Extortion (18 page)

Complex and obscure regulations are enormously profitable for the Permanent Political Class. But they are enormously damaging to the rest of us—like any extortion scheme. Alan Siegel has spent decades pushing for greater simplicity in communications and has consulted with major corporations on simplicity in branding. Dubbed “Mr. Plain English” by
People
magazine, Siegel says, “Complexity robs us of time, patience, understanding, money and optimism.” He goes on: “The United States was founded and governed for over two centuries on the basis of a document that is six pages long. That is 0.1 percent of the length of the current income tax code, which currently runs a whopping fourteen thousand pages.” (Even IRS commissioner Douglas Shulman admitted on C-SPAN that he can’t do his own personal tax return anymore because “it’s just too complicated.”)
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Law professor Michael Waggoner at the University of Colorado argues that “laws must be specific enough to solve a problem . . . suspicion is likely to grow among citizens that long and nearly unreadable laws are hiding things, a suspicion that may often be valid.”
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According to Waggoner, the trouble is that complicated laws enrich those who make the laws while making the rest of society poorer.
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Surveys consistently show that firms and individuals want to know what rules they need to comply with. In early 2009, Siegel conducted a survey and discovered that 79 percent of Americans wanted the president to “mandate that clarity, transparency, and plain-English be a requirement for every new law, regulation, and policy.”
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Another survey conducted in 2012 reveals that 85 percent of the people favor simplifying government rules and regulations, and 81 percent think that making regulations “simpler and less complex” would help create more jobs.
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Jobs outside of Washington, for a change.

Simplicity is important, says Siegel, because simplicity in government will shorten the distance between government and citizens. And that, of course, is why the Permanent Political Class hates the idea: there is a huge amount of money to be made as the middleman. Ex-bureaucrats and politicians can interpret and navigate through the thicket of rules and laws. It is a lucrative service to offer.

For bureaucrats and other members of the Permanent Political Class, there are profits to be made in the notion that “why use one simple form when four difficult ones will do.” Professor Anthony Heyes believes that “people working in regulatory agencies have too little incentive to make or keep procedures and practices simple, transparent or user-friendly.” He argues that one-third of the costs of regulations are “transaction costs”—that is, “paying someone to help you jump through the ‘hoops and hurdles’ of the regulatory process.”
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The next time Congress debates a complex bill, ask yourself: who benefits?

8

Protection for a Price

What About a Washington Corrupt Practices Act?

A little violence never hurt anyone.

—
“LEFTY TWO GUNS” RUGGIERO

T
HE MAFIA DOESN’T JUST OPERATE
on the street level. Mobsters hire lawyers who help them extend their system of extortion and intimidation through legal means. The role of the “mob lawyer” is to use the
legal system
to advance the interests of an organization that is constantly breaking the law.

Martin Light was once such a “mob lawyer.” In 1986 he told the President’s Commission on Organized Crime how he performed his job. Using legal tactics, intimidation, and bribery, his primary job was to “protect the family.” Even when defending an individual mobster facing legal charges, his primary commitment was to the organization, not his client. Trust and loyalty were the key, he said. If you were loyal, it was profitable to be a mob lawyer. He claimed that at the time there were twenty to thirty lawyers in New York who were used by the Mafia. The list was carefully vetted. Legitimate lawyers could never expect to get in on the lucrative business, he said. “Who would trust
them?
”
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The Permanent Political Class does not operate outside of the law. They are not actively breaking laws, and they do not fear jail time. Instead, they use extralegal means to extort their money. It is what makes them so successful, and their “family” so profitable. Their extralegal options even extend to our legal system, which we expect and hope will be impartial and fair.

In theory, the American federal judicial system interprets rules and laws consistently for all citizens. It has been subverted by racial bias and economic leverage, but in theory, and in our collective great hopes, everyone is equal before the law. Yet in recent years it has been increasingly bent for the benefit of the Permanent Political Class. Who gets prosecuted, how aggressively they are prosecuted, and who avoids facing charges can and often does depend on the ability to pay protection money to the Permanent Political Class.

If you are going to extort people—whether using illegal or extralegal methods—it is best to target those who have lots of money and who really fear what you could do to them. You also need a weapon that can be wielded easily. In the case of American justice, nothing beats a vaguely written, broadly interpreted law that can send a powerful and wealthy person to jail.

There are now more than 4,450 criminal laws on the books. As Harvard’s Alan Dershowitz warns, that creates opportunities for mischief. It creates a situation in which “citizens who believe they are law abiding may, in the eyes of federal officials, be committing three felonies each day.”
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But some laws are a lot worse than others, especially when they can be interpreted so broadly that they depend chiefly on the whims of prosecutors.

We would all like to think that presidential appointees at the Department of Justice or the Securities and Exchange Commission will administer justice without self-interest or political calculations in mind. Back in 1940, FDR’s attorney general, Robert H. Jackson, assembled federal prosecutors in Washington to warn them about the ease with which DOJ power could be abused. Jackson expressed his concerns that a government official would “pick people that he thinks he should get, rather than pick cases that need to be prosecuted.” Doing so would be quite simple, warned Jackson. The federal law books were “filled with a great assortment of crimes” and a federal investigator stood “a fair chance of finding at least a technical violation of some act on the part of almost anyone.” The reality was that it would be rather easy to start by “picking the man and then searching the law books, or putting investigators to work, to pin some offense on him.”
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The government has a great deal of discretion in how it pursues financial crimes. The Securities and Exchange Commission and the Department of Justice often work together investigating and prosecuting them. The SEC metes out only civil and administrative penalties. The DOJ handles both civil and criminal cases. But what sort of crimes do these agencies choose to focus on? Which companies do they choose to go after? How can companies and executives stay out of deep trouble? All of these questions are decided by senior government officials at these agencies and others who are appointed by the president and have their budgets set by Congress. And as we saw earlier, in recent years our top law enforcement officials were campaign fund-raisers.

There is an alarming amount of evidence that “protection money” determines how these cases are handled. One study by two business professors looked at 463 executives from 200 firms that had been in the crosshairs of the SEC. They found that those who paid their tithes to the Permanent Political Class in the form of campaign contributions got off far easier than those who didn’t. Among their findings: “Accused executives at firms who make political contributions, either via a political action committee or via the CEO, are banned for three fewer years, serve probation five fewer years, prison for six fewer years, and are 46% less likely to receive both prison time and an officer ban” than those whose firms did not do so. Donations made by the executives themselves had a similarly dramatic effect. And the amounts mattered. Giving more money “significantly reduces the monetary penalty” that firms and individuals are forced to pay.
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They conclude that protection money makes a huge difference: “There is sufficient motive for executives [to] make political contributions in the hopes that regulatory authorities will be less inclined to bring charges, or at the very least, that penalties will be lessened.”
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Another study found the same disturbing reality. Looking at a different set of data, the author of this study found that fund-raising and contributions are “effective at reducing the probability of enforcement and penalties.” She also found evidence of “firms strategically using political expenditures to avoid prosecution by the SEC.” They “target their political contributions to politicians serving on Committees with a strong relationship to the SEC.”
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A third study found that hiring members of the Permanent Political Class (specifically, Washington-based lobbyists) is another effective form of paying protection money. The authors of this study looked at SEC and DOJ investigations of a number of firms and discovered that companies with lobbyists on the payroll were 38 percent less likely to have any fraud detected compared to those not involved in lobbying. Furthermore, if any fraud is detected at a company that employs lobbyists, that investigation takes an average of 117 days more work by the regulatory authorities in question.
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The reality is that the SEC chairman and his or her commissioners, as well as the U.S. attorneys—not to mention the top leadership at the Department of Justice—are directly selected and appointed by the president of the United States. And the budgets of both the SEC and the DOJ are determined by Congress. They are political appointees. As Jackson warned a long time ago, our government gives them enormous discretion, and they apparently use that discretion to bring fewer charges against firms that pay protection money.

There is also evidence that these government officials can and frequently do factor politics into their prosecutorial decisions, just as Jackson feared. The DOJ pursues cases against political opponents with greater vigor than it brings to cases against its political allies. It happens under both political parties. A study by Professor Sanford Gordon at New York University found that under Presidents George W. Bush and Bill Clinton, prosecutions tended to reveal a “partisan bias.” Each administration was more aggressive in prosecuting suspects aligned with the other political party than those aligned with their own.
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This is not exactly news. It has been a longtime criticism of the Department of Justice. Modern American history offers examples of widespread abuse under Presidents Lyndon Johnson and Richard Nixon when it came to using the Justice Department to punish or threaten their opponents.

Even the Internal Revenue Service (IRS) can function as a tool of protection in the hands of an administration. Richard Nixon had his famous enemies list—which led to tax audits for the unlucky members. But in a broader sense, there is evidence that the IRS serves to protect those who matter to a president. A more recent study of who gets audited by the agency found that “the fraction of individual income tax returns audited is significantly lower in districts that are important to a president electorally.” The scholars conclude: “These findings suggest that the IRS is not a rogue government agency, but rather is an effective bureaucratic agent of its political sponsors.”
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More recently, the IRS has been engulfed in controversy concerning the targeting of conservative groups for additional IRS scrutiny and allegations of increased audits of opponents of the Obama administration.
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The Department of Justice has far more latitude and discretion than the IRS, which has only the tax code to use as a weapon. The DOJ has the entire criminal code. What is surprising is how it selects from among the many thousands of weapons hidden in our laws. Take, for example, the collapse of MF Global. The chairman of the financial firm was former New Jersey senator and governor Jon Corzine, an Obama fund-raiser who bundled over $500,000 for the president’s campaign.
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Corzine is the consummate insider. During the 2008 campaign, he was dubbed Obama’s “financial guru.”
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And members of his now-defunct firm served on Obama administration advisory boards.

Then news struck that Corzine’s firm vaporized $1.6 billion in client funds. Bankruptcy trustee reports on MF Global alleged that funds had been taken from customer accounts. Furthermore, the reports alleged that MF Global lacked adequate controls to prevent it from knowing it was using customer-segregated funds to meet liquidity needs. As James B. Stewart of the
New York Times
concluded, “It seems clear that serious violations of the law were committed.”
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The pattern of conduct demonstrated not only that serious violations had occurred but that senior executives, including Corzine, knew about them or were involved in their execution.

University of Washington securities law professor Anita Krug also believes that MF Global executives apparently filed a “false report.”
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As
Bloomberg
pointed out in April 2013, prosecutors could charge Corzine under the Sarbanes-Oxley Act, which allows for a CEO or executive who signs off on false financial reports to be sentenced to ten years in prison and ordered to pay a $1 million fine.
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Samuel Tenenbaum, associate professor of law at Northwestern and director of the Investor Protection Center, concurs that “clearly the law was broken” in the MF Global case.
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Louis Freeh, former FBI director, who served as a trustee in the MF Global bankruptcy case, called Corzine’s conduct “grossly negligent” and a clear “breach of fiduciary duty.”
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