrone Conviction

Mises Daily: Monday, May 10, 2004 by

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Ken Lay, Martha Stewart, and now Frank P. Quattrone must have been the culprits who caused the recession of 2001 and are also responsible for the relatively poor performance of the economy since then. We can think of no other reason as to why the U.S. Government has embarked upon numerous criminal investigations of business firms and their executives.

That certainly is not what federal prosecutors are saying, nor is the sycophantic press (like the New York Times) laying full blame upon these hapless people, two of whom are headed for prison after being convicted in federal court of "obstruction of justice." Yet, it is clear that the government needs scapegoats for the poor economy, and since the feds are not blaming themselves, it must be these criminal business executives.

Of the three executives we have mentioned, only Lay remains unindicted, and it is hard to know where the government's three-year investigation of him is going. Perhaps federal prosecutors will swallow hard and indict the former Enron chief of jaywalking, or "conspiracy to conspire to jaywalk," but at this writing they have not brought any criminal charges to the table.

We say these things only partly tongue-in-cheek, as we do believe that the government has been using business executives as the scapegoats for a bad economy, and perhaps no one falls more into that category than Quattrone, who now is going to prison on an "obstruction of justice" conviction that in the real world of law and justice does not pass the smell test. Once again, we see government prosecutors able to convict a person of the "crime" of allegedly "covering up" activity that was not criminal.

In the go-go late 1990s, when the Clinton Administration and its cheerleaders in the press and business community supposedly had created the "New Economy," it seemed that every new stock offering was the path to quick riches. Quattrone, writes the New York Times, "who helped ignite the initial offering boom in technology stocks, was to the 1990's what Mr. (Michael) Milken and his junk-bond financing was to the 1980's. Both devised new ways of generating cash that helped fuel a wave of innovation and a stock bubble."

The Times, not surprisingly, gets it only half right. Quattrone and Milken were financial innovators on Wall Street, but they did not create the stock bubbles that burst. No, as many writers on this page already have pointed out, that honor belongs to Alan Greenspan and the Federal Reserve. Greenspan, we should note, will be able to sleep in his own bed, not one of prison issue, as Quattrone will soon face.

For readers who only are familiar with the name, Quattrone was an investment banker based in California and whose firm was leading the way for the initial public offerings of "high-tech" firms during the 90s boom. As usually is the case during a boom-bubble period, the IPOs were very successful, often doubling or tripling in price on the first day they were being traded.

Quattrone rode the crest of that wave. According to the New York Times:

For a few years at the height of the technology boom, Frank P. Quattrone was the most powerful investment banker, and among the most powerful people, in Silicon Valley. It was not just that his decision to bring a company public could make its founders wealthy beyond ordinary people's imaginations. He had the power to hand out wealth to others just by allowing them to buy the stock he was selling.

"When someone gets control of the capital-raising process, it's very lucrative,'' said Andy Kessler, a hedge fund investor who once worked with Mr. Quattrone. "But his downfall was that at the other end people lost money.''

In other words, the markets ultimately figured out what the "experts" did not: booms are unsustainable because the economic fundamentals upon which a boom rests are as stable as loose sand. (Perhaps had Quattrone been familiar with Austrian Economics and its business cycle analysis, he could have given his clients better advice, but he is hardly alone in having misjudged the "New Economy.")  The difference, however, is that the government decided that since many of the original high-flying stocks crashed to earth, financial fraud must have been behind them, and that Quattrone was the "man behind the curtain."

Indeed, fraud did exist, but it was of the government, not market variety. The markets responded to the perverse incentives of Greenspan's new funny money in very predictable ways, or at least in ways predicted by the Austrian Business Cycle Theory (ABCT). The trouble was when the government decided to investigate Quattrone instead of itself.

According to the government, when Quattrone heard that an investigation was underway, he told investment bankers who worked with him at Credit Suisse in Boston to "clean up those files," which the feds declared amounted to a "cover up." The question that leaps out at the curious observer, however, is this: What was "covered up?"

Even after its investigation, the government concluded that Quattrone and his associates had committed no crimes. Once upon a time, that would have been good enough for all involved. However, in modern times, Congress has given prosecutors an inordinate number of "weapons" to use against anyone who is targeted, and there is no doubt Quattrone was a juicy target whose trial and conviction would bring many political benefits to the U.S. attorneys involved.

The "lesson" of this conviction, according to the New York Times and the other media pundits is that one should not try to alter any records once it becomes apparent the government is onto the case. We would like to respectfully say that this is nonsense. We first present the point of view, however, of the Times before explaining our position:

"The substantive conduct may be somewhat ambiguous,'' said Zachary Carter, a former federal prosecutor who now practices at Dorsey & Whitney in New York, "but the obstructive conduct may be clear."

Indeed, the cover-up is almost always easier to identify than the crime. The complicated financial transactions, executive bonuses and other activities cited in trials of other prominent executives are harder to explain than a simple lie.

"Any time cases involve either complicated financial transactions or issues of intent,'' Mr. Carter said, "those are going to be the cases where the jury is going to entertain some doubts. And any time the prosecution is in the position to simplify complicated cases for the jury, they're going to be better off."

Sometimes the actions that lead to charges of obstruction of justice or interference with an investigation may not be carefully planned efforts to hamper an investigation but a response driven by panic.

"It's not necessarily done with great deliberation,'' Mr. Carter said. "It's done as a reflex."

And it may well be, as in the case against Mr. Quattrone, that the panic was unwarranted, Mr. (Orin) Snyder (a former federal prosecutor) noted. "It's another ironic and tragic example of people being held responsible for interfering with an investigation in which ultimately they were not culpable,'' he contended. "This isn't an example of the cover-up being worse than the crime. There was no crime.''

First, the phrase "clean up the files" can mean anything. However, what the government wants us to know is that all business records, and about anything else that is in our possession, ultimately is the property of the state. This is an ominous message; it means that there can be no financial privacy whatsoever. Furthermore, the state ultimately decides what is "criminal" behavior and what is not.

Second, the twisted logic that is the basis of federal criminal law permits prosecutors to create crimes out of behavior that historically has not been considered criminal. Thus, whether or not he had committed any crimes (and, apparently, he had not), Quattrone had plenty about which to be nervous, given that the government was trying to find a way to pin the entire collapse of the stock market upon him. In other words, the feds have a way of declaring someone guilty even when he or she has not done anything criminal.

Third, if there was no criminal behavior, then there was no cover-up, period. Logically, one cannot cover up what one has not done.

Thus, the lesson of the Quattrone case is not that one should "cooperate" with the government (whatever that means), but rather that modern federal criminal law has become the Theater of the Absurd. Law has lost its meaning in the federal system, and the popularity of the Quattrone verdict demonstrates that the political classes and all of the "masses" of people who have voiced approval of the conviction want to keep it that way. In the end, we do not have rule of law; instead, we have rule of very ambitious people who have been given the power to make the law whatever they want it to be.

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William Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University. Send him MAIL. See his Mises.org Articles Archive. Candice Jackson, a graduate of Pepperdine School of Law, works for Judicial Watch. Comment on this article on the  blog.