In recent corporate scandals, some executives have learned the hard way that lying is still a crime in corporate America. Martha Stewart was accused of selling her ImClone stock allegedly after receiving insider information. However, she was not convicted of securities fraud. She was instead convicted for lying. In addition, Computer Associates executives were indicted and some have already pleaded guilty for lying to their own company’s attorney during an internal investigation when their lies were passed on by their attorney to the government.
American history is replete with cautionary tales about the importance of telling the truth. President George Washington is alleged to have said, “I cannot tell a lie,” about cutting down his father’s cherry tree, and even though this event may not have literally happened, it is a story often repeated to highlight the importance of telling the truth. President Abraham Lincoln was often fondly referred to as “Honest Abe.” However, some of our recent presidents have not exhibited such a high regard for telling the truth. For example, President Richard Nixon was threatened with articles of impeachment in the 1970s and resigned from office when it was clear that the House of Representatives was going to impeach him for lying about the Watergate break-in. The result was different, however, in the 1990s. President Clinton was charged with lying under oath and impeached by the House of Representatives, but the Senate did not convict him and he remained in office.
Businesspersons need to know that the rules regarding lying in business in the U.S. are currently being vigorously enforced. Contrary to the belief of all too many executives, the rules regarding lying are not confused and unclear—at least in the minds of today’s prosecutors. Recently, in case after case, scandal after scandal, American federal law enforcement officials have clearly shown by their indictments and prosecutions that there is no confusion in their minds—lying is a crime.
Lying Alone is Enough to Send You to Jail
After the conviction of Martha Stewart, the former CEO of Martha Stewart Living Omnimedia, Inc., numerous articles and editorials were written bemoaning the trial and her conviction. The arguments castigating the prosecutors for bringing the criminal case against her went something like this: (1) since Stewart was not in the final analysis being prosecuted for the underlying crime of securities fraud, it was not “right” for the prosecutors to go after her for simply lying to federal investigators, and (2) it was not “fair” for Stewart to be prosecuted for lying when so many other CEOs and top officers behaved so much more atrociously, enriched themselves so much more outrageously, and caused so much more damage to others than Stewart did.
Let’s take a closer look at the first argument—whether or not lying alone is a crime in America. When a witness takes the stand in a judicial proceeding in the United States, the witness is first asked to take the following oath: “Do you swear or affirm to tell the truth, the whole truth, and nothing but the truth?” Only after answering yes is the witness allowed to give testimony in a judicial proceeding. After taking this oath, a person who testifies willfully and falsely in a matter material to an issue involved in the proceeding will be guilty of the crime of perjury.[1] Any attempt to influence a witness’ testimony corruptly by promises, threats, or the like is committing the criminal offense of witness tampering.[2] Furthermore, anyone who attempts to prevent or impede the lawful process will be guilty of the crime of obstruction of justice.[3] In each of these crimes, there is no requirement that the person charged and convicted of such crimes first be convicted of some other “underlying crime.” Simply put, lying itself is a crime, punishable with serious jail time. Stewart is not being singled out for special treatment by being convicted solely of lying.
Let’s examine the second argument raised regarding whether it is “unfair” for Stewart to be sent to jail for lying. After all, what she did was not as serious and damaging as the behaviors of other senior executives involved in some of the more notorious scandals (Adelphia, Tyco, Enron, etc.). Again, one who makes this argument may not be thinking through the full impact of accepting lying within our judicial proceedings. If lying were suddenly to become acceptable, why would anyone tell the truth if it meant harmful consequences to themselves? Surely we are not so naïve as to believe that it is human nature to testify against our own interests and that we would automatically do so even if there were not swift, serious, and painful consequences for not telling the truth.
Lying is a crime because those who lie in a judicial proceeding are destroying the essential fabric of the “rule of law,” which has enabled capitalism to be so successful in the United States. Lying is and must be a crime in a judicial proceeding—and must be enforced against everyone—whether he or she is the President of the United States, the president of a Fortune 500 multinational organization, or the janitor. Stewart’s crime of lying must be viewed not only in terms of how it may have impacted her own company and shareholders,[4] but must also be viewed in light of the potential damage to our entire economy if lying were suddenly to be tolerated in our judicial proceedings. After all, if it is okay for Stewart to lie, then how can we complain about accountants who lie about a company’s financial audits, executives who lie about their company’s sales and revenues, or analysts who lie about their stock recommendations? What then makes us think that anyone will continue to invest their money in the American stock market, which has been the driving force of our brand of successful capitalism during the second half of the 20th century?
The Federal Government’s Powerful Weapons for Catching Business Liars
Perjury–Lying Under Oath
On May 21, 2004, federal prosecutors charged a Secret Service special agent with perjury for allegedly lying in the trial of Martha Stewart and her broker, Peter Bacanovic.[5] A general definition of perjury is: “Whoever…having taken an oath before a competent tribunal or person…that he will testify…truly or that any written…declaration…by him…is true, willfully and contrary to such oath states or subscribes any material matter which he does not believe to be true…is guilty of perjury.”[6] The two critical elements of perjury are (1) a deliberately false statement and (2) the statement must be about an issue material to the case.[7] In this instance, the government witness, Larry Stewart, was accused of testifying falsely that he had personally examined Martha Stewart’s broker’s worksheet before he testified about the ink. Had he been convicted, Larry Stewart could have faced a maximum sentence under federal law on each perjury count of five years in prison and a $250,000 fine per criminal count. However, a federal jury in Manhattan found him not guilty on October 5, 2004.
Obstruction of Justice
Until the recent spate of business scandals, obstruction of justice prosecutions were relatively rare, but in the last few years there have been several high profile prosecutions.[8] Arthur Andersen LLP, one of the largest and most successful accounting firms in the U.S., was convicted of obstruction of justice for destroying documents relating to Enron after learning of the existence of a federal investigation. David Duncan, the partner in charge, pleaded guilty to obstruction of justice.
Frank Quattrone, an investment banker for Credit Suisse First Boston, was convicted of obstruction of justice in May 2004 for sending a twenty-two-word email urging his colleagues to clean up their files after he had been told by the company attorney that the federal government was instituting an investigation. Quattrone was recently sentenced to eighteen months in prison, a sentence that far exceeded the recommendation of federal probation officials. A former vice president at Rite Aid recently pleaded guilty to charges of obstruction of justice.[9]
There are many types of obstruction of justice. Some of them, such as threatening or otherwise tampering with witnesses, or attempting to bribe judges, do not involve lying or other false statements. However, false statements—and related activities such as the destruction or concealment of documents or other physical evidence—can constitute obstruction of justice. Federal statutes make it “unlawful to ‘influence, obstruct, or impede the due administration of justice.”[10] In order to convict under these statutes, “the government must prove that there was a pending…proceeding, that the defendant knew of the proceeding, and that the defendant acted ‘corruptly’ with the specific intent to obstruct or interfere with the proceeding or due administration of justice.”[11]
Making false statements can certainly constitute obstruction of justice. The U.S. Supreme Court has said that if a person lies to a federal agent, those lies will be obstruction of justice if the conduct of the defendant has some “relationship in time, causation or logic” to a government proceeding so that the false statements may be said to have the “natural and probable effect” of interfering with that proceeding.[12] If the defendant “lacks knowledge that his actions are likely to affect a pending…proceeding,” he “necessarily lacks the requisite intent to obstruct.”[13] It is not enough that the defendant knows about the pending government proceeding at the time of his false statements. To be guilty of obstruction of justice, a defendant must make those statements knowing that they would be repeated or conveyed to the court, grand jury, or federal agency conducting the proceeding.[14]
Recently, Congress enacted the Sarbanes-Oxley Act of 2002[15], which included a specific section declaring that the destruction or alteration of documents (or the inclusion of false entries in such documents) constitutes the crime of obstruction of justice, which carries a twenty-year prison sentence. Destroying documents—or otherwise concealing tangible evidence—clearly can subject anyone engaging in such conduct to criminal prosecution.
From the legislative history of the Sarbanes-Oxley Act, it appears that the new obstruction of justice section was intended to be broader in scope and to eliminate some of the ambiguities and technicalities that had been required for a conviction as described above.[16]
Federal Lying Statute—No Oath Required
Businesspersons must be especially aware of the federal lying statute contained in Title 18 of the U.S. Code Section 1001, which states that: “(a) Except as otherwise provided in this section, whoever, in any judicial matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States, knowingly and willfully (1) falsifies, conceals, or covers up by any trick, scheme, or device a material fact; (2) makes any materially false, fictitious, or fraudulent statement or representation; or (3) makes or uses any false writing or document knowing the same to contain any materially false, fictitious or fraudulent statement or entry shall be fined under this title or imprisoned not more than five years or both.”[17]
Under this statute it is a crime to knowingly and willfully make any materially false statement concerning any matter within the jurisdiction of the United States. The falsehood must be material; but this requirement is met if the statement has the “natural tendency to influence or [is] capable of influencing the decision of the decision making body” which receives the false statement.[18] This statute has an extraordinarily wide scope. Unlike perjury, the false statement need not be given under oath. Any statement, whether made orally or in writing, can violate this law.
The statements need not be made in a formal setting. Any false statement made to any federal agent is enough. This is true even if the statement was not recorded and no transcript was made. (Often the only evidence of the false statement consists of notes made by the federal agent). It is not necessary that the government actually be deceived or misled. Unlike obstruction of justice, there is no requirement that the person making the false statements be aware of a government proceeding and intend to interfere with that proceeding. In fact, it is not even a requirement that there be any sort of judicial or other government proceeding. Any false statement made to any federal employee can be sufficient to violate this law. Martha Stewart, for example, was convicted of this crime because she made false statements to employees of the FBI and the SEC. Her lies were not made in a formal interview, and the only evidence of what she said was in the notes and recollections of the federal employees involved.
In fact, this crime can be committed even without making any false statement to a federal employee. All that is required is that the false statements have some connection to some matter within the “jurisdiction of the…United States.” Persons who lie to state agencies can be convicted of this crime if statements to that state agency might influence the functioning of federal agencies.
People have been found guilty of this crime because they lied to private contractors hired by a federal agency.[19] In April 2004, several executives at Computer Associates, the giant software company, were charged with this crime; three of them have pleaded guilty to the charges. They did not lie to any federal agent. Instead, they were charged with making false statements to attorneys working for Computer Associates who were conducting an internal investigation of allegations of improper conduct within the business. Since this internal investigation concerned activities that were within the jurisdiction of the United States, the government asserted that lies to the business’ attorneys were crimes. Prosecutors stated that the executives knew that their statements would be turned over to the government and because of this, they needed to tell the truth.[20]
Conclusion
Contrary to the impressions that may have been left by far too many commentators on the trials of Martha Stewart and Frank Quattrone and the like, lying alone is a crime. Any businessperson who forgets this simple truth in today’s environment of aggressive enforcement is likely to be very unpleasantly surprised.
[1] See Guide to American Law, Vol. 8 p. 178.
[2] See Black’s Law Dictionary (8th ed. 2004) p. 1107.
[3] See. Black’s Law Dictionary (8th ed. 2004) p. 1634.
[4] And one could argue that the trial and conviction have cost both herself and her shareholders dearly and the total cost is yet unknown.
[5] Martha Stewart claimed that her right to a fair trial was compromised because he failed to disclose a prior arrest on the jury questionnaire, but on May 5, 2004 the judge refused her motion for a new trial on this basis. http://money.cnn.com/2004/05/05/news/midcaps/martha/.
[6] http://www.cosmos-club.org/journals/1998/stein.html.(no longer accessible)
[7] Id.
[8] Richard M. Strassberg and Roberto M. Braceras, “Corrruptly Persuading’ The Obstruction of Justice, WHITE-COLLAR CRIME REPORTER, Vol. 16, No. 5, May 2002.
[9] http://www.forbes.com/markets/2004/05/13/cx_tm_0513video3.html.(no longer accessible)
[11] Id. (citations omitted).
[12] United States v. Aguilar, 515 U.S. 593, 599 (1995) (citations omitted).
[13] Id.
[14] See Jonathan D. Polkes, White Collar Crime, New York Law Journal, July 7, 2003.
[15] 18 U.S.C., Sec. 1519 (2004).
[16] 148 CONG. REC. S7418 (daily ed. July 26, 2002) (statement of Sen. Leahy).
[17] http://caselaw.lp.findlaw.com/scripts/ts_search.pl?title=18&sec=1001.
[18] United States v. Gaudrin, 515 U.S. 506, 509 (1995).
[19] http://www.davidconn.com/false_statements.html.(no longer accessible)
