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“Waterboarding” is a controversial procedure in which interrogators compel a target to cooperate by making him feel as though he is dying—specifically, by making him feel that he is drowning. I am not convinced that it amounts to torture, or that its use against Islamic jihadists is wrong.
But I am convinced that U.S. prosecutors have devised a metaphorical form of waterboarding, which they regularly employ against innocent businessmen. They have discovered a means by which they can convince a businessman who is not even suspected of a crime that his company—to which he may have devoted his life—will be killed if he does not cooperate with them.
And that, I think, is wrong.
The “waterboarding” of businessmen has its roots in the 2002 prosecution of Arthur Andersen, then one of the Big Five accounting firms. Because of its involvement in the Enron debacle, the company was charged with one count of obstructing justice. A story in the Wall Street Journal observed that “in the 212-year history of the U.S. financial markets, no major financial-services firm has ever survived a criminal indictment. Now, Arthur Andersen, LLP, will either make history or be history.”
The latter, of course, is what happened. The firm was convicted by a jury in June 2002, and in 2004 the conviction was upheld by the Fifth Circuit Court of Appeals. Its reputation destroyed, Arthur Andersen collapsed with a loss of 85,000 jobs.
U.S. prosecutors have devised a metaphorical form of waterboarding, which they regularly employ against innocent businessmen.
But then a strange thing occurred. Although the firm was beyond hope of recovery, it appealed its conviction to the U.S. Supreme Court. On May 31, 2005, in a stunningly brief 700-word decision, the Supreme Court unanimously threw out the company’s conviction. The reason was that the judge’s instructions to the jury had been faulty. And they had not been faulty in some minor, picayune, technical way. The judge had flat-out told the jury that it could convict Arthur Andersen even if its employees had acted without any consciousness of wrong-doing—despite the law’s specific statement that the actions in question had to be knowingly corrupt.
Now, one might suppose that being slapped down by a unanimous Supreme Court, with a curt one-page decision, would be looked upon as a setback by government prosecutors. And certainly commentators looked at it that way. A New York Times story quoted a lawyer for the U.S. Chamber of Commerce, Robin Conrad, as saying that the decision was “truly a slap in the face of the government for overreaching.” Well, maybe.
But one could also view the outcome in a quite different way: Prosecutors had targeted and destroyed Arthur Andersen despite the fact that it was innocent. That was to prove a useful datum for prosecutors.
A second source for the practice of “waterboarding” corporate executives was the too-little-known case of Jamie Olis. The basic story was told by Wall Street Journal columnist Holman Jenkins back in March 2004. Olis, Jenkins wrote, was “a midlevel Dynegy executive . . . He was one of three executives charged as architects of Project Alpha, which led to $300 million in debt being falsely reported as cash flow. His colleagues, including his boss, pleaded guilty and will face no more than five years. Mr. Olis went to trial and was sentenced last week to 24 years.” That is one hell of incentive to plead guilty.
But suppose a person truly believes in his innocence, as Olis did, and believes that he could demonstrate it in a trial? Well, prosecutors will tell their target, going to trial is going to be expensive for you. As a June 12, 2007, Wall Street Journal story noted, regarding the Olis case, “The government had prosecutors, Federal Bureau of Investigation agents, postal inspectors, and accounting experts to work the case.” There were also twelve million pages of documents produced as evidence. Just to have a copy of those documents printed would cost $100,000. And of course the government had computers to sort through the documents.
But Dynegy’s by-laws committed the company to paying for Olis’s legal fees, even after he was let go. So, the cost of his defense must not have been an issue in Olis’s conviction, right? Unfortunately, not so. According to another WSJ story, “Dynegy stopped paying his legal fees after it was pressed by the government to cut Olis off.” Evidently, the government did not want to go to trial. It wanted—cooperation. As Olis said in a prison interview, “What they wanted was for me to tell the story that I and everyone else engaged in a conspiracy . . . . I couldn’t ruin those people’s lives. I’m Catholic. And I can’t do that.”
With the Arthur Andersen and Olis cases, the basic elements of “waterboarding” corporate executives were in place. A chance to put the pieces all together soon emerged in the prosecution of KPMG. The ins and outs of the case do not concern me here. Suffice it that KPMG, now one of the “Big Four” accounting firms, had constructed certain tax shelters for its wealthy clients and that bureaucrats at the IRS, grandstanding politicians in the Senate, and anti-business reporters at PBS were (rightly or wrongly) denouncing these as “tax shelter abuse.”
In January 2004, the CEO of KPMG, Eugene O’Kelley, hired the prestigious law firm of Skadden Arps—and its headline lawyer Robert S. Bennett—to get the company out of trouble. One step was to distance KPMG from the three men it had sent to the Senate to defend the shelters. One “retired” with a consulting contract; one was placed on administrative leave; one was moved out of the tax division.
In February 2004, the IRS made a criminal referral to the U.S. Attorney’s Office for the Southern District of New York (the district that handles many prosecutions of financiers.) As the Wall Street Journal would later editorialize, the IRS’s behavior in this case was highly aggressive. Ordinarily, “the IRS issues its point of view on a shelter, putting taxpayers who use it on notice. If the IRS then takes the taxpayer to court over the shelter, he has the chance to respond before a judge who makes a ruling and precedents are established.” However,
in this case, the IRS called in the prosecutors first . . . No taxpayer has been brought to court over these shelters, and no judge has ruled on whether they “work,” in the jargon of the tax-shelter business . . . . The KPMG case attempts to short-circuit the messy business of proving that a tax shelter is illegal by using the power of prosecution to target the tax cadvisers directly . . . KPMG’s partners in this case believed they were selling shelters that were entirely legal, and the underlying legality of those shelters has never been formally challenged. Yet the government has come down on those accountants and tax lawyers as if they belonged to the mob. (October 6, 2005)
And at that, the Journal’s editorial writers did not know what had gone on behind the scenes.
Merely to threaten an indictment of KPMG was to threaten corporate death.
On February 18, O’Kelley, as the firm’s CEO, sent a reassuring memorandum to the firm’s partners. He promised them that any “present or former members of the firm asked to appear [before the U.S. prosecutors] will be represented at the firm’s expense.” But one week later, at a meeting with prosecutors, attorney Bennett declared that the firm’s concern was with its own survival, not with the plight of any individual. The example of Arthur Andersen—an innocent firm destroyed by an indictment—was clearly on everyone’s mind. Merely to threaten an indictment of KPMG was to threaten corporate death.
And that is just what the prosecutors began to do. When Bennett mentioned the fact that KPMG would be paying for its partners’ legal fees, the government’s lead attorney replied that “misconduct” should not be “rewarded” by the firm. (Whatever became of “innocent until proven guilty”?) Another government attorney said that if KPMG were not legally bound to pay such fees but did, “we’ll look at that under a microscope.”
The implication could not have been plainer: Cooperate. Give us the guys we want—bound hand and foot. If you resist, we’ll destroy you.
Let me make plain what was not going on at this point. KPMG had not conducted an internal investigation and decided that certain employees were guilty of “misconduct.” KPMG was not saying, “Yes, we have determined to our satisfaction that these people did something illegal, but we are going to help them mount a defense anyway.” The government was not asking KPMG to stop helping partners hide crimes known to the firm.
The government was demanding that KPMG deprive its partners of the ability to prove they did not commit crimes. And so it did. KPMG told its partners’ lawyers that their clients had ten days to comply with government demands. If they did not, legal fees would be cut off.
Once the partners had thus been rendered almost helpless, the government began to prosecute.
The details of the KPMG prosecution will be a story for another time—a time when the whole affair is finished. My sole object in this article is to celebrate a hero who emerged from the mess to call a halt to the government’s behavior: Judge Lewis A. Kaplan.
In June 2006, Judge Kaplan noted that “it had been the longstanding voluntary practice of KPMG to advance and pay legal fees, without a present cap or condition of cooperation with the government, for counsel for partners, principals, and employees of the firm.” It was a private arrangement, to be sure, and the government did not literally forbid it. But “KPMG refused to pay because the government held the proverbial gun to its head”—the imminent-death experience of waterboarding. And that, Kaplan believed, undermined the fundamental nature of American justice, which is the adversarial process.
Kaplan tried to remedy the situation by agreeing to hear a suit in which the defendants would proceed against KPMG for their legal expenses. But the Second Circuit Court of Appeals rejected that course and pointedly noted that Kaplan, if he felt justice had been fundamentally undermined, could always dismiss the government’s case.
So, that is exactly what he did, saying that the prosecutors’ behavior “shocks the conscience.”
Quoting a Supreme Court decision, Kaplan declared that an American prosecutor “is the representative not of an ordinary party to a controversy, but of a sovereignty whose obligation is to govern impartially, and whose interest, therefore, in a criminal prosecution is not that it shall win but that justice shall be done.” During the last half-century, the prosecutors of so-called “white collar” crime seem to have forgotten that simple truth.
Of course, Judge Kaplan’s ringing decision is being appealed by the government, and one can only hope that it will be upheld. Or, if it is not upheld in full, we may at least hope that the appellate court will sustain Kaplan’s attempt to stop, once and for all, the “waterboarding” of American companies.
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