NEW YORK (Bloomberg) -- David Stockman, Ronald Reagan's former budget director who later became an auto industry investor and executive, lived under the shadow of a fraud indictment for two years before prosecutors dropped the charges without explanation or apology.
“They wrecked my reputation, my business career,” Stockman, 63, says. “I don't know how you compensate for that.”
Stockman is among a growing number of executives who have been indicted for corporate crimes in recent years and then had the charges dropped.
From 2006 to 2008, the most recent period available, U.S. prosecutors dismissed charges against 42 such defendants for which the most serious charge was securities fraud. That's more than twice the 20 dismissals in the prior three years, according to the Federal Justice Statistics Resource Center.
The collapse of so many cases is surprising, legal experts say, because U.S. prosecutors are expected to have thoroughly investigated the facts and law before asking a grand jury to bring charges.
At least five indictments were returned -- and then dropped -- by the U.S. Attorney's Office in Manhattan, which oversees Wall Street.
“This strikes me as very unusual,” says Duke University law professor Samuel Buell, a former prosecutor who brought fraud cases stemming from the collapse of Enron Corp. “These are some of the best prosecutors in the Justice Department.”
The increasing number of dismissals may signify that the transactions in some corporate cases have become so intricate that even top prosecutors have trouble mastering them, Buell says.
The phenomenon may become more widespread as investigators sift through the wreckage of the global financial crisis. Criminal investigators have probed Lehman Brothers Holdings Inc., which filed for bankruptcy in 2008; Countrywide Financial Corp., which Bank of America Corp. acquired that year; and AIG, which got $182 billion in the U.S. bailout, according to people familiar with the probes.
‘Tough to prove'
If indictments stem from the collapse, Peter Henning, a former Justice Department fraud prosecutor, says he doubts they'll focus on sophisticated transactions involving mortgage-backed securities.
“Those are very tough cases to prove,” says Henning, who now teaches at Wayne State University Law School in Detroit, citing the acquittals in November of former Bear Stearns Cos. hedge fund managers Ralph Cioffi and Matthew Tannin on fraud charges.
Instead, prosecutors will look for clear instances where executives lied about company finances, he says.
Yusill Scribner, a spokeswoman for U.S. Attorney Preet Bharara in New York, who took office after the Manhattan dismissals, declined to comment. A dismissal -- or what lawyers call a nolle prosequi -- may result when the evidence or law changes or because prosecutors make a tactical or even a compassionate decision, says Bruce Green, a professor at Fordham University School of Law.
“It should only be necessary in the rarest of circumstances,” says Michael Garcia, who was U.S. attorney in Manhattan from September 2005 to November 2008. “But the circumstances arise.”
Kevin McDonald, who was acting U.S. attorney in South Carolina until May, says prosecutors owed no apology after dismissing fraud charges against four former executives of a company acquired by WebMD Corp. His office would have pressed the case, which was developed by agents with accounting expertise, had there not been adverse legal rulings before the trial, he says.
“A grand jury indicted them based on the strength of the evidence,” he says. “It's not unusual during the course of the case and the investigation for the facts and circumstances to change and for rulings to limit the admissibility of evidence.”
Alan Vinegrad, U.S. attorney in Brooklyn, New York, in 2001 and 2002, praises prosecutors for reconsidering cases while also urging them to ask what went wrong.
“My own view would be, ‘How come we didn't think of this before we indicted the case?'” he says.
Though exonerated defendants may sue for fees, there is no legal provision for repairing a damaged reputation.
“Somebody made an allegation that I did something improper, and everything got thrown under the bus,” former AIG executive David Pinkerton, 49, says. “One day, 100 people around the world want to talk to you. The next, your BlackBerry goes silent and you have three friends.”
For a public figure such as Stockman, the impact was magnified.
Television cameras rolled at a packed press conference on March 26, 2007, as Garcia announced the indictment of the former director of the Office of Management and Budget under President Ronald Reagan.
Allegations of fraud
Flanked by investigators, Garcia said Stockman had lied in regulatory filings and defrauded investors of $1.35 billion in a scheme to raise capital and save Collins & Aikman Corp., the suburban Detroit auto parts maker of which he was chairman, from bankruptcy.
Stockman's private-equity firm, Heartland Industrial Partners LP, paid $260 million for the parts maker in 2001 and snapped up other auto-supply companies in a bid to create the dominant supplier of fabric, consoles and other components for automakers.
Four years later, in May 2005, Collins & Aikman, with more than $1 billion in debt, filed for bankruptcy as Ford Motor Co. and General Motors Corp. slashed production.
After appearing in court in March 2007 to deny fraud charges that could have brought him two decades in prison, the gray-haired Stockman retreated to his home in Greenwich, Conn. He spent much of his time in his home office, which is decorated with framed tributes including one dated Aug. 13, 1981, from Reagan after the president signed a $750 billion tax cut.
“You rode point on this,” Reagan's note says.
‘Prospect of the guillotine'
Hunched over company documents, Stockman spent weeks reviewing the rebate transactions and accounting at the heart of the case. Then he penned a 31-page memo to his lawyers outlining how he had tried to rescue his company.
“The prospect of the guillotine tends to focus the mind,” says a now-relaxed Stockman, in jeans and a white baseball cap, from the office where scores of binders filled with company documents still line his bookshelves.
Stockman hasn't lost any of the combativeness he showed decades earlier in Reagan's cabinet when he was forced to apologize to lawmakers after saying they lacked courage to truly slash government spending.
Ignoring his lawyers' warnings that the government rarely dismissed fraud cases, he insisted that his attorneys seek to convince prosecutors that they were wrong. Stockman helped lead dozens of lawyers, paralegals, accountants and investigators through 15 million documents that the government turned over.
“I was naive enough not to understand how bad the odds were,” says Stockman, a former Harvard Divinity School student and U.S. congressman.
47 binders of documents
After more than a year of research, Stockman's attorneys produced a 221-page report backed by 647 footnotes and 47 binders of documents. Evidence was overwhelming that he was innocent, the report said, adding that prosecutors hadn't done their homework and had relied too heavily on an internal probe done by Davis Polk & Wardwell LLP, the law firm that guided Collins & Aikman after its 2005 collapse.
“The government gave far too much credit to private counsel's unfounded conclusions,” the report said. “Much of the documentary evidence most directly relevant to this case appears not to have been reviewed at all -- by anyone -- prior to Mr. Stockman's indictment.”
The report, financed by Stockman's indemnification policies, argued that Collins & Aikman was never in jeopardy of violating loan covenants and that the accounting issues in the case were ambiguous.
‘15 million-page swamp'
The defense found documents indicating that outside auditors knew of deals prosecutors said Stockman hid, transcripts of conference calls showing that Stockman never made statements attributed to him and records demonstrating that lenders weren't deceived about collateral.
“We found a lot of these,” Stockman says. “You'd find these nuggets everywhere, but it was a 15 million-page swamp.”
Stockman's defense delivered the report to prosecutors on Oct. 20, 2008. On Jan. 9, 2009, the government released a brief statement saying it had dropped the case against Stockman “in the interests of justice.” By then, the lead prosecutor had left for private practice.
Elkan Abramowitz, Stockman's lawyer, says the case underscores a wider issue. Lawyers for companies that come under government scrutiny have discovered that corporations won't be prosecuted if they deliver to authorities evidence against top executives, and sometimes they find crimes where there are none, he says.
“There is almost an institutional bias to find and expose criminality,” he says.
Davis Polk partner Dennis Glazer defends his firm's confidential probe and refuses to characterize its findings.
Today, Stockman's anger is palpable. He leans forward, his voice urgent.
“I think the prosecutors involved in this should be personally liable,” says Stockman, who paid a total of $7.2 million to settle lawsuits by investors and the Securities and Exchange Commission without admitting or denying liability.
Lawyer Andrew Weissman says Stockman, who is writing a book on the banking crisis, wants the case behind him. Seven other Collins & Aikman employees, including four who pleaded guilty, also won dismissals. Prosecutors never announced their dismissal of charges against the four who had earlier pleaded guilty.