June 28, 2011
Buell on Securities Fraud
Samuel W. Buell has posted What is Securities Fraud? on SSRN with the following abstract:
As Rule 10b-5 approaches the age of 70, deep familiarity with this supremely potent and consequential provision of American administrative law obscures its lack of clear conceptual content. The rule, as written, interpreted, and enforced, is missing a straightforward connection to, of all things, fraud. Fraud is difficult to define. Several approaches are plausible. But the law of securities fraud, and much of the commentary about that body of law, have neither attempted such a definition nor acknowledged its necessity to the coherence and effectiveness of doctrine.
Securities fraud’s lack of mooring in the concept of fraud produces at least three costs: public and private actions are not brought on behalf of clearly specified regulatory objectives; the line between civil and criminal liability is not acceptably sharp; and the law provides an at best weak means of resolving vital public questions about wrongdoing in financial markets. The agenda of this article is to illuminate and clarify the relationship between securities fraud and fraud, and to structure a law reform discussion that promises to make more explicit the connection between securities fraud remedies and the purposes of a regime of securities regulation; brighten the line between civil and criminal liability; and produce better understanding of what is being asked when, as so often these days, we wonder whether to label an important matter of market failure, “fraud.”
-- Eric C. Chaffee
June 28, 2011 | Permalink
This is an interesting read, and it is a useful basis for debate. I have two thoughts.
First, the paper's core argument, for a strict scienter requirement for criminal securities fraud that is higher than recklessness and negligence, is ironic in the context of our current criminal justice system. According to this author, when it comes to white-collar crime we should insist upon a fairness, clarity and exercise of restraint and discretion that is lacking in every other facet of our criminal justice system.
The numerosity, vagueness and broadness of our laws means that prosecutors, especially federal prosecutors, can build cases against pretty much anyone they want. (See Kozinski, You Are (Probably) a Federal Criminal.) In this country, we incarcerate more people as a percentage of our population than any society in human history, and 5-8 times more than other civilized nations.
People are being thrown into federal prison for using the wrong paperwork for importing flowers, signing for a delivery using a false name, or cheating on their taxes. Poor black men across the country routinely have their probation or parole violated for loitering, jaywalking, open container or riding a bike without helmet, resulting in 3-6 months more in Rikers or Pelican Bay. John Edwards is being prosecuted for lying in a TV interview. Online poker sites are being prosecuted by piggybacking a weak unenforced federal law on a weak unenforced state law. Sentences are inflated across the board. Few get paroled anymore. The conditions in many prisons is worse than that accorded to livestock.
In this context, for an author to be arguing about slippery slopes and the need for fairness, high-mindedness and proportionality when it comes to the likes of Mozilo, Cassono, Johnson, Raines and Lewis, who personally walked away with at least one billion dollars in collective ill-gotten gains, is pretty ironic.
Can you imagine what prosecutors would do to a gang of poor black men who stole one billion dollars in a string of bank frauds? The author's arguments are elitist entitlement in law-review form.
Second, the gravity of the harm does matter. The author argues, without support, that "securities law is not manslaughter" and that "we generally do not impose condemnatory forms of criminal liability that carry lengthy prison sentences on reckless actors who do not commit violent offenses." That is absurd. A de facto recklessness standard is used in many non-violent crimes carrying lengthy prison sentences. See above examples (among many more) and Michael L. Seigel, Bringing Coherence to Mens Rea Analysis for Securities-Related Offenses, 2006 WIS. L. REV. 1563.
Having said that, I like the author's manslaughter (though I think he meant second-degree murder) analogy. And in the context of that analogy, the difference between white-collar criminals and street criminals is as follows.
If a joyrider randomly shoots a gun out the window of his car and kills someone, he will be guilty of second-degree murder based on wanton and reckless conduct. Whether or not he intended to do so, the joyrider KILLED SOMEONE. If you later interviewed him in prison he would likely have come to accept accountability for his actions.
According to the author, if this joyrider is named Mozilo, Cassono, Johnson, Raines, Blankfein or Lewis, the joyrider should not even be prosecuted because, after all, he didn't INTEND to kill anyone. He is at worst guilty of the misdemeanor of illegal discharge of a firearm.
And unlike the street criminal in our hypothetical, who accepts responsibility for causing the death of another, our white-collar defendants, as well as the author and others who for whatever subconscious reasons go to such lengths to rush to their defense, lack the courage and decency to accept any accountability whatsoever for the horrifying damage that they caused to very fabric of our society and the lives of hundreds of millions of people.
Posted by: Charles Seavey | Jun 30, 2011 12:38:11 PM
With respect to your point about the breadth of criminal law, you should read, if you haven't already, Three Felonies A Day: How the Feds Target the Innocent, by Harvey Silverglate. Great book by a well-respected civil libertarian.
Posted by: Steve Bradford | Jul 4, 2011 8:58:21 AM