Judge Kozinski on over-criminalizing agency costs

Cite this Article
Larry Ribstein, Judge Kozinski on over-criminalizing agency costs, Truth on the Market (December 10, 2010), https://truthonthemarket.com/2010/12/10/judge-kozinski-on-over-criminalizing-agency-costs/

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.