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Wednesday, September 30, 2009

Term Limits Motivate New York City Voters

The New York Times Metro Section "Tip Sheet" recognizes (or speculates) that outrage over the overturning of two popular term limits referenda by New York City Mayor Mike Bloomberg and a majority of the City Council will be one of the few topics motivating voters this November.    This is in the wake of a citywide office runoff election for which about eight percent of the eligible electorate (i.e., Democratic Party enrolled voters) turned out.  

What does the small turnout mean?  In my opinion, it signifies a lack of confidence that there is much of a difference between the choices, indifference or an absolute lack of confidence in the political system.   Rest assured, in a crisis, you would have riots in the streets and 95% turnout. 

This is a good time to remember that while we have a democratic system of voting, our system of representation is that of a constitutional republic.   This means that once we vote (or stay home, as most do), our elected officials then have our "imprimatur" to do pretty much as they please.   The people's most effective -- if not only -- voice is heard at the ballot box.   Whining and protesting the year after is relatively pointless.  

The only effective term limits these days seem to be the investigations and prosecutions (or guilty pleas) initiated and secured by the local United States Attorney's Office. 

Tuesday, September 29, 2009

Top Bergen Democratic Lawyer Admits Fraud, Pleads Guilty

In a potentially earth-shattering legal development that may rock both the legal and political worlds in much of Northern New Jersey and serve as one nail in the coffin of current Governor Jon Corzine's reelection bid, now we have another corruption-related guilty plea involving New Jersey politics.

The former counsel to the Bergen County Democratic Party, Dennis Oury, yesterday morning pled guilty to several criminal counts involving:
  • the failure to file a tax return,
  • conspiracy to commit mail fraud, and
  • the deprivation of "honest services" (a fraud upon the residents of the town of Bergenfield, NJ) for failing to disclose his ownership interest in an entity which was to receive certain consulting fees from the town, while he was acting as borough attorney -- for the same town.  
On Planet Earth, that's called a conflict of interest and the argument goes that the ownership interest was not disclosed on purpose because Oury may have feared not getting the fees/contract awarded if the conflict was disclosed.  See this blog's first rule:  Public Funds + Private Gain = Criminal Liability.    I feel the urge to stress that in these "honest services" cases, there is the involvement of public taxpayer funds.   Hence there is (or at least it is argued that there is) a duty towards the public.   There are commentators out there who criticize these prosecutions, but some of this criticism misses the point that what may be a common, ordinary business practice in the private sector -- albeit one which offends the "smell test" -- changes entirely when a duty to the public is involved.   Perhaps the presence of the public duty, and the corresponding obligation (both moral and legal) to put the public interest first and the private interest last, needs to be publicized more in some quarters so the public better understands. 

Read the latest report from the Record of Hackensack, NJ.
Read an early Star-Ledger report here.  (Their coverage is usually very good so check for updates at

Oury has been reported to have acted as the borough / township attorney for a host of municipalities through Bergen County and Hudson County.   Most recently, he was the zoning counsel for a developer of a commercial development below the Palisades cliffs in North Bergen, NJ which was roundly criticized by some local residents and environmental groups for fear that the development might destabilize the cliffs and cause flooding.   The township rejected these claims as unfounded and supported the development, which was approved by the Hudson County Planning Board this past summer. See this earlier report from the Record of Hackensack, NJ in June 2009.

And now time for an educated guess.   If Oury is as "connected" as the press reports suggest, he may have quite a bit of insider knowledge regarding the "process" by which certain "business" is done in Northern New Jersey.   Said matters may be of considerable interest to the authorities.   Oury's inclination to "cooperate" may be inclined to cause significant consternation, hand-wringing and perspiration in many political, real estate, financial and legal quarters in the northern half of New Jersey.   This is more earth-shattering than one may realize from the generic press reports.    

(In other words, being a white-collar criminal defense lawyer in New Jersey just got more lucrative.  Just like running a funeral home.  No shortage of new business.)

No word yet in reports as to whether Oury will in fact be "cooperating."  (In plain English, this means:  Tell us everything you know, and maybe we'll recommend the judge be lenient on you at sentencing.) Then again, not everything is said for public consumption.   In fact, if you read the press clippings carefully you'll get the same impression.  

Incidentally, Oury has a co-defendant, former Bergen Democratic chairman Joseph Ferriero, whose attorney Joseph Hayden was quoted in the Star-Ledger story (see link above) as saying Ferriero would not plead guilty and would go to trial; the trial is scheduled to start this Thursday.    The later Record story does not mention the cooperation possibility.   (We will be watching to see what happens.   Check back for updates.)

So how does this affect the gubernatorial race?   With exactly five weeks to go before election day and the polls not moving very much, Chris Christie (who was the sitting U.S. attorney when the investigations into Oury and Ferriero were begun) is ahead in every publicly-released poll.   The incumbent Governor Corzine seems to have no traction, despite some alarming (or puzzling) gaffes by Christie which seem to indicate that in fact he may not have been planning to run for office while he was still U.S. attorney.

Monday, September 28, 2009

The Death of Criminal Intent: Take a Look at this WSJ Opinion Piece

Continuing today's theme of too-smart-for-your-own-good legislators, check out an outstanding opinion piece from today's Wall Street Journal, courtesy of Gordon Crovitz.

Eric Dixon is a New York lawyer and strategic analyst who engages in crisis management and other matters. Mr. Dixon cautions readers that this article is not legal advice. Mr. Dixon may be contacted for further comment through, or at 917-696-2442.

Who Needs the Sixth Amendment? It's Jersey!

Today's you can about legislators -- or judges -- trying to sound smarter than they really are.   (See the next entry below about New York's Mayor Bloomberg trying to stop all smoking.)

Earlier this year, a New Jersey Supreme Court justice came up with a patently unconstitutional suggestion for stopping "witness intimidation": allow statements made by the "witnesses" to police or lawyers to be admitted into evidence and remove the defendants' right to confront or cross-examine the witnesses. (See an earlier Star-Ledger report here.) This top New Jersey jurist clearly forgot the Sixth Amendment to our United States Constitution, which provides in relevant part:
In all criminal prosecutions, the accused shall enjoy the be confronted with the witnesses against him...
There's one other serious, practical flaw about this suggestion.  The judge assumes that the new suggestion/law (of course, his law) is going to deter someone, who (in the case at hand) already allegedly violated Thou shalt not kill.   Basic laws already had no effect; now the judge (and a surprisingly wide cross-section of the New Jersey law enforcement community) believes another "witness protection" law will do the trick.

I speculate that throughout this process, no one actually went to a prospective, threatened witness to see what he/she thinks.

Here's my first point.   If I were that witness, I don't want another piece of paper as "protection."   (Go ask some battered spouses how much help their orders of protection gave them.)  I want relocation, a Kevlar vest, maybe a new name.  

Here's my second point.   If I am a criminal actually intent on intimidating a few witnesses, under the current system I can find out who plans to testify against me, and I can wait until I get close to trial to start the intimidation process.   Under the new proposal, maybe I cannot find out who they if I don't want to "take any chances" I'll think of everyone who might be a witness and try to intimidate that larger circle of people.   (See how the proposal puts a larger circle of people at risk.) 

Moreover, since under the proposal their statements to the cops can be admissible, I can't wait until I get close to trial.   I have to intimidate them right away before they talk to the Five-O, because I don't know if they've said anything and after all, I can't take a chance.   (See how the proposal puts this larger circle of people at risk, at a much earlier point in time, and for an indefinite period of time thereafter.) 

If this proposal actually gets passed, anyone who is a prospective witness -- including people who may have absolutely no intent on saying a word to anyone with a badge -- is in a "zone of danger" from which they will not emerge...until they're dead.   If this is what passes for "witness protection," there must be an Orwellian definition at play here.   This will be more like witness extermination!

If you really want to help the witness you have to make the commitment to spend money and effort.   This means that police, investigators and prosecutors must use some elbow grease.   But we hear -- almost as a reflex -- that these public servants, with their pensions, are simply overworked, underfunded and just not given the "resources."  So in New Jersey, the solutions are simply to violate basic constitutional rights for the administrative convenience of the State, or to give false comfort to some of our most vulnerable citizens.  

$top $moking: Why More Laws, or Stronger Laws, Just Won't Help

New York's would-be Maximum Leader Mayor-for-Life Mike Bloomberg now proposes that smoking be prohibited in all public places like parks and beaches.  A quick recap:  Smoking was banned in all restaurants and bars several years ago and one is hard-pressed to think of a public venue (e.g. train station, sports venue) where smoking is currently allowed.

The ostensible goal here is to change behavior, to get people to stop this nasty addiction  habit.  One wonders, given the tidal wave of anecdotal evidence about ticket blitzes, whether the real reason is revenue generation.  The City can fine someone for each violation.  At $100 per violation, a ticket taker will pay for his/her salary in probably a couple of minutes.

This brings me to a larger issue of politicians' temptation to enact new laws and regulations to change behavior -- which they of course can take credit for -- in contrast to the much harder and inglorious task of enforcing existing laws.   There is some behavior that cannot be stopped.   That is why we have prison.  If some of the critics of the Securities and Exchange Commission are to be believed (and I for one do not give the SEC a pass at all, see my earlier post on the "fools" at the SEC), the Bernard Madoff fraud only happened because the existing laws weren't strong enough.  

(This is the time to imagine the deeply-intoned voice of Don Pardo saying, "But if our laws had been on the books, this would never have happened.")

Wednesday, September 23, 2009

Sand on the Brain? South Florida Corruption Case Echoes Bid Rig

There is a breaking story from the South Florida Sun-Sentinel (Fort Lauderdale) about a federal corruption case that echoes the Bid Rig corruption busts in Northern New Jersey this past July.   One difference:  plastic bags were used to carry the money, not paper bags like in Hoboken.  

Several Broward County elected officials are scheduled to appear in federal district court this afternoon.   I expect -- but do not guarantee -- that some relevant court filings will become available later today (that means, tonight).

Monday, September 21, 2009

We Told You So: Federal Criminal Probe of Bank of America

Bank of America and its top executives have been under a long-running federal criminal investigation for at least the past six months, according to this report.

Sunday, September 20, 2009

No Privilege for You: Headline-Seeking Congressman Pushes for Investigation Targets to Waive Attorney-Client Privilege

There will be an article in the Monday 9-21-09 New York Times (click here) on how a United States congressman is demanding that certain Bank of America executives waive their attorney-client privilege with respect to matters pertaining to the BoA acquisition of Merrill Lynch last fall/winter.   This acquisition has previously received attention and criticism, including on the Crime, Politics and Policy blog, for the billions in undisclosed losses and bonuses to Merrill executives which suddenly became disclosed just days after a shareholder vote to approve the acquisition. 

There are other reports that BoA and / or its executives (and possibly others known and unknown) are "under investigation" -- whether this means civil and/or criminal cannot be ascertained at this time -- with respect to this matter.

It is interesting to note the implicit criticism of the assertion (before it is asserted, by the way, in this case) of the attorney-client privilege as being among the refuges of the guilty, the miscreant class, whatever you what to call them.    Perhaps it is good, from a public policy point of view, that the "presumption of innocence" in our Constitution is revealed as little more than empty words.   In reality, these executives are going to be found "guilty" in some sort of court of public opinion egged on by headline-seeking, politically-ambitious Congressmen playing to "the street."

In this situation, or in any situation involving a complex set of facts, it is important to have an investigation that is determined to focus on "the facts."   Extraneous influences should be most unwelcome as they can and often do contaminate the process.    Public outrage over government bailouts (e.g., TARP), failing banks and other issues should not be used as a cover to blundgeon corporate executives -- some of whom may be very, very innocent -- into waiving their constitutional rights under pressure from either investigators or public officeholders.

This is looking like a lynch mob where the "verdict:" has been preordained.   In such a situation, it would not be surprising for the counsel to any corporate executives "in the mix" to completely assert the attorney-client privilege out of nothing more than an abundance of caution.   In a highly-charged atmosphere, such as what exists now, it is possible that there is no "explanation" that is or could be "exculpatory" -- meaning that the members of the "court of public opinion" have for better or worse made their decision and will fit the "evidence" -- whatever they decide to accept -- to fit their "story" or version of events that comport with their preordained agenda.   Such executives should be exercising extreme caution and should avoid any temptation to "talk their way out of trouble."   Admittedly, their reputation may take a beating, but in this situation as it is shaping up, what truly matters is their future.

Some "targets" (according to the legal parlance) may be tempted to talk out of a misguided belief that there is actually a chance to convince their inquisitors of their innocence.   This may be a huge mistake.   Someone who has preordained an opinion about a topic before hearing both sides or considering all relevant evidence is someone who likely should be shunned and ignored -- and much more so if one is under "investigation" by the same type of person.    There are some corporate and political clients who believe -- amazingly -- that their words can part the Red Sea.   These people are delusional and often their own worst enemy.   Some clients should develop the intellectual maturity to realize that there are times when they will be confronted with judgers of their character or actions, whether they be actual judges in a court of law, prosecutors, investigators, private civil class action plaintiffs' attorneys or the press, and they need to develop the internal intestinal fortitude to be confident in their own position and simply wait until they get before an impartial trier of fact.   Admittedly, there are reputational consequences to this approach...but the alternatives are adverse financial consequences and legal jeopardy consequences which outweigh a reputational concern.

Saturday, September 19, 2009

Why New Jersey Elections Are Dirty

There is a question, "Who watches the watchers?"   This comes to mind after yesterday's news that one of the individuals mentioned in the huge corruption/bribery scandal in New Jersey is an investigator with the Hudson County Board of Elections.   The story adds that this is an appointed position. (Who does the hiring, one must ask.)

Read more from the Saturday Jersey Journal.

By the way, kudos to this chap's attorney, James Lisa, for pulling no punches on the magnitude of his client's mistake. 

Thursday, September 17, 2009

Hoboken Petitions Should Be Tossed to Uphold the Rule of Law (Even in Hudson County)

A report this morning on the apparently untimely petition filings by both of the two leading contestants for Hoboken mayor raises some interesting issues. As a New York election lawyer who has guided some candidates through the New York petition rules (derided as arcane, so rough they make the New Jersey election law look "Mickey Mouse" by comparison), I find some of the allegations disturbing.

First, the number of signatures required to run for Hoboken mayor is very small (one hundred) and almost doable for a single person on a single day. A candidate who cannot get the required number standing outside the PATH station, for example, simply has no business either running or crying disfranchisement.    The New Jersey requirements are Mickey Mouse compared to the professional operation required to run for any office or party position in New York State.  

Second, the New York rules are useful. They are often criticized, because their numerosity requirement (from several hundred to several thousand "valid" signatures) and strict time constraints (a statutorily-prescribed 38-day period) place a major burden on campaigns and often whittle down the candidate field.   However, they are somewhat effective in preventing fraud.   One rule requires the petition volume to be bound. This would prevent the addition or subtraction of pages from petitions, which may have happened yesterday. One report has already mentioned an allegation of pre-notarized signatures. Such signatures may be valid, but the notarization is fraudulent and a New York petition with such a notarization would face its wholesale invalidation.   In New York, petitions found to have been "permeated with fraud" are routinely invalidated, if for little other reason than to prevent lawbreakers and corner-cutters from gaining an unfair advantage over candidates who do play by the rules. 

If candidates were allowed "leeway" for certain reasons, there is the question of whether candidates in compliance were denied their fundamental equal protection right by the county clerk's office.
In my opinion, if the reports are correct, both Beth Mason and Dawn Zimmer are in jeopardy of being ineligible to run. Rules are rules, even in New Jersey. Especially after the recent corruption arrests (including that of Hoboken’s just-elected Mayor whose resignation this July is the reason for the new election coming up), the principle of the rule of law must be upheld.

Even in New Jersey.

Wednesday, September 16, 2009

Can You Go To Jail For Not Having Health Insurance? Baucus Plan Released.

Senate Finance Committee, chaired by Senator Max Baucus (D-Montana) has issued the proposed health insurance plan.   Read the full Baucus plan here.

The plan raises the specter of criminal liability for those who are not insured.   That is not stated, but here's how it would work.

Enforcement of the health insurance mandate will be done by checking a box on the federal tax return.  (This presumably means the Internal Revenue Service will enforce the requirement.)  Now, any false statement on a tax return is punishable under Section 1001 of Title 18 of the United States Code (the same section used to convict Martha Stewart) with a prison term of up to five years.   Then throw in the interesting statute known as Section 371 of Title 18, which covers among other things those actions which "defraud the United States." 

Simply put, there can be no assurance that, at some point in the future, some smart-aleck prosecutor in the halls of the Justice Department will not engage in mental masturbation and, in the process of trying to show how smart he/she is, will conjure up a claim that some hapless soul is "defrauding the United States" by failing to have the requisite health insurance and thus imposing a "cost" upon the state.

More thoughts...

The plan does allow for opting out, meaning individuals can weigh the costs and benefits and choose to pay a penalty instead of being insured.   The maximum penalty per person (if one has an income of more than triple the federal poverty level) is $950 per year, or about $79 per month.   Weigh that $79 penalty and the risk of non-coverage against a cheap, no-frills, high-deductible insurance plan where an insurance holder still runs the risk of being "denied coverage."  I think many will do just that.

Some tidbits from the plan:

See page 24 second paragraph: "for purposes of calculating household size, illegal immigrants will not be included in FPL (federal poverty level calculations)."

Also, page 31 first paragraph: "Exemptions from the requirement to have health coverage would be allowed for religious objections [which are currently allowed under Medicare], and for undocumented aliens."  

Somehow, this plan -- especially the penalty part -- seems almost assured of squeezing that portion of the middle class which is just above the threshold for subsidies and for escaping the non-coverage penalty, and by inducing those families to make a Hobson's choice between paying for the hope/prospect of health "coverage" (remember, coverage is not guaranteed), and the rent (or food) I suspect the plan will help push a good number of working families towards de facto poverty.  

Who benefits?   The insurance companies.   Anything that mandates that people pay the insurance companies will by definition benefit the insurers.   This equates to people's pain, for private insurers' gain.   This plan is little more than a way to transfer wealth from people's pockets and into the coffers of the very profitable insurance companies.    Some would call this crony capitalism.

Eric Dixon is a New York lawyer and strategic consultant for businesses, political campaigns and individuals. Mr. Dixon is available for comment or consultation at and 917-696-2442.

Why Suburbanites Should Care About NYC Term Limits

Several hours after the polls have closed for New York City primary elections (which in most districts are the de facto general election), it appears at least four incumbents supporting term limits will go down to defeat and a fifth incumbent (the Bronx's Maria Baez) trails by ninety votes in a three-way race likely to go to a recount.   The voters have spoken.

Now the main event -- the mayor's race -- is between putative Mayor-for-life Mike Bloomberg and current Comptroller William Thompson.

Anecdotal stories are emerging in recent weeks about how businesspeople and visitors are feeling nickel-and-dimed in New York.   Stories emerge of city residents being ticketed for imagined infractions and suffering penalties of over one hundred dollars each.   A picture takes shape of a City looking to soak its residents and businessowners at every turn, from overt taxes and fees to the unofficial "penalties" and "fines" which act as a hidden, capricious and arbitrary tax.

Numerous parking lot operators have told this author that their business has been down significantly in the last year.   Some parking lots in Manhattan have actually reduced their rates.   This is virtually unheard of.   However, in a recession these businesses are doing what they can to combat an increasingly hostile City government that is, in their view, taking an ever more adversarial approach to the people who live and work within it.

These changes and added hostility impact non-City residents as well.   Our suburban neighbors choose to live in the suburbs for various reasons, but let's focus on the fact that they live in our suburbs.   They are not living in Philadelphia's suburbs.   If they live in Englewood instead of Cherry Hill, in Greenwich instead of Hamden, it's because of our City.  

If they become less inclined to work here (for example, because of the City's increasing hostility towards all automobiles), shop here or seek entertainment here, our City suffers.  Our workers suffer.   Our suburban friends also have a stake in keeping our City free and open and friendly to all.   When the City becomes a less desirable place, the value of their homes in our suburbs will also decline.  The appeal of these leafy suburbs around our City has its genesis not in the leafy streets along the Hudson River or the North Shore, but in the appeal and magnetism of our City.   People want to be in the City -- at least some of the time -- and it is the appeal of the proximity to New York that makes these suburbs the highly-prized bedroom communities that they have become and remained over the decades. 

Our suburban friends and fellow businesses are not indifferent to the mayoral race.  They have a significant stake in this election as well and they may feel the pain and inconvenience of the changes described above.   This 'suburban army' is a secret, well-financed and motivated weapon in the battle to take back our City.   Those of us upset over the arrogance that gave rise to the evisceration of term limits should waste no time in using this precious resource in the upcoming general election.

Campaigns 101: How to Lose an Election (Yep, More Christie GOP Follies)

Whomever is running the Christie/Guadagno gubernatorial campaign over in New Jersey (the Republican challengers to incumbent Jon Corzine, D-Goldman Sachs) must secretly be on the Corzine payroll.   It is hard to explain the absolutely idiotic comments Lieutenant Governor nominee Kim Guadagno (the current Monmouth County Sheriff) said earlier today, as reported by   Guadagno says, in relevant part, that 'Anybody who says that Newark doesn't have a problem with crime isn't living in the world that we're living in.'

Attagirl.   That's the way to win over the Republican base and the independent voters.   Let's really tick off the rising up-and-comer Newark Mayor Cory Booker (D-Yale Law School), so he can demonstrate his get-out-the-vote prowess for Governor Corzine on November 2nd.   This way, we'll have a larger-than-usual Democratic margin of victory!   And while we're criticizing Newark, what do you think the owners of the New Jersey Devils NHL franchise and the two-year-old Prudential Center, two New Jersey investment bankers named Jeff Vanderbeek and Michael Gilfillian (D-Lehman Brothers), are thinking right about now?   Do you think they'll sit back and allow some country-club Republicans to put down the town in which they've made a major, major gambleinvestment?  

Attagirl.   That's the road to victory, putting a Bunsen burner under powerful, talented, wealthy and connected people with either something big to prove or a lot of vested interests to protect, and every reason to work hard against you for the general election.

Perhaps the Christie/Guadagno campaign thinks the general election is already won, given that every public poll has them up by at least five points and most have them up by at least eight points.   That must explain allowing the bottom candidate to be goaded into an absolutely stupid remark which, incidentally, can be spun into a crass, base racist appeal.   As distasteful as the remark is -- and it's likely untrue, given the author's personal experiences in the Brick City -- the fact that it was made is actually worse that its content.

This is shaping up to be one of the worst decisions ever made in New Jersey in the last forty years, behind John McVay's calling a run play late in the fourth quarter against the Eagles (you know, Pisarcik hands off to Csonka...Fumble!...Edwards recovers!...) and Jim McGreevey's appointment of Golan Cipel to his adminstration.

I guess the Christie/Guadagno campaign strategy is:  Wash foot, open mouth, insert foot, repeat.

Monday, September 14, 2009

Federal Judge: SEC Put Self-Aggrandizement First, Shareholder Protection Last

The distinguished federal judge Jed Rakoff, sitting in the Southern District of New York, strongly rebuked the Securities and Exchange Commission over its negotiations with the Bank of America to settle civil allegations filed by the SEC stemming from BoA's acquisition of the then-troubled Merrill Lynch in December 2008 and the alleged failure to adequately disclose to BoA shareholders the terms of the acquisition and the financial state of Merrill Lynch.

Read Judge Rakoff's decision here.

Regarding the proposed agreement Rakoff rejected, he minced no words in writing (page 4) that the proposed agreement "does not comport with the most elementary notions of justice and morality, in that it proposes that the shareholders who were the victims of the Bank's alleged misconduct now pay the penalty for that missconduct."  Rakoff further blasted the parties, writing that "the notion that Bank of America shareholders, having been lied to blatantly in connection with the multi-billion-dollar purchase of a huge, nearly-bankrupt company [Merrill], need to lose another $33 million of their money in order to 'better assess the quality and performance of management' is absurd." (Page 4.)

If Judge Rakoff's characterization and analysis is correct, the SEC's judgment will fall under even greater scrutiny and the calls for the SEC's dismantling (as an overhaul may not be sufficient) will likely increase.  

It is hard to see how such payments as provided for in the settlement were to benefit shareholders.  While such financial arrangements are common to settle class actions on behalf of the shareholder class, Judge Rakoff distinguishes the BoA-SEC settlement as anything but the proper exercise by management of its business judgment, writing at page 7:
“It is quite something else for the very management that is accused of having lied to its shareholders to determine how much of those victims’ money should be used to make the case against the management go away.”

It almost makes you question the basic premise that the SEC's primary objectives are to protect shareholders and seek redress for them wherever possible.    The judge's implication is that the settlement was a sweetheart deal.   Perhaps career aspirations were at play here...and this would not be the first time that government lawyers were suspected of doing that.    In fact, such allegations are commonly made in connection with criticisms that the SEC has often chosen small brokerage firms and individual brokers as enforcement targets, instead of the "titans of industry."   Like Bernard Madoff.

The SEC's credibility is not just under fire; its very legitimacy as an enforcement agency is now suspect.   And the legions of Madoff victims are going to be saying, "we told you so."

Financial Regulation Overhaul: New Tools for the Same Fools?

Every time I hear calls for a new regulatory structure to fight some "new" or "emerging" problem, I think first as to why the existing laws or regulatory structure were insufficient.   Then, I consider who has been doing the enforcing.

So-called improved or stricter laws will be useless, if the enforcers (the regulators or the "cops on the beat") are not up to the task.  

Perhaps the people doing the loudest screaming for new regulations are the same people whose incompetence led to the crisis they now profess to want to save us from.   By shouting for new laws, they can distract us from the bad job they did before.   In essence, their argument is:  The [whatever bad thing happened] because we didn't have "the tools" to do the job, and it's definitely not because we screwed up. 

A tip on human nature. People do not like to have their incompetence exposed. (Exhibit A:  Michael "Heck of a job" Brown, formerly of FEMA.  Exhibit B: Securities and Exchange Commission.)

After all, in just the past few years we have had the subprime mess, the overleveraging that blew up a few thought-to-be-too-big-to-fail investment banks and commercial banks, Marc Dreier or Bernard Madoff.

That's funny.   I thought Sarbanes-Oxley was supposed to prevent all that.

Sunday, September 13, 2009

The Cure Can Be Worse Than the Disease: Health Care Reform and Unintended Consequences

One permutation of the Democratic health care overhaul features a proposed "fine" of up to $3,800 on anyone who fails to sign up for insurance.   This could have a disastrous unintended consequence.   Such a "fine" -- also known as a "tax" or, even better, an "unfunded mandate" -- is likely to prompt insurers to raise their rates by close to that amount. As with any product or service, if I am charging you a rate (call it "A") and can pitch you on the idea that you have to pay "A" in order to avoid getting hit with the fine (call it "B"), there is nothing to prevent me from raising "A" to at least what "B" would cost you. This basic cause-and-effect principle is almost assured of causing rates to skyrocket virtually instantaneously.

President Obama pitched his health care initiative principles -- since there really isn't a plan yet -- on the basis that under the promised plan, "everyone will have insurance."  But access to health care is not a problem because there is the fallback of the emergency room.   There are people who complain, and rightfully, that health care is expensive.   It is expensive to get sick, or to have an accident.   This is why insurance is attractive, since having it promises that a major illness or accident will not bankrupt us and that we will get treatment. 

The problem is the affordability of the insurance and the growing realization that at a certain price point -- which many of us have passed -- the benefits of insurance do not match the cost.

One practical use of insurance is to finance care for major problems. Insurance is thought of as a way to get health care without going broke. However, at the current rates which amount to well in excess of $1,000 per month for a basic family plan in many Northeastern states, many families are already "cash flow negative" right now and they are slowly going broke anyway.   Arguably, they may stand a better chance of preserving what assets they have now, if they drop all insurance and play the odds of not getting a major sickness.   Remember, in this country no one is denied coverage; if you have the flu and show up in an emergency room, you get charity care treatment.   The illegal aliensundocumented already know this.   And guess what?   They won't be paying the $3,800 annual fine.   Thus they have a net benefit.

And by the way, what happens to the truly poor under the poverty line? What happens when their annual fines go unpaid and start accruing? How will these people ever escape poverty if after five years they owe $15,000 in fines to the government?  Talk about an unending cycle of poverty.   If this won't be the most efficient way of keeping people dirt poor, please suggest one that fits the bill.

In advance...everyone should periodically check for the bill (or bills) when proposed, so you can be better informed.   Don't trust the various synopses of the plans.   Read the details for yourselves.  You'll be a step or five ahead of your local congressman.

Saturday, September 12, 2009

The Desecration of David Stockman: Confusing Business Failure with Criminality

It is the approximate one year anniversary of a calamitious week in American financial history, when the credit markets came very close to seizing up, the federal government took control of Fannie Mae and Freddie Mac, and Lehman Brothers declared bankruptcy.  Several formerly too-big-to-fail institutions did just that in 2008 (or were reduced to a shadow of their former selves), and there are multiple civil and criminal investigations of these companies and their executives.  

It is time to remember how the reputation and life of a business leader and former high-profile presidential advisor was almost destroyed in the wake of a less-prominent business failure.

A few years ago, automotive parts manufacturer Collins & Aikman went into bankruptcy after trying to stave off its financial difficulties.   In the wake of this financial failure, a few of its top executives were criminally indicted on securities fraud charges of deceiving the company's shareholders and creditors.  

Among those charged was chief executive officer David Stockman.   If the name sounds familiar, think back to the Reagan Administration's first term.  Stockman was the Administration's budget director at a time when the Administration pushed through an ambitious series of tax cuts which were largely credited with sparking the country's economic renaissance in the 1980s.

Stockman claimed, essentially, that he was being prosecuted for business failure.   Ultimately, earlier this year, the federal government elected to withdraw its criminal charges in the "interests of justice."  (This brings to mind former Reagan Administration Labor Secretary Raymond Donovan's famous quote, "Which office do I go to, to get my reputation back?")

Here's to hoping the Justice Department is appropriately careful in assessing these companies' situations.   A business failure is not a crime.  A business failure may not even mean that its executives did anything wrong, whether we're talking about actual criminality, recklessness or negligence.   There may not even be "bad business judgment."   In fact, there may be cases where businesses fail in spite of their executives' actions...meaning those executives were a net plus to the situation.   Sometimes, businesses fail because the world is changing, markets respond differently, and the competitive forces in our economy mean that often there's a loser every time there's a winner.  

From my observation post, there have been a good number of criminal securities fraud cases involving executives who felt pressured to "meet the numbers" set by Wall Street analysts in order to avoid drops in their company's stock price.   When blame is pointed at executives the minute the stock price drops, unfortunately those executives inclined to skirt, flaunt or outright disregard the rules have a greater incentive to "pull out the stops" to avoid the event that would precipitate the price drop. 

(Full credit should go, however, to all those fortright and upstanding executives who are courageous enough to do the right thing and show the leadership that makes them qualified to run their companies.   These people often don't make it on CNBC, they don't have their names on buildings, they often serve with no fanfare, but they should be recognized.)

A few years ago, a number-two executive at a certain information technology company got on a plane to get a backdated contract signed in order to fudge meet the analysts' revenue numbers.   This same executive was part of a scheme to modify our Gregorian calendar to add a few days to a month...hence giving rise to a thirty-five day month.   (Just think about that for a second.)   Of course, said executive is now getting three hots and a cot, courtesy of your tax dollars and mine. 

Being a corporate executive who may have made a bad business judgment does not make one a felon, or "deserving" of jail time.   As should always be the case, the government needs to resist the calls from "the street" for hands to be cuffed (since heads can't roll).    A reputation, once lost, is hard to rebuild.    Someone owes David Stockman an apology.    And let's hope more mistakes aren't made going forward.

Thursday, September 10, 2009

Residential Housing to Drop Another 25%: Whitney

The banking analyst Meredith Whitney appeared on CNBC this morning (9/10) and predicted that residential housing could drop another 25% from current levels on the basis that banks did not issue mortgages during 2005-07 assuming that we would have 10% unemployment.     Remember that for many years, "unemployment" (measured as "U-3" by the Department of Labor) was in the 4%-5% range.  

In other words, the banks underestimated the risk of default on their mortgages.   Actually, the risk would seem to be much higher - and thus seriously underestimated - on all outstanding mortgages, since unemployment cuts across all segments of the homeowner universe.   The only difference in the mortgage age is that an older mortgage is presumed (if there's no HELOC on the same property) to have been paid down more, so that the borrower has more equity in the property and can sell more readily if necessary.   Borrowers without equity often cannot sell their properties without paying the balance (the difference between the mortgage balance and the net sale price) or their lenders agreeing to a short sale, and if that doesn't happen, foreclosure is likely.   Hence the recent rise in foreclosure rates.

But wait, aren't we coming out of a recession?

Technically, maybe.   Think about how a recession is defined.   A recession means that economic output is shrinking, relative to earlier periods; a non-recession (i.e. a period of very low growth) means precisely that, a period of barely increased economic output measured against an earlier period.   If you are going to use late 2008-early 2009 as your measuring stick, then its not hard to have increased output.   In fact, to have barely increased output screams that conditions are still bad.    As if many of you didn't already know that.

By the way, what happens when the government loses its ability to keep interest rates down?   What will happen to prices when a 30-year mortgage goes from 5% today to 8%?  Or 10%?  

Wednesday, September 9, 2009

Why Save the Phoenix Coyotes Hockey Club?

The sports world has an interesting controversy brewing, involving the intersection of bankruptcy law, creditors' rights and the corporate franchise rights of association. 

The Phoenix Coyotes hockey club (officially, Coyotes Hockey LLC) filed for bankruptcy protection this past May, and its principal owner has been trying to sell the Coyotes to the maker of the Blackberry (Jim Balsillie).   Balsille offered in excess of US$215 million to purchase the Coyotes out of bankruptcy, with one contingency -- he gets to move the Coyotes to Hamilton, Ontario.

The National Hockey League has objected to the Balsillie offer.   In fact, they have blocked him from purchasing several other teams in the past.   The acrimony must be so strong that the NHL has formally submitted a bid to the bankruptcy court for the Coyotes...for US$140 million.

Not surprisingly, current Coyotes ownership (which claims to also be a creditor/lender) prefers the Balsillie bid (which has now been raised to $245 million including $50 million to pay off Glendale, AZ for building a new arena and other improvements and lost future rent).  

If you were a creditor, you'd prefer the Balsillie bid too.   Excluding the payoff/go-away money to the small town in Arizona, there's a difference of more than $50 million.  

Why is the NHL so determined to keep the Coyotes in Arizona?   If the NHL bid is accepted by the bankruptcy court, there's the risk that the "comparable" value of all other hockey teams would be reduced by the smaller bid (although the NHL intends to then seek other permanent owners).    Why make every other franchise owner sustain -- at least in theory and on paper -- a reduction in the value of their franchise?   And, why stick all other owners with probably another $1.0 million expense (each team's pro rata share of the 2008-09 operating losses reported by the Coyotes last season in court filings as $27 million)?

On a business perspective, the Coyotes are not worth keeping in Phoenix.   Here's why:

(1)  The Coyotes only generated $13.3 million in ticket revenues, or about $330,000 per home game.   Add in suite and premium revenues and you have $21.7 million -- or $500,000 per home game.    That's an average of about $35 per capita for your reported average crowd of 14,000.    Subtract the suite and premium figure (for luxury boxes and similar high-end revenues) and the average revenue per fan might be in the $25 range.    At these numbers, it is not likely that the Phoenix market can generate more revenue, and at most attendance can go up four to five thousand per game.    Assuming $30 per head, that is a maximum of $5-6 million, barely a dent in a $27 million annual loss.

(2)  Before you ask, the Coyotes report revenues from concessions and merchandise to be less than $1.5 million.  That is a paltry figure when you have season attendance of about 600,000.

(3)  The Coyotes only generate $4.5 million from local market broadcast revenues, but the league rights get them an additional $8.4 million. 

(4)  Here's a whopper.   The Coyotes receive $13.5 million in revenue sharing as a small market club.   Subtract the subsidy, and the Coyotes are losing $40 million a year!

(5)  Total 2008-09 revenues for the Coyotes: $58.3 million with the subsidy; $42.8 million without it.

(6)  Total 2008-09 hockey-related expenses: $59.1 million.   Note that the Coyotes are near the league's salary floor (the minimum required by the NHL's collective bargaining agreement with its players' association) and their salaries for "cap purposes" were probably in the $40-41 million range.   That number cannot be reduced much more, unless league-wide revenues decline significantly.    Even a ten percent decline would yield potential savings of $4 million.

(7) Total reported 2008-09 expenses: $85.45 million. 

With these numbers, where is the road map to profitability for this franchise, in this market?

Answer:   There is none.   Perhaps the NHL believes it is a stronger league if it can maintain the right to approve its owners.   However, in this instance, rejecting Balsillie means every other owner is stuck with a smaller comparable value and an obligation to chip in pro rata on a clearly unsustainable franchise.   Moreover, the theoretical value of other franchises will decline if current owners/tomorrow's sellers are hampered in their choice of buyer.   (The same principle applies to owners of condos and co-ops dealing with an obstructionist board which won't approve a deal.)    There is a real significance to this dispute:  there are several other troubled franchises around the world of pro sports and the NHL in particular.   Just locally, it is likely that each of the Islanders, Devils, Nets and...yes, the Mets, have serious operating losses or debt service issues emanating from the franchise purchase or the construction of new facilities, or both.  

The NHL should act in the best interests of its fans, its other owners and the creditors of the Coyotes and let this team move to Hamilton, Ontario.

Eric Dixon is a New York lawyer and strategic consultant for businesses, political campaigns and individuals.  Mr. Dixon is available for comment or consultation at and 917-696-2442.

Massive Fraud? Yeah, Blame the Attorney!

Today's  New York Times business section has an article on the general counsel of Bank of America who was fired four days after BoA's gunshot wedding acquisition of Merrill Lynch in December 2008.   This was right around the same time that it was revealed to the world that Merrill had understated its bonus payouts and impending losses which ran into the billions.     The New York Attorney General, Andrew Cuomo, is weighing whether to file criminal charges under New York State's notorious Martin Act against several BoA executives for their failure to disclose material facts about the acquisition to BoA shareholders.

The Martin Act is not like the federal securities laws.   One aspect of the Martin Act is its dispensation of the need for criminal intent as an element of a felony.   This helps explain its power and reach, and why former AG Eliot Spitzer was so feared when he chose (unwisely, many commentators say -- and unfairly, many defense counsel say) to wield the Martin Act to fight what he considered to be corporate wrongdoing.  

The Times fails to give a clear and fair picture of the professional obligations constraining the bank's general counsel.  Timothy J. Mayopoulos, BoA's general counsel, is described in the Times article as having "cited legal ethics rules and declined to provide specifics on the advice he gave the bank [BoA]" when giving testimony in a deposition to Cuomo's office.   This is a misleading statement and makes the lawyer look bad.  

Here's the real deal:   Mayopoulos was not free to provide these specifics.   As a lawyer, he was and remains bound by the attorney-client privilege.   This privilege is generally sacrosanct, with some exceptions, and its violation can lead to a lawyer's professional sanction (which can include disbarment).   Lawyers in Mayopoulos' position are not free to speak, unless their client waives the privilege.   Therefore, Mayopoulos should not be viewed as an obstructionist.   Rather, this is a man who may well have done the "right thing," and paid for it with his job; furthermore, to add insult to injury, he may be suffering from the drip-drip-drip of unfounded and unofficial accusations and the sting of innuendo, which he cannot fight back against because he is still constrained by the privilege.  

To their credit, the Attorney General's office is preparing to disregard the assertions by BoA executives that they relied on legal counsel to justify their actions. 

There are too many clients out there who deceive their counsel, who hide or conceal information or who actively mislead them, and then seek to hide behind their "trusted professionals" -- or even point the blame at them -- while simultaneously enjoying the protection that the attorney-client privilege affords them.

Now, there are exceptions, and one is the "crime/fraud" exception.   However, that has to be proven, or admitted, and until that time, the privilege is in place, and a man's reputation continues to erode.

This lawyer may be a victim in this case.   He has paid...with his job, and with his reputation.   He deserved better from the Times, which failed to flesh out this important legal issue.

Two Dominoes Fall in the Soprano State

Two Jersey City officials pled guilty to federal criminal charges of attempted extortion in New Jersey federal district court in Newark, NJ this afternoon. 

Guy Catrillo and Mayer Khalil are the two officials.  According to prosecutors and the pleas, Catrillo and Khalil agreed to take $15,000 and $72,500 in bribes, respectively, from an undercover informant believed to be admitted-felon-and-cooperating-witness Solomon Dwek.   The difference in dollar amounts will account for the different ranges of projected jail time, with reports quoting prosecutors as saying Catrillo faces about two years while Khalil could face up to 87 months.  (There are sentencing guidelines, which are advisory, and that's an entirely different matter.) 

In keeping with this blog's policy of informing and educating you, see the Khalil criminal information and Catrillo criminal information for yourselves.

The Khalil information specifically names two other Jersey City officials -- Mariano Vega and Edward Cheatam, both of whom were arrested in the big Bid Rig arrests in July -- and Cheatam was indicted last month. 

Now...a related observation made earlier on this blog...Court filings pertaining to several of the arrested individuals seem to indicate (see next sentence) that these individuals are (through their counsel) in discussions about guilty pleas.  In fact, there are August 2009 filings (by the prosecution) regarding both Vega and Cheatam which petition the Court for an "extension of time" for the stated reason to allow for plea negotiations without violating the defendants' right to a speedy trial.   Note that these pleadings reflect either rushed, sloppy or intentionally misleading drafting by the prosecutors; someone subscribing to the latter explanation could view it as one way to exert pressure or impose embarrassment as a different form of pressure for the defendant to plead guilty.   In any event, those filings are public record, and both Vega and Cheatam were specifically named in today's criminal informations.   This may indicate that Vega and Cheatam are among the defendants who will plead guilty at some point...or it could indicate absolutely nothing.  (Another note:  nine days after the Vega extension was filed, Vega switched attorneys.)

In addition to the named other defendants, I also see a reference to unnamed "others" in the Khalil information.   Bet that many people who live or work in Jersey City will be reading it.  Who should be worried?

Tuesday, September 8, 2009

The Abandonment of Van Jones

The Obama Administration failed to defend Van Jones, one of its chosen "czars," over the weekend.   Van Jones was tossed overboard after a few days of controversy, as the Administration showed its about as gutless as the Clinton Administration.

Van Jones (real name: Anthony Jones) was a Yale Law School classmate of mine who had some radical progressive ideas back in the days of the Clinton Administration.   He caught my attention for no other reason than his interesting use of the square root symbol in place of the "V."  For those of you who spend most of your time on a different planet, Jones is a housing activist of some distinction who became was one of the "green czars" of the Obama Administration before his resignation being forced to fall on his own sword over the Labor Day weekend.

Van Jones and I probably disagreed on most issues, both then and now, and certainly we differ on temperament.   (We certainly disagree on cop-killer Mumia Abu-Jamal and on 9/11; Jones is wrong on both.)  There were many people in law school -- and for that matter in most of academia, whether as professors, administrators or students -- who would demonize personally anyone who disagreed with them on any issue of consequence to them.   However, it was -- and remains -- my impression that while Van was crazy, he was no phony.   He "walked the walk," and approached issues with more genuine sincerity than many of our colleagues who did and said things because it was in vogue, or politically correct, or an efficient way to score "brownie points." 

It is the character issue that makes me think that the Obama Administration is copying the very worst of the Clinton Administration.   Van Jones' politics and statements may offend many people, but here's one thing he deserves credit for:   he gives a damn.   This is a rare quality and ought to be embraced, regardless of where you are on the political spectrum.  

His perceived offenses are minor and did not warrant his removal.   Criticism is a part of the political game, whether its Washington, D.C. or Little Rock.   The Obama Administration should have stood up for him when the political firestorm (sure to be brief) hit.   The fact that the Administration scarcely hesitated before jettisoning Jones -- and then is leaking (if Drudge is to be believed) that he didn't fill out some questionnaire -- sends an alarming message that activists and acolytes are disposable, that leaving Van Jones to twist in the wind is acceptable collateral damage.

Progressives ought to be outraged at this treatment, and should be among the first to jump ship (if they aren't already).   The Obama Administration is following in the worst footsteps of the Clinton Administration in abandoning its own ardent followers and ideological supporters.    The abandonment of Van Jones harkens to the days when Bernard Nussbaum was thrown overboard in the early Clinton Administration days.   This bodes ill for the future of Obama Nation.

Friday, September 4, 2009

Madoff Report Dumped on Friday Night Before Labor Day Weekend

Full report available at

The report was released around 6 pm on the Friday night prior to the start of the three-day Labor Day weekend.   That timing speaks volumes.   There's an indication that the truth of L'Affair Madoff may be covered up -- no, buried -- alongside other embarrassing events.   The Madoff incompetence should now become part of Area 51 lore.

Wednesday, September 2, 2009

SEC Incompetent on Madoff Fraud; Time to Scrap the SEC?

The 22-page "executive summary" of the Inspector General report on the Securities and Exchange Commission's multiple failures to investigate and detect the Bernard Madoff fraud is out today and available at

The full report (some 400-500 pages according to press reports) should issue later this week or early next week.  

One item caught my attention.   There is a paragraph about the attorney staffing problems at the Commission, and in particular, its failure to have many lawyers on staff with a familiarity with the various federal securities laws.  (Emphasis mine.)   Instead, the Commission's lawyers tended to have general litigation experience.    That is amazing -- litigating without having the faintest idea as to the context or significance of many of the issues.   That could explain how mega-Ponzis like Madoff, or Marc Dreier, don't appear on the radar screen but "small" or totally-seemingly-insignificant cases get brought (such as one that was chronicled in the New York Times a few months back, the article did appear on a Saturday this past summer).  

There are a lot of experienced, credible and honest lawyers "out there" who would love to work for the federal government, and many of them have securities experience.   In addition, many of them have so-called "deal" or "transactional" experience, and if anything, that "real world" experience of dealing with compliance issues and difficult clients is much more useful than being a simple, garden-variety litigator.   Why aren't these people being hired?    Was the Bush Administration using the same criteria for hiring SEC lawyers that it was apparently using for hiring Justice Department lawyers?

The SEC failed the American people.   Its failures may be organizational.   Working for the SEC the last few years may end up being a black mark on one's resume, just like working for Enron.   I had been thinking that the calls to dismantle the SEC were an overreaction.   Now, I am not so sure.  

More comments will follow in a new blog entry, when the full report is issued and only after I am able to read it cover to cover (unlike our Congressmen and -women) in order to know what I am talking about.

Chris Christie and the Honest Services Statute; Charlie Rangel too

The Corzine campaign has a new ad out that criticizes Chris Christie for imposing one set of rules on others -- while he was chief federal law enforcement officer of New Jersey - while allegedly playing by a different set.   This is no doubt inspired by the recent, undisclosed $46,000 loan to his subordinate and the subsequent failure to either disclose said loan on state and federal disclosure forms or report the interest on said loan on state and federal tax returns.

Compare the Christie transgressions with:

(1) the failure to pay taxes on approximately $16,000 by former Guttenberg mayor Peter LaVilla, who pled guilty in 2003 to failure to file a tax return and received a sentence of four years' probation.


(2) the "honest services" crime of former Mercer County public official and former prosecutor Harry Parkin, who received a 90-month jail sentence for a variety of corrupt acts.  (Parkin went to trial, and acted as his own lawyer.)

Parkin's indictment (handed down during Christie's tenure) describes the public's right to, and the official's duty of, "honest services."  (See paragraph 11 for yourselves, courtesy of the Justice Department's website.)  It reads, in relevant part:

"As a public official of Mercer County, defendant HARRY G. PARKIN owed Mercer County and its citizens and the [Mercer County Improvement Authority] a duty to, among other things . . .

(B) disclose personal financial interests in official matters over which [the defendant]... exercised influence, authority and discretion in favor of those interests, and to not affirmatively conceal such material information."

(One note of interest:  Remember that Parkin was indicted for and convicted of several crimes, which were in connection with his holding positions for which he received significant salaries from government agencies.  Perhaps a crucial difference, beyond party affiliation, is that with Christie, no public monies appear to be involved.) 

Just apply this language to Christie and consider the ramifications of applying the same standard.    Whether that standard ought to be applied, to anyone, is a different issue.   However, these cases -- and there are others to be sure -- illustrate why Corzine's campaign thinks there are legs to this issue/story.

AND --- lest we forget -- the Chairman of the House Ways and Means Committee, the esteemed Charles Rangel, has a similar and more grave tax problem and failure-to-disclose problem.   There are already (on Thursday 9/3/09) editorials by such esteemed publications as the Washington Post for Rangel to step down from his committee chairmanship.    I agree wholeheartedly.

How would Rangel fare under an obnoxious United States attorney?   Please note:  I am not criticizing Rangel, this is a civil matter which undermines his credibility to be on the Ways and Means Committee but this is not a criminal matter...I mean, let's get real.   This is more of a criticism of the prosecutorial overreaching to "go after" certain people under any pretense available, and occasionally someone who is a target is stupid enough -- and that is the correct phrase -- to actually have done something wrong.  

Rangel should be distinguished from the nut-job theorists and their followers, like the actor Wesley Snipes, who think taxes are somehow unconstitutional.   But rules are rules and at some point there is no excuse for a failure to disclose, or failure to pay; rather, one can presume these people are just playing a game of "gotcha" where they wait to get caught and then profess contrition.   Rangel and Christie appear to be peas of the same pod on this issue.

Tuesday, September 1, 2009

Prosecuting the City Council Slush Fund Abuse: Using Jersey as a Guide

Today a New Jersey development offers a useful guidepost for how to criticize -- or prosecute -- the abuses by certain members of the New York City Council (and State Legislature) of the grant process for non-profit organizations.   I write about this today, because it may not be clear in some readers' minds how this really is a problem, much less a crime.

Earlier today, former New Jersey assemblyman Joseph Coniglio was sentenced to 30 months for extortion and mail fraud.  (Expect he'll be out in about 19-20 months to a halfway house.)  Federal prosecutors charged him with a series of abuses stemming from his purported consulting for a hospital while using his government position (especially, being on a state budget committee) to steer grants to the same hospital paying him.   You see, in New Jersey, legislators are also part-time, so Coniglio did the "consulting" for the hospital while being a state legislator able to steer grants its way.   But a legislator is not a lobbyist.  See the problem?

Prosecutors charged that Coniglio really did no (or very little) work, and the consulting payments were bribes in disguise.  The arrangement posed a clear conflict of interest, and the quid pro quo amounted to an abuse by Coniglio of his elected position for personal gain (if not outright extortion) and an unfair advantage to the hospital over its competitors (other hospitals in the region, which were not paying Coniglio).    As we've learned from the recent Supreme Court hearings for "Sonia from the block" Sotomayor, a preference towards some equals discrimination towards others.  

Good and noble purpose, you might ask?  Coniglio's attorney argued that the grants were useful in funding a new cancer center, but this did not change the final analysis in either the jury's mind, or mine.

(For another example of a very similar case, Google the name "Wayne Bryant" and add the acronym "UMDNJ." Mr. Bryant is now a guest of the government.)

This translates well to the slush fund abuses.   Each time a government grant goes to one non-profit organization, that money is by definition not going to someone else.   Anything making this process less than fair is thus ripe for challenge.    When we have (as alleged) legislators creating non-profit organizations in order to receive government monies, which then are largely used to "employ" the legislators and their friends and family, it yields the following objectionable elements:

(1) an abuse of an elected position
(2) to bestow preferential treatment upon one non-profit
(3) with such preference coming at the expense of the public at large and each and every non-preferred entity
(4) for direct and personal financial gain
(5) with the entire arrangement posing an obvious and strong conflict of interest.  

Readers should find each of these five features to be objectionable, if not criminal.   Certainly, it is wrong.

How could these situations be remedied?   In each case, the problem is the personal gain element.   Legislators seeking to cash in -- while doing no real work -- are the problem.   These are not cases of altruism.   They are cases of greed.  

But what if Coniglio was doing real work?   In Coniglio's case, had he been doing plumbing consulting for the hospital, using his professional background as a plumber, even the federal prosecutors (namely, top former deputy Michele Brown)  admitted in a prior press conference after Coniglio's conviction that such work would have been legal.   Here, the concern was that this was a "no show" or "sham" job.   Expect this to also be the concern with the City Council slush fund for non-profits, and to see the claim that these organizations essentially exist only on paper and really exist only for the personal gain of their organizer/benefactor legislator.

In both New Jersey and New York, we have a diversion of the grant monies away from other purposes (item 3 above).   This element explains where and how there is palpable harm to the public.   This is not a victimless crime.

Let's make it simpler, class:

Public funds  + private gain = Federal felony indictment.

Now, if you object to Coniglio getting 30 months in jail, that is a different issue.   Some may argue that he should have been booted from office, or de-barred (disqualified) from holding any public employment.  Certainly there were options to resolve this, to deter future transgressions in keeping with a primary prosecutorial objective of deterrence, without using up a precious cot on an elderly man when dangerous terrorists are out there -- dangerous, I tell ya -- and that is a topic worth discussing...and will be treated at length in the future.  

You may also raise concerns as to whether some officeholders are on the proper notice regarding the legality or propriety of their actions.   The vagueness of some federal statutes (such as the "honest services" statute which even Supreme Court Justice Antonin Scalia has criticized) leaves opportunities for prosecutorial abuse and overreaching and jeopardizes politically vulnerable targets.   From a legal perspective, I would think that elected or appointed officeholders need to consider retaining skilled white collar criminal and civil regulatory attorneys (hint, hint) who understand that proper risk-averse guidance to clients means consulting both state laws and regulations, federal laws and regulations, and the uncodified, unwritten rules of state and federal prosecutors regarding the practices they find objectionable enough to try to develop a criminal case.

A final note.   Credit goes where it is due.   This investigation was started by the United States Attorney's Office, while it was run by Chris Christie.   Mr. Christie has recently been subject to much criticism, including on this site, but his office deserves the credit for this investigation...which Acting U.S. Attorney Ralph Marra assures us is "continuing."   Let's see what happens here.   Curiously, no one from the hospital -- the major beneficiary in the Coniglio arrangement -- has been charged, although at least one key hospital administrator received immunity in exchange for his testimony against Coniglio.   That just doesn't strike me as right.

Eric Dixon is a New York lawyer and strategic analyst who engages in crisis management and other matters. Mr. Dixon cautions readers that this article is not legal advice.  Mr. Dixon may be contacted for further comment through, or at 917-696-2442.