There is, perhaps, no better example of the difference between state criminal jurisprudence, bound by state legislation and common law principles, and the out-of-control federal system as it has evolved, than the titanic battle between Spitzer and insurance magnate Maurice R. “Hank” Greenberg, whose business vehicle, the American International Group, Inc. (“AIG”), was at the time the world’s largest business insurance company. Attorney General Spitzer, widely thought to have his eye on higher elective office (he later won the New York governorship), went after AIG and Greenberg starting in 2005 for a number of accounting practices alleged by Spitzer to have improperly inflated AIG’s earnings and net worth.
At the center of the Spitzer-Greenberg controversy was a transaction between Greenberg’s AIG and the General Re insurance unit of mega-investor Warren Buffett’s Berkshire Hathaway investment company. As was the case with the KPMG tax shelters, the question was whether the transaction had real economic purpose or was instead an artificial transaction meant only to bolster the appearance of AIG’s financial strength on its books. There was talk of indicting AIG and its feisty chairman. Greenberg vehemently denied the impropriety of the accounting treatment AIG employed and lodged a bold public challenge to Spitzer to, essentially, put up or shut up. Tagging along in the investigation were, more ominously, the Securities and Exchange Commission and the Department of Justice.
Now, it’s important to understand that the federal McCarran-Ferguson Act of 1945 gives primary responsibility to the states for regulating and taxing insurers. Under its terms, “even the SEC can go only so far with its accounting cudgel,” observed The Wall Street Journal’s Deborah Solomon at the time of AIG’s troubles with the law. While there were increasing calls for “greater federal oversight of the industry,” including proposals to repeal the act altogether, she reported, it was still in effect in 2005.35 But that didn’t stop the federal criminal justice system from swooping in on AIG.
As a result of the enormous pressure placed upon AIG by simultaneous state and federal investigations, its board finally forced out its long-time leader. Greenberg did not leave quietly. Instead, he threw down a gauntlet in his letter of resignation submitted March 28, 2005.36 A mere two days later, the company admitted, according to a page one Wall Street Journal report, “to a broad range of improper accounting that could slash its net worth by $1.77 billion.” In what the Journal dubbed the company’s “extraordinary confession,” the new leadership suddenly (but, to sophisticated observers, not surprisingly) agreed with state and federal investigators that the questioned transactions “appear to have been structured for the sole or primary purpose of accomplishing a desired accounting result.”37 In other words, they were fraudulent.
Predictably, this sudden confession of error, a complete turnabout from the position stoutly and consistently advanced by the company under Greenberg’s chairmanship, as well as by its auditors and its lawyers, made criminal prosecution of the company unlikely. The Wall Street Journal, noting that “no major financial-services company has survived indictment in recent history,” with specific reference to Arthur Andersen, reported that AIG’s more benign fate was a result of the fact that AIG’s board, without Greenberg, “has been cooperative” and was “earning praise from New York Attorney General Eliot Spitzer.” Obviously, it was earning points with the feds as well.
Now that AIG’s new leadership admitted to fraud supposedly committed by Greenberg and other former company employees, prosecutors were free to focus on those individuals. But in the end, Spitzer’s office did not indict either the company or any of its former employees, including the recalcitrant Greenberg. Instead, on May 26, 2005, the state filed a civil complaint against AIG, Greenberg, and one other former executive, alleging the impropriety of a number of Greenberg’s accounting practices, a variety of state fraudulent business practices, state securities fraud, common law fraud, and violations of New York State’s insurance laws.
When AIG issued its 2004 annual report, repeating the company’s abject confession of error, which had been filed with the SEC in May of 2005, a still unrepentant Greenberg had his law firm release a “white paper” to the news media, contesting the characterization of the transactions as erroneous, much less fraudulent.38 Spitzer, eyeing the New York governorship, shot back, telling the press that the lawsuit might be enlarged “to include additional civil fraud charges against Mr. Greenberg.” State insurance law, however, simply did not render the AIG/General Re transaction criminal, and even Eliot Spitzer could not make it otherwise. On the same day, his office announced that it would not bring criminal charges against Greenberg.39
That didn’t stop Spitzer from boasting to the press that he “had enough evidence to pursue a criminal case against Mr. Greenberg.” Sounding more and more like the gubernatorial candidate that he was, Spitzer went on television and announced on This Week With George Stephanopoulos (ABC News) that “the evidence is overwhelming that these were transactions created for the purpose of deceiving the market. We call that fraud. It is deceptive. It is wrong. It is illegal.”40 Still, while “we” might dub the transactions “illegal,” New York State’s criminal law apparently did not, and Spitzer knew it. Spitzer could huff and puff, and the media could be taken in for a while, but in the end New York’s criminal fraud law was not Silly Putty®. It had real form, substantive meaning, and actual limits, and it put the brakes on the Spitzer juggernaut.
The same could not be said for the feds, however. At that very same time, federal prosecutors were trying to determine whether Greenberg committed the crime of masking AIG’s true financial condition by engaging in a sham transaction with General Re.41 The case against Greenberg, who the feds by now recognized was going to fight rather than make a deal, obviously was not strong enough without the “cooperation” of other former AIG, as well as General Re, executives who could be pressured to adopt a revisionist view of what they and others did.
And so it could not have come as a surprise to Greenberg and his lawyers that, in early February 2006, federal prosecutors announced the indictments of four former General Re executives and a former executive of AIG, charging them with the old standbys, namely conspiracy, securities and mail fraud, and making false statements. The feds were also “possibly ratcheting up the pressure on other senior executives,” according to The New York Times. In June of the prior year, two other General Re executives had pleaded guilty to charges that they’d engaged in a sham transaction to assist AIG’s effort to artificially bolster its financial position. And in February 2008, when the five AIG and General Re executives who went to trial were convicted, federal prosecutors sought the equivalent of life sentences. Clearly, the DOJ was seeking to climb the ladder on the rungs of plea-bargaining executives who suddenly came up with new versions of history. Later, the DOJ would pressure the convicted defendants in hopes they could be persuaded to sing and compose, heading toward Greenberg at the apex. “It moves prosecutors that much closer to the possibility of criminal charges against executives above the level of people who have already been charged,” observed former federal prosecutor turned white collar criminal defense lawyer Robert A. Mintz to The New York Times. “Certainly prosecutors will pressure these defendants to assist them in their investigation in exchange for a more lenient sentence.”42 In what had become a matter of course among the media when covering so-called white collar crime, the Times report did not question the ethics or social benefit, much less the truth-seeking capacity, of such a prosecutorial game plan.
A few days after the AIG and General Re executives’ indictments, AIG issued a ritual public apology for its illegal conduct and announced a $1.64 billion settlement—in effect, a large cash tribute paid in exchange for staying in business.43 Greenberg, for his part, was thrown into fighting trim. He announced the following month that he was itching to go to war with Spitzer in the civil fraud suit before Spitzer left office in November of 2006 to enter the gubernatorial primary.44 Spitzer’s office, however, was in no h
urry to get the case tried. “We’re handling this like any other case,” said Spitzer’s deputy, Michele Hirshman, at the same time denying a claim by “at least one AIG board member” who told Business Week that Greenberg’s ouster by the AIG board was necessitated by Spitzer’s threat to indict the company unless Greenberg were kicked out.45
It had turned out to be an empty threat, however. Even New York State’s legendarily tough, creative and ambitious attorney general finally had to admit he could not indict under state law. Spitzer and his staff understood, in the end, that while state prosecutors in New York could indict Maurice Greenberg and any other ham sandwich, they could not convict where the law did not specifically cover the questioned activities and where the target was not inclined to roll over and play dead.
The feds, on the other hand, not only can indict a ham sandwich, they can convict, and all too often they can make the conviction stick on appeal. As University of Southern California Gould School of Law Professor Susan Estrich told me, “Federal law makes life a law school hypothetical in which there are always crimes to be found by a ‘good student.’”46 Eliot Spitzer was a good student, but he was unable to charge a crime under state law. The feds suffered no such limitation. So far, because of AIG’s ritual apology, it has been able to avoid federal criminal indictment. Though Greenberg hasn’t yet been charged in any federal indictment, it seems almost inevitable, given the patterns seen elsewhere in this book, that the feds will seek to use the convictions of the five other AIG and General Re executives in order to “climb the ladder” and get an indictment against AIG’s big kahuna. Until that happens, though, Greenberg still potentially faces civil charges brought by the Securities and Exchange Commission for the transactions that brought down the other executives. In May 2008, federal District Judge Christopher Droney tentatively allowed the process to move forward since, as Fortune reported, “[he] said there was ‘sufficient evidence’ for a civil jury to conclude that Greenberg had initiated the problematic transaction.”47
Almost completely missed in the widespread news coverage of the whole sorry affair was the question of how and why the feds had entered the fray with criminal indictments and continuing investigations in the first place. The Department of Justice did not have to await the repeal of the federal McCarran-Ferguson Act of 1945, nor the enactment of new congressional legislation giving the federal government additional oversight jurisdiction in the insurance industry. Department of Justice prosecutors, without the adoption of any such federal laws, were able to indict and convict former executives of General Re and AIG, thus beginning their climb up the ladder for Hank Greenberg.
CHAPTER SIX
Lawyers: Government Offense Against the Best Defense
Christ Church in Greenwich, Connecticut, could not be more genteel. As a child, former president George H.W. Bush attended this Episcopal church, and many years later he held his parents’ funerals in its august sanctuary. Now it was on the brink of a scandal.1 In October 2006, a church employee discovered that church organist Robert Tate had been storing illicit pictures of children, child pornography, on his churchissued laptop computer. Soon thereafter, the church sought legal advice from respected local attorney Philip Russell, who recommended that Tate be immediately terminated from his employment by the church. On October 9, Russell took possession of the laptop and destroyed the hard drive, which contained images of naked young boys.
Many lawyers would have done precisely the same thing, on the theory that the law allows, perhaps even requires, the destruction of “contraband,” or material considered harmful and illegal for anyone except those in law enforcement to possess under any and all circumstances. Dealing with contraband can be very tricky, even for a sophisticated lawyer with criminal law experience. The very act of possession is criminal. It is illegal to possess heroin, for example, which federal narcotics laws regard as having no approved medical uses. No prescription nor any medical condition justifies its possession by anyone, at any time, for any reason. Child pornography is in the same category.
Had the hard drive containing the pornographic images been found in the possession of either the Church or its lawyer for “safe-keeping,” he would have had to do a lot of explaining to avert criminal charges. Likewise, turning the computer over to the police would likely have subjected both the church and its lawyers to questioning, if not suspicion and an investigation. So what was Attorney Russell to do? Should he take possession of the pornography-laden hard drive and hold on to it, thereby arguably committing a serious felony every moment it was in his possession? Should he turn in the hard drive, thereby arguably incriminating (and betraying) his client, the church, which, after all, owned the laptop? Or should he keep the hard drive in the laptop and simply leave it in the church office, where anyone entering the office, including impressionable young children, could access it? Faced with such difficult choices, he decided to destroy what the law considered contraband. It was a defensible, even honorable, decision.
But, unbeknownst to Russell, three days earlier the feds had begun to investigate Tate, having been tipped off to his involvement in child pornography. The U.S. attorney’s office considered the computer hard drive to be evidence in its investigation. And so, to the shock and dismay of members of the bar, the feds charged Russell with obstruction of justice and destruction of evidence, a felony that carries a 20-year maximum prison sentence. The February 2007 indictment did not claim that Russell knew, at the time he destroyed the images, that the feds had already begun an investigation. Prosecutors even acknowledged that Russell destroyed material that it was illegal to possess. But they indicted him nonetheless.
Lawyers across the country had that sinking feeling: “There but for the grace of God go I.” The Russell prosecution was only the latest in a long line of dubious legal assaults against members of the bar. Lawyers, as a group, are not particularly popular, and those who take on criminal matters often sink to the bottom of an already rather low pile. Still, the independent bar has been a bulwark against government overreaching and official repression since before the founding of the republic. (Virtually every American schoolchild knows the story of John Adams’s defense of the British redcoats in the Boston Massacre.) America’s lawyers, as a profession, are more directly involved in opposing certain governmental goals than perhaps any other group. And when government overreaches in any arena controlled by law, it is frequently the lawyers who show up at the frontlines. The same may be said for opposition to governmental attempts to over-regulate an industry. So a prosecutorial assault on lawyers who are, essentially, just doing their jobs, is a matter that should be of particular concern in a free society.
Shock turned to anger when the trial judge in Russell’s case, Alan H. Nevas of the U.S. District Court for Connecticut, let the indictment stand and ordered Russell to stand trial. He was able to do so because Russell was charged under two lesser known provisions of the Sarbanes-Oxley Act of 2002, which, as seen in the previous two chapters, was supposedly designed to restore investor confidence in the wake of the Arthur Andersen corporate accounting scandal—namely Section 802 (“Criminal Penalties for Altering Documents”) and Section 1102 (“Tampering with a Record or Otherwise Impeding an Official Proceeding”).2 These new obstruction provisions broadened the obligation to retain documents so that a party could not destroy them in contemplation of a future investigation even if no formal investigation had begun (or the holder of the records did not know of any such investigation) and no subpoena had been received. The new statute made it a felony to “knowingly alter, destroy, [or] mutilate…any document or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter.” Since Judge Nevas concluded that, under the new obstruction statute, it was unnecessary for the government to have specified in the indictment that Russell had in mind any particular investigation, or that his intention was that of “obstructing or interfering with” any official proceeding or investigation, it wou
ld be up to a jury to decide, at trial, whether there could have been any such link in Russell’s mind when he destroyed the hard drive in the church computer used by Robert Tate.3
Legal and business experts immediately objected to the vagueness of the obstruction provisions under which Russell was ordered to stand trial. “The revised language,” noted one business writer, “implied that people could face criminal charges by tampering with documents before they become evidence in a federal investigation.”4 The intersection between ordinary document-retention-and-destruction policies, which are ubiquitous in industry, and the federal crime of obstruction of justice, was becoming impossible to navigate with any confidence. The application of this statute to a criminal defense lawyer handling contraband injected a new dimension to the apprehension, which bordered on terror. Even Mark A. DuBois, the Chief Disciplinary Counsel for the Connecticut Bar Association (surely an “establishment” figure and hardly a maverick from the criminal defense bar) told Greenwich Time that he was troubled by how attorneys like Russell are forced by the feds to act as soothsayers. “The operative issue for the criminal lawyer to decide is ‘what’s evidence and when does something become evidence,’” he said. “How prescient does a lawyer need to be? Now if you guess wrong you’ve got big problems, because it is a serious crime.”5
Wholly aside from the issue of at what point in time Sarbanes-Oxley requires the preservation of potential evidence, Irwin Schwartz, a highly regarded Seattle criminal defense attorney and a former president of the National Association of Criminal Defense Lawyers, questioned how a lawyer could be indicted for destroying contraband materials. Schwartz was also puzzled about how and why a statute written to preserve corporate records was suddenly being used to criminalize the destruction of material that, unlike corporate records, it is a crime to possess under any circumstances.6 Again, what was Attorney Russell to do?
Three Felonies a Day Page 23