The Friday Editorial: Lerach's Lament and the Criminalization of Officer and Director Behavior

Bill Lerach wrote a coruscating op-ed in the Washington Post making several good points about corporate greed. He rails that “[e]xecutive failure is consistently rewarded with giant payments -- or, really, payoffs -- to keep the parting sacrificial lamb quiet so that he or she won't bleat to the stockholders, lawyers and the media that the others at the top of the company (and in the boardroom) knew what was really going on.”

While not expressly suggesting that greedy CEOs be sent to jail, that seems to be his implicit message. Prof. Ribstein, blogged about the op-ed, rebutting this argument for criminalization arguing that “[t]he criminal justice system is wildly inappropriate to deal with this sort of case.” I am with Prof. Ribstein on this one. The problem is that Learch’s examples do not indicate that the actors were morally blameworthy, merely that they engaged in risky business actions. Meting out jail terms in such cases only serves as a temporary palliative for retributive urges. It is almost certain that those clamoring loudest for imprisoning risk-taking CEOs would be bringing down the rafters with their cheering had the risky bets paid off. A man cannot be made a hero one day and a criminal the next, based on the vagaries of the market.

Mr. Lerach is not alone in wanting criminal law punishments. This, almost obsessive, current focus on criminalizing conduct that was traditionally dealt with by other areas of the law is reflected in the fact, that of the approximately 3000 crimes in the federal statute books, almost half were created since 1970. Virtually every new legislation aimed at behavior modification is accompanied by claims about the need for criminalization upon the pretext that civil sanctions do not pack enough punch. This has serious ramifications insofar as it undermines the coercive power of the criminal law by diluting its expressive power. It also makes victims out of those (like Lerach) who do not deserve prison because their actions were not morally wrongful.

In a telling indictment of the system Lerach laments that “[t]he real frustration is that there's so little that can be done. Shareholders supposedly have access to the courts for a remedy, but they won't get far… The government -- forget it. The SEC, and even Congress, appears to be getting ready to cut back shareholder rights and court access even more.” Notwithstanding the system’s current flaws, the answer is not criminalization.

Lerach ends with a rather disingenuous claim: “I'm on my way to prison because, in my zeal to stand up against this kind of corporate greed over the years, I stepped over the line. It turns out that the legal system is a lot tougher on shareholder lawyers than it appears to be on Wall Street executives.” The enormous amounts that he made were at least as much of a motivation for his actions as any “zeal.” The unsavoury squabbling that lawyers engage in for class action booty in the name of shareholder activism is, sadly, yet another agency cost that comes with the territory.