CASE STUDIES | Political Prosecution

The Political Prosecution of an American Businessman

In the wake of real corporate scandals in 2002, politicians eager to appear ‘proactive’ demanded that prosecutors aggressively find and punish corporate miscreants. The President created a Corporate Fraud Task Force “to combat white collar crime.” This well-meaning push for business accountability caught some real crooks (who probably would have been caught either way). It also came down hard on other business people who were not crooks, who lacked criminal intent, and who were not deserving of punishment.

One business leader who fell victim to the political push to prosecute corporate executives was John J. Cassese.

The microprocessor was still two years away when, in 1969, Cassese and two friends founded Computer Horizons. At that time, the average computer was the size of several refrigerators, cost hundreds of thousands of dollars, and might have enough memory to hold a single Credence Clearwater Revival MP3. During the next thirty years, Cassese labored to build Computer Horizons into one of the world’s leading information technology services companies. The company today has hundreds of millions of dollars in revenue and provides thousands of jobs.

In the early 1990s, Cassese was pressured to sell out to a French company. He fought tenaciously, calling shareholders and convincing them to hold out. In the end, he saved Computer Horizons from hostile take over and positioned it as a major player in the burgeoning technology boom. As a businessman, Cassese was recognized, not just for material success, but also for his stewardship of clients and employees. He was named New Jersey Entrepreneur Of The Year for 1997. The following year, Investors Business Daily featured him in its front page “Leaders & Success” column.

In April 1999, Cassese considered merging Computer Horizons with Compuware, another leading information technology services company. Executives from the two companies met once and several weeks later Compuware forwarded an offer to purchase Computer Horizons. The letter of intent allowed for either a tender offer (a public offer to purchase shareholders’ stock for more than the market price) or a cash merger. The Computer Horizons Board of Directors decided that the offer was too low and notified Compuware.

During this time, Compuware had also been conducting more fruitful negotiations to acquire Data Processing Resources Corporation (DPRC). By early June 1999, DPRC’s board had had approved the merger. On June 17, 1999, Compuware CEO Peter Karmanos was asked to call Cassese and tell him that Compuware had decided to acquire a different corporation, but that they might be interested in merging with Computer Horizons in the future.

According to the United States District Court for the Southern District of New York:

On June 21, 1999, Karmanos spoke with Cassese, whom he had never met, for the first and only time on a four-minute phone call. During that call, Karmanos told Cassese that (1) Compuware would not be doing a deal with Computer Horizons at that time, but might be interested in purchasing it in the future; and (2) that Compuware was going to announce a deal with DPRC instead. Karmanos did not tell Cassese any details about the deal.

At 9:30 a.m. the next day, June 22, 1999, Cassese called his Morgan Stanley broker to buy stock in DPRC. As an experienced businessman, Cassese knew that it is legal to buy stock based on non-public information about a merger as long as it is not a tender offer and you do not have a fiduciary duty to the companies involved. The first broker he called, a friend of Cassese’s sons, was unavailable and so Cassese left him a message. He then called his Merrill Lynch broker and placed an order for 10,000 shares of DPRC. When the first broker returned his call, he placed an order for another 5,000 shares.

Both brokers would later testify at trial that these trades were typical for Cassese. He never indicated that he was trying to hide anything and he did nothing out of the ordinary. He had owned stock in DPRC before, and owned stock in other competing companies. Cassese did not ask the brokers to monitor DPRC’s stock price or status.

On the morning of June 24, 1999, Compuware announced its acquisition of DPRC. They also announced that this would be by tender offer. When his Morgan Stanley broker reached him with the news that afternoon, Cassese seemed surprised and told the broker to sell the stock. Cassese called his other broker and had him sell the stock as well, but later asked if it was possible to cancel the trades. They could not be undone. Cassese made about $150,000 from the transactions.

Two and a half years later, on February 25, 2002, the SEC filed a complaint against Cassese alleging insider trading in DPRC stock. Establishing civil liability for violations of federal securities laws does not normally require any showing of intent. In essence, there is strict liability for such a violation, whether the individual knew or intended their actions. Cassese settled immediately with the SEC. He gave up all profits from the DPRC stock sales, plus interest, and paid a penalty equal to his profit. In all, Cassese paid the government $321,387.84.

“I’m very well paid, and it looks stupid,” Cassese told the Bergen, New Jersey, Record, when asked about the settlement. “I never tried to hide anything. If I made a mistake, I made a mistake.” Cassese was able to keep his job at the company he had founded 33 years earlier. The matter appeared settled.

In the background, the Enron scandal was unfolding: investigations were opened, congressional hearings began, and partisan allegations echoed up and down Pennsylvania Avenue. A flurry of state and federal investigations were launched into various Wall Street firms and other corporations. It soon became clear that telecommunications giant WorldCom was self-destructing. In July 2002, President Bush created the Corporate Fraud Task Force and signed the Sarbanes-Oxley Act.

Business school academics claimed that the late 1990s boom had produced a culture of corruption within American business. Some politicians accused regulators and prosecutors of going soft on corporate crooks. But House Finance Services Committee Chairman Michael G. Oxley (R-Ohio) warned that increasing anti-business hysteria threatened to “smother American businesses with red tape,” and “ punish those who have done nothing wrong.”

Prosecutorial discretion is often a critical safeguard against political expedience. Even as legislators dramatically expand the number of crimes and weaken the traditional notion that criminal intent is a prerequisite for criminal punishment, prosecutors generally do the right thing. They allocate their resources to prosecute those who deserve punishment – those who have done a bad act (actus reus) with a corresponding bad intent (mens rea, literally “bad mind”). Sometimes, however, this safeguard gives way to political pressure.

On March 13, 2003, the United States Attorney for the Southern District of New York – a member of the Corporate Fraud Task Force – announced two criminal charges against Cassese. Both charges were based on the DPRC stock transactions from nearly four years earlier. Cassese had, of course, settled the SEC’s civil complaint a year before and paid the government an amount equal to twice his profits plus interest. Nevertheless, the government suddenly and inexplicably decided that Cassese should pay even larger fines and go to prison too – up to ten years for each count.

On July 23, 2003, District Judge Robert W. Sweet threw out one of the charges against Cassese (an alleged violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5). The charge required that the government prove either insider trading or misappropriation by Cassese. It was uncontested that insider trading was irrelevant because Cassese was not a corporate insider at either Compuware or DRPC. The latter theory required that Cassese “misappropriate[d] confidential information for securities trading purposes, in breach of a duty owed to the source of the information.” But nothing in the indictment even suggested that Cassese owed a duty to his competitor, Karmanos, after their one brief telephone conversation.

The judge found that even if proven, the facts alleged in this part of the indictment failed to constitute a crime. The case law was clear; the government’s purported support was easily distinguishable. The judge further commented in a footnote, “It is interesting to note that the SEC determined it inappropriate to charge Cassese with [this violation] in the civil context.”

In September 2003, Cassese was tried for the remaining insider trading allegation (supposed violations of Section 14(e) and Rule 14e-3). After a six-day trial, the jury deadlocked. A second trial ended on October 2, 2003, and after a single day of deliberations, the jury found Cassese guilty. A Department of Justice press release trumpeted the verdict.

Cassese filed a motion for judgment notwithstanding the verdict, arguing that in this context, he could not have had criminal intent without knowing that the merger would be by tender offer. He further challenged the government’s interpretation of the facts, asserting that “the evidence that the government claimed was proof that [he] acted willfully actually showed his innocence.”

Judge Sweet, in his opinion on the motion, pointed out that while knowledge of a tender offer is not a necessary element of the crime, criminal intent is. In every similar prior case, different circumstances evinced the criminal intent of those convicted. But in Cassese’s case, without knowing that the merger was by tender offer he had no reason to believe that his actions were illegal. He could not have had the requisite criminal intent. Judge Sweet noted that Cassese was subject to strict liability in the civil context, but not in a criminal trial.

Criticizing the government’s attempt to transform the securities laws into a “trade at your peril” regime, Judge Sweet reversed Cassese’s conviction. Overruling a jury verdict is a rare and courageous act for a trial judge. Given their tenuous theories of the law and facts, however, the prosecution’s evidence simply failed to indicate that Cassese had committed the crime. The government is currently challenging Judge Sweet’s decision – attempting to reinstate Cassese’s conviction and send him to prison.

Cassese was not ignorant of the law – he knew, or thought he knew, that what he was doing was legal. He could not know, until it was announced, that the form of the merger would cast legal doubt on his stock transactions. In the world of multi-million dollar businesses and global markets, Cassese was an entrepreneur who created jobs and wealth for thousands of people. There is no indication that he ever acted with corrupt intentions, and yet the government tried to send him to prison for twenty years. Even after a judge rejected their case, prosecutors continue to hound Cassese.

When politics push prosecutors to disregard the traditional limitations on criminal punishment, every American is in danger. If innocent intentions are insufficient to keep a person out of jail, what kind of “justice” does our justice system serve? Getting tough on corporate criminals should mean getting tough on those who actually commit crimes – with criminal intent – in the marketplace. Getting tough on corporate criminals should not mean criminalizing success.

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