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The War on Business

Tags Big GovernmentLegal SystemInterventionism

09/03/2002William L. Anderson

With the recent guilty plea of former Enron executive Michael Kopper, it seems that the floodgates are now officially open in the government’s war against American business. Democrats are demanding something just short of summary executions, while Republicans and President George W. Bush are trying to outdo the Democrats in their anti-business rhetoric, and the mainstream news media outlets are playing the role of Joseph Goebbels in helping to stir the whole pot of hysteria.

From Ted Rall and the New York Times on the left to Fox News, the Washington Times, and Robert Novak on the right, people are being told that U.S. business officers and owners are crooks, charlatans, and threats to a free and decent society. Of course, the public is responding predictably, as pollster after pollster reports that Americans approve of arrests and more arrests of these alleged miscreants.

Unfortunately, this set of affairs has nowhere to go but downward, as the government’s assault on business is going to have devastating effects, not only upon the individuals being arrested and charged with near crimes against humanity but also upon the future business environment in this country. However, many of the accused probably are guilty of little more than misreading the market or trying to keep their company’s stock prices high against impossible odds (and protect themselves against a herd of class-action lawyers looking to sue when those prices inevitably fall).

Furthermore, as Novak pointed out in a recent column, high-profile arrests mean favorable publicity for U.S. prosecutors. According to Novak, James Comey, Bush’s new U.S. attorney in New York City, will try to follow in the footsteps of Rudy Guiliani, the former New York U.S. attorney who parlayed his prosecutions of Michael Milken and Leona Helmsley into the mayorship of that city, and now makes speeches at 75 grand a pop.  Writes Novak,

"Comey has not pleased Republican lawyers by insisting that accused corporate executives who had surrendered voluntarily be manacled and perform a well-photographed perp walk. However, the spectacle was enjoyed by the prosecutor’s boss: George W. Bush."

There is no doubt as to what Comey and his cohorts are attempting to do. By making it nearly impossible for anyone accused of “fraud” and other such crimes to receive a fair trial, or by piling on indictments--some of which are for activities that actually are legal according to U.S. law--dozens of executives will be forced to plead guilty and go to prison, often for “crimes” they never committed.1

At this point, I need to pause to answer the questions that many readers certainly will be asking: How can someone actually defend fraud?2  Furthermore, if people commit fraud, should they not have to go to jail for it?

Neither I nor any of my like-minded colleagues who write on these pages endorse the commission of fraud on any scale in any organization, be it business or government. However, before we sharpen our guillotines to lop off the heads of the accused, perhaps we should try to make a determination of how we define that word. Fraud, one would think, goes to intent, and, in the case of criminal law, means the presence of mens rea, or “a guilty mind.” In other words, in order to call something fraud, one must have intended to commit it in the first place.

For example, assume that I sell my old car to Joe. When I had it, the car ran well and I had no reason to suspect it would do otherwise. A day after Joe buys it, however, a belt breaks, or there is some other malfunction that costs him a bundle to repair. The question arises as to whether or not I have defrauded Joe. Had I known something was about to blow and did not inform him at the time of purchase in response to his questions, then I may be guilty of fraud.

But what if Joe comes to my house, asks me my selling price, then pays it on the spot without asking questions? If he did not ask about defects, am I obligated to tell him, anyway? (St. Thomas Aquinas outlined a similar situation in which a merchant sells wheat to starving villagers. Is he obligated to let them know more wheat is on the way? Aquinas said no, although he added it would be more virtuous of him to inform the peasants of the coming shipments.)  It is obvious that, although it would have been nice of me to inform Joe of the car’s troubles, I did not defraud him, since he had shown no interest in asking about the defects.

In the case of corporate executives, the issue is a bit dicey, but it is still possible to make sense of what might be fraud and what is not. For example, if the matter involves the gray areas of accounting, including the various categories in which one records assets and liabilities, often it is difficult to ascertain whether or not fraud has occurred, and one needs to apply the mens rea standard.

Unfortunately, the U.S. Supreme Court has slowly but surely worn away the protections of mens rea, which has been a boon to ambitious prosecutors. As Paul Craig Roberts has pointed out in his book The Tyranny of Good Intentionslarge numbers of Americans each year go to prison for violations of laws or regulations of which they either were ignorant or disobeyed without any iota of criminal intent.

Yet, intent goes to the heart of the matter. Assume that I am driving my car carefully down a city street (at the speed limit) when a child suddenly and without warning jumps in front of me. I then hit the child and he is killed. That boy is as dead as he would be had I kidnapped and murdered him, yet in the former case,  I killed him without any criminal intent, while in the latter case I would have committed a depraved act.

Any fair-minded person would object if a prosecutor charged me with first-degree murder for the first illustration, yet that is precisely what has been occurring in criminal justice in the United States, and especially in the federal system. For example, a number of people have gone to federal prison for violations of environmental law despite the fact that (1) they did not harm the environment, (2) they were acting in good faith, having received state permission, and (3) they were unaware of violating federal statutes until after the fact.

This latest anti-business jihad being conducted by various federal agencies is likely to follow the example of environmental prosecutions, in that many people are going to be prosecuted for what are alleged technical violations of financial regulations in which either there are “gray area” issues or the violation occurred without criminal intent. Both Congress and the White House, however, are trying to outdo one another in the category of who can demonize business executives most loudly, especially with critical congressional elections coming this fall.

When one includes ambitious federal prosecutors in the mix, along with a statist, lap-dog news media that operates as little more than a conduit for illegal leaks from prosecutors, it is not difficult to see just how poisonous the present atmosphere has become to any fair application of justice. What supposedly passes for a civilized court system in which one is “assumed innocent until proven guilty beyond a reasonable doubt” has turned into something akin to mob rule.

Furthermore, one should also ask the question of whether or not some of these cases actually belong in civil instead of criminal court. Over the last several decades, Congress has slowly but surely given over its lawmaking powers to judges and bureaucrats. On top of that, lawmakers have been moving situations that once were reserved for civil courts into the arena of criminal law.

Take the recent “insider trading” case with ImClone, for example.  Even if we assume that the company’s executives (and Martha Stewart) sold their stock on the open market knowing that the bad news regarding the Food and Drug Administration would quickly depress the stock’s value, that ultimately is something that should be decided in the civil arena. If the purchasers of those particular shares of stock believe they have been defrauded, civil law gives them ample opportunity to seek redress in the same way that Joe could sue me if I were to defraud him in selling him my old car.

Making such issues criminal matters is harmful in many ways. First, it deflects the true direction of harm. Instead of real individuals having been hurt, we have the state “claiming” harm to the “community.” As Austrian economists such as Ludwig von Mises and Murray Rothbard have long pointed out, however, “community” is a fictitious entity. Only individuals can be hurt. By forcing the issue into criminal court, resources that might have been used to give redress to the victims of fraud are now being used by prosecutors and defense attorneys, and if the individual charged is found guilty, the government often seizes that person’s property, making it impossible for the actual victims of fraud to be compensated at all.

Second, the expansion of criminal law becomes a tool of tyranny. When more and more activities are criminalized, in the end it means more ruined businesses, destroyed families, and increased financial burdens upon taxpayers, as they must pay for the expanding prison population. The United States already incarcerates more people than any other nation on the face of the earth (approximately two million, one-fourth of all the world’s prisoners), and the majority of them are in jail for non-violent offenses.

Because Congress and state legislatures have greatly increased the number and scope of the coercive tools used by the prosecution to gain convictions, we have also seen an increase in the number of innocent people going to prison.3  Given the current public outcry over the alleged business scandals, politically motivated prosecutors are working overtime to bring cases against hapless executives, many of whom at worst are guilty of technical violations of regulations and at best were operating in good faith, given the business conditions when they made their fateful decisions. And the present political climate ensures that most of these executives, guilty or not, do not stand a chance of receiving a fair trial.

No doubt, many “ordinary” people have applauded the recent “perp walks” that federal prosecutors such as Comey have forced upon arrested executives in attempts to further humiliate them. No doubt, many “ordinary” people have been angered at some of the heavily publicized alleged misdeeds of these executives, who supposedly have looted their own companies for their own gain. No doubt, many “ordinary” people have approved of “throwing the book” at those who are being charged.

What these folks do not realize, however, is that if prosecutors can roll wealthy and prominent people, illegally leak grand jury testimony with no fear of being prosecuted themselves, and conduct poisonous campaigns in the press that all but guarantee those currently in the dock cannot receive a fair hearing, then there is no limitation at all to state power. A government that can jail the rich and well-known at will and confiscate all of their assets is a government that can do the same thing to “ordinary” people--and at a lower cost to government officials. If people really want a prosecutorial state with no limitations, they will have their wish granted--and lose whatever precious freedoms they may still have. That is nothing less than a deadly bargain with the Prince of Darkness himself.

  • 1. For example, it is legal for businesses to use non-U.S. banks, but prosecutors often will charge people with “money laundering” in an attempt to increase the number charges in order to ensure an increased likelihood of guilty pleas.
  • 2. My recent defense of Martha Stewart brought a number of hostile e-mails to my computer in which people accused me of defending fraudulent behavior.
  • 3. As Paul Craig Roberts has noted, many people plead guilty even if they are innocent, since they lack the resources to fight the modern prosecutor, who often do not care themselves whether or not the accused is guilty or innocent.

Contact William L. Anderson

William L. Anderson is a professor of economics at Frostburg State University in Frostburg, Maryland.

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