Posted May 1, 2010 4:40 AM CDT
By Anna Stolley Persky
Henry T. Nicholas III
Photo by Jebb Harris/The Orange County Register
When a federal judge in California blew away charges of fraud and conspiracy in a controversial stock-option backdating case in December, observers were stunned.
Prosecutors had claimed that Henry T. Nicholas III and William Ruehle, the high-profile co-founder and former CFO, respectively, of Broadcom Corp., concealed millions by illegally altering the stock options awarded to employees of the Irvine, Calif.-based technology firm.
But U.S. District Judge Cormac J. Carney instead found that prosecutors had tried to prevent three key witnesses from testifying, improperly contacted attorneys for defense witnesses and leaked grand jury information.
That was onerous in itself. What most startled observers was the stormy language Carney used to lash out at prosecutors. “The lead prosecutor somehow forgot that truth is never negotiable,” Carney charged in his Dec. 15 decision. “To submit this case to the jury would make a mockery ... of the constitutional right to due process.”
What’s more, Carney said, critics should put themselves in the defendants’ shoes: “You have only three witnesses ... and the government has intimidated and improperly influenced each one of them. Is that fair? Is that justice? I say absolutely not.”
Photo: AP Images
And Broadcom wasn’t the only case. Earlier last year, in a case also involving stock-option backdating, the 9th U.S. Circuit Court of Appeals at San Francisco reversed the conviction of Gregory Reyes and moderated the sentence for Stephanie Jensen, former officers of Brocade Communication Systems in San Jose, Calif.
Federal prosecutors also focused their aim on backdating—retroactively setting a stock price lower to boost the profits when an employee sells shares. It’s legal when account ed for, and high-tech companies in the 1990s used it to lure professionals in a competitive market.
In the Brocade case, however, prosecutors had told the jury that the company’s finance employees didn’t know about the backdating, although those workers had earlier told the FBI that they did, wrote Judge Mary M. Schroeder in an August opinion.
But Schroeder added an edge to the ruling, slamming the prosecutors for their tactics. “We do not tolerate a prosecutor asserting as a fact to the jury something known to be untrue or, at the very least, that the prosecution had very strong reason to doubt. ... There is no reason to tolerate such conduct here.”
Reyes’ appellate attorney, Seth Waxman of the Washington, D.C., office of Wilmer Cutler Pickering Hale and Dorr, declined comment, citing pending litigation.
It isn’t just the California backdating cases that have sparked courts to criticize prosecutors for questionable tactics. Recent prosecutions involving tax evasion, public corruption and terrorism have pushed judges beyond irritation into seething anger.
In cases throughout the country, including the high-profile pursuit of former Sen. Ted Stevens of Alaska, judges have reprimanded prosecutors for deliberately failing to produce potentially exculpatory information. In rulings like those for Broadcom and Brocade, prosecutors have been publicly slammed for manipulating the outcome.
“On a human level, you can understand that, in the heat of a case, a prosecutor’s emotions might take over, and they may be motivated to do whatever’s necessary to win,” says Ross Garber, a partner at Shipman & Goodwin in Hartford, Conn., who specializes in criminal defense. “But prosecutors have a higher duty that they can’t lose sight of, and that’s justice.”
Photo: Getty Images
In January the Department of Justice stepped in, revising rules for prosecutors on handling criminal discovery. The memo, by then-Deputy Attorney General David W. Ogden, establishes “the minimum considerations that prosecutors must undertake in every case.” The last revision, in 2006, required U.S. attorneys’ offices to take “a broad view” of evidence and err on the side of disclosure.
Ogden, now at WilmerHale, said in his Jan. 4 memo that each U.S. attorney’s office is expected to appoint a discovery coordinator who will attend a training conference in October. The department will also create an online directory of resources and produce a handbook on discovery and case management.
JUST WIN, OR WIN JUSTLY?
Justice’s inspector general, Glenn A. Fine, said in a November 2009 report that “restoring confidence in the department is an important and ongoing challenge.” Fine said the Justice Department has faced criticism for the politicization of hiring and firing, but that the department’s problems didn’t end there.
“While the department has taken important steps on the issues of politicized hiring and firing that we identified in our reports, the department is also faced with significant issues arising from several re cent prosecutions, including the prosecution of former Alaska Sen. Ted Stevens,” Fine said in the report.
“The department needs to ensure that the diligence, hard work and sound ethics of the overwhelming majority of department employees are not undermined by the few but highly visible incidents of potential misconduct.”
Few deny the hard work and diligence of prosecution. The Justice Department “wants prosecutors to make their cases,” says Joseph diGenova, former U.S. attorney in Washington, D.C., and now a partner at diGenova & Toensing. “And if anyone thinks it’s anything other than prosecute at any cost, then they are wrong.”
Others say that prosecutors are simply doing what they’ve always done: They are fighting to get criminals off the street, whether they are violent offenders or white-collar masterminds. Aggressive tactics have always been a weapon for prosecutors, as they are for any lawyers worth their pay, they say.
“Criminal prosecution is not a garden party,” says Jeffrey A. Taylor, former U.S. attorney for the District of Columbia. “It should be civil and professional—but, given the stakes, it must be hard-fought.”
Justice Department spokeswoman Laura Sweeney says that DOJ prosecutors “follow the facts and the law wherever they may lead.”
“Thousands of career prosecutors go into courtrooms around the country every day to hold accountable those who violate the laws,” Sweeney says. “We will continue to be aggressive, yet responsible, in our pursuit of justice for crime victims and the American people.”
But in United States v. Ruehle, Judge Carney found plenty of prosecutorial misconduct to complain about. The government, he said, “intimidated and improperly in fluenced” three witnesses critical to Ruehle’s defense.
One witness, who had left Broadcom, lost her new job after government investigators paid a visit to the company’s general counsel. Thus intimidated, she was told she would have to plead guilty to a felony to make her testimony “more convincing to a jury.” Another witness was threatened with prosecution if he stuck with earlier, truthful statements made to the SEC. And a third, the judge said, was forced to plead guilty to a crime he didn’t commit, in an effort to discredit any testimony that might benefit the defense.
The judge was so infuriated by the government’s witness intimidation that he dismissed all charges against them, as well as the stock-related counts against Ruehle and Nicholas. But for Nicholas, a flamboyant billionaire, he went even further.
Nicholas had been facing another spectacular set of charges that accused him of using and distributing a wide range of recreational drugs—including cocaine and Valium—and even threatening to kill anyone who talked about it. The second case was the subject of newspaper and magazine stories, including a Vanity Fair article, “Dr. Nicholas and Mr. Hyde: Sex, Lies and Underground Lairs,” based on allegations that Nicholas kept a specially constructed tunnel under his home to entertain himself and guests with prostitutes.
Citing a prosecution threat to subpoena Nicholas’ 13-year-old son to testify against his father, Carney gave the government three weeks to show cause why he shouldn’t drop the Nicholas drug case. On Jan. 7, the government dropped the drug charges.
THE SHADOW OF ENRON
Many Justice Department observers point to the collapse of the Enron Corp. as a watershed moment for federal prosecutors. In 2001 and 2002, Enron went from being one of the most influential and profitable companies in the U.S. to a paradigm of corporate corruption and mismanagement. As other examples of corporate deception followed, the Justice Department grew anxious to show that it was tough on greedy executives.
“Post-Enron, prosecutors became comfortable with casting a much broader net in the pursuit of fraud in the capital market,” says Jacob Frenkel, a former federal prosecutor and a partner at Shulman, Rogers, Gandal, Pordy & Ecker in Potomac, Md. “The Bush administration and opportunistic prosecutors saw the opportunity to bring high-profile, big-dollar cases against corporate leaders and public officials for how they conducted business. Even career prosecutors cannot ignore the clamor of Congress, the public and senior Justice Department officials to pursue aggressively and win these cases.”
And problems arise, critics say, when the Justice Department puts pressure on its lawyers to show strength by winning cases.
DiGenova says overzealous behavior occurs whenever the DOJ announces what he calls a “campaign du jour,” bringing the media spotlight and a promise to the public to punish the wrongdoers.
“The department announces to the world that it will stop these types of crimes,” says diGenova. “The department has invested too much.”
Patrick Collins, a partner at Perkins Coie and a former assistant U.S. attorney in Chicago, agrees that prosecutors can start cutting corners on a high-profile case.
“There can be a lot of pressure to win,” says Collins. “You don’t want to embarrass yourself or your office. You know if you lose the case, the criticism will come in full force.”
Frank Quattrone (left) and attorney John Keker
Photo: AP Images
The Justice Department’s war on corporate crime produced a slew of prosecutions against executives. However, some higher-profile cases resulted in acquittals or reversals upon appeal. In 2003, the trial of Frank Quattrone, a former Credit Suisse First Boston banker accused of obstruction of justice, ended in a hung jury. In a second trial in 2004, Quattrone was convicted, but that was reversed upon appeal.
In 2005, the Justice Department’s massive fraud case against Richard Scrushy, founder of HealthSouth Corp., resulted in an acquittal. Four months later, the government brought a new case of fraud and bribery against Scrushy and won a conviction, but that case has been tainted by charges that it was politically motivated. The conviction has thus far been upheld on appeal.
“In attempting to convey a sweeping deterrent message, the government has repeatedly overcharged as criminal violations what often is untimely or incorrect business judgment,” Frenkel says. “While many without resources end up pleading guilty, those who can fight are winning acquittals or reversals upon appeal.”
Even the much-ballyhooed prosecution of Arthur Andersen crumbled upon appellate scrutiny. While the accounting firm was convicted of obstruction of justice, the U.S. Supreme Court unanimously ruled in 2005 that the jury instructions were flawed and sent the case back for another trial. By then, Andersen had disintegrated, and prosecutors did not push for a retrial. In the high court’s ruling, Chief Justice William H. Rehnquist said prosecutors should have shown more restraint in their pursuit of the case.
More recently, federal prosecutors dropped fraud charges against David Stockman, a former budget director in the Reagan administration and ex-CEO of Collins & Aikman. Prosecutors had said that Stockman knew Collins was in financial trouble and manipulated the company’s earnings reports to hide evidence that the auto parts supplier was in a downward slide.
And in November 2009, a jury in New York City acquitted two former Bear Stearns hedge-fund managers accused of securities fraud. The case was widely viewed as the first of many to be filed in an attempt to hold Wall Street executives responsible for wrongdoing that precipitated the credit crisis and current recession.
But some former prosecutors say that it’s unfair to lump all these cases together to conclude there is a widespread problem.
“For every one of these high-profile, problematic cases, there are hundreds prosecuted every day in courthouses throughout this country where prosecutors have upheld the highest traditions of their office,” says Taylor, now managing partner of Ernst & Young’s fraud investigation & dispute services practice in Washington, D.C.
A STRETCH OF SETBACKS
In 2006, federal prosecutors successfully convicted former Enron CEO Jeffrey Skilling for fraud. But now the U.S. Supreme Court is reviewing his case, along with several other appeals related to the Justice Department’s prosecution under the federal honest-services fraud statute.
The law—which took its current legislative form in 1988—makes it a crime for public officials and corporate executives to deprive citizens or shareholders of their “right of honest services.” Critics say that the law is hopelessly vague, giving prosecutors too much discretion. In February, Justice Antonin Scalia wrote in dissent to a denial of cert for a 7th Circuit case that the law, though only 28 words in length, has “been invoked to impose criminal penalties upon a staggeringly broad swath of behavior.”
In December, the high court heard arguments against the statute by lawyers for newspaper mogul Conrad Black and former Alaska state Rep. Bruce Weyhrauch. Some justices appeared to signal they were looking for ways to scale back the 21-year-old statute. The court will hear Skilling’s appeal this spring.
The Justice Department has long argued that the honest-services law is an indispensable tool for fighting corruption. Legal observers predict that the Supreme Court is poised to better define the scope of the statute and rein in more ambitious interpretations of its breadth.
But to Harvey Silverglate, a criminal defense attorney and author of Three Felonies a Day: How the Feds Target the Innocent, the honest-services law is just one in a series of overly broad statutes that give prosecutors too much power.
“Federal criminal statutes by and large used in the majority of indictments are characterized as criminalizing means without specifying the nature of the criminal conduct,” says Silverglate, who is of counsel at Zalkind, Rodriguez, Lunt & Duncan in Boston.
“Because there is no such thing as federal common law, it is difficult to know the definition and perimeters of a crime such as fraud. Hundreds of years of winnowing and defining and narrowing down what fraud means in our state systems does not help us understand what fraud is in the federal system.”
Silverglate adds that the problem of prosecutors using broadly worded statutes goes far beyond the financial realm into other cases, such as those brought against politicians. Silverglate says that U.S. prose cu tors have pursued a variety of cases against state and local politicians under vaguely worded federal law, with sometimes novel or “creative” theories.
Taylor agrees that white-collar and political cases can involve a bit more prosecutorial creativity, but he insists that this should go hand in hand with a cautious attitude. Still, the role of prosecutors is to pursue criminals, and the public should want them to exhibit some resourcefulness in how they do their job, Taylor says.
“We want prosecutors and investigators to be aggressive in ferreting out and bringing to justice offenders,” says Taylor. “Most prosecutions involve violent crime or narcotics offenses where it is very clear a crime has been committed, but the challenge is to identify the perpetrator. In white-collar cases, it is often clear who acted, but it is not clear that those actions, though perhaps not appropriate, constitute a crime.”
Taylor adds, “In light of that ambiguity, the government has to tread carefully, but that ambiguity can’t mean that the government abdicates responsibility for pros ecuting white-collar crime.”
Justice Department critics say that, in some cases, the decision to pursue indictments seems arbitrary. Defense lawyers in the Reyes case, for example, pointed out that backdating has been common at hundreds of companies.
“An indictment is the equivalent of a nuclear weapon,” says Garber, who co-chairs the National Association of Criminal Defense Lawyers’ white-collar crime committee. “When there’s misconduct of some kind, there are often lots of ways to address that misconduct. An indictment and a criminal prosecution are very blunt instruments with dramatic consequences. In my experience, sometimes prosecutors lose sight of that.”
Some say federal prosecutors pushed the margins in their pursuit of former Illinois Gov. Rod Blagojevich. In an apparent effort to get information on the governor, prosecutors brought criminal charges against gubernatorial adviser Christopher Kelly three times in two years. He eventually pleaded guilty in two of the cases but then died in a suspected suicide.
After Kelly’s death, Scott Fawell, once a top aide to former Illinois Gov. George Ryan, said that the government “has some responsibility, some blood on its hands, for what happened to Chris Kelly.”
But Collins says statements like that go too far. There are gray areas and complications in prosecutorial conduct because the public demands that they do what it takes to catch and punish “the bad guys.”
“Certainly prosecutors can abuse their power, but it’s not all black and white,” Collins says. “There’s no rule that says you can’t indict somebody three times. There’s no rule that says you can’t arrest a governor at his home.”
In the wake of the 9/11 attacks, the Justice Department stepped up prosecutions of suspected terrorists. And in a particularly sensational turn of events, one former terrorism prosecutor in Detroit, Richard G. Convertino, was accused of withholding evidence in trial and eventually prosecuted by other Justice Department lawyers. A jury acquitted Convertino in 2007.
Another Justice Department embarrassment came with the collapse of a tax-shelter fraud case against 16 former KPMG employees. In July 2007, U.S. District Judge Lewis A. Kaplan dismissed 13 of the 16 indictments because, he said, the defendants’ constitutional rights had been violated. Kaplan described as “outrageous and shocking” a prosecution threat to indict the accounting company if it paid the legal bills for its former employees’ defense. In August 2008, the 2nd Circuit at New York City upheld the judge’s dismissal.
Photo: AP Images
And then last year came the highest-profile debacle of them all—the failed public-corruption case against Stevens, the Republican senator. In April 2009, U.S. District Judge Emmet G. Sullivan in Washington, D.C., voided Stevens’ conviction and appointed Henry F. Schuelke III, a well-known Washington lawyer, to investigate whether the members of the trial team should be prosecuted for criminal contempt.
In his November report, Fine said the Justice Department’s handling of the Stevens case “created concern about the prosecutors’ adherence to professional standards of conduct.”
Defense bar critics say that prosecutors too often skirt over ethical rules, especially as they take their cases to trial. In fact, much of Ogden’s January memorandum addresses the obligation to disclose evidence. Among them are two key Supreme Court decisions—1963’s Brady v. Maryland and Giglio v. United States, issued in 1972—that require prosecutors to turn over potentially exculpatory evidence.
The memo also discusses the Jencks Act, which requires prosecutors to turn over witness statements and materials relied on by the prosecution if the defense counsel is preparing to cross-examine a prosecution witness.
But Justice officials say that since 2000, its Office of Professional Responsibility has con ducted investigations of 107 allegations of Brady/Giglio violations. The OPR determined that Justice attorneys committed professional misconduct on only 15 occasions while handling roughly 680,000 criminal cases.
The justice department also announced a pilot project aimed at figuring out how best to collect and organize information from multiple sources so that nothing important falls through the cracks. The DOJ is even appointing a senior lawyer to review and oversee all evidence-sharing issues.
But Taylor predicts that Brady disputes will continue to be a battling point between prosecutors and defense lawyers.
“As long as we have an adversarial criminal justice system, there will be vigorous disagreements among prosecutors, defense attorneys and judges about what constitutes Brady evidence,” Taylor says. “Not to trivialize this important issue, but it can be a bit like calling balls and strikes. The prudent prosecutor should always try to throw the ball over the middle of the plate.”
But criminal defense lawyers say the problem is that prosecutorial power is an inherent part of the system and, when unchecked, can be abused.
“Prosecutors have enormous power—the power to indict, the power to subpoena,” Collins says. “The criminal justice system is laden with prosecutorial discretion, and this power can be used appropriately and inappropriately.”
Some lawyers say the Justice Department’s prosecutors have been given leeway by judges and their own supervisors for too long.
“The department has been AWOL in supervising the ethics of its prosecutors,” says diGenova.
But the DOJ’s Sweeney responds that Justice “has rigorous policies and practices in place to help prosecutors make prosecutorial decisions that often arise throughout the course of investigation and trial.”
While some critics urge stricter rules for prosecutors and better supervision, other lawyers say Justice is incapable of regulating itself. Silverglate says it is filled with ambitious prosecutors—“lifers in the department”—who truly “believe that their coun try is beset by fraud.” They think creative tactics in tackling crime are necessary to get the job done, he says.
“This problem is not going to be resolved by our depending on prosecutors suddenly getting religion. It is not going to happen,” says Silverglate. “There’s no chance of reform from the inside. The culture has simply become too corrupt and too widespread.”
Silverglate says it is “up to civil society to launch a counteroffensive in order to cure this problem.” He says the press following DOJ cases must look at indictments and prosecutorial conduct with a more critical eye. He adds that federal judges are too lenient with the department, noting recent exceptions such as the Stevens case.
“Judges have to see these plea bargains for what they are—corruptions of justice—and judges have to examine these indictments more carefully,” Silverglate says. “Bar associations have a role too—they have to stand up for the integrity of their profession.”
Lawyers critical of U.S. prosecutors also urge their fellow defense counsel to get more aggressive and do less plea-bargaining on behalf of clients, even when they think they can get a good deal in a weak case.
“Defense lawyers can speak up and they should. They have to be vigilant,” Collins says. “Defense lawyers have to shout from the mountaintops when they see an abuse.”
Anna Stolley Persky is a freelance writer based in Washington, D.C.