Michael:

Many people have wondered why it has taken so long for the corporate scandals of the past few years to result in convictions. Perhaps they should take a closer look at the the ‘fine print’ of our nation’s securities fraud legislation.

The importance of this ‘fine print’ is currently on display in the trial of Tyco CEO L. Dennis Kozlowski and former chief financial officer Mark Swartz. The two men are accused of stealing $170 million from Tyco to finance their lavish lifestyles by taking unauthorized bonuses and abusing company loan programs as well as reaping an additional $430 million by inflating Tyco stock prices via improper accounting and then dumping their shares from 1995 through 2002.

A conviction requires that the men were motivated in these activities by ‘criminal intent.’ It appears that the definition of this critical ‘term’ is stumping the very people who most need to understand it: the jury. From an A.P. story on the trial:

NEW YORK - Jurors at the Tyco International grand larceny trial asked a judge Tuesday to explain the term “criminal intent,” the second time they have requested that explanation in four days of deliberations.

In making the request, the panel asked state Supreme Court Justice Michael Obus to “go slowly” this time in giving his explanation.

On Friday, under protest from prosecutors, Obus informed the jury that criminal intent was meant to describe a defendant’s state of mind, and that there was no separate definition of the term.

“That’s what the law says,” Obus told the prosecution on Friday. “I know you’re not crazy about it, but we just work here.”

Adding in impossible-to-objectively-prove criteria like “criminal intent” is a wonderful way to let legislators appear to be doing something about the bad guys without, um, actually doing anything about the bad guys. (Where would the law--that paradigm of intellectual precision--be without its metaphysical mysteries like 'intent' and 'the reasonable man'?)

Truth-in-advertising applied to the legislative process would reveal that an amazing amount of the laws on the books are riddled with this kind of semantic nonsense. Of course, the heavy campaign contributions of the securities’ industry to Congress wouldn’t have anything to do with this sort of clever drafting, would it?

I can hear the objections now. I mean, haven't most of us--at one time or another--ended up with some large fraction of $600 million in our pockets as a result of forgiven corporate loans, bonuses granted during informal board meetings where no minutes were kept and as a result of regrettably inflated financial results given out to the investing public? And that surely didn't mean that we had 'criminal intent,' right? It was all just an honest mistake!

If eliminating intent, criminal or otherwise, as a requirement for securities fraud seems too draconian for you, I have another suggestion. Let's get rid of securities fraud as a crime. The way it currently is, the public is duped into thinking that having their money stolen by crooked management is a crime, and it probably isn't--unless the light-fingered managers happen to go in for tape-recorded soliloquoys on their motives while they're putting their hands in the till. At least with no securities fraud laws, we'd know where we (currently) really stand.

Just remember the next time you invest in the stock market: it’s perfectly safe--the government is on the job.

Cheers,

Friedrich

Nearly every crime in this country requires a showing of criminal intent. If Kozlowski had killed someone, or stolen a car, or lied to the prosecutors under oath (a la Martha), the state would have to show the same thing to convict him of a crime -- criminal intent.

Very few crimes do not require a showing of criminal intent -- statutory rape is an example of this rare sort of strict liability crime.

While having to prove criminal intent certainly makes it harder to convict a person of a crime, it's hardly prevented prosecutors from achieving criminal convictions in the past.

Posted by: Mike O'Sullivan on March 24, 2004 1:51 AM

Mr. O'Sullivan:

So you're okay with laws, like securities fraud, which pretend to safeguard the public but can, in fact, be gotten around easily? Take Enron--obviously hiding billions of dollars of debt off balance sheet was good for the stock market price and bad for investors who believed, silly fools, in the published Enron balance sheet. But did it show criminal intent? After all, those off-balance sheet transactions were all blessed by high priced lawyers and accountants. The poor, no doubt unjustly maligned management of Enron may have just been getting really bad professional advice. (Not that giving really bad professional advice seems to carry any penalty for such professionals. After all, they're professionals, and granted great latitude by the government, a privilege they've been able to turn into significant income from, er, enabling securities fraud. And of course these professionals were shocked, simply shocked, at the evaporation of trillions of dollars in Ordinary Joes' retirement accounts a few years ago.) Now, see, personally, I don't believe the 'bad advice' theory for a minute--I think the high priced advice was, ahem, bought and paid for, so to speak--but can I prove it? Apparently the government has trouble proving such intent, or no doubt a bunch of Enron-ites would be languishing in the slammer now.

So maybe securities' fraud is a case a la statutory rape in which the huge disparity in information (and 'expertise') available to insiders vs. outsiders makes it reasonable to lose the intent requirement, which is grotesquely difficult from an evidentiary point of view.

Alternatively, as I suggest in the post, if we're going to keep 'intent' on board in these issues, it would be truth in advertising to just lose the laws altogether. At least the Average Joe would then have a more accurate notion of what he could be in for when he puts his hard-earned money in the market. Of couse, the securities industry doesn't want that--they prefer the status quo where it looks like investors are protected, but really aren't--easier to shear the sheep that way, huh?

And are you seriously discussing the Martha Stewart case as a triumph of justice? Remember, she got jail time for foolishly talking to the FBI, not for securities fraud. Lets see how many executives cooperate with such investigations in the future.

Posted by: Friedrich von Blowhard on March 24, 2004 4:37 AM

Sorry, Mr. O'Sullivan, but you wouldn't happen to be a lawyer, would you? 'Cause it looks to me (as a non-lawyer) as if lawyers have a conflict of interest here, big time. An unclear, murky, promise-far-more-than-it-can-deliver legal system is sort of tailor-made to boost attorney incomes, wouldn't you say? Whereas relatively clear laws, or, heaven forbid, simply fewer laws would be kinda bad for business, legalistically speaking, no?

Posted by: Friedrich von Blowhard on March 24, 2004 4:46 AM

At common (criminal) law, there were two kinds of intent, "Specific" and "General". Specific intent crimes required not only that the defendant committed the criminal act but that he specifically intended to commit the act defined as a crime. General intent crimes only require proof that the defendant actually committed the act. The commission itself is evidence of the intent: "I didn't intend to crack that safe!!" doesn't go far as a defense.

I haven't read any of the statutory law relevant to this case, but I would guess that the problem might arise from confusion over what kind of intent "criminal intent" is -- specific or general? Is evidence that the Tyco execs did what they did enough to convict them, or does the jury have to find that they committed the criminal acts they are accused of, and that they specifically intended to commit those criminal acts?

Either way, it sounds to me like the prosecution may have done a poor job of making it clear to the jury just what the defendants did wrong, under the law. And it could certainly be that the relevant statutes are vague enough that it makes doing this difficult.

Posted by: Twn on March 24, 2004 10:19 AM

I think assisting in a greater definition of "criminal intent" is perfectly reasonable here, or else, as FvB says, get rid of the notion of "intent." Holding "informal board meetings where no minutes were kept" is enough, right there, for me to assume criminal intent. Do I have x-ray vision into their souls? No. I think any time normal public company procedures are ignored, one can either assume criminal intent, or assume that I don't care what their intent was. Criminal it is. Why didn't lawmakers state that? For instance, another element in this trial is loans which were "forgiven" and which no disclosures were made in their public filings related to officer compensation. Another slim hole to slip through in the was some OTHER regulation was drafted? Or, is simply not publishing it enough to assume "criminal"? If it is an important element in determining if a crime has occurred, the WHAT IT IS and WHAT CONSTITUTES IT (i.e., "criminal intent") should be spelled out in the law. Or else it doesn't really matter.

Posted by: annette on March 24, 2004 10:22 AM

First, let me say that I find the conduct of the Tyco CEO and Board of Directors to be reprehensible. Their apparent breach of trust with their shareholders is conduct that I consider to be dishonorable, a position that I don't take lightly.

That said, let me present another angle on this:

If you can't figure out what conduct the law requires, if the papers can't figure out what the law requires, and if a jury can't figure out whether the conduct of the defendants was criminal (even after having the law explained "slowly" by a legal expert), why should Kozlowski and Swartz have known that what they were doing was criminal?

Posted by: Doug Sundseth on March 24, 2004 4:09 PM

Mr. Sundseth:

There you've put your finger on yet another sore point in the Majesty of the Law. To wit--it is often impossible for a citizen to really know in advance if they are within the bounds of the law or not. Not that I'm a big fan of Microsoft, but prior to its antitrust ordeal of a few years ago it could have submitted its vendor contracts and a description of its negotiating conduct to a dozen antitrust lawyers and I guarantee you would not have gotten 12 opinions saying that its behavior was clearly illegal under antitrust law. Of course, the enforcement of antitrust law is notoriously political, but I don't think that undermines my point--the exact scope of many, many laws exists only in the mind of the judge at your trial. And of course you can't consult him before you run afoul of the law. (I believe this aspect of the law was accurately summed up by Oliver Wendell Holmes when he described 'The Law' as "what we expect a court to do." Mind you, he didn't say, "what we know the court will do, but "what we expect it will do." I think a few minutes pondering that remark will unsettle most 'law abiding' people who take the time to think about it.)

Posted by: Friedrich von Blowhard on March 25, 2004 2:55 AM

let me try to explain criminal intent. the intent need not be to twirl your mustachios and go "Nyah ha ha!!!", it must simply be the intent to do the act which is defined as a crime. you neednt intend to be evil, you merely need to intend to put those 600 million in your pocket when you are forbidden to do so. if you can show that the six million dollars fell into your pocket, you have not the criminal intent.

Posted by: tony on March 25, 2004 2:40 PM






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