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Federal Criminal Law: Expediency Over Principle

Mises Daily: Tuesday, February 22, 2005 by

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For the past few weeks, I have been following the Richard Scrushy trial in Birmingham, Alabama. Like so many other highly-publicized trials, this one has had its media drama, the hype, and all of the other things that come with high-profile cases – sans murder – and it provides part of the "bread and circuses" that the public and news media seem to demand these days.

The gist of the case is as follows: Scrushy was the CEO of HealthSouth, a large healthcare firm headquartered in Birmingham. According to federal documents, the company's financial records were "doctored" for many years in order to fool Wall Street analysts into believing the company was more profitable than it really was, thus meeting Wall Street expectations and allowing its stock price to remain higher than it would have been had the truth been known about the firm's finances.

Federal prosecutors (the case is being held in federal court) allege that the accounting fraud went on for several years, with the value of the "overpriced" stock totaling about $2.7 billion above where it would have been otherwise.

Like all other claims of financial fraud, it is difficult to know what the stock price would have been had this alleged creative accounting not occurred; furthermore, prosecutors allege that since Scrushy held large amounts of HealthSouth stock, he personally benefited from the alleged fraud. (Of course, being the largest single holder of HealthSouth stock, he also suffered the greatest losses when the information became public and the value of the company's paper fell steeply.)

Scrushy lived rather ostentatiously, not only amassing a large amount of expensive goods for his own use, but also spread the money in very conspicuous ways around the community. Thus, others who were in the paths where Scrushy lavished his money also benefited from the largess – the alleged fraud. Certainly, his lifestyle also is on trial, and I doubt it is winning him any points with the jury.

While Scrushy admits that accounting fraud took place, he contends he knew nothing about it and that it was orchestrated by underlings, something that "shocked" him. One set of charges against him comes from the 2002 Oxley-Sarbanes Act, which makes it easier for prosecutors to levy charges against CEOs like Scrushy, and the courts long ago did away with the prohibition on vicarious criminal liability. In other words, while Scrushy is paying megabucks for a "star" defense team, in the end a jury will convict him of all or nearly all counts and would have been no worse off had he represented himself or picked someone from a nearby homeless shelter to act as his lawyer. Such is the nature of the federal system, which is nothing less than a huge conviction machine.

My purpose here is not to defend Scrushy's alleged behavior. From what I can tell, the company simply made up numbers out of whole cloth, which constitutes deliberate criminal fraud. Unlike Enron, which used quasi legal means to hide its losses, the numbers people at HealthSouth simply used disappearing ink.

Yet, as I follow the trial to its inevitable conclusion (and then Scrushy will spend at least 20 years or more in federal prison, so he had better become used to eating bad food and having deplorable medical care and hope he survives to the end of his term), I find a number of things that are terribly disconcerting. Whether or not Scrushy is guilty (and almost everyone who falls into the federal criminal system is found guilty) takes a back seat to the larger issue of how "justice" is administered in the federal system.

What we see here is that the federal system has become a legal system that exists of the prosecutors, by the prosecutors, and for the prosecutors. When Rudy Giuliani, then the U.S. attorney for the Southern District of New York, remarked that the Crime Control Act of 1984 tilted the playing field in favor of prosecutors, he was not exaggerating. A legal system that at its founding was set up as a mechanism to ensure rights of the accused has become a system of guilty pleas and show trials, and is more akin to what Stalin enjoyed in the U.S.S.R. than what George Washington, Thomas Jefferson, and the great William Blackstone helped create more than 200 years ago.

If Blackstone were observing this "trial," he would find two things that were most disconcerting. The first is that all of the "star" witnesses for the prosecution are people who already have pleaded guilty in exchange for their testimony against Scrushy. The second has been the use of hearsay testimony, which absolutely goes against what Blackstone called the "rights of Englishman." Let me explain.

All of the plea bargains came when the accused officers of HealthSouth agreed with federal prosecutors to testify as to the situation prosecutors say existed at HealthSouth. Now, prosecutors will claim that what they want is simply the truth; those familiar with U.S. attorneys and plea bargains know full well that all too often, plea bargained testimony is laced with creativity. As the noted criminal lawyer Harvey Silverglate once told me in an email, while the testimony from one who has pled guilty is portrayed as "singing," in reality, it is more like "composing."

Blackstone himself argued strenuously against plea bargaining, since the various deals that are struck, as well as the conversations and interrogations that lead to the agreement are hidden from the public. Because federal prosecutors can wield an astonishing array of legal weapons against the accused, and since almost all federal criminal trials end in guilty verdicts, prosecutors hold all of the cards. Guilty pleas are all but inevitable, but they also lead to less-than-veracious testimony.

Thus, the "riveting" testimony from executives on the witness stand may make for good press, but there is no way to know how truthful it really is, and since the courtroom is supposed to be the place where truth is spoken, we can say that when prosecutorial power ensures that something less than the truth will prevail, justice itself is lost.

The second problem deals with hearsay testimony. One of the basic "Rights of Englishmen" has been the "right to face one's accuser." As Paul Craig Roberts and Lawrence Stratton write in their book Tyranny of Good Intentions, this principle came about after the sham trial and subsequent execution of Sir Walter Raleigh, who was convicted of treason via accusations made by someone who never testified in the trial.

Yet, the federal courts routinely permit hearsay testimony on behalf of the prosecution, calling hearsay a "statement of interest." On Friday, February 4, jurors heard about a young chief financial officer who said he no longer could stand the fraud being committed and left the company. Jurors were told about how the young man decided to make the change after returning from his honeymoon, as well as other tales of personal anguish that he felt.

The only problem is that they did not hear from the young man himself. Instead, they heard another former company officer testifying as to what he claimed that the young man said to him. This is classic hearsay testimony, as the defense had no opportunity to rebut the secondhand evidence. Once upon a time, such testimony would have been forbidden in a U.S. court of law; now it becomes a central portion of the prosecution's case.

There is much more. The various protections of the Bill of Rights protect the accused by making sure they are not forced into becoming deputies for the prosecution. However, laws like Oxley-Sarbanes and others simply have eliminated those protections, with the courts signing off on them, the New York Times and Washington Post (both of which already editorialized for elimination of the rights of freedom of the press when they endorsed the McCain-Feingold bill) giving approval, and the "bread and circuses" public giving adulation to prosecutors as heroes.

To put it another way, almost the entire case being built against Scrushy has been done through means that could only have been in place following the destruction of the core of the Bill of Rights and the traditional "Rights of Englishmen." This does notmean that Scrushy is innocent of having orchestrated a major stock fraud; indeed, I suspect that much of the man's wealth gained through the value of company stock was ill-gotten. However, when nearly all of the witnesses against him are co-workers who were facing decades in prison for "committing" such "derivative crimes" as "wire fraud," "mail fraud," and "money laundering," and who were able to bargain down their sentences to a few years of incarceration, it becomes difficult to ascertain what part of their testimony may be true, and what part false. That is because they are testifying to what federal prosecutors having ordered them to say.

At this point, the reader may declare, "So what? Yes, we know that prosecutors are guilty of misconduct, and that some of the testimony may be exaggerated, but we just know that Scrushy is guilty, and that whatever he receives will be a form of 'rough justice' of which 'society' has been deprived because of 'legal technicalities'."

However, there is a much larger principle at stake here than the conviction of Richard Scrushy or the pursuit of prosecuting financial fraud. When prosecutors are permitted to tear down the Constitution of the United States – and that is what they do on a routine basis – then we have lost the law in the alleged pursuit of justice. We cannot have justice without law, and for law to be part and parcel to liberty, it has to be something other than edicts handed down by the legislatures and the courts to aid the prosecution in gaining convictions, even convictions of people who seem to be guilty as sin.

In other words, I am arguing that principles matter, and that they matter greatly. Without the fences that the founders of the United States carefully erected in order to protect those rights that they claimed were God-given, we are left to the mercy of political animals that care only about results and not about truth.

There also is one more point, that while seemingly secondary, makes the whole matter even more complicated. The fall of HealthSouth and the subsequent accounting fraud must be viewed within the larger arena of the overall collapse of the securities bubbles at the beginning of this decade. From Enron to the legion of financial restatements that led self-righteous politicians to claim that there existed a "corporate crime wave," we see a larger pattern on behalf of the U.S. Government that created an unstable financial atmosphere.

What the government was calling the "New Economy " really was nothing more than an inflationary bubble created by the Federal Reserve System, a bubble that Austrians predicted would burst – which it did in spectacular fashion. This was a financial fraud orchestrated at the highest levels of government that resulted in losses of trillions of dollars, not to mention the hundreds of billions of malinvested dollars that steered the U.S. economy in a wrong direction.

(As the vaunted federal budged "surpluses" morphed into half-trillion dollar deficits, we have seen a number of financial "restatements" coming from the Office of Management and Budget. However, no federal number crunchers or politicians will be led off to the federal courts in handcuffs despite this unprecedented "crime wave.")

Within a few years, Alan Greenspan, the maestro of this financial hoax, will be making speeches for which listeners will pay him six figures (to hear the same obtuse language he uses when testifying before Congress). His partner-in-crime, former President Bill Clinton, by then will be elevated to near-sainthood.

Meanwhile, Richard Scrushy will be spending what is left of his life in a federal prison. Perhaps he deserves to be there, but we will never know. One thing we do know, however, is that the government that will put him there is guilty of much greater crimes and swindles than Scrushy and his underlings ever could have produced.

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William Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University. Send himMAIL. See his Mises.orgArticles Archive.Comment on theblog.