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February 2012 Archives

Various members of the media and self-proclaimed ethics "watchdogs" have attacked Majority Leader Eric Cantor and the House Republican caucus this past week for passing -- by an overwhelming 417-2 vote -- a version of the Stop Trading on Congressional Knowledge, or "STOCK," Act.

The legislation is intended to apply federal prohibitions against insider trading to government officials, but a story in Politico ran with a typical headline: "Cantor under fire for STOCK Act tweaks," referring to provisions in the House legislation that departed from the earlier version of the bill passed by the Senate.

Just what were these "tweaks"?

In some respects, the House version of the STOCK Act strengthened rather than weakened limitations on profiteering off of government secrets, relative to the Senate bill.

It's hard to make any objection to extending insider-trading rules to the executive branch and to initial public offerings of securities, apart from the fact that the former would limit Democrats currently in control of the White House and the latter might embarrass former Speaker Nancy Pelosi, who has profited from IPOs of businesses directly affected by House legislation.

But it's similarly difficult to make a strong principled objection to the House bill's two most controversial dilutions of the Senate's STOCK bill.

To begin with, unlike the Senate bill, the House version eliminates sweeping registration requirements for private parties outside the government. The Senate STOCK Act would require registration as a lobbyist for anyone who might be characterized as trading in "public intelligence" -- i.e., facilitating investment-related guesses about the future shape of government policy based at least in part on conversations with government officials.

Such registration requirements clearly affect First Amendment rights to speak and petition the government. Moreover, as legal ethics scholar Richard Painter has suggested, it's perverse to target government officials' leaks of inside information by "requiring people to register before they gather information about their government," rather than by developing "stricter rules for government employees who selectively disclose government information to persons outside the government."

The second way in which the House version of the STOCK Act modifies the Senate bill is by eliminating the latter's provision that would target "undisclosed self-dealing by public officials."

Twice in the last 14 years, the Supreme Court has unanimously rejected prior versions of this rule, largely because the statutory provisions involved were so broad and vague that no one could precisely tell what conduct was actually prohibited.

Unfortunately, the Senate's proposed law would continue to offer little clarity as to what conduct would constitute "self-dealing." It's hard to know exactly what legislation considered by Congress would not affect the interests of, for instance, Sen. John Kerry, D-Mass., who directly and through his wife owns pieces of the Forbes and Heinz family trusts.

Moreover, the Senate bill's self-dealing restriction would reach not only federal officials, but also public servants across state and local governments. The Senate bill would thus impose a new federal mandate, uncertain in scope, which in many cases would depart from states' own disclosure requirements. It's hard to see why the federal government should be the chief ethics enforcer for state governments.

Just as insider trading is a misappropriation of corporate assets -- such that employees profiting off inside knowledge are stealing from the company -- so is government employees' profiting off their inside knowledge a violation of the public trust.

But the fact that we should want our public officials to be bound by the same insider trading laws that govern those in the private sector hardly means that we should support any and all pieces of legislation that would achieve that effect.

The House version of the STOCK Act is an improvement on the Senate version, and its proponents should be lauded, not criticized.

Paul F. Enzinna
Partner, Brown Rudnick

Jim invites Pam, an employee of a potential customer, to lunch. Over the next several years, during which Jim and Pam enjoy dozens of lunches and dinners, and Jim treats Pam to many rounds of golf, Pam's company becomes one of Jim's biggest customers. None of this is extraordinary -- most, if not all, businesses, entertain customers in the hope of developing business. However, a recent decision by the U.S. District Court for the District of Columbia threatens to criminalize this practice. In United States v. Ring, the court held that an individual who provides a "thing of value" to another, with the "corrupt intent to influence" her, may face up to 20 years in prison for violating the federal "honest services fraud" statute.

The federal mail and wire fraud statutes prohibit schemes to "obtain[] money or property, but prior to 1987, courts expanded the statutes' reach, applying them to reach, in addition, deprivations of "intangible rights," including the right to another's "honest services." This theory of "honest services" fraud was applied most often in cases of bribery of public officials, but was also applied in the commercial context. However, in 1987, the Supreme Court held that the mail and wire fraud statutes are limited by their terms to deprivations of money or property. Congress responded nearly immediately, passing a separate statute defining fraud to include deprivations of "honest services."

After his 2006 conviction for "honest services" fraud, former Enron CEO Jeffrey Skilling argued on appeal that the statute should be struck down for failing to specify what conduct is prohibited. The Court agreed that the statute is vague, but rather than striking it down, held that it must be limited to conduct at its "core" -- i.e., bribes or kickbacks paid to influence decisions. In other words, to prove honest services fraud after Skilling, the government must show not merely a deprivation of "honest services," but also that the deprivation resulted from a bribery or kickback scheme. To prove bribery, the government must show an understanding between the giver and the recipient that there will be a quid pro quo, with the recipient providing something of value in exchange for the bribe. However, in Ring, the court held that a defendant may be convicted of honest services fraud with no showing of any quid pro quo agreement, but on a showing of only a unilateral "corrupt intent to influence." Skilling applied this theory both to charges of honest services fraud involving public officials, and those involving conduct in the private sector -- in each case, the statute covers only bribery or kickback schemes.

Kevin Ring was a Washington lobbyist who worked with Jack Abramoff. Unlike Abramoff and several other of his associates, Ring was not charged with bribery or defrauding clients. Instead, he was indicted for several counts of honest services fraud, for providing members of Congress and their staff with travel, "fundraising assistance," drinks, golf and tickets to sporting events and concerts. The government claimed that Ring provided these items in order to "groom" officials by making them "more receptive to requests for official actions on behalf of [Ring's] clients in the future." However, the government presented no evidence of any agreement between Ring and any public official that there would be any quid pro quo. Instead, prosecutors were permitted to argue that Ring could be convicted upon a showing that he intended to "to influence and reward official acts." And at the government's request, the court instructed the jury that it was "not necessary for the government to prove that . . . the public official actually accepted the thing of value or agreed to perform the official act."

The jury in Ring clearly had difficulty discerning and applying the law. During deliberations, it asked the judge for additional clarification of the line between "legal and illegal gifts," but the court refused any additional instruction. A short time later, the jury returned with a guilty verdict.

The Ring jury -- and the American public -- may have found his wining and dining Congressional staffers in order to obtain access distasteful, but absent a quid pro quo agreement, it was not honest services fraud. The Ring decision represents a disturbing trend toward "overcriminalization," in which regulatory transgressions and other conduct is transformed into criminal offenses by legislators eager to prove they are "tough on crime," abetted by courts that fail to enforce necessary limits on prosecutors' efforts to expand the scope of "criminal" conduct. Kevin Ring's appeal will be heard in the spring. If allowed to stand, the Ring decision would make potential criminal defendants of the millions of men and women who provide current and potential customers with "things of value" in order to make them "more receptive" or to "build a reservoir of goodwill." That prospect should send shivers down the collective spine of American business.

Jim Copland

Published on 01/18/12

By now, others have well documented the extraordinary nature of President Obama's appointments to fill the National Labor Relations Board and head the new Consumer Financial Protection Bureau -- purportedly exercising authority under the Constitution's Recess Appointments Clause, but almost certainly acting outside the constitutional provision's scope.

But beyond the constitutional issues, the political and policy implications of the president's action has drawn insufficient attention. The president has, in an election year and without congressional oversight, assumed sweeping and virtually unilateral authority to make policy that will generate windfalls for his two most financially crucial campaign constituencies -- organized labor and the plaintiffs' bar. Just how important are trial lawyers and labor unions to the president's election? In the 2008 election, lawyers and law firms funneled over $45 million into Obama's campaign, more than twice as much as any other industry.

The Service Employees International Union spent over $31 million in independent expenditures to aid the president's campaign -- again, more than twice as much as any other outside group.

The organized plaintiffs' bar and various labor unions constituted a staggering 19 of the top 20 political-action committees' spending on behalf of Democrats in the 2008 campaign, doling out between $1.7 million and $3.2 million each.

Since assuming office, Obama has worked to repay these campaign benefactors. The auto-company bailouts propped up unions by undercutting the clear legal rights of secured debt holders, and much of the "stimulus" spending was designed to protect public-sector unions by shielding them from budget cuts made by strapped state and local governments.

Trial lawyers avoided any serious tort reform in Obamacare, and they got legislation that gutted statutes of limitation for employment-discrimination lawsuits and expanded the scope of private litigation against government contractors.

That said, Congress has frustrated the president's most ambitious plans to help labor and lawyers. Even with large majorities in both houses of Congress, Obama was unable to muster support for the Employee Free Choice Act -- the deceptively labeled "card check" bill that would have allowed unions to form without secret-ballot elections and empowered federal bureaucrats to make sweeping changes to private labor contracts.

Similarly, the most sweeping reform bills on the tort bar's wish list also never came to pass, including legislation designed to make it easier to file baseless claims in federal court; a bill to expand securities litigation by allowing lawyers to sue customers and suppliers for companies' alleged frauds; and a trial-lawyer tax break that would have allowed plaintiffs' lawyers to treat contingency-fee loans as immediate expenses.

With his recess appointments, however, Obama is now in a position to avoid such congressional obstacles and help unions and lawyers through fiat. With three of the five NLRB members slipped into power in the dead of night -- and two of these three were nominated only two days before the Senate's Christmas break, hardly stalled by congressional inaction -- the president's labor-friendly cronies will be well-positioned to make rulings advantageous to unions.

Expect to see more along the lines of the Obama NLRB's extraordinary effort to thwart a Boeing plant's construction in right-to-work South Carolina. As CFPB director, Cordray will be positioned to green-light state tort litigation previously blocked by federal regulation and to "delegate" enforcement to state attorneys general, who in turn will farm out lawsuits to the plaintiffs' bar.

Cordray himself leveraged the Ohio state attorney general's office into a powerful campaign fundraising mechanism, when his election pulled in over $800,000 from out-of-state plaintiffs' law firms and he then hired many of those same firms to sue on the state's behalf.

The president's NLRB and CFPB appointments should be understood not only as an affront to the Constitution's system of checks and balances, but also as an aggressive move to energize his deepest-pocket electoral supporters. Sadly, American law and policy will be the likely casualty of this Chicago-style campaign gambit.


Ted Frank

Published on 01/25/12

Last week, several Internet sites protested against two bills, the Stop Online Piracy Act and Protect IP Act, that would take a heavy-handed approach to preventing copyright infringement.

Though the movement was led by left-leaning technology sites, the SOPA/PIPA kerfuffle has the potential to demonstrate why conservative principles are important.

The problem with SOPA and PIPA was their broad scope. The bills went beyond primary infringers to impose criminal penalties on search engines and service providers that linked to infringing domain names.

The threatened censorship of the Internet -- hundreds of innocent sites could be blocked because of alleged infringement by a single blog -- led many sites to go "dark" for a day to protest SOPA's drastic consequences.

It was certainly amusing to watch thousands of teenagers take to Twitter to complain, profanely, that in the absence of Wikipedia and other sites, they had no place to go to plagiarize their homework assignments.

But, more importantly, several senators and representatives, including a number of former supporters of the legislation, announced their opposition.

Hollywood, which has predicted catastrophic consequences from piracy since the now-obsolete VCR became commonplace decades ago, is outraged and continues to support the legislation -- but it now seems clear that SOPA and PIPA will not become law without substantial modifications.

In the meantime, some observations:

First, we should be thankful: Legislative "gridlock" is a feature, not a bug, of our constitutional system. We often see parties in power complain how hard it is to get legislation passed, but the number of bottlenecks in the system means that legislation is considerably less likely to pass without consensus.

Without these bottlenecks, special interests would find it far easier to ram through bad legislation like SOPA. The deliberate pace of legislation gave time for Internet opponents to mobilize.

Second, both bills demonstrate the problem of overcriminalization. All too often, a special interest asks Congress to "fix" a problem by threatening to send more people to prison.

When criminal law goes beyond punishing intentional, violent and fraudulent behavior to ensnare innocent business people guilty only of running afoul of complex and technical regulations, the chilling effect on free enterprise and job creation can be tremendous.

Bloggers had fun pointing out the number of instances where SOPA supporters were violating the proposed law, but millions of Americans already unknowingly violate hundreds of other laws on the books.

When everyone is a criminal, federal prosecutors have the awesome power to pick and choose who will have their lives ruined. The possibility of politically motivated prosecutions is a severe danger to liberty.

Third, Congress passes bills all the time without knowing what's in them, each time with dramatic unintended consequences. Bloggers were outraged at a congressional hearing where committee members had no clue about the damage SOPA was going to do to the Internet.

Further, they seemed to care very little about the effect of their ignorance. But this ignorance extends far beyond the Internet. Limited-government conservatives oppose bad legislation like Dodd-Frank and Obamacare because of the unintended consequences and adverse effects of government meddling in the market.

Finally, the successful opposition to SOPA demonstrates the importance of corporate free speech. It has become trendy on the left to assert after Citizens United that corporations are not people, and thus have no free-speech rights; there's even a constitutional amendment to that effect pending.

One wonders how far that argument goes: Do corporations have no Third Amendment rights, either, allowing the government to quarter troops at the Ritz? Corporate free speech made a decisive difference in the SOPA/PIPA debate. The media, generally SOPA supporters, were unwilling to cover the issue until corporations like Google and Wikipedia forced them to pay attention. The Left should re-evaluate its attempt to limit political speech.

The near-catastrophic passage of SOPA demonstrates the power of limited-government principles. Conservatives should use it as a teaching moment.


 

 


Isaac Gorodetski
Project Manager,
Center for Legal Policy at the
Manhattan Institute
igorodetski@manhattan-institute.org

Katherine Lazarski
Press Officer,
Manhattan Institute
klazarski@manhattan-institute.org

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.