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Sunday, April 11, 2010

Court Rejects Christie's Omission Liability Theory


This past week, the Third Circuit Court of Appeals upheld a lower federal court ruling which rejected the Justice Department's use of an apparently made-up theory of "omission liability" in connection with criminal charges against two high-ranking Bristol Myers-Squibb executives.   The case is U.S. v. Schiff and a PDF version of the opinion is provided here.   The appellate court upheld earlier criticisms of the government case made by the district court judge, Faith Hochberg, herself a former United States Attorney for the District of New Jersey.
The criminal case against the executives was brought in 2005 and is still pending because there are several charges against the two men.  This case attracted a lot of attention several years ago because it involved a very promin It is interesting to read the Third Circuit's strong criticisms of the case, in no small part because of the apparent expansion of criminal liability, in ways that Congress did not intend, by federal prosecutors working in the United States Attorney's Office in Newark, NJ under the then-stewardship of now-New Jersey Governor Chris Christie.   Interestingly, the related shareholders' civil lawsuit (a federal class action) against Bristol Myers and others was thrown out of Manhattan federal court in 2004 (as noted by the appellate court in its footnote, see page 12 of the opinion).
The Third Circuit upheld the District Court's March 2008 ruling that there would be no further "legal theory morphs" in the Schiff case and criticized the government's "shifting and adding to its theories" of the criminal liability of the defendants (see p. 16), chiding it for playing "musical chairs" both in pretrial proceedings and during the appeal process "with their pursuit of changing legal theories" under the standard securities anti-fraud rule known as Rule 10b-5, and further criticized the government for its "introduction of new legal theories [which] appear[] designed to find new creative ways to hold [the defendants] liable" for certain of Bristol Myers' SEC filings (see pp. 17-18).   Then the court noted that the government had stipulated (meaning it agreed or admitted) that there were no "affirmative misstatements" in those SEC filings, yet its lawyers tried to use their new theories in order to bring back into play those filings, so they could argue that the defendants were criminally liable for misstatements in SEC filings which the government itself had admitted contained no such misstatements.  (See pp. 17-18.)  Get it?  
The appellate court ruled that either the federal government waived its right to use those theories (by agreeing to the stipulation admitting there were no misstatements), or that the omission liability theories "were not legally viable as federal crimes."  (See page 19.)   Furthermore, as much of the rest of the opinion makes clear, the government case seems to be an attempt to convert what is arguably a civil case involving an alleged breach of fiduciary duty, by means of failing to correct an earlier omission, into a criminal act, despite the fact that some time-honored court cases involving the securities laws have recognized that silence is not fraudulent or misleading under Rule 10b-5 (analogous to the main antifraud statute) in the absence of a duty to disclose. 
The government's use of these theories -- if not its approach in the Schiff case -- is troublesome.   First, there is the practical problem that corporate executives have in trying to comply with not only the law, but also with an as-yet-unimagined interpretation by some anonymous prosecutor (who may well be trying to impress either a superior or prospective employer by engaging in what they might euphemistically call creative lawyering and what some others might call sophistry).  In such a scenario, a hapless and totally innocent executive or manager may be totally blameless, and certainly free from any type of nefarious or criminal intent, yet his freedom could be in jeopardy because of some twisted, untested and possibly wholly-illegitimate theory.   This just does not seem right and just, on principle.   But this theory was blessed and pushed, under the stewardship of now-New Jersey Governor Chris Christie. 
The second problem with the government's approach is that it indicates a mentality which approves of prosecuting people even when their actual wrongdoing may be very speculative or highly uncertain, or when such an investigation may be unsupported (or just plain wrong) by the facts or improper or wrong as a matter of law.   What can one conclude about people who would "go after" someone but having to resort to a new theory to do so?   It seems like actual wrongdoing became irrelevant, because the "chase" after a prominent business executive had the allure (or potential to generate career-enhancing headlines) to justify changing theories.  By extension, this would mean that a local federal prosecutor's office employing such theories and tactics would imperil any business executive whose activities raised their ire.  You can see that such a mentality brings us far from our classically held notions of justice and fair play, and quite near to a system where prosecutorial power stops being a check on wrongdoing and instead becomes a tool of the state, a means for political repression and, in this case, economic control. 
Another problem is that the pursuit of these defendants using multiple, changing and evolving theories strongly suggests that someone, instead of being "man enough" to admit to a mistake or error in professional judgment, chose to pursue all sorts of theories -- even if that would mean violating an earlier stipulation -- in order to chase professional achievement (the notch on the belt) and in order to cover up the earlier mistake in judgment.   Where is the professional confidence, not to mention personal integrity and moral character, to stand up and say, we made a judgment, we tried our best, but the facts don't justify this investigation continuing or the law doesn't support it?  The game of musical chairs with these theories suggests clearly that the facts did not warrant a prosecution on such an evidently-flawed basis.
Read this opinion, and consider that fact, the next time you hear Gov. Christie mentioned as a "pro-business" or "conservative" governor, or even as presidential timber.  In the Bristol Myers investigation, you can see that federal prosecutor Christie had no problem pursuing certain defendants, even when the facts were so weak that his office had to violate a stipulation and repeatedly shift around various theories of wrongdoing.   It should be of grave concern for the business community when its ability to operate lawfully, and for its executives and managers to avoid having their freedom threatened and lives ruined, becomes unpredictable due to prosecutorial overreaching or some young lawyer's "creativity."  

A functioning capitalist economy requires predictability in its laws; indeed, that feature is a requirement for the rule of law to exist.   However, when "the law" is defined not by its lawmakers (i.e., Congress) but by unelected, faceless prosecutors (i.e., bureaucrats who passed the bar exam), you have an environment hardly conducive to any free enterprise.  People complain about an activist judiciary, but the Schiff case indicates that under Chris Christie, the New Jersey U.S. Attorney's Office was a very activist bureaucracy...but one with the power to ruin people.  (For more on this concept of how prosecutors have the power to ruin people, buy and read Harvey Silverglate's fine 2009 book Three Felonies a Day, which I have previously mentioned and recommended to all of you.  Don't go to the library; buy the book -- it's worth it because it's worth reading, keeping and using as a reference.)   
The Schiff investigation was launched and pursued during Christie's long tenure as New Jersey's United States Attorney.   This puts him in the unenviable -- if not untenable -- position of having to explain to that state's business community how it can feel comfortable when investigations and prosecutions can be started, brought and pursued even despite the absence of facts supporting a valid theory of liability.   Oddly enough, the very same criticism was leveled at the Manhattan U.S. Attorney's Office several years ago when it brought a series of cases, also on an untested and spurious legal theory.   Among the people investigated -- and in one peculiar instance, someone who was not criminally charged despite having been found by the Securities Exchange Commission  to have had a substantial role in the challenged activities -- was a man named Todd Christie. 


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