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Wednesday, January 25, 2012

Obama's Crony Justice Will Make Business A Crime

Largely unnoticed in President Obama's State of the Union speech Tuesday was his call for a new enforcement agency to prosecute financial crime.  The implication, from the tone and theme of the rest of the speech, was that financial crime is one of the main causes of the economic crisis of the last five years. What is worrisome is what logically follows: more business leaders, managers and entrepreneurs must go to jail.

Under the guise of a populist appeal to equality, expect a new wave of criminalization of private enterprise. And Obama does not need Congress (which makes the laws) to cooperate; he can create a new executive agency of which the staffing and decisions on which cases to investigate and prosecute can effectively criminalize targeted industries, activities and businesses.

In reality, financial crime is fairly constant in its frequency. What varies is its detection and, yes, the willingness of the authorities to carefully investigate and uncover the various white-collar crimes which plague us. But there are many crimes that are caught, and many agencies that handle this task.

Unlike the Department of Justice, which still retains many career prosecutors committed to upholding the agency's professionalism and commitment to justice over numbers (of convictions), a new agency would be staffed by people who would set the new templates for "how things are done," and would be an invitation for politics or purely personal vendettas to infect each and every decision-making process.

There are plenty of white-collar crimes prosecuted by the Justice Department. We have "regular" securities fraud (e.g., lying about a company's new drug), accounting fraud (making the numbers look better), mortgage fraud (lying to get one), appraisal fraud, bank fraud, identity fraud and wire fraud (e.g., telemarketing).

We have seen huge frauds go unpunished criminally. The Justice Department decided not to prosecute Countrywide Bank management, although it is investigating the recently-deposed management of Freddie Mac and Fannie Mae (and only those officers whose tenures started after the housing bubble burst). There have been no prosecutions of the managements of the "too big to fail" banks. Although business failure is not a crime, the surprising fall of these institutions suggests the possibility of a criminal nondisclosure of material information to the investing public.

Managements of much smaller companies which fail often are investigated and some are prosecuted, sometimes despite circumstantial evidence and, frankly, evidence no stronger that questionable or perjurious cooperating witness testimony. The Justice Department has had little problem finding cases to bring, particularly against smaller enterprises (for they lack the resources of behemoth enterprises and thus are thought easier to attack and get convictions -- the "numbers"). Nothing has prevented a reallocation of resources towards the "big" cases involving the "too big to fail" crowd -- nothing but unannounced agendas that one must suspect to be at work.

The final danger of any new bureaucracy is its tendency to take actions, no matter how harmful, in order to justify its existence and the jobs of its employees, and the temptation for those employees to act with an eye on enhancing the resume rather than pursuing the ends of justice.

With these considerations -- and never mind the new de facto Millionaire's Alternative Minimum Tax -- America's entrepreneurs have just been given new reasons to shut down, preserve capital and hope for the political nuclear winter to eventually pass.

Eric Dixon is a New York investigative lawyer. Follow Mr. Dixon on Twitter at @dixonstrategy.

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