OPINION:
Federal prosecutors carry immense power in our system of government.
In a famous address, President Franklin D. Roosevelt’s attorney general, Robert H. Jackson, told his assembled crowd of Justice Department employees: “The prosecutor has more control over life, liberty, and reputation than any other person in America.”
Jackson said one source of the prosecutor’s power is his flexibility: “His discretion is tremendous.” An aspect of that immense discretion is the choice of which statutes to charge in which cases.
The Justice Department recently revived one of its biggest sticks to fight financial fraud — the so-called financial kingpin statute — in a pair of cases that deserve attention from business leaders and lawyers alike.
Enacted in the wake of the savings-and-loan scandals of the 1980s, the statute imposes a mandatory minimum 10-year prison sentence on any corporate executive found guilty of violating its terms.
The statute has lain more or less dormant since its enactment. No one has been charged under it in more than a decade, as the government has preferred traditional charges such as bank or wire fraud.
The department’s decision to bring two separate and near-simultaneous charges under the statute introduces a substantial new weapon into the government’s arsenal.
To secure a “kingpin” conviction, the government must prove two elements: that the defendant organized, managed or supervised a continuing financial crimes enterprise and that he or she received $5 million or more in gross receipts from the enterprise during any 24-month period.
Those are demanding requirements because Congress intended the law to target the white-collar equivalent of a cartel boss — the organizer of a large-scale criminal enterprise who was personally profiting from the enterprise he ran — without exposing the executive sitting atop a corporate hierarchy and drawing a standard salary.
Enter Daniel Chu, the former CEO of Tricolor, an auto lending company. The government alleges that he managed or supervised his subordinate, Chief Financial Officer Jerry Kollar, in cooking the books to the tune of $800 million in double-pledged collateral, fictional dollars that left investors and contractors out of luck when the company went belly up.
Mr. Kollar has turned state’s evidence, pleading guilty in a deal that requires him to testify against his former boss and colleague. The plea deal makes sense for him, as he can contextualize his own role in the scheme while throwing his boss under the bus.
It puts Mr. Chu in a hard spot. Is he willing to risk a minimum of 10 years in prison by going to a jury, arguing that his subordinate was the real fraudster all along, and he was taken in, like everyone else?
Last month, the government flipped the former chief operating officer, David Goodgame. Just weeks ago, Messrs. Chu and Goodgame were filing motions jointly and had aligned in their defense.
This prosecution should draw the attention of every corporate general counsel because the government’s newfound use of the financial kingpin statute means that CEOs can now face 10 years of hard time if a subordinate goes sideways.
As one major law firm wrote in a client alert, the statute’s “leadership element can be broadly construed. Executives who approved fraudulent conduct may satisfy the statute’s ’organized, managed, or supervised’ requirement even without direct involvement in transactions.”
The statute’s malleable language creates real concerns for large companies, especially publicly traded ones, where top executives operate with substantial autonomy from the CEO.
Every CEO relies on information from subordinates that he or she cannot personally verify line by line. If prosecutors can satisfy the kingpin statute by arguing that ordinary corporate oversight amounts to supervising a criminal enterprise, then virtually any chief executive becomes vulnerable to liability whenever a rogue subordinate commits fraud.
This puts CEOs in an especially difficult spot, as the prosecutor’s usual pattern in criminal enterprise cases is to plea-bargain the minions in pursuit of the top guy.
Of course, the government may well prove its case against Mr. Chu and Patrick James, the other CEO charged under the financial kingpin statute in the past six months. Both men are presumed innocent until proved otherwise.
The FBI has audio recordings of Mr. Chu comparing his company’s situation to Enron, and the James indictment alleges double- and triple-pledged assets that shorted liabilities by an astounding $9 billion.
The government should take white-collar crime and financial fraud seriously. It wrongfully bilks employees, investors and others out of their jobs, contracts and savings. At the same time, however, the government must be careful to ensure that its use of the financial kingpin statute does not outpace reasonable expectations of corporate management.
With great discretion comes great responsibility to use such powerful tools with discernment.
• Daniel Suhr is president of the Center for American Rights and one of the nation’s leading constitutional litigators. He was a senior adviser to Wisconsin Gov. Scott Walker for six years.
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