Reason Magazine - Staff

The Madness of Patrick Fitzgerald

mtm@walterhav.com (Michael McMenamin) — Mon, 05 Mar 2007 05:41:00 EST

“Madness! Madness! Outrageous!” special Prosecutor Patrick Fitzgerald shouted in a high pitched voice as he began his closing argument in the Scooter Libby perjury trial. It was a feeble effort at sarcasm, a jab at the defense, from a lawyer whose sense of humor is as underdeveloped as his sense of justice or fair play. But prosecutors, especially special prosecutors, need neither. It’s not in their job description.

In those few words, however, Fitzgerald unintentionally—but accurately—characterized what he has been about these past three years. Like a drunk who stumbles and falls in the darkness, he picked himself up, dusted himself off, and walked off as if nothing had happened. Try and tell Judith Miller that nothing happened. Fitzgerald sent her to jail and she was subsequently forced to resign from The New York Times because she refused to burn a source.

Fitzgerald went after Miller even though, unlike Robert Novak, she had never used the name of a CIA WMD analyst, Valerie Plame, in a story about her ex-ambassador husband Joe Wilson’s CIA-sponsored trip to Niger to search for Iraqi WMDs. Yet it was Novak’s story which led to Fitzgerald’s appointment. Worse, Fitzgerald did this to Miller even though he must have known to a moral certainty that (A) Richard Armitage, Colin Powell’s deputy at the State Department, was Novak’s source; and (B) Plame was not a covert agent within the meaning of the espionage law in question, nor did anyone have reason to think she was.

Wait: It gets better. The mainstream media didn't cover the story in any detail, nor did it call Fitzgerald to task. But the fact remains that Judith Miller was tried, convicted and sentenced to prison based exclusively upon written evidence from witnesses whose identities and testimony were kept secret from her and her lawyers. They were given no opportunity to question, rebut, defend her against the secret evidence the courts relied upon exclusively in convicting her. Indeed, a full eight pages of the D.C. Court of Appeals decision discussing and analyzing this secret evidence was redacted from the published opinion. Judith Miller is unique, the first American ever to be sent to jail based on facts she never saw and a federal appellate opinion she was not permitted to read. That's not troubling?

The central element in the case against Libby—who at least got to see all the evidence against him—was not that he lied about leaking Plame’s name. After all, he was not the first nor the only Bush administration official to do so. Richard Armitage (who was the first), Karl Rove and former White House Press Secretary Ari Fleischer did so as well. Besides, Libby admitted leaking her name to several journalists, including Miller, Matt Cooper of Time and Glenn Kessler of The Washington Post.

No, the key count in the perjury case against Libby concerns from whom he first learned that Plame worked for the CIA. In fact, he first learned it from Vice President Cheney, as he later testified. But initially, he testified he learned it from NBC’s Tim Russert. So what’s the big deal? That’s perjury, Fitzgerald said, because Libby was afraid he committed a crime and attempted to cover up where he first learned her identity.

A crime, of course, which Fitzgerald knew had never been committed. Russert is critical to Fitzgerald’s case because specific intent is one of the elements of perjury the prosecutor has to prove. Fitzgerald must show—beyond a reasonable doubt—that Libby lied about Russert knowing it was a lie and not as a result of confusion, mistake, or a faulty memory. So even if no crime had been committed, Libby’s mistaken belief that he had commited one would provide a motive to lie.

Russert at trial said it was “impossible” that he and Libby discussed Plame. Really? When the FBI first interviewed Russert, he told them he couldn’t completely rule out the possibility he discussed Plame with Libby because he didn’t take notes and he talks to so many people. Time’s Matt Cooper did take notes which indicate Libby might have told him that he was not even sure if Joe Wilson’s wife was with the CIA.

Fitzgerald has an overarching theory that the White House was systematically trying to punish Joe Wilson by outing his wife. Yet four journalists with whom Libby talked during the relevant time period—Bob Woodward, Walter Pincus and Glenn Kessler of the Post and Evan Thomas of Newsweek—all said Libby never mentioned Plame to them.

Bob Woodward, like Novak, learned of Plame’s identity from Armitage. More importantly, he testified that he might have mentioned Plame to Libby in their conversation later that month. Did Libby confuse Woodward with Russert? Does he have a bad memory? Glenn Kessler thinks so. Libby testified in great detail to the grand jury that he spoke with Kessler on a cell phone while Kessler was with his kids at the zoo and had a “lucid conversation” where he mentioned Plame. Kessler said it never happened.

Does Ari Fleisher have a bad memory? Walter Pincus thinks so. Fleisher testified it never happened but Pincus testified at trial that Fleisher called him and changed subjects in the middle of their conversation to reveal Plame’s identity, calling Wilson’s trip to Niger at the CIA’s behest a “boondoggle”. Boondoggle? A Cheney/Rove talking point perhaps? Libby testified he used the same word in the conversation he did or did not have with Glenn Kessler.

No trial lawyer will be surprised to learn any of this. Human memories are fragile and fallible, growing more so as time elapses, especially if there are no notes to refresh memories. Memories are what witnesses convince themselves must have happened. Russert kept no notes of his conversation with Libby, yet by the time of trial had decided that it was “impossible” they discussed Plame. Russert’s earlier admission to the FBI that he couldn’t rule out the possibility they did discuss Plame is closer to the truth. As an experienced prosecutor, Fitzgerald knew that too.

Is this prosecution based on fragile memory "madness?" Is it "outrageous?"

It certainly is.

Michael McMenamin, a contributing editor of Reason, is a media defense lawyer in Cleveland. His book Becoming Winston Churchill, The Untold Story of Young Winston and His American Mentor will be published this spring in the US and UK by of Harcourt.

The Secret Trial of Judith Miller

mtm@walterhav.com (Michael McMenamin) — Wed, 10 Aug 2005 00:00:00 EDT

Judith Miller—The New York Times reporter now in federal prison for refusing to burn a source before a federal grand jury investigating an executive branch leak of a former covert CIA officer's identity—is a hero to her fellow journalists, a martyr to the media's constitutional mission of serving as a restraint on government abuse. In contrast, the public doesn't seem to give a damn. Why should journalists have special privileges before a grand jury which ordinary citizens do not? Why should non-journalists care? Why indeed.

One answer is that many federal courts and, in a limited way, even the Supreme Court have held that the First Amendment does give journalists special testimonial privileges before a grand jury. Not a lot. But some. A second answer is that 49 of the 50 states either by legislation (31 states) or judicial decision (18 states) have reporter shield laws of varying strength. A similar state level consensus led the Supreme Court in 1996 to recognize a federal common law testimonial privilege for psychotherapists and social workers much as it had earlier done for lawyers and married couples. On Tuesday, the American Bar Association endorsed federal statutory protections for journalists.

The First Amendment issue in Miller's case has been more widely reported than the federal common law privilege, but both are key to understanding why Judith Miller's conviction and imprisonment has set a new and ominous precedent which can and will be used against non-journalists as well.

Testimonial privileges require a court to weigh the government's evidence as to why they need her testimony. Yet Judith Miller was tried, convicted and sentenced to prison based exclusively upon written evidence from witnesses whose identities and testimony were kept secret from her and her lawyers. They were given no opportunity to defend her against, question, or rebut the secret evidence the courts relied upon exclusively in convicting her. Indeed, a full eight pages of the D.C. Court of Appeals decision discussing and analyzing this secret evidence was redacted from the published opinion.

Judith Miler is unique, the first American ever to be sent to jail based on facts she never saw and a federal appellate opinion she was not permitted to read. She won't be the last. Make no mistake: This will happen again and again whenever a case involves "national security,""the war on terror," or any combination thereof. This is too big a weapon for the executive branch to ignore, especially since it was fashioned by the most prestigious of the U.S. Courts of Appeals and approved by the Supreme Court. Let's face it. If they can do it to a reporter for The New York Times, they sure as hell can do it to anyone else.

Sadly, the mainstream media have overlooked this aspect of Miller's conviction and, as a consequence, the pubic has as well. While some in Congress have introduced legislation to provide for a federal reporter-shield law akin to those used by states, no federal shield law being considered would have protected a reporter from what happened to Miller.

Before Miller's conviction, legislation to prevent such a menacing miscarriage of justice would have seemed unnecessary.

In 1948, in the case In re Oliver, the Supreme Court reversed the conviction where a grand jury had jailed a witness for contempt based on the secret testimony of another witness . Justice Hugo Black wrote:

In view of this nation's historic distrust of secret proceedings, their inherent dangers to freedom, and the universal requirement of our federal and state governments that criminal trials be public, the Fourteenth Amendment's guarantee that no one shall be deprived of his liberty without due process of law means at least that an accused cannot be thus sentenced to prison.

In 1983, in In re Kitchen, the Second Circuit U.S. Court of Appeals in New York reversed a contempt conviction before a grand jury where some of the government's evidence was secret. The Court stated:

We hold that in the sort of case now before us, a fair opportunity must at least include...the right to confront all of the government's evidence, both documentary and testimonial, unless particular and compelling reasons peculiar to the grand jury function require some curtailment of the latter right.

"Some curtailment" of that right is one thing; its complete elimination is something else entirely. Like the other two branches of government, the judiciary has an inherent hostility toward the media which may help explain why enemy combatants have fared far better in federal courts than reporters. In Hamdi v. Rumsfeld, the Supreme Court held that

[a]ny process in which the Executive's factual assertions go wholly unchallenged or are simply presumed correct without any opportunity for the alleged combatant to demonstrate otherwise falls constitutionally short.

The Fourth Circuit U.S. Court of Appeals held in U.S. v. Moussaoui that enemy combatants had a due process right to review all evidence in the government's possession that was material to his defense. Earlier this year, another judge from the same U.S. District Court for the District of Columbia that jailed journalist Miller gave a better deal to Guantanamo detainees, holding that detainees' counsel with security clearances were entitled to access to classified evidence being used against their clients.

The infamous Court of Star Chamber was established in 1487 in England and abolished in 1641. It started out with good intentions—to ensure the fair enforcement of laws against prominent people—but it didn't stay that way. During the reign of King James I and his son Charles I, court sessions were held in secret. Evidence was presented in writing, not by witnesses. The American writer and poet Edgar Lee Masters wrote of the Court of Star Chamber in its later days that:

[T]he Star Chamber frequently sentenced objects of its wrath to the pillory, to whipping and to the cutting off of ears... The Star Chamber finally summoned juries before it for verdicts disagreeable to the government, and fined and imprisoned them. It spread terrorism among those who were called to do constitutional acts. It imposed ruinous fines.

Fining and sending people to prison based on secret evidence characterized the Star Chamber. The same thing characterizes the federal judiciary today. The only comfort Judith Miller can take from her ordeal is that she didn't have her ears cut off. After all, they are what got her in trouble. She only listened. She never published what her confidential sources told her.

The Silence of the CEOs

mtm@walterhav.com (Michael McMenamin) — Mon, 05 Jan 2004 00:00:00 EST

If only Attorney General John Ashcroft could cow Al Qaeda as successfully as he has CEOs of publicly traded companies, the U.S. might be making more progress in the war against terror. How else to explain the silence with which corporate chiefs around the country greeted the chilling criminal indictment of the Martha Stewart Living Omnimedia, Inc.'s CEO on the charge of professing her innocence of insider trading allegations leaked to the media by anonymous government sources? Is it because Martha Stewart is a woman and most CEOs are not? Not really. There are plenty of high-powered female CEOs of public companies, and nary a peep has been heard from them either.

The silence is ominous because the government's criminal case, scheduled for trial later this month, is transparently thin. Yet the implications for officers of public companies are enormous. The Securities and Exchange Commission's civil insider trading charges against Stewart are (as I wrote in Reason in October), flimsy, and the Justice Department has decided against pursuing criminal charges of insider trading. Yet Stewart could now go to prison for making a public statement during the investigation of those charges. The perversity of this situation does not faze U.S. Attorney General John Ashcroft, who, early in October, personally selected Stewart's prosecutor, James Comey, the current U.S. Attorney for the Southern District of New York, to be his new number two man at the Justice Department.

Ms. Stewart has been charged with criminal securities fraud because she and her lawyers publicly declared her innocence in connection with her private sale, in December, 2002 of a small amount of stock in another company, Imclone. This exercise of pure free speech, Ashcroft's Justice Department contends, was a "material false statement" made to influence the stock price of her company, Martha Stewart Living Omnimedia, in violation of SEC Rule 10b-5; for that, Ashcroft believes, she should go to prison.

In a brief filed in federal court in October, Ms. Stewart's lawyers offer several hypotheticals of comparable "crimes" under the Ashcroft Justice Department's new theory:

• A CEO of a successful, conservative, family-oriented Fortune 500 company falsely denies accusations of being a homosexual, resulting in a rebound in the company's stock price.

• Press reports inaccurately state that another CEO has an advanced form of cancer and will die within four weeks. The CEO falsely denies she has cancer but what she has, in fact, is treatable and no imminent threat to her life. The company's stock price goes up.

• The tabloids report that the CEO of a public company that distributes bibles is an atheist, something the CEO falsely denies, halting a slide in the company's stock price.

• A CEO deemed critical to the success of his company is accused of having an adulterous affair with a young woman and stocks plunge amid fears that he will be forced out of the company. He falsely denies the allegation and the stock price of his company rises.

Based on the Stewart indictment, John Ashcroft apparently believes all of these examples of statements on purely personal matters are crimes—securities fraud—for which the CEOs should do hard time. What Ashcroft has done by approving Ms. Stewart's indictment is to threaten prison terms for officers of companies who dare to exercise their First Amendment rights. This is bad for publicly held companies and worse for their officers.

Any public company or officer who comments on a pending government investigation concerning the company now does so at the peril of later being indicted for inaccurately or falsely denying the allegations of improper conduct. For the same reason, every officer of a public company is effectively deprived of the right to protect his or her reputation by denying public reports about purely personal matters which damage their good name.

To paraphrase Bob Dole in another context: Where is the outrage? Make no mistake. This is the most blatant attack by government on pure free speech in recent memory, made more chilling by the prominence—and wealth—of the target. If they can do it to Martha, they sure as hell can and will do it to the average American.

It's not only her fellow CEOs who have failed to come to Ms. Stewart's defense. Liberals have been missing in action also, including Martha's good friend, Senator Hillary Rodham Clinton. Curiously, most of those who have spoken out on Ms. Stewart's behalf are libertarians or conservatives—William Safire, Alan Reynolds, Larry Elder, Paul Craig Roberts, Mark Steyn, Jack Kemp, The Cato Institute, and the Washington Legal Foundation.

The lack of liberal support is disappointing, so let me remind Martha's liberal friends. John Ashcroft is still Attorney General. He and civil liberties are still estranged. An indictment of someone as prominent as Martha Stewart after an agonizingly long seventeen-month investigation could not have happened without Ashcroft's blessing. Ashcroft is the one who picked Martha's prosecutor to be the second most powerful person at the Department of Justice.

The law here is clear. The First Amendment requires strict scrutiny of any attempt to criminalize pure speech. The First Amendment protects in nearly absolute form the right of a person to speak out in defense of her reputation; to assert her innocence of a crime; and to deny false leaks from anonymous government sources on a matter of public concern. All three apply to the statements Ms. Stewart made for which John Ashcroft seeks to imprison her. That the government would even bring such charges in the first place demonstrates the contempt which Ashcroft and his new top deputy hold for the First Amendment.

Government attempts to infringe civil liberties ought to be a critical concern for everyone, regardless of their politics. Yet we are rapidly closing in on twelve consecutive years of two U.S. Attorneys General, one from each party, with a minimal level of legal competence and a maximum hostility to the most fundamental American freedoms. On her watch, Janet Reno brought us Ruby Ridge, Waco and the midnight kidnapping of Elian Gonzalez, delivering the Cuban boy to a totalitarian dictatorship before a federal court of appeals could forbid her from doing so. Reno's disregard for civil liberties deserves a place in history alongside A. Mitchell Palmer, Woodrow Wilson's red-baiting Attorney General who imprisoned both the Socialist Eugene Debs for opposing U.S. involvement in World War I and a Hollywood producer for portraying our ally Great Britain in an unfavorable light in his film on the American Revolution.

John Ashcroft is determined not to let these two Democrats have all the glory. He's off to a good start. Martha Stewart is only his latest victim. She won't be the last.

St. Martha

mtm@walterhav.com (Michael McMenamin) — Wed, 01 Oct 2003 00:00:00 EDT

June did not bring much sunshine for New York City or good news for Martha Stewart. After twisting in the wind for nearly a year and a half, the Diva of Domesticity was sued for insider trading by the Securities and Exchange Commission (SEC) and indicted for securities fraud and obstruction of justice by the Department of Justice.

Those who are salivating over Stewart's demise should put down their forks. In early 2002, when she was first questioned by the feds, all the news outlets reported speculation, based on anonymous government sources, that she had sold the last remnant of her ImClone stock on December 27, 2001, because her buddy, ImClone founder and CEO Sam Waksal, had told her that the Food and Drug Administration was about to reject an application for Erbitux, the company's highly touted cancer drug. The news reports also suggested that she had lied to the feds about Waksal's tip. But as the government now tacitly admits, neither of these allegations is true. That fact helps explain why the feds waited until June 2003 to bring charges: They had trouble finding anything to pin on Stewart.

The most serious criminal charge against her is not perjury or insider trading but securities fraud, based on the fact that she denied to the press, personally and through her lawyers, that she had engaged in insider trading. This was done, the feds say, not for the purpose of clearing her name, but only to prop up the stock price of her own publicly traded company, Martha Stewart Living Omnimedia. In other words, her crime is claiming to be innocent of a crime with which she was never charged.

As for the SEC's civil case, it hinges on an elastic understanding of insider trading, an offense Congress has never defined. The justification for the ban on insider trading, which makes little economic or legal sense, is just as murky as the behavior covered by it. Given the difficulty of figuring out exactly what constitutes insider trading (let alone why it's illegal), it is entirely possible that Stewart and her lawyers weren't sure whether she had broken the rules. In any event, under existing case law, it's clear that she didn't.

What Did She Know?

All Stewart knew when she ordered the sale of her 3,928 ImClone shares was that, according to her broker, the price of the company's stock had dropped from $64 at opening to $58 under heavy selling (7.7 million shares vs. the daily average of 1.1 million), and that his clients, Sam Waksal, and his daughter, Aliza, also had been selling. The SEC charged Stewart with insider trading because her broker told her the Waksals were selling, and the Department of Justice indicted her because she denied any culpability for insider trading.

Stewart was not the only investor connected to Waksal who joined the selling mob that day. She just received the most scrutiny. There was Martha's friend, Mariana Pasternak, who was on vacation with her when all this happened and whose ex-husband coincidentally sold more than 10,000 shares of ImClone that day. He wasn't charged with insider trading. Then there were the two unnamed friends of Waksal described by The New York Times: One sold $600,000 of ImClone stock on December 27, while another sold ImClone stock worth $30 million on December 27 and 28. Phone records show the sales took place "almost immediately" after contact between Waksal and the sellers. The government has refused to identify these anonymous investors and so far has declined to indict or sue them for insider trading.

Finally, there were Waksal's daughter, Aliza Waksal, a 29-year-old actress, and his octogenarian father, Jack Waksal. On December 27, Sam Waksal telephoned Aliza at the ski resort where she was vacationing and told her to sell all her ImClone shares (40,000 for $2.5 million). Before government investigators questioned Aliza, Waksal told her to conceal their conversations, using the cover story that she needed the proceeds to buy an apartment (which she didn't do until seven months later, spending $1.4 million to buy it from her daddy's development company). After talking to his son, Jack Waksal sold more than 136,000 shares on December 27 and 28 for more than $8 million. Jack Waksal also lied to the government, denying that he spoke to Sam Waksal prior to selling his ImClone stock. This was before prosecutors produced phone records showing that calls between them all had taken place before the trades were made. Neither Aliza Waksal nor her grandfather has been indicted or sued for insider trading or lying to the government.

The disparate treatment of Stewart and the other ImClone investors is especially troubling when you consider the government's definition of insider trading and rationale for prohibiting it. The government says insider trading occurs when someone buys or sells stock based on material, nonpublic information received from an insider. While Aliza Waksal spoke directly with her father prior to her sale, Stewart knew the Waksals were selling (arguably not material information, since insider sales are not always reliable predictors of a stock's movements) only because her broker (not a true corporate insider) told her so. Although Martha tried to speak to Waksal, she was unable to get hold of him before selling her stock.

Likewise, the government says insider trading is illegal because it does "economic harm" to the market. Therefore the size of the trade must matter. Aliza Waksal avoided $630,295 in losses and her grandfather three times that, while Stewart saved only $45,000. By this measure, Aliza Waksal's sale and her grandfather's did more "economic harm."

Suppose we stretch the definition of insider trading beyond economic harm caused by the use of material, nonpublic information, and instead use the SEC's long discredited "fairness" or "level playing field" theory. According to this view, it was not fair that Martha knew the Waksals were selling before the rest of the market knew. That standard still wouldn't explain why Aliza Waksal's trade was legitimate. Stewart's excuse was that she had already told her broker she wanted to sell when the ImClone share price fell below $60, which is what happened on December 27. Aliza Waksal's excuse was that although she's an adult, she is still financially dependent on her father, so she had no choice but to do as he instructed, which included selling the stock and lying to government investigators. Which explanation sounds more plausible?

When Waksal worked out a settlement with the government, it reworded the language regarding Aliza Waksal's sale. The settlement now says Waksal "directed Aliza to sell all of her ImClone shares," and Waksal "benefited because he was her entire means of financial support." Thus Sam Waksal is guilty of his adult daughter's insider trading because if she hadn't sold, he would have ended up paying more of her bills. She didn't benefit from the trade, according to the government; he did.

Birth of a Crime

As the treatment of Aliza Waksal and other lucky ImClone investors suggests, the prosecution of insider trading has nothing to do with supposed economic harm or even "unfair" tips, let alone lying to the government. Instead it's about bringing down the biggest and best-known targets to make it look like the laws against insider trading are accomplishing something.

Such publicity stunts are necessary because the insider trading ban is bad economics and worse law. Although there's a broad consensus, among Wall Street executives as well as Washington policy makers, that trading on inside information is harmful to investors and the market, this consensus has never been supported by solid evidence. Yet during the last four decades the SEC has waged a campaign to maintain and expand the scope of the insider trading ban, perpetuating the myth that scores of insiders are secretly enriching themselves at the expense of the investing public.

It has been, in many respects, a successful campaign. In a June survey by the Sienna Research Institute, 60 percent of those polled thought Martha Stewart was guilty of insider trading, and 51 percent thought she was guilty of obstruction of justice. Many people think Stewart "should have known better" because she used to be a stockbroker. But when it comes to insider trading, the SEC and the Justice Department don't want anyone to know better. If they did, they would have long since asked Congress to clearly define the offense. Instead, as Barron's Editor Thomas G. Donlan wrote in June, "The government prefers to define [insider trading] case by case. 'He did what? Oh, that should be illegal.' So it is."

Insider trading was not a crime until passage of the Securities and Exchange Act of 1934, Section 10(b), which prohibits "fraud" in the sale of securities. This offense was intended by Congress to cover stock trades by a corporate officer, director, or major shareholder -- someone with a fiduciary responsibility to a company's stockholders -- based on nonpublic, material, "inside" information. In 1961 the SEC for the first time claimed that Section 10(b) and its SEC-promulgated companion, Rule 10(b)(5), extended beyond people traditionally considered to be corporate insiders. The case involved a Cady, Roberts & Co. broker who learned from a director of Curtis-Wright Corp. that the company was going to reduce its dividend. Before the reduction became public knowledge, the broker sold Curtis-Wright shares owned by his wife and clients.

Although the broker was not a traditional insider and did not have a fiduciary duty to Curtis-Wright or its stockholders, the SEC charged Cady, Roberts with insider trading. It argued that Section 10(b) was "designed to encompass the infinite variety of devices by which undue advantage may be taken of investors and others." The SEC thought it was inherently "unfair" for the broker to sell shares when he knew that the people buying them did not have the same information he had. The SEC ignored the fact that all trades on impersonal stock exchanges involve the potential for asymmetric information; one party frequently will know something the other does not. That is how markets work. It's why two people can simultaneously think XYZ stock is a buy and a sell at $2.

Yet the SEC is still using the same "fairness" rationale today. Commenting on the insider trading case against Martha Stewart, SEC enforcement director Stephen M. Cutler told The Washington Post, "It is fundamentally unfair for someone to have an edge on the market just because she has a stockbroker who is willing to break the rules."

Bad Economics

That position makes no economic sense. In his classic 1966 book Insider Trading and the Stock Market, Henry Manne of George Mason University Law School demonstrated that inside information makes stock markets more efficient. Stock market efficiency depends on the speed and the accuracy with which new information is assessed by the market and reflected in share prices. When insiders trade on their knowledge, that information is immediately reflected in stock prices, thereby conveying this "inside" information to the market. The more information available, the more accurate the stock prices and the more efficient the allocation of capital.

What's more, there is no evidence that insider trading harms the market. The SEC says insider trading has to be prevented because it would cause the public to lose confidence in the market and abandon it. Yet such flight does not seem to have occurred in the years before 1934, when insider trading was still legal, and scholars such as Manne point out that the 1929 stock market crash was not caused by insider trading.

A 1987 study by the SEC's own economists casts further doubt on the commission's view of insider trading. The study, which looked at the effect of corporate takeovers on stock prices during the 1980s, determined that, on average, nearly 40 percent of the increase in a target company's stock price occurred before the takeover announcement. Yet the economists found that insider trading did not cause the pre-bid rise, which was entirely the result of speculation in the media, how much stock the acquirer bought before announcing the takeover bid, and whether the bid was hostile or friendly.

A footnote to the report questioned the assumption that inside traders profit at the expense of less-informed investors. "Those selling into the market when the better informed are buying probably would not have sold had they possessed the same valuable information," the economists noted. "However, they still would have sold if the information specialist had refrained from buying, especially if the trading of the specialist did not affect significantly the stock price. This holds true whether the trading is based on insider information or on careful analysis and successful anticipation of the event."

An insider, by definition, has better information than an outsider. So does a market professional. Market professionals sometimes track insiders' buying and selling of their company's positions, which are available through public filings. Whether the trader with better information acquired it from an inside tip or simply through diligence and hard work, the SEC economists reasoned, does not change the effect on either the market or the other party to the trade.

Bad Law

Not only is the SEC's "level playing field" theory bad economics, the U.S. Supreme Court has held that it is bad law. The Court first rejected the theory in a 1980 case involving Vincent Chiarella, who worked in the composing room of a financial printing company, Pandrick Press. Chiarella handled the announcements of five corporate takeover offers. Despite Pandrick's use of code names for the companies, Chiarella was able to deduce their identities. Armed with this knowledge, he bought modest amounts of the target companies' stock before the takeover announcements and sold it immediately afterward. The SEC investigated, confronted Chiarella, and not only made him give up his profits (about $30,000) but referred the case to the U.S. attorney for criminal prosecution. Based on the SEC's level playing field theory, Chiarella was indicted for securities fraud, brought to trial before a jury, and convicted. The always SEC-friendly U.S. Court of Appeals for the 2nd Circuit rubber-stamped the verdict.

On appeal, however, the Supreme Court ruled that Chiarella could not have been guilty of securities fraud. His employer worked for the corporate raider, not the target. Chiarella therefore had no duty to shareholders of the target corporation. "Section 10(b) is aptly described as a catchall provision," Justice Lewis Powell wrote for the majority, "but what it catches must be fraud. When an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to speak." Chiarella had no such duty, unless the law required all market participants to disclose what they know or to refrain from trading on such information. As Powell noted, "Neither the Congress nor the Commission ever has adopted a parity-of-information rule."

The second defeat for the SEC's level playing field theory involved an investment analyst, Ray Dirks, who specialized in the insurance industry. Two employees of Equity Funding Corp. of America gave Dirks information that enabled him to uncover a shocking and pervasive insurance scandal. Dirks learned that Equity Funding had invented records of policies that never existed to bolster sales figures, intimidated employees who threatened to expose the fraud, and falsified other corporate records to paint a picture of fiscal health. The corporation's executives knew all this was taking place.

Upon learning the extent of the scandal, Dirks told his clients, who promptly sold their Equity Funding stock. Then he told the SEC and The Wall Street Journal. Instead of praising Dirks for uncovering the scandal, the SEC hauled him into court. As punishment for giving his clients the "inside information" on Equity Funding, Dirks was prohibited for six months from trading or associating with a registered broker/dealer.

The U.S. Court of Appeals for the District of Columbia Circuit upheld the SEC's action. In a decision that can charitably be described as confused, the D.C. Circuit ruled that the Supreme Court really did not mean what it said in Chiarella. Even though Dirks had no fiduciary responsibility to Equity Funding, the appeals court said, he had an overriding obligation to the SEC and the trading public to disclose the fraud or to refrain from trading.

The Supreme Court, which ruled on Dirks' appeal in 1983, was not pleased. In unusually blunt language, Justice Powell wrote: "We were explicit in Chiarella in saying that there can be no duty to disclose where the person who had traded on inside information was not [the corporation's] agent...was not a fiduciary, [and] was not a person in whom the sellers [of the securities] had placed their trust and confidence."

The Supreme Court's message to the SEC in Dirks was as clear as it was in Chiarella: If you want a level playing field, go see Congress, not us. Section 10(b) is about fraud, not fairness. The Court also went out of its way to chastise the SEC for its inconsistency in insider trading enforcement. Suggesting that it was "hazardous" to deal with the SEC, the Court accused the commission of bringing "test cases" that contradicted its stated enforcement policies. In his opinion, Powell quoted from a speech by a former SEC chairman who said the commission "does not contemplate suing everyone who may have come across inside information" and specifically listed as people who would not be sued "persons outside the company such as the analyst or reporter who learns of inside information" -- in other words, people like Ray Dirks.

Misappropriated Logic

When Powell retired from the Supreme Court, the SEC got the opportunity to try out a new version of the level playing field theory based on the concept of "misappropriation." It's best illustrated by Wall Street Journal reporter Foster Winans, who was one of the writers of the Journal's "Heard on the Street" columns, which frequently affected stock prices. Perhaps comforted by that SEC chairman's assurances that reporters wouldn't be sued, Winans agreed to disclose the subject of the next day's column to a broker who sometimes traded on that information, giving Winans a small portion of his profit.

Like Chiarella, Winans was hit with both civil and criminal charges even though he had no fiduciary obligations to either the buyers or the sellers of the stocks traded. The only party he defrauded was his employer, The Wall Street Journal (which fired him but did not pursue criminal charges). The only basis for the insider trading charges against Winans was the level playing field theory, i.e., the idea that selling advance information about the column wasn't "fair" to the market. Yet the SEC argued that because he had committed a fraud on his employer, The Wall Street Journal, by "misappropriating" information that belonged to it, Winans was guilty of securities fraud under Section 10(b), even though the entity he defrauded, The Wall Street Journal, had no connection with any securities trade. Winans was convicted of insider trading as well as federal mail and wire fraud, and the 2nd Circuit upheld his conviction. The Supreme Court affirmed Winans' mail and wire fraud conviction but split 4�4 on the insider trading conviction and issued no opinion. Powell, who had retired a few months earlier, would have been the deciding vote.

It wasn't until 1997, in United States v. O'Hagan, that the Supreme Court approved the misappropriation theory. O'Hagan was a lawyer whose firm represented a company that intended to make a tender offer for Pillsbury. O'Hagan "misappropriated" this information without his client's knowledge or consent by buying call options in Pillsbury stock, which became very valuable when the tender offer was announced. O'Hagan took home a tidy $4.3 million in profits. As with Chiarella, Dirks, and Winans, no one in the market was hurt by this action, not even O'Hagan's client. The government, under the same misappropriation theory it had used with Winans, secured a conviction. The U.S. Court of Appeals for the 8th Circuit reversed on the grounds that the misappropriation theory was beyond the scope of Rule 10(b)(5) and did not involve fraud directed toward a buyer or seller of securities. The 8th Circuit also reversed O'Hagan's mail fraud and money laundering convictions, concluding that they rested on violations of the securities laws that had not been proven.

There was no way the Supreme Court could let a lawyer get away with making millions of dollars by stealing confidential client information, so it reinstated the conviction and approved the misappropriation theory. But the Court said its decision was not based on fairness or protecting the trading public. The Court in its decision and the government in oral argument agreed that it would have been perfectly legal for O'Hagan or Foster Winans to trade on their inside information had they privately disclosed to their client and employer, respectively, what they were doing, notwithstanding the "unfairness" to the market. No deception, no foul.

Although the misappropriation theory narrows the definition of insider trading, the SEC continues to believe in the level playing field and to look for ways to broaden its approach. In O'Hagan the government argued that "the very aim of [section 10(b)(5)] was to pick up unforeseen, cunning, deceptive devices that people might cleverly use in the securities markets." Justice Clarence Thomas quoted this claim in his dissent, along with the dry response of one of his colleagues: "That's rather unusual for a criminal statute to be that open-ended, isn't it?" Yes, it is. But open-endedness has its advantages. It allows the SEC to ignore, condone, or even facilitate insider trading when it chooses and then go after a juicy target like Martha Stewart, whose alleged insider trading is well outside anything recognized as such by the Supreme Court.

Ivan the Not-So-Terrible

In its heart of hearts, even the SEC knows insider trading doesn't hurt the market. Remember the financier Ivan Boesky? Back in the 1980s, Boesky agreed to pay a record $100 million in penalties for trading on inside information purchased from the Drexel Burnham Lambert investment banker Dennis Levine. The Wall Street Journal estimated that Boesky had made more than $200 million in profit from Levine's information. By cutting a deal, the SEC let Boesky keep half of his illicit profits.

But wait, it gets better. Before the SEC announced the settlement, it allowed Boesky to cut his trading partnership's liabilities by $1.3 billion through a series of government-sanctioned insider trades. SEC Chairman John Shad later told a House committee that the market wasn't hurt by those trades because it bounced back after a one-day loss. So keeping $100 million in ill-gotten gains and executing insider trades totaling more than $1 billion are both OK if the SEC says so.

Yet Martha Stewart got nailed for saving $45,000 without breaching a fiduciary duty to anyone. The initial trading case against her centered on whether she knew that Sam Waksal was selling his ImClone stock because of the FDA's impending rejection of the company's anti-cancer drug. The feds interviewed Stewart about the sale and claim that during the interview she lied to cover up her wrongdoing and then issued false claims of innocence when anonymous government sources leaked these unproven accusations against her, allegedly doing so to support her own company's stock price.

The government now admits Stewart never had inside information from Waksal. Here are the facts patched together from various pleadings and other public accounts:

On December 27, Stewart and her friend, Mariana Pasternak, were flying in Stewart's private jet to San Jose del Cabo, Mexico, for a vacation at a resort. The plane stopped to refuel in San Antonio, where Stewart called her office on her cell phone and learned that her Merrill Lynch broker (and friend), Peter Bacanovic, had telephoned. Bacanovic, who was also a broker for Waksal and his daughter, Aliza, was in Miami at the time and didn't connect with Stewart when she returned his call at Merrill.

According to the SEC, Douglas Faneuil, Bacanovic's assistant, who copped a plea in exchange for a misdemeanor slap on the wrist, advised Stewart, at the behest of Bacanovic, that the Waksals were selling their ImClone stock. In doing so, Faneuil (and allegedly Bacanovic) broke Merrill Lynch's customer confidentiality rule. Stewart asked Faneuil where the stock was trading. Faneuil said $58, and Stewart told Faneuil to sell her remaining ImClone shares (3,928 shares for close to $230,000). Stewart then left a message for Waksal at his office, subsequently summarized in a note from Waksal's secretary: "Martha Stewart. Something is going on with ImClone and she wants to know what."

The SEC started investigating ImClone within days of the FDA announcement on December 28, 2001. It first interviewed Bacanovic on January 7, 2002, and Stewart on February 4. Stewart and Bacanovic each told investigators that she unloaded her shares because of an oral arrangement they had to sell her ImClone shares at $60. Faneuil initially backed them up but later recanted, telling prosecutors there was no agreement. He said Bacanovic pressured and bribed him (with extra vacation and free airline tickets) to lie. As further proof of this cover-up, the Justice Department's indictment cites the fact that Bacanovic marked "@60" near the listing for Stewart's ImClone holdings in a blue ink different from the blue ink he used on a spreadsheet where he wrote down portfolio decisions for Martha's various holdings on December 20. The feds claim the different ink proves that he made the notation after December 27. Forensic experts say there is no way to tell when the "@60" notation was made.

The SEC also charges that prior to the initial February interview, Stewart temporarily changed an entry in her telephone log from "Peter Bacanovic thinks ImClone is going to start trading downward" to "Peter Bacanovic re: ImClone." Then she had second thoughts and changed the log back to its original form. This aborted tampering with evidence does not prove Stewart was guilty, but it does illustrate the uncertainty created by the government's murky insider trading rules.

The Real Insiders

A better approach would focus on actual wrongdoing rather than the perceived unfairness of unevenly distributed information. Insider trading should be regulated by existing criminal laws that prohibit industrial espionage and the theft of trade secrets and sensitive commercial information. Dennis Levine, for instance, could have been prosecuted for stealing proprietary information from his employer and selling it to Boesky. Ditto O'Hagan. At most, Foster Winans and Peter Bacanovic should have been fired for violating their employers' internal policies, not prosecuted or sued for insider trading.

Anything more should be left to the public companies and the stock exchanges on which their shares are traded. If companies want to permit or prohibit insider trading by their executives, let them say so publicly and let investors decide if they want to buy shares based on that policy. If a stock exchange believes insider trading damages investor confidence, it should require companies whose shares trade on the exchange to have rules against it.

The SEC does not want this to happen. Its prosecution of Ray Dirks for saving his clients from the Equity Funding fraud and its failure to sue Sam Waksal's daughter, father, and anonymous friends for their insider trading suggest why. The SEC does not care about protecting individual investors; insider trading has no effect on them anyway. It does not care about the integrity of the market or capital formation; insider trading has no effect on them either. The only people protected by SEC prosecution of the nebulous "crime" of insider trading are SEC lawyers and their allies, who can keep on inventing new definitions of the offense as they go along. Before suing Stewart, the SEC had never gone after the customer of a broker who offered his knowledge of what another customer had done as a reason to make a trade.

The Justice Department and the SEC don't care about the "fairness, efficiency, and integrity" of our capital markets. Letting Aliza Waksal keep her profits from insider trades proves that. The government lawyers want to enhance their own power and prestige. They don't care who they hurt in the process, such as the shareholders of Martha Stewart Living Omnimedia, who saw the company's value drop by over $400 million between December 2002 and August 2003.

What's worse, these government lawyers don't seriously expect to prevail at trial. Without a credible claim of insider trading against Stewart, the securities fraud charge based on her public (and truthful) denials of the government-leaked claims that she was guilty of insider trading will collapse. Martha will walk, and it will be a good thing. But she and her shareholders will have paid an unnecessary price. That's not a good thing. It's a disgrace. And a damn shame.

Teddy Roosevelt's Hidden Legacy

mtm@walterhav.com (Michael McMenamin) — Sun, 01 Jun 2003 00:00:00 EDT

Knave of Torts

mtm@walterhav.com (Michael McMenamin) — Thu, 01 Aug 2002 00:00:00 EDT

Labor Lost

mtm@walterhav.com (Michael McMenamin) — Wed, 01 Nov 2000 00:00:00 EST

Organized labor was a one-century phenomenon. Look it up. Union members were only 9.5 percent of the private sector work force in 1999, down from a peak of 37 percent 40 years earlier. The last time union membership was that low was in 1902, when union members were 9.3 percent of the private sector work force. And back then, unions were true member-based organizations poised to play a significant role in the new century’s economic growth, not the government-coddled, coercive institutions they have become. The current union leaders, led by AFL-CIO President John Sweeney, have no realistic plans to change course. They are presiding over the final, terminal stage of organized labor. And they like things just the way they are.

Today union leaders, politicians, and employers conspire to take from their members, constituents, and employees hundreds of millions of dollars every year, in violation of the First Amendment. What was once a proud mass movement that improved and dignified the lives of its members in vital segments of the manufacturing-based economy is now no more than a special-interest adjunct to a political party, humored and tolerated less for the voting bloc it no longer commands than for the soft money it can deliver. Organized labor in the private sector no longer serves the interests of its members. It has failed to adapt to the new information economy, as it successfully adapted to industrialization in the early 20th century. It is dying before our eyes.

No one symbolizes the sad, cynical future of organized labor as just another special interest group with money to throw around better than Sweeney, the well-padded former president of the Service Employees International Union (SEIU). The SEIU, whose core members are janitors and low-level health care workers, is now the single largest union in the AFL-CIO. Sweeney, who majored in economics at Iona College, has been a union employee all his adult life; he started working for SEIU in 1960. He has never cleaned office buildings or emptied bed pans, as have the bulk of the SEIU’s members, whose hard-earned dues paid his expense account and supported his comfortable, six-figure-income lifestyle while he headed up the SEIU.

Sweeney was elected president of the AFL-CIO in 1995, over the opposition of the old industrial unions. His campaign theme: Do what I did. Stop spending so much money on your current members, negotiating and administering their contracts and processing their grievances. Instead, trust their employers to do the right thing. Then spend more money on organizing new members. Sweeney’s goal was to increase AFL-CIO membership by 3 percent annually, i.e., an additional 600,000 new members each year–a tough goal he has yet to meet. In 1998, for example, the AFL-CIO added a record 475,000 new workers to its member organizations. But with other union members leaving through plant closings and downsizings, the net gain was only 65,000.

Even the net gain is deceptive because the union members leaving through plant closings and downsizings are not being replaced by members holding comparable jobs. Organized labor grew in the 20th century as America changed from an agricultural to an industrial economy. Things are very different today, and organized labor has found no analogous role in the post-industrial economy.

Even academics sympathetic to unions concede that they’re on the skids. In his recent book, From the Ashes of the Old: American Labor and America’s Future, Stanley Aronowitz, a Marxist-leaning professor of sociology at the City University of New York, writes: "As we approach the new century, organized labor has fallen on hard times. Once the force that encouraged government intervention in every aspect of economic life, the labor movement, over the last twenty years, has become a symbol of what many see as a surpassed system. Many younger people, who never experienced the Depression, World War II, and the days of postwar prosperity, are now mesmerized by the ideology of individual initiative and the promise of a gleaming high-tech future."

Sweeney already knows that unions have nothing to offer to people "mesmerized by the ideology of individual initiative and the promise of a gleaming, high-tech future." The simple reason: They’re making too much money. But if the New Labor of John Sweeney holds no attraction for employees in the post-industrial economy, and the manufacturing work force of the old economy continues to shrink, what is Sweeney’s business plan for maintaining labor’s cash flow from member dues? His new paradigm for labor is to organize the working poor, those people employed in minimum-wage or near-minimum-wage positions.

That paradigm is embodied in Sweeney’s own SEIU, one of the few unions that consistently shows net membership gains. The SEIU spends 47 percent of its annual budget on organizing, and its locals devote approximately 20 percent of their funds to the same task–a total of more than $60 million, $33 million of it from the locals. To appreciate the magnitude of this, as recently as 1993 no more than 10 of the SEIU’s 77 locals put any money into organizing, and in 1995 the SEIU and its locals spent only $20 million on organizing. Even the SEIU’s 1995 spending level is impressive when you consider that as recently as 1996, according to Richard Bensinger, director of the AFL-CIO organizing department, only 3 percent of union funds nationwide was spent on organizing.

The marketing strategy is working. In 1998 the SEIU won 66 percent of the elections in which workers chose whether to certify it as their representative. By contrast, the Teamsters won only 44 percent of their elections, and the rest of the AFL-CIO, other than the Teamsters and the SEIU, won only 49 percent.

The SEIU’s success in winning certification elections underscores the rank cynicism of Sweeney’s model, which gives the union a swelling stream of dues revenue. The fact is that unions achieve less for the working poor than the market does. A recent study by economists William Even of Miami University of Ohio and David Macpherson of Florida State University shows that during the last 20 years the median percentage wage growth for full-time minimum-wage workers in their first year of employment was 13.8 percent. For all minimum-wage workers, it was 10.1 percent. No union contract today even comes close to what the market produces on its own for the working poor, who rapidly move on to better-paying jobs.

The SEIU is the country’s largest health care worker union, in both hospitals and nursing homes. Health care is the union’s niche, and Sweeney’s successor as SEIU president, Andrew Stern, is pressing his old boss hard for an allocation of markets to eliminate competition from other unions in the health care industry. Last year, the SEIU entered into a jurisdictional agreement with the Hotel Employees and Restaurant Employees Union (HERE) under which the SEIU agreed not to organize hotel workers or gambling employees and, in turn, HERE agreed not to organize janitors or health care workers. (If two companies made a deal like that, of course, they’d be violating the antitrust laws, but unions have long had a get-out-of-jail-free card when it comes to antitrust.)

Why target the health care industry? In a recent monograph, Labor Pains: The Corporate Campaign Against the Health Care Industry, Jarol B. Manheim, a political science professor at George Washington University, offers the same explanation Willie Sutton once did for robbing banks: That’s where the money is. Manheim points out that there are 6 million to 7 million potentially organizable workers in the health care industry, whose dues would produce a revenue stream of nearly $3 billion a year. Moreover, as Manheim observes, "many of these workers are in low-wage, low-prestige jobs and many are women or minorities."

He incorrectly considers this a barrier to organizing, because turnover in these jobs is well over 90 percent. Manheim suggests that high turnover "makes the workers to be organized something of a moving target." Not really. In a dynamic economy, there will always be high turnover in low-wage, low-prestige jobs as the working poor move on to better-paid, higher-prestige jobs and have their places taken by other entry-level employees. This suits the SEIU just fine. All it has to do is win one election with the employees it has organized at that time. Once it wins, it pretty much can just sit back and let the dues roll in.

Unionization doesn’t stop turnover in low-wage, low-prestige jobs. But the new employees who take those jobs after their predecessors move on to better things find themselves saddled with a union they didn’t choose because the labor laws presume that the new employees support the union in the same proportion as the old employees did. The law does provide for decertification elections, but the National Labor Relations Board (NLRB) frowns on them. As a consequence, only 199 were held in the first six months of 1999, down from 247 in the first half of 1998. Besides, to win an initial election, unions need only a majority of those voting. Decertifying a union requires a majority of all eligible voters.

The SEIU is far less successful at representing its members than at organizing them. While it won two-thirds of its elections in 1998, it succeeded in actually negotiating a contract in less than half of those workplaces. The reason has to do with the economics of the health care industry, which is highly dependent on government financing and highly constrained by government regulations. Seventy percent of the revenue in nursing homes alone comes from Medicaid. Starting with the Health Care Finance Administration in Washington, every aspect of the health care delivery system is regulated by one, two, or more levels of government with respect to the quality of care, the type of care, conditions in health care facilities, and reimbursement. These rules and the level of Medicaid reimbursement limit the ability of employers to meet union demands.

In his description of a threatened statewide strike at Connecticut nursing homes in 1999, Manheim shows how government regulation can work to the SEIU’s benefit. Given Medicaid-mandated cost controls, the nursing homes simply could not afford the pay increases demanded by the union. The impasse energized the state’s governor, John Rowland, who met with legislative leaders and subsequently announced a 10 percent increase in Medicaid reimbursement rates in each of the next two years, for a total of $179 million, $150 million of it earmarked for salary increases.

But this sort of thing doesn’t work very often, which is why the SEIU can’t successfully conclude more contracts and keep its campaign promises to secure higher wages. The employers cannot afford to pay more, and the people in the low-wage, low-prestige jobs that are the SEIU’s stock in trade cannot afford to go on strike. Without the strike weapon, the SEIU has little leverage unless it can find a pushover like John Rowland who doesn’t have the experience or sophistication to recognize a bluff when he sees one. Even then, the SEIU has to have enough of a state’s nursing homes under contracts with a common expiration date to mount a credible bluff.

The SEIU’s continued expansion in the health care industry depends less on its ability to deliver higher wages than on its political clout. In July, for example, the Health Care Finance Administration delivered a report to Congress recommending new rules that would force thousands of nursing homes to hire more nurses and health aides. But that will happen only if Congress dramatically increases Medicaid payments to nursing homes.

Organized labor’s future was far brighter 100 years ago, even if its market share was no greater than it is today. Early in U.S. history, unions were organized around skilled trades or crafts: bricklayers, plumbers, pipe fitters. Unions established apprentice programs to train employees and ensure quality. They served as clearinghouses and hiring halls. Samuel Gompers, the legendary head of the American Federation of Labor (AFL), was a cigar maker’s son who apprenticed as a shoemaker and later as a cigar maker. As industrialization increased throughout the United States in the late 19th and early 20th centuries, the labor movement adapted by forming industrial unions, such as the United Mine Workers, headed for many years by John L. Lewis, the son of an immigrant Welsh miner and a mine worker himself. The early unions were bottom-up associations, organized and run by the members. While often resisted by employers, collective bargaining during the first third of the century unquestionably served to improve safety and conditions in a wide range of American industries, from the mines to the mills.

Led by Lewis, the industrial unions split from the AFL in 1934 and formed the Congress of Industrial Organizations (CIO), a split that continued until 1955, when the rival groups merged. The rivalry between the AFL and the CIO did not prevent them from uniting to secure the passage of the National Labor Relations Act (NLRA) of 1935, which marked the end of labor unions as voluntary organizations. The NLRA not only permitted but encouraged compulsory union membership as a condition of getting and keeping jobs.

The power of the federal government had a predictably dramatic effect on the fortunes of labor unions in the 1930s and ’40s. In 1902, 9.3 percent of all private sector nonagricultural workers belonged to unions. By 1935, the figure had increased only to 14 percent. But by 1940, unions had nearly doubled their size, to 24 percent of private sector workers. At the end of World War II, union membership had soared to almost 34 percent of private sector workers. That figure inched up to 35 percent in 1955 and hit a peak of 37 percent in 1960. The years that followed were all downhill for unions in the private sector, which gradually dropped to 31 percent of nonagricultural workers in 1970, 28.5 percent in 1975, 20.6 percent in 1980, 14.6 percent in 1985, 12 percent in 1989, and 9.5 percent today.

A major reason for the decline is that free markets are natural enemies of monopolies. Scratch a trade union, and you always find a would-be monopolist underneath. While few succeed, they openly seek to eliminate wages as an element of competition in an industry. As United Steelworkers General Counsel Arthur Goldberg wrote in 1956, "Any labor union is a monopoly [whose purpose is to] eliminate competition between working men for the available jobs in a particular plant or industry [and] increase by concerted economic action their wages."

This is not easy to do. If a union fails to organize all of the companies in a particular industry, it cannot maximize its power. So long as nonunion competitors are not paying the same labor costs, unionized companies in a competitive industry are not in a position to pass on all their wage increases to their customers in the form of higher prices. Or if they pass on their wage increases, they are likely to suffer severe losses in sales volume to their nonunion competitors. As a consequence, unions in highly competitive industries usually are not very powerful. Labor cost remains a competitive factor. Unionized companies are hard bargainers. They know wage increases can’t be passed on to their customers unless their nonunion competitors raise their prices at the same time.

The Teamsters faced such problems in the 1930s with the fledgling over-the-road trucking industry: It was decentralized, with many small nonunion firms, and entry for new companies was relatively easy because of low capital investment requirements. Labor costs were the single largest expense in the trucking industry. Because of the intense competition, wage increases could not be offset by price increases. That fact frequently led companies to move their headquarters to cities where labor costs were lower.

Ease of entry and cutthroat competition: not a pretty picture for a union. Fortunately for the Teamsters, they had the Motor Carrier Act of 1935 and the Interstate Commerce Commission (ICC) on their side. The New Deal brought competition in over-the-road trucking to a rude halt. Interstate truckers had to apply to the ICC for a "certificate of public convenience and necessity," which rigidly specified the routes to travel, terminals to use, and territory in which to operate. The ICC also eliminated competitive rates, establishing rate bureaus run by the truckers themselves. In other words, the ICC took a growing, highly competitive, decentralized industry, in which anybody who could buy a truck could go any-where there was a road, and substituted a rigid, stultifying cartel under which government consent and fixed rates replaced market demand and competitive prices.

Lucky for the Teamsters, who by the 1960s had the country’s largest union. Lucky for organized crime, which drew on the Teamsters’ pension fund to jump-start its hotel and casino empire. Without the iron hand of the federal government to bring order out of the imagined chaos of trucking in the ’30s, the Teamsters never would have been able to achieve a nationwide contract; organized crime would have had to find different sources of funding for its Las Vegas investments; Teamsters boss Jimmy Hoffa wouldn’t have spent the late ’50s and early ’60s fighting off the Kennedy brothers; and James Hoffa Jr. would know where his father is buried. Jimmy Hoffa understood the vital role the ICC played in the Teamsters’ success. He knew that trucking companies were woefully weak bargainers on economic issues because the ICC was always there to grant rate increases. In response to a question about whether he anticipated a strike over a 1962 dispute, Hoffa said, "Only if we need one to convince the ICC to grant a rate increase."

The market eventually catches up to monopolies. Deregulation did in the Teamsters. Unions also once had a virtual monopoly in three major U.S. industries: autos, steel, and rubber. The preeminent position of American automobile companies in the U.S. market was substantially altered by foreign competition. Honda and Toyota now have plants in America, all nonunion. Something similar happened with the U.S. rubber industry. Michelin of France has many nonunion plants in the United States, and there are only two American-owned tire companies left. Foreign companies bought the rest. The United Steelworkers saw their membership drop from more than 1 million in 1981 to barely 600,000 in 1988. Even today, after merging with the United Rubber Workers, their membership is only 670,000.

As a generation of economists has demonstrated, monopoly positions cannot be maintained by corporations for any extended period without government assistance. Without legal barriers to entry, the prospect of high profits lures competitors into the market. Unions are no different. It is virtually impossible for them to achieve monopolistic goals in highly competitive, growth-oriented industries where new jobs are being created, like the businesses of the new information economy. As a consequence, unions have a vested interest in government regulation, and they tend to be strongest in stagnant or decaying industries, where seniority or union hiring halls raise barriers to entry, and in heavily regulated industries with little price competition.

Let’s not forget the public sector. Like transportation in the past and health care today, government is a monopoly to which ordinary economic rules don’t apply. Accurate statistics weren’t kept on union membership in the public sector before 1983, when 35.7 percent of all public sector employees belonged to unions. During the next 10 years, unions managed to increase that by only three percentage points, to 38.7 percent. Since then the trend has been down, with the figure dropping to 37.3 percent in 1999. Meanwhile, however, the importance of government employees to the labor movement has been rising. Back in the early 1980s, only one of every three union members was a public employee. Now it’s closer to one out of every two. Low-paid service workers on the one hand, government employees on the other: That is the face of New Labor.

In its role as a left-of-center special interest group relying on campaign contributions rather than votes for political clout, Old Labor does not have much of a future. What about New Labor? Fifteen of the 25 biggest-spending political action committees in 1998 were labor union PACs. Well over 90 percent of organized labor’s political contributions and expenditures go to Democrats. More important, during the ’90s five of the top six and six of the top 10 soft money contributors to the Democratic Party were New Labor unions–i.e., unions representing government employees and workers in heavily regulated service industries. The big givers included the SEIU, Communications Workers of America, the United Food and Commercial Workers, the National Education Association, the American Federation of Teachers, and the American Federation of State, County, and Municipal Employees.

It’s a strange list, but it proves the point: Where are the great names from labor’s fabled past? Where are the Auto Workers? The Steelworkers? The Mineworkers? The Teamsters? Anyone trying to understand why Al Gore wants to expand government and spend the surplus rather than give it back to the people who earned it need look no further than this soft money list. Unlike Clinton, Gore is no more of a New Democrat than Walter Mondale. They both sold their souls to the unions, the quid pro quo being more public spending because that will increase the number of public employees, the most readily available pool of new union members and New Labor’s best chance for improving its cash flow.

This is a risky strategy. Since 1980, according to The New York Times, between 32 percent and 40 percent of the voters in union households have voted Republican. In 1996 the AFL-CIO conducted a special $35 million campaign to unseat the Republican Congress elected in 1994. Yet a survey showed that 62 percent of union members opposed that spending and fully 59 percent of them would have liked their share of that money given back to them.

Fortunately, they have the support of the U.S. Supreme Court. In the 1988 case Beck v. Communications Workers, a decision written by its most liberal member, William Brennan, the Court said it violates the First Amendment to force employees, over their objections, to pay union dues that are used to support political candidates or causes. President Bush’s only attempt to enforce Beck came in 1992, when he issued an executive order requiring federal contractors to inform their employees of their Beck rights. That order was soon rescinded by President Clinton. Since 1993, the Clinton administration, Democratic members of Congress, federal judges, and NLRB members appointed by Clinton have been engaged in a vast ruling class conspiracy with union leaders to keep employees covered by union contracts ignorant of their First Amendment rights under Beck, making it as difficult as possible for them to object and recover the political contribution portion of their dues.

Beck is the labor movement’s unacknowledged Achilles heel. If the rights of employees recognized by the Supreme Court in that decision are ever enforced, it will doom John Sweeney’s strategy of organizing the working poor along with more public employees in an attempt to reintroduce class warfare into American life through political campaign contributions. Beck doesn’t just make it illegal to take union dues from employees over their objections and use them for political contributions. It says you can’t use their dues for anything other than what directly benefits them: collective bargaining, contract administration, and processing grievances. What that means, in plain English, is that when an employee objects you can’t legally spend his union dues for political campaigns or for organizing other workers. The NLRB, labor’s lapdog, predictably disagrees, but its recent decision to that effect will be reversed on appeal.

In Beck the Court found that fully 79 percent of union dues were spent on activities that did not directly benefit the dues-paying workers. In Washington state, where voters passed a Paycheck Protection Initiative in 1992, 85 percent of the state’s teachers declined to have their dues spent on political contributions. Imagine what would happen to New Labor if it lost two-thirds of its revenue. No one in Congress would ever return John Sweeney’s phone calls.

Most employees in unionized workplaces are unaware of their rights under Beck. A 1996 survey of 1,000 union members by Americans for a Balanced Budget revealed that 78 percent did not know they had a right to obtain a refund for that portion of their dues spent on political contributions. You can be certain that figure would approach 100 percent if they were asked about their right to refunds for dues spent on organizing.

Why aren’t companies doing more to educate their employees about Beck? Largely because it’s not in their interest for unions to increase spending on contract administration or grievance processing, expenditures approved by Beck. That would cause problems, possibly reduce productivity. Plus, any company that tried to inform its own employees of their Beck rights would face union reprisals.

Nor are we likely to see a concerted national effort by unionized companies to educate their employees. The Business Roundtable and the National Chamber of Commerce are too focused on bottom-line issues such as tort reform to be bothered with the constitutional rights of blue-collar stiffs. They probably think it serves them right for voting for a union in the first place.

New Labor could not survive without its continuing cash flow unconstitutionally confiscated from employees ignorant of their rights. Could Congress enact legislation enforcing Beck rights in a meaningful manner, as the initiative in Washington state did by requiring explicit approval for political spending? A Republican one might. Such legislation has been narrowly defeated in the past. Would a new president sign it? Not if his name is Al Gore. And only maybe if it’s George W. Bush. Keep in mind that a lot of those don’t-rock-the-boat Business Roundtable types have given money to the Bush campaign.

Unions as we knew them in the 20th century are near death. An unconstitutionally acquired cash flow may keep them afloat for a while, but it’s only a matter of time. New Labor, public employees and the working poor, will fare no better. They have only a marginal role in the 21st century’s post-industrial economy. Government can’t save New Labor now, any more than it could save Old Labor 40 years ago, when it started its downhill slide. It can only delay the inevitable.

The leaders of New Labor have chosen a path that will not lead to recovery. It is based almost entirely on support from the ruling political class, which allows them to exploit public employees and the working poor to generate the revenue for contributions to Democratic politicians. By turning their backs on their members, New Labor’s leaders are living precariously. Because of Beck, they are just one election away from ruin–a sad end for a once proud movement that now puts cash flow ahead of its members.

The Cogs of War

mtm@walterhav.com (Michael McMenamin) — Tue, 01 Feb 2000 00:00:00 EST

Truth, Terror and David Trimble

mtm@walterhav.com (Michael McMenamin) — Fri, 01 Oct 1999 00:00:00 EDT

You are a very important person. But before your ego can deflate and you can start spending the prize money, some journalist writes a book accusing you of complicity in the government-sanctioned murder of innocent people. What to do?

If you're Henry Kissinger, you shrug your shoulders, denounce the accusations as absurd, and go about your business of preserving Soviet-American hegemony until Ronald Reagan can become president.

If you're David Trimble, the first minister of the yet-to-be-formed coalition government in Northern Ireland, the head of its largest Protestant party, and the co-recipient of the 1998 Nobel Peace Prize, you adjust your orange sash, denounce the charges as absurd, and--because you still live in the United Kingdom--sue or threaten to sue everyone in sight for libel, including the publisher, the journalist, and any U.S.-based online bookseller who dares offer the book for sale in the U.K.

Does this mean David Trimble is more thin-skinned than Henry Kissinger? Not exactly. It simply means that, in the name of the First Amendment, the libel regime in the U.S. actively discourages public figures from seeking legal redress against the media when they claim they are defamed. If you don't like what the media say, the Supreme Court says your status as a public figure will afford you a forum to issue your denials. But in the U.K, if you're a defamed public figure and you don't sue, you're perceived as a cowardly wimp or guilty as charged. Probably both.

Although there's only one book out there saying bad things about David Trimble, he's going to have to stand in line at the courthouse to sue. The 1998 book, The Committee: Political Assassination in Northern Ireland, and a 1991 British TV documentary also called The Committee have been the subject of no fewer than eight separate libel lawsuits, seven in the U.K. and one in the U.S., where it is a bestseller with more than 60,000 copies sold. (See "Tracking the Suits," page 42.)

The book's author is British journalist Sean McPhilemy, who was also the executive producer of the documentary that started it all when it was broadcast on Britain's Channel 4. The central thesis of the book and the program is that, starting in 1989, a committee consisting of high-ranking members of the Protestant establishment in Northern Ireland, including lawyers, businessmen, politicians, and ministers, used the services of Protestant paramilitaries in a terror campaign against Catholic targets in Northern Ireland. Victims were located and identified by members of the Royal Ulster Constabulary (London's Ulster police force), who, says McPhilemy, at best looked the other way or, at worst, actively assisted the hitmen. Trimble is accused in the book of being an associate of The Committee, rather than a member, and of providing political cover for its activities.

The implications of both the book and the litigation surrounding it are significant.

Of immediate importance is its impact on the Northern Ireland peace process, which, as this is written, is a shambles. That's either because 1) Trimble has refused to allow the formation of a new Northern Ireland government that includes representatives of Sinn Fein (the political wing of the Irish Republican Army), as envisioned by last year's Good Friday Agreement, or because 2) the IRA has refused to commence the decommissioning of its arms, also part of the agreement. Take your pick.

The litigation will also provide a vivid contrast between the British and American libel regimes and how they handle what is essentially the same case. While libel defense lawyers in both countries prefer the American system with its many First Amendment defenses, the much-maligned British system may well go much further than the American in uncovering the truth about the sensational allegations. Finally, because U.S.-based online booksellers have been sued in the United Kingdom, the litigation may determine whether the U.K. libel regime's age-old custom of effectively banning a book by threatening a libel action will survive in an age of e-commerce.

By McPhilemy's account, the "Ulster Central Coordinating Committee" was an outgrowth of Protestant reaction to what they considered a "betrayal" by Margaret Thatcher in 1985, when Britain gave the Republic of Ireland a limited role in speaking for the Catholic population of Northern Ireland. There also was a growing frustration within the Protestant establishment and the RUC itself that the hands of the security forces were being tied by politicians in London. The IRA wasn't impressed by the Thatcher initiative and continued its relentless campaign of terror against Protestants, including prominent Protestant businessmen who, by the IRA's definition, had "collaborated" with the authorities by selling them goods or services. More extreme Unionists (so called because they traditionally supported union with Britain), including a then little-known university law lecturer named David Trimble, urged Ulster's independence from Great Britain, a view shared by The Committee. For the record, all the members of The Committee who are identified in the book have denied the group's existence.

In his book, McPhilemy identifies 18 victims whose murders were allegedly sanctioned and organized by The Committee between February 1989 and September 1991. All of these murders are officially "unsolved." This terrorist campaign, whether or not directed by The Committee and assisted by the RUC, continued to be chillingly effective. In 1992, the hit squads killed nearly twice as many Catholics as the IRA did Protestants. A serious IRA peace initiative followed in 1993.

McPhilemy's largely circumstantial evidence regarding Trimble is based on Trimble's alleged close association with many persons identified as members of The Committee, and on Trimble's efforts, in response to the documentary (which identified no Committee members by name), to discredit it and McPhilemy. Trimble attacked the documentary in interviews and, with full legislative immunity, on the floor of Parliament. McPhilemy interviewed his primary confidential source, James Sands, extensively on several occasions, including a lengthy videotaped interview in which he claimed to have sat on The Committee itself. According to McPhilemy and his investigators, the details of his story and his background checked out. He was who he said he was--a close political associate of many of the people he identified as being on The Committee.

As for the case against McPhilemy, it rests on the fact that the Royal Ulster Constabulary was able to identify James Sands as the source and, after substantial interrogation, to persuade him in 1992 to recant his Channel 4 interview. Unfortunately for the RUC, they didn't have access to the complete transcripts of Sands' interview with Channel 4, whereas McPhilemy was able to obtain from a U.S. court a complete transcript of the RUC's interrogation of Sands. In his book, McPhilemy examines in careful detail both the initial Sands interview with Channel 4 and the RUC-induced retraction and easily demonstrates the credibility of the initial version.

Additionally, Sands met with McPhilemy's American and British lawyers earlier this year and signed an affidavit confirming that his original interview was true and accurate and his retraction to the RUC was induced by threats. Yet in subsequent interviews with the British press, Sands has again recanted (albeit not under oath). Moreover, McPhilemy had another anonymous source within the rogue element of the RUC who confirmed details of collaboration with anti-Republican terrorists (though not the existence of The Committee itself). McPhilemy claims to have more former RUC members as sources as a result of further research for the book. One of those has been identified in court papers as former RUC Sgt. John Weir, who claimed that an alleged Committee member, Belfast solicitor Richard Monteith, told him in December 1998 that "the book was basically accurate" and contained only "small mistakes."

McPhilemy himself was a respected investigative journalist before producing The Committee. But he was not political, never having done an article or program on Northern Ireland. As a former colleague wrote earlier this year in The Financial Times, "McPhilemy, a Catholic who is married to a Northern Ireland Protestant, had deliberately made no programmes on sectarian strife in his native province because he was pessimistic about political progress and disinclined to immerse himself in the intransigence and bigotry that prevailed on both sides of the sectarian divide."

These factors--McPhilemy's reputation as a journalist, his lack of Irish Republican sympathies, his initial reluctance to do the program at all, the two confidential sources, the patent inconsistencies in his major source's recanting, and the numerous (if anonymous) former RUC officers who supposedly confirm RUC complicity in the unsolved assassinations--have a direct bearing on the likely outcome of any libel suit brought into an American court. Taking them all into account, it is not unreasonable to conclude that McPhilemy has acted throughout with a good-faith belief in the truth of what he has broadcast and published. And if that is the legal issue in a libel case, it won't get to a jury in the United States if the person suing is a public official or public figure.

That is among the reasons that most of the libel suits were filed only in the U.K., notwithstanding that the book is widely available in the United States. In the U.K., libel plaintiffs are thought to have it easier than in the U.S. For one thing, if you sue someone for libel in the U.K., it is the defendant who must prove the truth of what he published.

Also, plaintiffs in the U.K. can do more than sue the author and publisher of the alleged libel. They can sue anyone who disseminates it, including news dealers and booksellers. All they have to do is prove that the news dealer or bookseller had knowledge of the defamatory content and continued to sell the offending publication. The knowledge requirement is usually taken care of by the plaintiff's helpful solicitor, who sends an ever-so-polite letter to the bookseller or news dealer advising him to remove the offending publication from his wares or he will have his pants sued off. This usually does the trick, given the low profit margins of most booksellers and news dealers.

On the down side, the plaintiff must pay his solicitor for the lawsuit as well as the barristers who actually try the case. Contingent fees are forbidden. And if the plaintiff loses, he must pay the attorneys' fees for the defense. So while libel plaintiffs may have it easier in the U.K., the threat of losing and paying the other side's attorneys' fees acts as a deterrent to frivolous suits.

Unfortunately, there is no such deterrent in the United States. On average, far more frivolous libel actions are filed in the U.S. than in the U.K. So plaintiffs' lawyers in the U.S. frequently take libel cases on a contingent basis. Inasmuch as America does not have a "loser pays" tradition on attorneys' fees, the Supreme Court has helpfully placed a multitude of roadblocks in front of libel plaintiffs to keep them from raiding media treasuries. Plaintiffs have the burden of proof. And not only do they have to prove that the statements about them were false; they also have to prove that the media defendants were at fault. Specifically, if you are a private figure, you must prove that the reporter was negligent in doing his job.

If you are a public figure or a public official, the bar is raised even higher. A public official must show that the statements were false and defamatory, and that the reporter deliberately lied or was so reckless in his reporting that you could conclude he didn't care whether what he reported was true or not. This is commonly referred to by libel lawyers as the New York Times v. Sullivan rule, after a 1964 Supreme Court decision.

The Supreme Court has done all this in the name of the First Amendment, and the accepted dogma in the United States today is that it has been necessary to avoid a "chilling effect" on free speech. As a consequence, almost 90 percent of all U.S. libel actions are decided in favor of the media before trial on issues other than truth. It is by no means clear, however, that the constitutional standards of New York Times v. Sullivan are more of a deterrent to frivolous libel actions than the United Kingdom's practice of making the loser pay the winner's attorneys' fees.

Perversely, the U.S. system that makes it so hard for public figures and public officials to recover for damage to their reputation actually gives them a free pass when very bad things are said about them. All they have to do is issue a vigorous denial, because in the United States they are not expected to sue. They can hide behind New York Times v. Sullivan and say they don't want to spend tens of thousands in attorneys' fees to prove that a reporter was reckless when all they want to do is clear their good names, something the U.S. libel system is not designed to do if you are a public figure or public official.

But in the U.K., given all the advantages that a libel plaintiff possesses, public officials have long been under enormous pressure to issue libel writs if they have been defamed. If a public official merely satisfies himself with an angry denial, people start wondering, repeat the libel, and think, "If you don't sue, it must be true."

So which system better serves the public interest in terms of uncovering wrongdoing by public officials? It is probably impossible to quantify, but occasionally something comes along that allows you to draw a comparison. The Committee is just such an occasion, and in this case the U.K. system wins hands down.

None of the libel suits that arose in the U.K. in the wake of the 1991 broadcast of The Committee would have happened in the United States. Richard Monteith, the Belfast solicitor, filed both criminal and civil libel suits against McPhilemy even though the original documentary was careful not to describe any Committee members in any way that would allow them to be publicly identified. And even if it had, a U.S. public figure would have used the media, not the courts, to fight back. In addition to defending himself against Monteith, McPhilemy also was determined to rescue and restore his reputation as a journalist. That reputation had been battered by the media campaign against him and the program by the RUC, the Ulster establishment, and those media outlets that bought their spin. The Sunday Express, for example, accused him of lying to Channel 4 about threats to his life, and The Sunday Times accused him of perpetrating a hoax in the 1991 TV broadcast.

From the outset, McPhilemy contemplated libel suits against both papers in a way an American journalist would never have considered. It's fair to conclude that, but for the initial Monteith suits involving the documentary and the imperative to clear his own reputation, McPhilemy would not have undertaken the additional extensive research necessary to publish the book that identifies the names of The Committee members, and which resulted in the new lawsuits, including David Trimble's.

McPhilemy's suit against The Sunday Times is scheduled for trial in January in Britain; the only suit to be brought in a U.S. court is scheduled to come to trial here in March. While both trials will generate considerable heat, the British libel trial is the more likely to shed light on the book's essential allegations. This is because the defense in the American suit will focus on whether McPhilemy was reckless or negligent in his reporting, while The Sunday Times will focus its defense on the book's falsity.

McPhilemy attempted to limit the case to the Times' accusation that he was incompetent and careless at best, and a hoaxer and deceiver at worst. But in May, the Court of Appeal in London rejected McPhilemy's attempt. The Court of Appeal judge reasoned that The Sunday Times article at issue "comes close--I am inclined to say very close--to asserting that the programme's central thesis was untrue. I accept that in some circumstances a publication that the content of a programme is untrue may not be defamatory to the programme makers. But I consider that in this instance it adds to the defamatory sting to say, not only that the main content of the programme was based on obviously worthless evidence, but that it was, or probably was, untrue."

McPhilemy wanted to put himself and his journalistic methods on trial, not the truth of the central thesis of the program. The Sunday Times' lawyers finally figured out they might not win by an attack based on McPhilemy's incompetence or mendacity. Far better, The Sunday Times reasoned, to try and prove that McPhilemy's main source--James Sands--was unworthy of belief based on his erratic RUC-induced statements after the broadcast.

David and Albert Prentice aren't going to have it so easy in their U.S. trial next March. Last October, the Prentices, prominent Ulster businessmen and alleged members of The Committee, filed a libel suit in Washington, D.C., against McPhilemy, his production company, and the American publisher of The Committee. If they are determined by the court, as a matter of law, to be public figures, then only McPhilemy's conduct as a journalist (whether he knowingly lied or was indifferent to the truth) will be at issue, not the book's truth or falsity. Truth will be at issue if the case goes to a jury, and that won't happen unless the Prentices are private figures.

McPhilemy's American lawyer certainly believes the Prentice brothers will be found to be public figures. Recent court papers filed by him allege, among other things, that the Prentice brothers have extensively advertised their business throughout Northern Ireland, sought publicity for their many charitable contributions, financed an anti-Republican printing company, openly cooperated with The Sunday Times in its McPhilemy litigation long before they had been identified as Committee members, and actively sought publicity for their lawsuit against McPhilemy. If McPhilemy can prove all this to the court's satisfaction, the Prentice brothers will be just another U.S. libel plaintiff statistic, one of the 90 percent who lose before trial on issues other than truth.

One issue arising from this tangle of cases is straightforward. Does the David Trimble lawsuit against Amazon.com, along with policeman Trevor Forbes' lawsuit against Barnes & Noble, endanger the future of Internet book sales in Britain by U.S. booksellers? In a word, no.

While it is true that U.K.-based booksellers, including Amazon's U.K. subsidiary, have removed the book from their Web sites, the major U.S. online booksellers--Amazon, Barnes & Noble, and Borders--continue to sell and ship the book to customers in the U.K. (The book's U.S. publisher, Roberts Rinehart of Colorado, no longer accepts orders for the book placed by customers in the U.K. on its Web site.) When asked why Amazon had taken the book off its U.K. Web site but still made it available on its U.S.-based Web site for sale to U.K. customers, Simon Murdoch, managing director of Amazon.co.uk and vice president of Amazon.com, explained: "From a legal point of view, it's actually quite a big distinction. The situation is, if you actually buy the book from any company in the States, as I understand, you would be actually bringing the book in yourself as an individual."

David Trimble is maintaining his suit against Amazon.com despite the fact that the book is no longer available on Amazon.co.uk. But there are two additional reasons why Amazon.com need not be worried about it. First, any libel judgment against Amazon in the U.K. will be enforced only against its assets located in the U.K. And, assuming that Amazon.co.uk is a subsidiary corporation and not simply a division of Amazon.com, English solicitors maintain that its assets cannot be used to satisfy a judgment against the U.S.-based parent. Second, there is an increasing trend among U.S. courts to refuse to enforce English libel judgments transferred to the U.S. because they are the product of a system which is contrary to the public policy of the United States.

The ultimate outcome of the U.K. suits against Amazon and Barnes & Noble, therefore, is that the U.K. libel system will not be able to impose its standards on books shipped from the United States. Equally important, English solicitors will no longer be able to effectively ban books in the U.K. simply by threatening to sue a bookseller. They can limit access, but banned books in the U.K. are a thing of the past thanks to U.S.-based online booksellers.

As to the other issues, the bottom line is that the British libel regime has resulted in the publication of a bestseller in the United States that credibly accuses the first minister-designate of the new government of Northern Ireland of providing political cover for terrorists. The U.S. libel regime is far less likely to have produced such a result.

Politically, the timing could not be worse. The situation is again becoming critical in Northern Ireland, and McPhilemy is an inconvenient presence not only to David Trimble but to British Prime Minister Tony Blair as well. Trimble's lawsuit only serves to focus more attention on himself and the accusations against him.

Tony Blair has now gone much further in Northern Ireland than Margaret Thatcher ever dreamed: Genuine power sharing with the Catholic minority is at hand; the IRA's guns are once again temporarily silent; and the Republic of Ireland has formally dropped any claim to sovereignty over Northern Ireland. Yet David Trimble, as the first minister-designate, is refusing to allow the new government to be formed because the IRA won't commence decommissioning its arms.

Trimble and the IRA are playing a dangerous game. Each has a diametrically opposed view of what the British will do if the peace process breaks down, and the cease-fire with it. Trimble trusts that Blair will again send in the British Army to restore order.

But trusting the British to do the right thing is not a policy; it's a wish. That Blair was a hawk on Kosovo is no guarantee he will be the same in Northern Ireland, especially in the face of what is widely perceived as Unionist intransigence. If the IRA breaks the cease-fire and the British don't send their army back in, Ulster will end up being led by a politician who only 10 years ago was advocating Ulster independence. And if Ulster independence comes, so probably will a new Irish civil war between north and south, much to the delight of the IRA, if not Sinn Fein, neither of which ever made the mistake of trusting the British to do the right thing for Ireland.

If David Trimble really wants to live up to the legacy of his Nobel Peace Prize, he should spend less time on his reputation and more on his country, U.K. libel law notwithstanding.

Nazi Economics

mtm@walterhav.com (Michael McMenamin) — Sun, 01 Aug 1999 00:00:00 EDT

Clients From Hell

mtm@walterhav.com (Michael McMenamin) — Mon, 01 Jun 1998 00:00:00 EDT

The decision in the Paula Jones case came as a big surprise. It shouldn't have. Heaven knows we here at REASON tried to do our civic duty, unpleasant as it was, nearly four years ago--we told President Clinton how he could beat the rap with minimal political fallout. (See "Defending The President," August/September 1994.)

Did he listen? Judge for yourself. Rather than fork over the price of a REASON subscription, Clinton chose (a) to hire one of Washington's highest-priced lawyers with, at the time he was hired, precious little experience in sexual harassment law, and (b) to spend in excess of $4 million in legal fees for what should otherwise have been a routine case costing him less than $100,000. In the process, Clinton has placed his presidency in peril. And for what? While it couldn't happen to a more deserving guy, it didn't have to be this way. At REASON, we don't need hindsight to conclude that Clinton unwisely chose to utilize Nixonian strategy and tactics while ignoring his strongest issue--sexual harassment law was on his side, even if Paula was telling the truth. Indictment or impeachment looms large over his lame-duck presidency as a consequence.

What REASON said on quid pro quo harassment: Jones claims [she was given] a job transfer and failed to receive merit pay increases in retaliation for having turned Clinton down. Most of what we will need should be found in Jones's personnel file with the Arkansas state government. If it contains a legitimate, non-discriminatory reason for her transfer, we are halfway home....As for the pay claim, there already have been news reports that Jones received at least one merit increase and three cost-of-living increases in less than two years. If we can prove all this, her quid pro quo claim is in deep trouble.

What Judge Susan Wright said: "The Court has carefully reviewed the record in this case and finds nothing in plaintiff's employment records, her own testimony, or the testimony of her supervisors showing that plaintiff's reaction to Governor Clinton's alleged advances affected tangible aspects of her compensation, terms, conditions, or privileges of employment."

What REASON said on hostile environment sexual harassment: Our argument here is that what Clinton is claimed to have done is not, repeat not, illegal sexual harassment. Boorish, bad taste, clumsy--but not illegal....Clinton's alleged conduct is obviously more egregious [than that of Clarence Thomas and Robert Packwood] but still eminently defendable under existing law. But our real ace in the hole, what's going to get us out of this case quickly, is one additional and critical fact: It only happened once. Not one federal court has ever found a single incident to be sufficiently severe
to constitute a hostile environment, even though some federal courts have admitted that a single severe incident--for example, rape or violent sexual assault--could do so.

What Judge Wright said: "While the alleged incident in the hotel, if true, was certainly boorish and offensive, the Court has already found that the Governor's alleged conduct does not constitute sexual assault. This is thus not one of those exceptional cases in which a single incident of sexual harassment, such as an assault, was deemed sufficient to state the claim of hostile work environment sexual harassment."

OK, you say, if it was that obvious four years ago how strong Clinton's legal position was (and it was that obvious), why did the case take so long? Two answers: Bad strategy. And even worse tactics.

REASON's advice on strategy: We're talking strategy, not public relations. And our strategy is simple. It's to win. At the earliest possible time. And before the plaintiff has much opportunity to take sworn testimony from potentially embarrassing witnesses like state troopers, Gennifer Flowers, and other Clinton mistresses.

Clinton's strategy: It's not clear, even in hindsight, that Clinton and his legal team had a coherent strategy other than stall, stonewall, delay, and win at the last possible moment, all the while ignoring that such a course could inflict maximum damage on the presidency.

REASON's advice on asserting presidential immunity: What about presidential immunity? The technical legal phrase is "the Nixon gambit." Should we use it? Well, we could....But it would be wrong, that's for sure. It's a delaying tactic, and it's bad public relations....All that guarantees is that this case is going to be around for the next two years, through the 1996 presidential election. So keep in mind our strategy: It's win, stupid, as soon as we can. We don't need delays.

What Clinton did: Well, he couldn't resist pulling a Nixon. So the Supreme Court knocked him down 9-0, and the case hung around long enough for Lewinsky and Tripp to surface. And now he's making the same Nixonian mistake again by claiming executive privilege in connection with Ken Starr's criminal obstruction of justice investigation involving, among other things, someone close to Clinton preparing "talking points" for Monica to deliver to Tripp to change her testimony about Kathleen Willey. When this reaches the Supreme Court, Clinton will again lose 9-0.

REASON's advice on pre-trial tactics: Clinton's lawyer, Bob Bennett, is in the Washington office of a huge New York law firm known for its hardball, take-no-prisoners litigation style. He might well take the same approach here and harass Jones and her lawyers by burying them in paper with motions, briefs, document requests, interrogatories, requests for admissions, and deposition notices--all the weapons in the modern litigator's arsenal. He might well do that, but it would be a mistake. Why? Keep in mind our strategy. We want a quick victory before Jones's lawyers have a chance to take their own depositions--testimony under oath--of Arkansas state troopers, Gennifer Flowers, and other assorted Clinton mistresses.

What Clinton did: No weapon in the modern litigator's arsenal was left unused by Clinton's lawyers. And by not going
for a quick victory, Clinton had his own deposition taken, exposing himself, so to
speak, to Ken Starr's investigation of perjury charges against him.

REASON's advice on seeking an early deposition of Jones: [W]e promptly take the depositions of Jones and the Arkansas state employees who ordered her transfer and granted her pay increases. We limit our questions to the oral-sex request, the transfer and merit pay, and whether the hotel incident affected the way she did her job. We then go to the judge and ask her to dismiss the case on the two substantive legal issues we examined earlier--quid pro quo and hostile environment. We also ask the judge to prohibit Jones's lawyers from taking any potentially embarrassing depositions from troopers or bimbos pending her decision on our request.

What Clinton did: He stalled and delayed, waiting over three years before he deposed Jones. By then, she had changed lawyers, and taken all those "potentially embarrassing depositions from bimbos" we had warned him about. Moreover, giving Jones's lawyers all this time to research Bill's past is exactly what led to Monica Lewinsky, Linda Tripp, Kathleen Willey, Jane Does 1 through 4, and a grand jury investigating Clinton for perjury, suborning perjury, and the obstruction of justice.

Why did Clinton choose a defense which ended up jeopardizing his presidency? Who knows? Maybe it was guilt. Or arrogance. Or paranoia. Maybe all three. Trial lawyers have a saying, "Sometimes you win; sometimes the client loses." It's true more often than you think. In the Paula Jones case, his lawyer won, but Clinton lost--if not his presidency, then certainly his place in history. Like a marriage, you rarely know what really goes on between a lawyer and his client. While some may believe that Bob Bennett's inexperience in employment law hurt his client in the early days of the Jones case, Clinton and his wife were sophisticated clients, Yale lawyers both, and no one can doubt they were calling the shots, not their lawyer. "Clients from hell" is the phrase most often uttered by my sisters and brothers at the bar about those who insist on micromanaging every detail of their case. The Clintons got the defense they deserved. It was the country that deserved better.

What Clinton should do now: Put down the drum. Drop the celebratory cigar. Recall Churchill: "In defeat, defiance; in victory, magnanimity." If Jones appeals, do the honorable thing and settle the case. Pay Jones the damages your lawyers discussed earlier and apologize for the pain the ordeal has caused her. Why? Because Jones has a better than even chance of beating you on appeal. You heard it here first. Sexual harassment law is not what is was four years ago. If the CEO of a Fortune 500 company did today what Clinton is accused of, there are few federal judges who would keep that case from a jury. And the U.S. Court of Appeals for the 8th Circuit has not been a friendly venue for Clinton, even if its record on sexual harassment is a conservative one. As we told you four years ago: "There's always a first time for anything, and the Supreme Court of Michigan has already held that a single incident created a hostile environment."

So, Mr. President, the choice is yours. Listen to REASON. Or not. Try and get it right this time. You're not in Arkansas any more.