Civil Asset Forfeiture

The Settlement Shakedown

Federal and state governments are extracting and pocketing huge payments from big businesses, perverting justice along the way.


Moonlight Fire
Guy Kitchens / ZUMA Press

In September 2007, the "Moonlight Fire" ripped through 65,000 acres of northern California, forcing the evacuation of 100 homes and the exertion of thousands of firefighters over 16 days. More than two-thirds of the wreckage occurred on federal land, so the government had a keen interest in assessing blame.

State and federal officials quickly located a culprit: Sierra Pacific Industries, one of the biggest lumber producers in the United States. A logging company contractor working for Sierra Pacific on Labor Day struck a rock with a bulldozer, investigators claimed, setting off the sparks that kindled the initial blaze. Though the company insisted it was not at fault and did not start the fire, it settled with the federal government in 2012 after Judge Kimberly Mueller for the Eastern District of California suggested in pre-trial orders that Sierra Pacific could be held liable for the fire, under complex California forestry regulations, even if the contractor didn't start it.

The settlement was a massive haul for the feds: $55 million to be paid out over five years, with the lumber giant also agreeing to hand over more than 20,000 acres of its land. Yet to Sierra Pacific, it still may have seemed like a good deal. According to company filings, at one point the U.S. attorneys investigating the case claimed more than $1 billion in damages. The state of California also made its own separate demand for $8 million from the company.

After Sierra Pacific opened its pocketbook, evidence began emerging that the settlement was based on improper prosecutorial withholding of key information, and even straight-up lies. By October 2014, after Sierra had delivered $29 million of its settlement to the Department of Justice (DOJ), the company was asking the District Court to void the agreement due to "fraud upon the court." The alleged fraudsters' motive? To secure a financial windfall for both the state and the federal government.

While such post-facto complaining might sound par for the course from expensive corporate defense attorneys, the charges had enough merit to stop the state-level lawsuit in its tracks and send shockwaves throughout the Golden State's legal system. In February 2014, Plumas County Judge Leslie C. Nichols found that the California Department of Forestry and Fire Protection and the California attorney general's office, which jointly investigated the fire with the DOJ, engaged in "egregious and reprehensible conduct" in the case, failing to turn over thousands of pages of documents indicating that several other people could be responsible for the fire-people who lacked Sierra's deep pockets. Also revealed in a 2013 audit: For years, Cal Fire had been secretly and illegally stashing money from settlements in a nonprofit under its control rather than depositing it in California's general fund. According to Sierra Pacific's filings, Cal Fire demanded a check for $400,000 for this fund as part of a settlement offer.

Nichols declared that the state had engaged in "a systematic campaign of misdirection with the purpose of recovering money from the defendants." California was ordered to pay $32 million to reimburse Sierra Pacific's court costs and fees, and the judge tossed out the state's lawsuit.

In the wake of the scandal, all the judges in the district representing that part of California were recused from considering the case, and Ninth Circuit Chief Justice Alex Kozinski—who has been withering in his criticism of the government's behavior—was asked to assign a replacement judge. He ultimately decided to return the case to the district, putting it in the hands of Eastern District Senior Judge William Shubb. What U.S. Attorney Benjamin Wagner boasted in a 2013 district report was "the largest recovery ever by the United States for damages caused by a forest fire" had instead come to symbolize an ominous trend of government greedily shaking down deep-pocketed defendants.

Under Attorney General Eric Holder, the DOJ has netted more than $100 billion in civil fines, settlements, and restitution for fiscal years 2012 and 2013. Criminal fines and settlements account for another $80 billion. Attorneys general throughout the 50 states have also learned to love massive payouts from banks and other big businesses accused of wrongdoing. Typically agreed to in exchange for dropping civil and criminal liability, these settlements in theory are supposed to compensate victims. But government agencies are often the biggest beneficiaries, creating an incentive structure that favors negotiation over prosecution and big corporate targets over discrete executive villains. The combination can too easily lead to perversions of justice.

In January, Holder finally recognized a similarly debased incentive that civil libertarians had been complaining about for decades: civil asset forfeiture against individuals, many of whom are never even charged with a crime. The attorney general issued an order banning what so far is only a small subcategory of DOJ asset seizures, but the move came amid mounting bipartisan congressional pressure, increased activism on both the left and the right, and a rash of recent press coverage, particularly in The Washington Post. (reason has been documenting and denouncing civil asset forfeiture since the 1980s.)

There is an emerging consensus in America that having law enforcement pocketing and profiting from property taken from non-criminals is a serious miscarriage of justice. "Civil forfeiture is fundamentally at odds with our judicial system and notions of fairness," argued John Yoder and Brad Cates, former directors of the DOJ's Asset Forfeiture Office, in a Washington Post op-ed piece four months before Holder's announcement.

Yet this insight has generally not been applied to the property of large corporations. Which is a shame, since the temptation for police and prosecutors is even more corrupting when the target is an entire bank instead of someone who has merely withdrawn a pile of cash from one.

California vs. the Big Guy

Giant logging companies and faceless investment banks do not engender the same sympathy as, say, the owner of a cash-only burrito joint in Arnolds Park, Iowa. (One such owner, Carole Hinders, recently staved off an attempt by the Internal Revenue Service to seize $33,000 from her on grounds that Hinders was consistently making bank deposits smaller than $10,000, thereby potentially facilitating the never-charged crime of intentionally structuring deposits in a way to avoid the Bank Secrecy Act.) It also doesn't help for public relations that the kinds of crimes financial institutions get charged with make even the Hinders case sound clear-cut.

One key difference is that large corporations can afford lawyers-and absorb settlements. Indeed, Sierra Pacific lists four different law firms on the 100-page motion it filed in November to overturn the agreement it had signed onto just two years before.

What sets the Sierra Pacific case apart is the scope of government skullduggery alleged, sometimes by government insiders themselves. The complaint quotes two assistant United States attorneys who were disgusted by the behavior of their peers and reported it to superiors.

One whistleblower, Robert Wright, was removed from the case in 2010, calling it "the first time in [his] 40 years of practicing law that [he] felt pressured to engage in unethical conduct as a lawyer." Another, Eric Overby, left the case on his own and reportedly met with Sierra Pacific's counsel to express his concerns. He told them he had never seen a case like this one, adding, "It's called the Department of Justice. It's not called the Department of Revenue….We win if justice wins." The U.S. attorney's office denies the accusations of misconduct.

Overby's view of what motivates the DOJ may need rethinking. Pivoting off the increased attention on asset forfeiture, some scholars are starting to look more closely at the incentives that encourage U.S. attorneys and state attorneys general offices to pursue these big settlements. What they're finding is not unlike the rural deputy dragging out the drug-sniffing dog as an excuse to search a car for loose cash to seize, but on a much larger scale.

The pursuit of a giant settlement from Sierra Pacific is no mere one-off. "Many states permit the office of the attorney general to retain a specified percentage of the damages and civil penalties obtained through enforcement of state and federal antitrust laws, and many others have similar provisions linked to the enforcement of consumer protection, false claims and related statutes," wrote law professors Margaret H. Lemos and Max Minzner in a January 2014 Harvard Law Review article titled "For-Profit Public Enforcement."

The bad incentives are as pervasive as they are unexamined, the authors argue: "Other states have established all-purpose revolving funds for the support of the office of the attorney general, which are funded by the proceeds of any civil litigation conducted by the attorney general and may be used for the performance of any of the powers or duties of the office. Such civil enforcement provisions have flown almost entirely under the academic radar, even as commentators have heaped critical attention on similar provisions governing the forfeiture of assets in criminal law."

For example, did you know the Health Insurance Portability and Accountability Act of 1996 includes a provision that funds its own enforcement arm from fines and recovered assets? Or that the American Jobs Creation Act of 2004 allows the IRS to keep a quarter of the money it collects pursuing unpaid taxes? Both mechanisms are comparable to how law enforcement agencies bolster their funding with assets seized during drug busts. "Just as asset forfeiture provisions create incentives for enforcers to maximize forfeitures," Lemos and Minzner write, "such enforcement-funded revolving funds create incentives for enforcers to maximize financial recoveries."

The amount that U.S. companies have paid in fines has skyrocketed in recent years, from an estimated $1 billion a year in total fines at the turn of the 21st century to more than $12 billion in 2014 from federal judgments alone, according to a September 2014 cover story in The Economist titled "Criminalising the American Company." The twin threats of overregulation and money-hungry bureaucrats has meant that businesses spend millions trying to comply with arcane rules to avoid attention from prosecutors looking for any excuse to pounce.

Consider Kamala Harris, California's ambitious attorney general, who filed suit against Delta Airlines in 2012 (and threatened other big companies with the same) over a California law requiring that a privacy policy be conspicuously posted within smartphone apps. Harris' office warned in a press release that it could demand $2,500 from Delta for each documented violation—meaning, every time a consumer accessed the insufficiently labeled app. A federal judge eventually dismissed the lawsuit over a conflict with federal law, saving the company potentially billions in fines.

If even a state attorney general doesn't know which businesses are impacted by federal regulations, think how tough it is for the companies themselves to keep up. Harris' misstep has not put a dent in her ambitions: In January, she announced that she'll be running to fill retiring Democratic Sen. Barbara Boxer's seat in 2016.

Feeding the Beast

As America struggled through the 2008 housing collapse and its aftermath, state governments in particular felt the pinch. Asset forfeiture became an increasingly attractive way for bureaucrats to fill funding gaps.

In 2012, the federal government and 49 states hailed a massive settlement with five large banks—JPMorgan Chase, Wells Fargo, Citi, Bank of America, and GMAC (now called Ally Financial)—over allegedly abusive mortgage and foreclosure practices. More than $25 billion in relief was coming to affected homeowners, prosecutors bragged. "Our settlement holds America's largest banks accountable for harms homeowners suffered from shoddy loan servicing, illegal robo-signing, and faulty foreclosure processing," declared Washington State Attorney General Rob McKenna. Much of the money did go to harmed homeowners, but not until the government skimmed off a healthy cut.

Some $2.5 billion of the settlement went to states to use pretty much however they wanted. The national affordable housing advocacy group Enterprise Community Partners analyzed how the states were spending the settlement money and discovered that many of them diverted it to programs that had nothing to do with housing. In several states, the money went without strings to the office of the attorney general or directly into the state's general fund. In California, Gov. Jerry Brown proposed using part of it to help plug holes in the budget for the state Department of Justice and for debt service on state housing programs.

Despite these potentially corrupting financial incentives, the possibility of prosecutorial misconduct in the Sierra Pacific case hasn't gotten the same kind of attention as, say, the Long Island snack-food distribution company that had $447,000 seized by the office of then–U.S. Attorney (and current U.S. attorney general nominee) Loretta Lynch for the same kind of small-deposit activity that ensnared the Iowa Mexican restaurant. (In January, the federal government finally agreed to give the money back to the owners of Bi-County Distributors, who had never been charged with a crime.)

But Sierra Pacific did draw the attention of Sidney Powell, a former assistant U.S. attorney turned private white-collar defense lawyer, who wrote about the case in October for the New York Observer. Powell's own experience with prosecutorial misconduct in pursuit of convictions led to a 2014 book, Licensed to Lie: Exposing Corruption in the Department of Justice (Brown Books). Among the subjects: the misbehavior of prosecutors going after Merrill Lynch executives in 2003 for connections to the Enron scandal (in the course of extracting an $80 million settlement from the brokerage); the destruction of the accounting firm Arthur Andersen following a conviction (subsequently overturned unanimously by the Supreme Court) for its work with Enron; and the pursuit of charges against Sen. Ted Stevens (R-Alaska), who lost re-election after federal accusations of corruption in 2008. Despite being convicted (and later dying in a plane crash), Stevens was cleared after revelations of prosecutorial misconduct.

"It's an outrage the way they handle things," Powell says. "I think they found out how to make a boatload of money shaking down corporations and other businesses through civil asset forfeitures that are very hard to defend against."

Asked whether financial incentives played a role in the Enron case, she says the DOJ certainly cashed in. "I know the department got…hundreds of millions from Citibank and some of the other banks related to the Enron debacle. And…I don't know where all that money went. Maybe some of it was owed, but the way the government goes about it and what they do with it has no transparency that I know of."

While Powell sees the settlements as prosecutors shaking down Wall Street for the cash by threatening criminal charges against anybody who might try to resist, the populist Rolling Stone journalist Matt Taibbi makes the opposite point: that banks and corporations are greasing the skids by agreeing to large payments that absolve boardrooms and executives of culpability for the housing bubble and collapse.

In a November piece, Taibbi concluded that the DOJ's $13 billion settlement with JPMorgan Chase in 2013 should be seen not as a punishment but as a bribe. "The root bargain in these deals was cash for secrecy," Taibbi writes. "The banks paid big fines, without trials or even judges—only secret negotiations that typically ended with the public shown nothing but vague, quasi-official papers called 'statements of facts,' which were conveniently devoid of anything like actual facts."

Per the terms of the settlement, $2 billion will go straight to the U.S. Treasury. Hundreds of millions will be split among the attorney general's offices in California, Delaware, Illinois, Massachusetts, and New York. Just $4 billion, or less than one-third, is intended as "consumer relief" for anybody harmed by JPMorgan Chase's conduct.

Wall Street critics like Taibbi are frustrated that under such settlements, nobody goes to prison for fraud or misconduct. This would seem to put him at odds with Powell, whose post–Department of Justice career revolves around defending executives and corporations in court. What connects the two is a shared belief that bad incentives are pushing the DOJ to pursue money rather than justice. As Holder and Congress begin the first baby steps toward rolling back the civil-asset-forfeiture regime against individuals, it's time to start being more skeptical when a similar practice is aimed at corporations.