By Alykhan Velshi (Sept. 2006)
The last three years have not been kind to Conrad Black: his media empire and his reputation are in a shambles, his various properties are being auctioned off by court-order, and his assets and family jewelry are being confiscated – all this, and Black has yet to be convicted of a single crime.
In November 2003, the media baron resigned as chief executive of Hollinger International after an internal investigation alleged that he had received more than $7 million in company funds. The former head of the Hollinger media empire is now facing lawsuits from disgruntled shareholders, the Securities and Exchanges Commission, and his former companies. U.S. Attorney Patrick Fitzgerald (yes, that Patrick Fitzgerald) has also filed more than a dozen criminal charges against Black, including racketeering, mail fraud, wire fraud, obstruction of justice, money laundering, and tax evasion.
The media in particular has relished Conrad Black’s downfall. Canadian journalist Peter C. Newman, who has never met a man he would not betray, disclosed the finger-sniffing details of Black’s sex life. Jan Wong, another Canadian journalist and former Chinese Red Guard, threw a wallet with some money and a picture of a crippled boy over the fence of Black’s home in Toronto’s nouveau riche Bridle Path area, and then wrote an article excoriating Black when it was not returned. These journalists, whose stock in trade is demolishing icons, are pandering to their readers’ sense of envy and entitlement. The Black prosecution shows that the legal system is doing the same thing.
The trial by attrition of Conrad Black has exposed the dark underbelly of the legal system, where the government can ruin a man, take his property, his means of livelihood, and make him a social pariah – all without the hassle of securing a conviction. There is an insidious little worm that has crept into the legal system, an iconoclastic mentality that is distorting the rule of law. Focused less on securing justice than on bringing down the high and mighty, all the while pandering to the politics of envy, it affects the entire system of corporate governance.
This is highlighted by four developments in the law of corporate governance: the concentration of power in the hands of minority shareholders, the criminalization of technical regulatory violations, the abandonment of the rule of law in favor of aggressive prosecutorial tactics, and the entrenchment of a culture that penalizes success.
The latest fad in corporate governance, which predates the corporate scandals of the last few years, is to empower shareholders. However, rather than empowering shareholders as a class, recent reforms have increased the power of minority shareholders. Minority shareholders are, basically, those who do not own a controlling stake in a company.
The desire to strengthen minority shareholder rights is based on several misplaced assumptions: first, that minority shareholders are in a position of relative weakness when compared to majority shareholders and corporate directors, and second, that the overall management of a company is improved by giving minority shareholders additional rights.
Both assumptions do not survive scrutiny. The perception that majority shareholders are rich fat-cats out to squeeze every last dollar from a company, and that minority shareholders are helpless pensioners with Depends bills to pay gets things exactly backwards. In the case of Hollinger, the minority shareholders were hedge funds, venture capitalists and investment banks, while the controlling shareholder was an entrepreneur. It is willfully naïve to assume that the power relationship was to the disadvantage of the minority shareholders.
Equally, when the interests of the original investors and minority shareholders conflict, it is incorrect to assume that the latter's interests are more closely aligned with the long-term health of the company. Indeed, the shift in power to minority shareholders has actually harmed good corporate governance. The three main ways that minority shareholders rights have been strengthened recently are, first, the easing of restrictions on when minority shareholders can launch so-called derivative lawsuits against the company, second, the creation of equitable and legal duties between and among shareholders, and, third, an increase in the ability of minority shareholders to thwart decisions taken by the directors of a company, even when such action is supported by a majority of shareholders.
What have these reforms wrought? Well, there has been a massive increase in the number of so-called strike suits, which occur when a minority shareholder launches a lawsuit alleging corporate wrongdoing whenever there is a dip in the price of a company's shares. High-technology companies, biotech firms and other corporations that depend on innovation are hardest hit by lawsuits that question every short-term management decision. That a congressional response was needed to limit strike suits should remind us that empowering minority shareholders carries its own costs, and that good corporate governance requires privileging those who have the long-term interests of the company at heart.
In addition, by fudging the rules on when majority shareholders can exercise their power to appoint corporate directors, the legal system has created a great deal of uncertainty that has increased legal compliance costs. When Black tried to use his stake in Hollinger to exert influence over the sale of some of his media titles to the Barclay brothers of Britain, an overly-bumptious judge intervened to stop him – even now, the precise rules to be applied are uncertain, resulting in large legal fees whenever there is disagreement.
Indeed, the very proof of what happens when you allow a small faction of shareholders to run a company is, as we have seen with Hollinger International (which recently changed its name to Sun-Times Media Group), a fire-sale of corporate assets and the production of corporate reports that read as though they were written not to increase confidence in the company, but to settle vendettas with former enemies. Reading through some of Hollinger's corporate reports, I was struck by how much they focused on the Black family's birthday parties and shopping habits and the scant attention paid to the company's bottom line and its financial situation. What these minority shareholders need is adult supervision, not more power over the company.
In 2003, just as his legal troubles were beginning, Black published a laudatory biography of Franklin Delano Roosevelt. In it, Black acknowledged that the New Deal probably prolonged the Great Depression, but countered that it preserved the credibility of the market economy at a time when unemployment was more than 30% and there was a genuine crisis of capitalism. There is a certain cruel irony in Black's praise of the New Deal, because there is a direct line from the New Deal to Black's current woes.
The New Deal's creation of the regulatory state – where Congress delegated much of its law-making power to specialist executive agencies – has through the effluxion of time resulted in regulatory agencies making the rules, defining their scope and, in some cases, actually enforcing them. Conrad Black, whatever his views on the New Deal’s golden legacy, is today in the crosshairs of its golden shower: what would previously have been civil wrongs punished by a fine are now criminal offenses, and Black is a latter-day Joseph K.
For example, Black's decision to turn down a salary increase (which is taxable as income) and instead accept the payment of management and non-compete fees (which are, if arranged competently, not taxable as income) resulted in tax evasion charges being filed against him, as well as serious criminal charges for violating corporate securities laws. That is to say, a technical, and probably innocent, tax and disclosure violation suddenly became a Very Big Deal. Through the New Deal's looking glass, regulatory violations receive a similar punishment as serious crimes.
Some have argued that not punishing corporate criminals undermines faith in global capitalism; well, so do windfall profits, CEOs earning seven figure salaries, and high gasoline prices – yet we do not criminalize these things. Corporate crime, frankly, is often a matter of question begging, that is to say, the criminalization of things which ought not to have been crimes in the first place. There are many criticisms one can level at someone who manages his affairs to minimize tax liability and in the process neglects the fiduciary duties he owes to his company, but calling these actions criminal, and seeking to punish them with jail-time, is a massive overreaction. A good rule of thumb is that unless a CEO's conduct falls within traditional concepts of “fraud”, “embezzlement”, “larceny”, and so on, we should proceed with caution when creating new and vague criminal offenses.
In addition to punishments that are woefully disproportionate to the crime, there has also been a steady undermining of the rule of law where corporations are concerned. For example, former deputy attorney general Larry Thompson drafted the now-infamous Thompson Memorandum urging prosecutors to give lenient treatment to companies that waive lawyer-client privilege. Already, this has resulted in companies like KPMG refusing to pay the legal fees of its employees who rely on lawyer-client privilege during corporate investigations. We should query the wisdom of government punishing individuals for exercising legal privileges that, since Blackstone's Commentaries, have been integral to our notion of the rule of law.
In his book The Tyranny of Good Intentions, Paul Craig Roberts, a former assistant secretary of the Treasury, wrote about a Justice Department memo from 1990 urging that, “Every effort must be made to increase forfeiture income” of assets held by criminal defendants. As Roberts explained, in “80 percent of asset confiscations, no charges are brought against the confiscated owners.” This practice from the early 1990s continues today in the Black prosecution, with federal prosecutors seeking more than $90 million in asset forfeiture from Black's estate.
Additionally, Black has been forced to sell several of his properties. Recently, when Black sold his New York apartment to help pay his legal fees, U.S. authorities seized the proceeds of the sale, leaving Black on the hook for the real estate listing fee. Although this is funny in its own cruel way, it is a disquieting abuse of government power.
Fitzgerald, Black's prosecutor, has become an expert in trial-by-press-conference. Although not involved in the day-to-day handling of the Black prosecution, Fitzgerald makes a point of swooping in and calling a press conference every time a new criminal charge is filed. Unsurprisingly, Fitzgerald has continued the longstanding practice of throwing every possible charge at Black and hoping that something sticks. More than a dozen criminal charges have been filed against Black. If Black is convicted of all or even most of them, he could spend a very long time in prison. It is the prospect of harsh punishment from cumulative convictions that prosecutors use to negotiate plea agreements, which may explain why the vast majority of corporate crime prosecutions are plea-bargained. No ex-CEO wants to serve multiple life sentences for racketeering, wire fraud, and obstruction of justice – the ménage-à-trois of white collar crimes.
The combination of all these things – bypassing lawyer-client privilege, forcing a defendant to forfeit most of his assets before trial, and scaring a defendant with a laundry list of regulatory charges to browbeat him into a plea-bargain – corrupts the legal system. Tilting the playing field too far in the direction of prosecutors, who have the power of the state at their disposal, and an obeisant media willing to pander to the envy of their readership, does violence to the rule of law.
Much of Black's troubles stem from the fact that he and his wife led a lavish lifestyle. Reading through the Hollinger reports that fault him for corporate mismanagement, this seems to be the source of most of the anger directed his way. However, this grievance is based on a fundamental misunderstanding of what the Hollinger brand used to be. As David Asper, Vice-President of CanWest Global Communications Corp, once explained: “If Lord Black ever decided to sell his interest in Hollinger, it is he – and not Hollinger – with which we did not wish to compete.” Hollinger was merely a means for Conrad Black to exert influence over his newspapers – replacing staff, changing the editorial slant, and improving the overall quality of the writing and reporting.
This is why maintaining Black's public persona was so important: he harkened back to the good old days of grand newspaper proprietors, family dynasties, and concern for the value of the brand rather than vulgar things like day-to-day movements in share prices. In most publicly traded companies, there is no correlation between the success of the company and the extravagance of the chief executive. I do not know who the CEO of Lucent Technologies is, and even if I did, it would not bother me one way or another whether he liked Paganini or knew that Josh Bell could not play in tune on the violin.
Hollinger, by contrast, was more like Donald Trump's corporate empire. Success depended on the image it projected and the status of its chairman. It is precisely because Donald Trump maintains a lavish lifestyle, keeps an absurd coiffe, and has a wife that looks like the arm candy every sexless beta male lusts after, that Trump condominiums sell at a premium. Likewise with Conrad Black, that grand but somewhat dandyish social climber. Paul Fussell, author of Class: A Guide Through the American Status System, would have said that Black’s futile attempt to be “upper class out of sight” spoke to the deepest longings and insecurities of the middle class. The Hollinger brand was built around Black’s persona, which may be why, with Black no longer at the helm, it is nothing more than a holding company for a variety of underperforming newspapers.
It does not take a devotee of Ayn Rand's doorstop screeds to appreciate the dangers of punishing the creative entrepreneurial class in a company built around their success. In fact, as Rand would have predicted, nearly all ex-Hollinger publications have experienced some sort of decline, whether in quality or in circulation, since Black left the newspaper business.
It is too easy to liken Conrad Black to Ken Lay and Hollinger to Enron. However seductive, this comparison should be resisted. The Enron fraud resulted in a massive loss of shareholder wealth and the financial ruin of many families, and it was caused by a deliberate attempt to misreport financial statements to perpetrate a fraud. The Hollinger affair, by contrast, has resulted in no shareholder bankruptcies, was not based on a fraud about the company's financial health, and has only impoverished its former chairman. Like mistaking a donnybrook for a pogrom, we lose our sense of proportion when we compare Hollinger to Enron.
Black's mistake was that he ran Hollinger as if he owned it when, in fact, he only owned a controlling stake. Black ignored the fact that shareholders and directors owe special legal and equitable duties to one another, as well as to the company. But this mistake is not criminal, and it does not justify the punitive lawsuits being filed against him, the pre-trial seizure of his assets, or the damage being done to his reputation.
Judges who think nothing of stripping Black of his livelihood, iconoclastic prosecutors and their cheerleaders in the Frognal set, and a bunch of greedy shareholders trying to scavenge whatever is left over – this is the tragedy of the Black prosecution.
Alykhan Velshi is a lawyer living in Washington, DC. He can be reached at [email protected].
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