Judge Kozinski on over-criminalizing agency costs

Larry Ribstein —  10 December 2010

In U.S. v. Goyal, the government contended that the defendant, former CFO of Network Associates, had violated GAAP by causing the company to recognize revenue from certain sales sooner than it should have, and of lying to the company’s auditor.  The jury convicted defendant of securities fraud, false SEC filings, and making materially false statements to NAI’s auditors.

The 9th circuit reversed the judgment on the jury verdict, holding that “[t]he prosecution offered no evidence adequate to prove that any GAAP violations materially affected the revenue that NAI reported” and failed “to offer any evidence supporting even an inference of willful and knowing deception” to the auditor. The court concluded: “Even viewing the evidence in the light most favorable to the prosecution, no reasonable juror could have found Goyal guilty beyond a reasonable doubt of any of the charges against him.”

It’s pretty remarkable that the defendant was able to persuade the court to reverse a judgment on a jury verdict.  But the case is especially notable for Judge Kozinski’s concurrence, reproduced here in full:

This case has consumed an inordinate amount of taxpayer resources, and has no doubt devastated the defendant’s personal and professional life. The defendant’s former employer also paid a price, footing a multimillion dollar bill for the defense. And, in the end, the government couldn’t prove that the defendant engaged in any criminal conduct. This is just one of a string of recent cases in which courts have found that federal prosecutors overreached by trying to stretch criminal law beyond its proper bounds. See Arthur Andersen LLP v.United States, 544 U.S. 696, 705-08 (2005); United States v. Reyes, 577 F.3d 1069, 1078 (9th Cir. 2009); United States v. Brown, 459 F.3d 509, 523-25 (5th Cir. 2006); cf. United States v. Moore, 612 F.3d 698, 703 (D.C. Cir. 2010) (Kavanaugh, J., concurring) (breadth of 18 U.S.C. § 1001 creates risk of prosecutorial abuse).

This is not the way criminal law is supposed to work. Civil law often covers conduct that falls in a gray area of arguable legality. But criminal law should clearly separate conduct that is criminal from conduct that is legal. This is not only because of the dire consequences of a conviction—including disenfranchisement, incarceration and even deportation—but also because criminal law represents the community’s sense of the type of behavior that merits the moral condemnation of society. See United States v. Bass, 404 U.S. 336, 348 (1971) (“[C]riminal punishment usually represents the moral condemnation of the community . . . .”); see also Wade v. United States, 426 F.2d 64, 69 (9th Cir. 1970) (“[T]he declaration that a person is criminally responsible for his actions is a moral judgment of the community . . . .”). When prosecutors have to stretch the law or the evidence to secure a conviction, as they did here, it can hardly be said that such moral judgment is warranted.

Mr. Goyal had the benefit of exceptionally fine advocacy on appeal, so he is spared the punishment for a crime he didn’t commit. But not everyone is so lucky. The government shouldn’t have brought charges unless it had clear evidence of wrongdoing, and the trial judge should have dismissed the case when the prosecution rested and it was clear the evidence could not support a conviction. Although we now vindicate Mr. Goyal, much damage has been done. One can only hope that he and his family will recover from the ordeal. And, perhaps, that the government will be more cautious in the future.

I couldn’t have said it better myself.  But I did say something a lot like it a few years ago:

Depriving people of their freedom is the most serious thing our government can do, short of killing them. It is justified if we’re very sure the conduct deserves society’s severest condemnation. If we’re not sure, we risk diluting the moral force of the criminal law and instilling doubts concerning the system’s fairness. Just as we don’t tolerate a reasonable doubt about whether a particular defendant is guilty of the crime charged, so we should want to be sure that the conduct he’s been charged with should be treated as criminal.

I’ll have more to say about the travesty of over-criminalization of agency costs in a forthcoming article.

Larry Ribstein


Professor of Law, University of Illinois College of Law

9 responses to Judge Kozinski on over-criminalizing agency costs


    Whatever the other merits of the appellate court’s decision, it’s a bit bizarre for Kozinski to be going on about what the government couldn’t prove, and emphasizing that criminal law is the community’s sense of right and wrong — in a case where he’s reversing a jury verdict.


    I missed the part in which Judge Kozinski mentioned sending the names of all prosecutors involved to their respective bar associations for possible disciplinary action.


    Exactly. Conrad Black is still in jail.


    “Congress shall make no law restricting freedom of trade.”


    I’m reminded of the bureaucrat in Atlas Shrugged. Something like…we expect the laws to be broken, how else will we control the population…


    I am surprised to hear K’s advocating the idea that “the community’s sense of the type of behavior that merits the moral condemnation of society” is a standard that separates criminal from civil law. I thought we commoners were not allowed to pass laws based on our sense of morality. Only the big boys in black robes get to refer to morality.


    I agree. Prosecutors have become too creative in their application of criminal law. But this is only part of the problem. Legislatures are too willing to criminalize mere bad fortune. Take a look at the criminal penalties Congress made applicable to a CFO who signs off on financial statements that contain a material error. Under the law, the CFO is subject to criminal liability even if the CFO can prove that he or she were unaware of the error and that he or she was not unaware due to negligence. Even if the errors in the financial statements were due to nothing more than a mistake with no one having any intent to deceive or defraud, the CFO could go to jail. That’s a misuse of the criminal justice system that in many ways is worse than what the prosecutors have been doing.

Trackbacks and Pingbacks:

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