David Stockman's Reply-Side Strategy
Friday, April 27, 2007
Former White House budget director David A. Stockman wants everyone to know that he is very different from those executives serving decades of prison time for their roles in accounting misdeeds.
After all, the onetime federal lawmaker turned Greenwich, Conn., money man, indicted on fraud and conspiracy charges, said he never sold stock, borrowed cash or charged luxury items to Collins & Aikman, his Michigan auto parts company. Rather, Stockman said, he and his investment partners poured $360 million into the business, driving up their personal risk even as the company veered off track.
"I'm frustrated," Stockman said over a lunch of salmon, mixed greens and a virgin Bloody Mary, seething as he recalled how court officials cuffed his hands behind his back when he surrendered March 26. "I spent my whole life being an honest citizen. Now all of a sudden it's like I'm some big fraudster, when the facts contradict that idea entirely."
It's an awkward place for Stockman, who spent hours at the lunch trying to distinguish himself from such fallen corporate titans as "the guy who charged his wife's birthday party to the company." He was referring to Tyco International's former chief L. Dennis Kozlowski, whose prison interview aired the evening before Stockman turned himself in for fingerprinting.
Yet Stockman's evolving defense strategy borrows liberally from a stream of cases that began with Enron and flows through last week's insider trading conviction of Qwest Communications chief executive Joseph P. Nacchio.
The long-ago Washington media star returned to the national stage last month, when Stockman faced the cameras after pleading not guilty to eight criminal charges. His outspoken rhetoric echoed the bare-knuckles approach of Enron founder Kenneth L. Lay, another public figure with long government ties and a powerful interest in preserving his reputation.
Lay, who died last year before he could be sentenced, chose CNN's "Larry King Live" as a friendly venue to make his case after his 2004 indictment. Stockman appeared on CNBC's "Kudlow & Company," alongside former Reagan-era colleague Lawrence Kudlow. Lay's attorneys blasted prosecutors for overreaching and accused them of stopping at nothing to win an indictment. Acting as his own spokesman, Stockman told reporters that the government was "uninformed."
"This is really a fairy tale in which all kinds of little tidbits have been strung together in an effort to reach and stretch and strain to develop a coherent conspiracy theory that makes no sense," Stockman said last week as he dismissed the 65-page indictment against him with the flick of a wrist.
Stockman has been doing a lot of talking these days, and his words could be used against him at trial next year. Federal prosecutors in Manhattan will pore over the record of Stockman's voluminous interviews for insights into his character and topics that could render him emotional and shake him from his story during cross-examination, former government lawyers said.
Sean M. Berkowitz, who led last year's cross-examination of Enron's Jeffrey K. Skilling, another brilliant and sometimes prickly defendant, stressed the importance of being prepared by interviewing scores of corporate insiders, studying documents the defendant received, and seeking opportunities to catch him by surprise.
"With a witness who is incredibly bright and knowledgeable about their company, there is not going to be an 'all right, I did it' moment," said Berkowitz, now a partner at Latham & Watkins. "Cross-examinations of these witnesses are more like a chess match, where your hope is to get them in a position where they don't have reasonable answers to key questions."
Prosecutors already have signaled they may try to introduce as evidence Stockman's 1987 book, "The Triumph of Politics," which describes the disconnect between optimistic public statements he made at the same time he harbored private doubts about President Ronald Reagan's agenda.
But it remains unclear whether some of Stockman's best-known statements, dating to his tenure as budget director, will reach jurors' ears. In June 1985, a month before he left government, Stockman delivered a private speech to the board of the New York Stock Exchange, telling the audience that national leaders had employed "accounting gimmicks, evasions, half truths and downright dishonesty in our budget numbers."
According to news reports, Stockman continued, "Indeed if the Securities and Exchange Commission had jurisdiction over the executive and legislative branches, many of us would be in jail."
To be considered legally relevant, however, the statements need to be reasonably close in time and related to the current criminal proceeding, according to court rules that cover defendants' patterns of behavior, legal analysts said.
As in the Enron case, prosecutors have few e-mail messages and memos that suggest what Stockman was thinking at the time of the company's cash crisis. Like Lay and Skilling, Stockman did not use e-mail, relying instead on assistants to handle his correspondence. Skilling, the former Enron chief executive, is serving a 24-year prison term in Waseca, Minn.
The defendant's credibility will be all the more important because the government's case against Stockman is highly technical, revolving around such complex accounting issues as when to post revenue for supplier rebates and how to adjust performance ratios that triggered hundreds of millions of dollars in loan repayments.
"Are they going to believe the government's nitpicking about this or our good faith efforts to save the company?" Stockman asked of potential jurors, before flipping through several thick notebooks and launching into a heated debate between him and the government charges.
Manhattan U.S. Attorney Michael J. Garcia said at a news conference last month that Stockman "resorted to lies, tricks and fraud," misleading lenders and analysts to preserve his investment and his reputation.
The experts said Stockman must take care to insulate himself from hostile questioning if he takes the stand as expected. Arguments that he knows little about numbers and that he always acts responsibly and tells the truth could leave him open to cross examination that bores in on his character and crystallizes the issues for a jury.
"My guess is the government will sit there, hoping he opens the door," said former prosecutor Stephen A. Saltzburg, now a law professor at George Washington University.
Finally, the Stockman defense team, led by prominent New York criminal lawyer Elkan Abramowitz and civil lawyers from Wilmer Cutler Pickering Hale and Dorr in Washington, is expected to follow the playbook of former chief executives of HealthSouth and Brocade Communications and vigorously contest delaying an SEC civil lawsuit. In those cases, over prosecutors' objections, defendants won permission to proceed with the SEC dispute while awaiting trial in the criminal case.
Such a tactic could give the defense a sneak preview of key information and witness statements to attack the criminal prosecution. Most judges have rejected these sorts of defense requests. But the judge in the HealthSouth case in Birmingham, Ala., and a judge overseeing the Brocade stock options backdating case in California have allowed them to move ahead.