Law and Justice . . . and the Looting of America

"You go to court for law; not justice.  Law and justice are not the same thing. Never confuse them."

Those words were spoken back in 1963, not by a supreme court justice, not by a lawyer, but by a street cop I knew. He was my father.  The statement was made as a throw-away remark reflecting on a day in which he appeared in court as the arresting officer on a case in which he believed Dame Justice had suffered not a miscarriage, but an abortion. In his observation, it was regrettable, though not uncommon.

Those words are as true now as they were then, perhaps more so.  I listen to the clamoring of the public for justice to be done to the white collar thieves who have mugged society of one third of its wealth with apparent impunity. But the problem with the public's rightful demand is that they are seeking justice through a legal system.  Again, as my father noted, the legal process dispenses law, not justice.

Justice is a moral concept that pervades society in various hues, and by no means with unanimous consensus. Law attempts to bring structure and consistency and, hypothetically, a degree of predictability of outcome in its application.  And, did I mention fairness?  Oh, yes, that too.  But we all know that it doesn't work that way for a variety of reasons, not least of which is that it is a human enterprise and thus burdened with inevitable imperfection to some degree.

Now, I'm not a lawyer. I'm an accountant by training and an auditor of some experience. My perceptions regarding the public's cry for justice in the sub-prime/bailout/et al fiasco come from an auditor's perspective, and a light sprinkling of borrowed street-cop wisdom.  So let's field test the assumption of easy prosecution of the sub-prime malefactors from that perspective and see how it can scale up to wholesale indictments, prosecutions, convictions, and imprisonment. (We'll ignore restitution as a practical matter.)

On a good day in a simple situation, an auditor (and presumably most investigators) who suspects fraud must step extremely carefully.  Before he/she can conclude that a subject individual has committed fraud, he must first satisfy himself that the internal policies and control system of the entity were sufficiently proper that the misappropriation of assets could only be explained by a concerted, intentional breach; i.e. "innocent until proved guilty".  A smart fraudster, understanding that threshold of proof, will endeavor to work weaknesses in the system that will alibi his actions to look like innocent errors or 'bad business judgement' within a poorly defined or ambiguous system, rather than a deliberate violation of procedure.  Nobody goes to jail for 'looking stupid' if the business environment lends sufficient credibility to that argument. This is the situation for a plain vanilla fraud involving one perpetrator in one entity with no other involvement.

Now let's step it up a notch.  Internal control systems ASSUME that individuals as a group are basically honest, and will not collude as a group to defraud an entity.  It is on that basis that segregation of duties is created to assure that no one individual has sole control of assets and can perpetrate a fraud without observation by someone else who can question his actions.  But once two or more individuals in the right positions are willing to collude, that theory goes out the window, and internal control systems are compromised.  Investigation and prosecution becomes more challenging, but not impossible.

If the fraud involves multiple entities, it becomes yet more complex if the entities are active players and not just paper companies.   

If the fraud is pervasive in the organization, the person you're going to want to touch is the highest level individual responsible.  But with height in the corporate pyramid comes power, and ironically, the counter-intuitive defense that we've all heard too often of 'plausible deniability'  (Honest to God, I didn't know that THEY were doing THAT), as employed by a couple of Presidents of the country's biggest 'corporation'.  So the stakes go up and so do the resources to do battle.

Flash back to Enron. This was one very large and complex entity.  The SEC investigation of the Company began in October, 2001. Mr. Skilling was arrested in February, 2004 and convicted in May, 2006, based on evidence and testimony of several lower level executives who were rolled up steadily to secure sufficient qualified evidence to effectively prosecute Messrs. Lay and Skilling.  The tentacles of the Enron case reached into accomplices in Merrill Lynch and other entities.  Prosecution of the case was made challenging by the level of complexity in explaining the convoluted organizational structure and arcane financial machinations to "a jury of our peers", not all of whom are lawyers, CPAs and MBAs.

Enron was a piece of cake compared to the breadth, depth and impacts of the sub-prime et al grand theft. The Sub-prime theft involved massive individual and institutional collusion, both within and between organizations, on a scale that set a de-facto standard of business practice which creates the potential grounds for plausible deniability at a variety of levels.  The public may instinctively sense wrongdoing and intuitively assign blame, but the law, in its best application, does not operate on instinct and intuition. It operates on a body of facts that establish intent beyond a reasonable doubt.

But let's go farther.  Under the Bush administration, SEC resources were seriously constrained. During the Obama administration to date, Congress has delayed significant judicial appointments and starved other regulatory agencies of necessary resources and powers. In the case of the sub-prime grand larceny, there are far more major figures in far more institutions and they are all cumulatively far more powerful than Enron. This is not to excuse the government, particularly for its failure of due diligence within these constraints. It is simply to note that it enters this battle significantly outgunned, relative to the task.

The legal system in the US is not one that unilaterally dispenses Solomon-like wisdom.  It is a competitive battlefield. In this case, government prosecutors are fighting a hydra. If the Feds attack one of the heads ineffectively, they could make strategic blunders that could compromise follow-on efforts, and they cannot attack all at once, any more than the government could go directly after Lay and Skilling in Enron.

Let us also recognize that the Enron prosecution on a much more limited scale did not occur in the context of a potential national economic meltdown.  Sub-prime prosecutions are in such a context; and, unlike Enron, involve institutions that are at the heart of our financial system and rely on public confidence to function properly.  To proceed recklessly, or aggressively but ineffectively, could both fail to achieve the desired justice and further erode the public trust.

Finally, there is the politics of the situation. The operation of law in this country is supposed to be above politics. Supposed to be.  Whatever the intentions of the Obama administration may be, it does not operate in a political vacuum. Its efforts to regulate are not unilateral and free of opposition. Clearly its capacity for unfettered prosecution can be no greater, particularly in the context of competing crises.

To sum up, those who believe that the road to justice in the Sub-prime heist should be faster and broader than it is are probably clueless as to what it takes to work through the legal process. Or, if they are aware of the mechanics, they probably have not sufficiently fathomed that 'this ain't Enron'. This isn't a Clint Eastwood movie either (Hang 'Em High or Dirty Harry), though many times I too wish it was.

*  *  * 

One day, my father had to make a collar in a high risk part of town. This was back in the good old days, before SWAT teams. Hell, before portable radios were standard issue. He described the situation in which he apprehended the suspect without back-up in a bar known not to be cop-friendly.  Being young at that time, I asked naively if his gun was enough protection in such a situation. He replied that it wasn't the gun that protected him; it was the badge. "The badge says that I belong to the biggest organized gang in town; and if they mess with me, they'd better be ready for more of me."  He added that when people no longer respect the law, even the badge will not be sufficient protection.

Today, it takes SWAT teams and sometimes armored vehicles to do what he did alone.  It's not that he was John Wayne. It's that our society has fallen so far that a badge is not a shield, but a target.  And the worst of it is that it's not the street thugs who have brought us to this point. 

The new thieves use tools my father did not know of to steal sums he could not imagine. And one of those tools is law itself, so convoluted at times that it poses more danger to the innocent than the guilty. 

White collar crime. It once was considered a ' victimless crime '. Only if blood is a prerequisite for victim status.

Justice. it's a nice concept. Some day, maybe.  But not today. And probably not tomorrow.

Onward

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Copyright 2012