Legal Extraterritoriality As An Assault on Capitalism
By Eric Dixon - Board Member - Financial Policy Council Inc On 28 Feb 2013

Is the federal government trying to subvert American capitalism by pushing for extraterritorial application of American criminal law as a way to induce the flight of capital, and the capital classes, from the United States?

Is this theory so radical?  Little else explains why federal government lawyers are making certain arguments to defend the fraud convictions of two Wall Street financiers – Ross Mandell and Adam Harrington of Sky Capital -- against their appeal.  Our government now argues that “criminal statutes have extraterritorial reach so long as the nature of the crime does not turn on where the defendant acts and where restricting the statute to domestic acts would undermine the statute’s purpose.” Appellate Brief For The United States of America, Mandell v. U.S., Docket Nos. 12-1967 and 12-2090, at 34 (emphasis added).  You read that right; where the crime occurs is irrelevant, because if our federal government declares the "purpose" of an American law reaches beyond our borders, you can be prosecuted for something you are accused of doing abroad, even if that act is not a crime offshore! Unless American courts reaffirm a recent Supreme Court decision, our Justice Department can stretch the reach of America’s metastasizing criminal law and equally byzantine civil law anywhere on the planet. Extraterrestrials, beware.
 

Our federal government's attempt to expand its jurisdictional reach, its control, is now being tested before the federal Second Circuit Court of Appeals in New York City considering Messrs. Mandell and Harrington's appeals of their criminal convictions.  The reach of our criminal law is a cause for concern, given the myriad of often-contradictory, expansive and vague laws already on the books and the increasingly broad concept of illegality.  The dangerous implications stretch beyond the world of finance. Among those with an interest in the outcome may be longtime United States Senator Robert Menendez (D-NJ), who has recently been accused of not adequately reporting the value of private plane trips ostensibly taken in part to procure the company of an allegedly underage woman while in the Dominican Republic. (2)(3)  However, caution is urged with all investigations, particularly those involving prominent individuals. (4)  Investigations are often commenced on the basis of information or claims made by individuals whose credibility is, at best, suspect. The investigation into Sky Capital, the brokerage firm which employed Messrs. Mandell and Harrington, is one example. (5)

The extraterritorial reach of the United States securities laws beyond America's borders may be redefined by the forthcoming decision in the Mandell appeal.  The Second Circuit Court of Appeals will likely focus on two Supreme Court decisions including its recent ruling in Morrison v. Nat’l Australia Bank Ltd., 130 S. Ct. 2869 (2010).  Its Morrison opinion reaffirmed its presumption against applying American laws outside our borders in the context of shareholder civil litigation. Morrison held that “unless a contrary intent appears, [a statute] is meant to apply only within the territorial jurisdiction of the United States.” Morrison, 130 S. Ct. at 2877.  The Supreme Court further wrote that the antifraud provisions of the federal securities laws gave “no clear indication of an extraterritorial application,” Morrison, 130 S. Ct. at 2878, and that “there is no affirmative indication in the Exchange Act that §10(b) [the securities antifraud statute] applies extraterritorially, and we therefore conclude that it does not [apply outside the country].” Morrison, 130 S.Ct. at 2878, 2881.  But the Morrison case involved a shareholder civil suit, whereas Mandell's appeal is a criminal case involving prison time.  Messrs. Mandell and Harrington, and the New  York City Bar Association (filing as an amicus curiae or "friend of the court" in the appeal on behalf of the two men) argue that this same Section 10(b) cannot have one meaning in a civil suit but a second, different meaning in a criminal case. 
 
The Justice Department disagrees.  First, it stokes the hysteria by arguing that overturning these securities fraud convictions would  “gut enforcement of the criminal securities fraud laws.” U.S. App. Brief, Mandell v. U.S., at 40.  The government then argues that the Supreme Court has become essentially an Enemy of the State because to follow its logic in Morrison would “render the criminal securities laws ineffectual against U.S. citizens who commit certain securities fraud crimes from entirely within this country, creating a veritable safe harbor for fraudsters who are clever enough to draft securities offerings that would make transactions in the securities ‘foreign’ under Morrison."  U.S. App. Brief, Mandell v. U.S., at 40.  But the real trouble lies in the government’s position (or admission) that “If bringing a criminal prosecution were injurious to the nation’s diplomatic efforts, the executive could simply decline to do so.” See U.S. App. Brief, Mandell v. U.S., at 40, unnumbered footnote. This is startling. Our federal government, through its lawyers, now admits that considerations other than guilt or innocence are appropriate factors in determining whether to bring a prosecution.(6) Can you say, "too big to jail"? This is troubling in an era where the Department of Justice openly states that some large financial institutions have escaped prosecution out of recognition of the institutions’ integral value to the financial system, and where popular distrust in our institutions and system of justice is in decline.  

After these distracting histrionics, the Justice Department finally confronts the extraterritoriality issue of the appeal.  The logic of its argument is weak.  To justify the expansive, extraterritorial policy, it argues Morrison “did not purport to interpret Section 10(b) as it applies in criminal cases,” but then goes further, adding that “the presumption against extraterritoriality…does not apply in criminal cases.”  U.S. App. Brief, Mandell v. U.S., at 33.   In fact, the government contends – using an accepted but mistaken interpretation of the Supreme Court’s 1922 case U.S. v. Bowman, 260 U.S. 94, 98 – that the presumption against extraterritoriality “should not be applied to criminal statutes which are, as a class, not logically dependent on their locality for the government’s jurisdiction” (in plain English, rejecting the classic notion that jurisdiction exists where the crime occurred) but which instead arises from “the right of the government to defend itself against obstruction, or fraud wherever perpetrated.”  Bowman, 260 U.S. 94, 98 (1922)(emphasis added in italics).  The government relies on a century-old case that stands for the government's right to defend itself against fraud, but neither Mandell nor Harrington were charged with or convicted of any crimes against the federal government.  The government's argument should not apply.

While the federal government relies heavily on the 1922 Bowman case, its own legal brief concedes that the fraud of which the two Sky Capital brokers were convicted is precisely the type of crime requiring "territorial jurisdiction" (i.e., you prosecute where the crime was committed). Bowman even listed -- and the government itself cited it -- various crimes like “assaults, murder, burglary, larceny, robbery, arson, embezzlement and frauds of all kinds” as requiring this “territorial jurisdiction.”  Bowman, 260 U.S. 94, at 98; U.S. App. Brief, at 37 (unnumbered footnote)(emphasis added).  But this inconvenient truth doesn't stop the Justice Department from trying to destroy the traditional territorial jurisdiction concept by dismissing it as a relic of a bygone era “ before widespread international travel and communications connected people and countries to each other so readily.” U.S. App. Brief, Mandell v. U.S., at 37.  The government neglects to mention that by the 1920s, transoceanic liners regularly made cross-Atlantic travel within days, international communication was possible by telephone and telegraph, and commercial air travel was in its infancy, with the world still reeling from the effects of World War I including its advent of rudimentary airplane battle.  Taken to its logical extension, the Justice Department seems to infer that jurisdictional barriers fall as technological and travel barriers fall or are surmounted.  By that token, American courts' jurisdiction -- and certainly the federal government's power to regulate, investigate and prosecute -- are limited only by the very limits on mankind's ability to travel and communicate!  Or put another way: there are no limits on the government's interpretation.  At that point, there is no check on the government's power, no check on potential abuses, no check on a runaway Justice Department.
 
Think about it: What crime does not turn on where it occurred?  The crime scene is the very genesis of jurisdiction. So now the federal government wants to argue, "Never mind!"? Can one think of the chaos that would result if foreign tribunals were to respond in kind? Would that be desirable under any circumstances?  Very simply, the government pushes an internally inconsistent argument for an illogical and troubling policy. 

The government’s approach in the Mandell appeal is to achieve a worldwide reach of American criminal statutes.  However, we can expect an unintended consequence. Far from being useful in protecting the law-abiding, this policy will scare foreign capital from any contacts with America.  Capital will flow out, stay out and stay away, for the risk-averse reasons I gave earlier. The danger is in discouraging capital from coming to or remaining in to be used in America.  The result: the United States will be at a competitive disadvantage with the rest of the world because of the greater reach of its criminal law and the greater vulnerability of the capital classes (for various reasons) to being targeted for investigation and prosecution.  

We surely will hear the trite comments about defending law-breakers, about how the government's warnings of the evisceration of the securities fraud criminal statutes will come true if this appeal is successful and the convictions reversed.  But the concern of this article is the effect of this prosecutorial policy on those players in the world economy who have the means to choose where to go, where to live, where to invest, where to work.  There is simply no reason, none at all, for these people to remain in any locale where there are both the greatest number of ways to "get in trouble" and the greatest number of people -- politicians playing to "the street," for example -- looking to haul you into court or drag you to jail.  

There is a simple fact: people don't like going to jail.  Most people will do anything to avoid jail, both before and after they get in trouble.  Even American prisons, which for white-collar and other "nonviolent" convicts are nicknamed "Club Fed" and certainly are among the most humane facilities in the world.  While investors and consumers may enjoy greater protection from criminality under United States law, the risk-averse capital classes may decide to move their operations and assets abroad in order to reduce or avoid entirely the risk of an overzealous American criminal prosecution – especially in an age of the criminalization of business and the growing perception of an American presidential administration hostile to the capital class.  While some might see jail as a cost of doing business, most people are sane and will shut down or move abroad rather than risk losing their liberty.

Law-abiding Americans want to follow the law, but following it requires the law to be understood.  Experienced lawyers can and often do disagree on the interpretation of the law, how to handle its increasingly arbitrary and haphazard application and enforcement by the authorities, and how to modify behavior accordingly.  In an age where reasonable minds can disagree on the territorial reach of the law and certainly on what the law is meant to regulate and proscribe, it ought to be terrifying that benign disagreements over the interpretation of laws can result in inadvertent violations of the criminal law, and subsequent prosecutions and jail time for hapless, well-meaning Americans.  The result: Americans are less and less subject to the rule of law, and more and more subject to rule by intimidation.

The stated goals of deterring crimes like fraud are indisputably laudable.  And the authorities are correct in warning about people who may move offshore to avoid prosecution, then come back home in a game of hopscotch (or cat-and-mouse).  But these arguments have nothing to do with deterring crime, with stopping fraud.  Laws have a disproportionately deterrent effect upon the law-abiding, putting them at a disadvantage for, well, obeying the law.  Criminals who break the law could care less how strict they are, or how strong the penalties, because their credo is to break the law and not get caught.  But the reality is that in a new world where boundaries are increasingly flexible, where capital is transnational, where jobs often cross borders, competition between countries for capital, assets and talent will encourage these items to move to the most welcoming climate.  People who sense they are or can be punished for the virtue of obeying the law should not be expected to suffer this insult, and the economic disadvantage which results, once they have the chance to move.  Call it economic osmosis.  Far from deriding or decrying this, we must confront the reality of this rational behavior.  Certainly, the unemployed and chronic dependents do not move into "eat-what-you-kill" jurisdictions -- they move towards the most generous welfare states with the least demanding eligibility standards.  So why shouldn't such economic rationality be expected from those with far more at risk?   

The most welcoming climate for business is not a country where raw envy is the genesis of an accepted paradigm where success is bad, where business is criminalized, where the laws are enforced in increasingly arbitrary and unpredictable ways, where some firms with pull can avoid prosecution and encourage scrutiny of their up-and-coming competitors.  (All valid concerns in a land where some firms are considered "too big to fail" and where leading executives of said firms often move back and forth between those firms and the government agencies charged with their regulation, in the syndrome known as "the revolving door.")  Those stated goals serve the purpose of, at a minimum, providing a pretext to which an objection is virtually impossible -- and thus acting as the perfect political cover for the true goal of expanding American government control.(1)  As crazy as it may first sound, these arguments actually would fit with a nefarious agenda of making the United States inhospitable to capital and those who still possess it -- under the rubrics of protecting the "public welfare" and acting for "the common good."  There are practical implications for our economy when anyone’s contacts with the United States would carry an unwanted and unavoidable risk of criminal prosecution.  The “lower bar” or easier standard to reach for bringing criminal cases threatens to make the United States a new Forbidden Zone in which the entrepreneurial, ownership and managerial classes face perhaps the highest risk of prosecution anywhere in the world (that is, among nations with developed systems of civil law and accepted systems of criminal justice).  While Americans may be hesitant to move abroad, foreigners and an increasingly multinational, transnational capital class with choices will have every reason to choose to stay out.  The implications for the American economy cannot be good. 

The solution is to pare back our contradictory criminal laws so that the ones which remain on the books are much better understood -- and better able to be enforced.  Every time an elected or appointed official whines that "we need a new law," you should take that as a copout.  We don't need new laws or more laws.  We need people in authority to have and use old-fashioned elbow grease to use existing laws to deter criminal conduct and prosecute the criminal conduct which can reasonably be prosecuted beyond a reasonable doubt.  The cry for new laws is merely a cover to excuse the laziness of those in authority to investigate tough cases.  Is it any wonder, then, why there haven't been any criminal prosecutions of top corporate management of the Too Big To Fail financial institutions for the housing crisis and economic near-meltdown of 2008?  Finally, our government leaders, both appointed and elected, need to show restraint, discretion and maturity in exercising their powers.  We need government leaders temperamentally suited to exercise these sentiments and who have the confidence to defend this direction. More laws, different laws, are merely external checks on behavior and are too susceptible to circumvention, revision, nullification and repeal.  The best and most effective check on government power comes from personal characteristics -- in short, maturity, coming from within.  Let's hope we are not asking for too much.

FOOTNOTES

 (1) The Mandell and Harrington cases are not necessarily the product of an Obama Administration policy – should one even entertain, much less subscribe to, this theory – of pushing extraterroritality as a way of increasing the United States’ control over its citizens to areas beyond our borders.  Search warrants in the relevant investigation were obtained as far back as August 2006, during the second term of President George W. Bush. U.S. App. Brief, Mandell v. U.S., at 19. 

(2) See David Martsko, "ABC, FBI, Menendez camp tight-lipped about senator's brewing underage prostitution scandal," The Daily Caller (website), posted January 28, 2013, available at http://www.freerepublic.com/focus/f-news/2982634/posts.  See also Note 4. 

(3)  The actual federal statute that may be in play is the PROTECT Act of 2003 (Pub.L. 108-21, 117 Stat. 650, S. 151, enacted April 30, 2003).  (NOTE -- For the purposes of this law, illicit sexual conduct includes commercial sex with anyone under 18, and non-commercial sex with persons under 16 when there is at least a four-year age difference or the person is under 12 years of age. Previous US law was less strict, only punishing those having sex either in contravention of local laws OR in commerce (prostitution); but did not prohibit non-commercial sex with, for example, a 14 year-old if such sex was legal in the foreign territory.)  This statute has the stated intent of preventing child abuse.  18 USC 2423(c) and (f).
 
(4)  The other thing about investigations is that they often rely on highly questionable sources.  The unfolding Menendez investigation is centering around alleged use of prostitutes, and the young women themselves may be of highly suspect credibility for a variety of reasons.  One domestic news source claims that a Federal Bureau of Investigation agent has written that the information provided by a certain unidentified informant in the Dominican has provided "accurate information." See Note 2, supra.   However, it is quite likely that the FBI is making that claim merely to encourage a continued flow of information from its source, because a source -- of whatever credibility level -- who believes he or she is being ignored will probably stop providing any information.  This author believes FBI agents are allowing the source to believe that he is considered credible just to keep the information pipeline open while the agency continues to independently -- and one would hope, privately -- assess the credibility of all the information that is or will be received.  

(5) Investigations can otherwise be reliant upon information provided or generated by sources whose credibility is, at best, suspect.  The federal criminal investigation of the Wall Street brokerage firm Sky Capital may have had its genesis in information provided by a cooperating witness who worked at a predecessor firm and had agreed to plead guilty to unrelated criminal charges. See U.S. App. Brief, Mandell v. U.S., at 20-21. This is not uncommon.  The identity of the witness was revealed in pretrial motions in the Sky Capital prosecutions.  The witness, while acting under the supervision of the Federal Bureau of Investigation as early as 2006 (or earlier) before his sentencing and incarceration for unrelated crimes, may have effected one or multiple frauds upon different federal judges by using different names in each of a federal criminal case, federal civil case and federal bankruptcy case. See Eric Dixon, "Felon-Turned-Witness Used Multiple Names: Catch Me If You Can," Crime, Politics & Policy blog, July 6, 2011, available at http://www.ericdixonlaw.com/2011/07/felon-turned-witness-used-multiple.html; see also United States v. Herbert Figueroa, 2005-cv-00181, District of New Jersey (criminal case); In re Heber Mario Figueroa, Chapter 7 bankruptcy proceedings, District of New Jersey, 07-bk-19071 (bankruptcy case withdrawn by debtor) and 08-bk-13440 (subsequent bankruptcy filing); and Morgan Funding v. Mario Figueroa et al., 2007-cv-04073 (civil case, Southern District of New York).  Interestingly, Figueroa was dismissed from the civil suit upon the district court’s reliance upon Figueroa’s assertion that he was entitled to dismissal because his then-pending bankruptcy filing afforded him an automatic stay from litigation.  Figueroa, who at the time was apparently the initial cooperating witness referenced in court pleadings in theMandell criminal prosecution, did not tell the federal district court that on the same day he sought dismissal from the civil suit in reliance upon the bankruptcy code’s automatic stay provision, he was simultaneously withdrawing his own bankruptcy petition which gave rise to the protection of the stay.  This is, at least arguably, a serious fraud upon the federal court and was committed by Figueroa after his guilty plea to several felony charges in a different case and while he was supposed to be under the supervision and oversight of the federal Bureau of Probation.  
 

(6) See Ben Protess and Jessica Silver-Greenberg, “HSBC To Pay $1.92 Billion To Settle Charges of Money Laundering,” The New York Times, December 10, 2012, available at http://dealbook.nytimes.com/2012/12/10/hsbc-said-to-near-1-9-billion-settlement-over-money-laundering/.

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