Better in their words…

Government “out of control”.  This is one more problem that “reducing the size of government” helps minimize.  Oh, and by the way, don’t look in the NYTs for this story…

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Federal and state prosecutors have built a sorry record since the fall of Enron created a political incentive to pursue white-collar defendants, whether or not they’ve committed crimes. In the latest embarrassing episode, the abuses include prejudicial evidence, botched jury instructions and “compelling inconsistencies” suggesting that the government’s star witness “may well have testified falsely.”

Those were among the problems cited Monday by a three-judge panel of the Second Circuit Court of Appeals when it tossed out the convictions of four former executives of General Reinsurance and one former executive from AIG. The collapse of this case renders even more appalling the way that prosecutors used it to force both companies to fire their CEOs—Joseph Brandon at Gen Re and Hank Greenberg at AIG. In the latter case, the resulting loss of shareholder wealth—and creation of taxpayer risk—has been staggering.

The federal case was built on an obscure reinsurance transaction between the two companies in late 2000. The feds convinced a jury in 2008 to convict the executives of fraud and conspiracy on grounds that they had engineered the transaction as a sham simply to improve AIG’s reported loss reserves and therefore juice its stock price.

Yesterday a unanimous three-judge panel vacated all of the convictions. Among other problems, the judges found that trial judge Christopher Droney had improperly defined for the jury what it means to “willfully cause” a crime. As a result, according to the appellate judges, “the court ended up with a charge that allowed the jury to convict without finding causation.” Then there is the government’s key witness, Richard Napier, whose story kept changing about who cooked up the allegedly fraudulent scheme.

The appeals court also found that Judge Droney allowed federal prosecutors a stolen legal base: displaying charts to the jury showing AIG’s plunging stock price after details of the investigation appeared in the press in early 2005.

Oddly, the judge had realized that a chart with a continuous line moving downward would be prejudicial and disallowed it. But he nonetheless allowed similar charts with bar graphs and a series of dots. The appellate judges found “it is inevitable that jurors would connect them” and that “the charts suggested that this transaction caused AIG’s shares to plummet 12% during the relevant time period, which is without foundation.”  If news of an investigation and the resulting stock decline can be used as evidence of fraud, then prosecutors can simply manufacture damning evidence at will.

Along the way, prosecutors also used the investigation to force the two companies to fire their CEOs. Neither federal nor state prosecutors brought criminal cases against either man. But AIG’s stock was losing altitude in early 2005 in part because New York Attorney General Eliot Spitzer was piggybacking on the federal case and demanding that AIG’s board fire Mr. Greenberg. AIG’s directors complied in March of that year. After Mr. Greenberg’s firing, the company dramatically increased its mortgage exposure, and the rest is financial crisis history.

Over at Warren Buffett’s Gen Re, Mr. Brandon wasn’t forced out until 2008, after the now vacated guilty verdicts had been rendered. The AP and other media outlets have reported that Mr. Brandon was fired after pressure from federal prosecutors. Mr. Brandon was never criminally charged, and last winter the Securities and Exchange Commission decided that there wasn’t even a civil case to be made against him. So where does he go to get his reputation back?

Speaking of civil cases, virtually all that remains of this sorry adventure in prosecutorial abuse and wealth destruction is a vestige of Mr. Spitzer’s old lawsuit against Mr. Greenberg. Since it relies so heavily for evidence on the criminal case that has now been obliterated, current New York AG Eric Schneiderman should drop it immediately. That’s also good advice for federal prosecutors considering whether to revive the shoddy criminal case that dissolved on Monday.

Review & Outlook: Spitzer’s Latest Loss – WSJ.com.