In the scene that gives the book its title, one of the novel’s greatest Atlases, the steelmaker Hank Rearden, is asked: “When you strain your energy to its utmost in order to produce the best, do you expect to be rewarded for it or punished?” The questioner’s point is that Rearden knows he should be rewarded for his productive efforts, yet he allows himself to be punished—and by helpless parasites at that. Why? Why not free himself of his tormentors? Why not shrug them off?
Rand’s novel, thirteen years in the writing, was finally published in October 1957, but she did not stop asking “Why?” Why were businessmen persecuted? Why did moralists not condemn the injustice? Why did businessmen themselves do nothing? Within a few years, she had taken to the college lecture circuit to denounce this continuing oppression, and her talk could not have been more provocatively titled: “America’s Persecuted Minority: Big Businessmen.” Nor could it have been better timed. The Sixties were just beginning, and the students at elite Northeastern universities were preening themselves for their moral superiority, in part because they opposed Southern segregation and in part because they disparaged capitalists (like their fathers) as “hidden persuaders” and perpetrators of “planned obsolescence.” Into this environment came Ayn Rand
, to declare that America’s truly oppressed minority comprised just those businessmen the students scorned.
“These Seven Men Were Martyrs”
Reading Rand’s talk today, one discovers that its philosophical and legal framework were extensively elaborated, while its topicality rested on a single, famous case of price-fixing: the electrical-equipment conspiracy case of 1961, which involved twenty-nine companies—including such leaders as General Electric, Westinghouse, Allis-Chalmers, and Carrier—and forty-four of their mid-level executives. Making that highly publicized case the centerpiece of her defense was a daring choice on Rand’s part. For one thing, there was no question that the defendants had consciously violated the antitrust laws. In the words of the great anti-antitrust crusader Dominick T. Armentano, writing in Antitrust and Monopoly: “The fact that there were secret meetings among various equipment producers between 1956 and 1959 was indisputable. . . . [Some of the meetings] involved the determination and application of secret bidding formulas and the formal allocation of some market business, particularly government jobs.” What Armentano goes on to show, however, is that this conspiracy to fix prices generally broke down as soon as its meetings broke up, and that demagogic officials attacking the companies could not comprehend how identical prices might well arise from the need to meet competition, because those officials held a cost-based theory of pricing.
But Rand went much further, for the idea that American businessmen might be sent to prison for violating economic regulations clearly shocked her. She began by denouncing in general terms the fluid and incomprehensible strictures of antitrust law. Next, she explained that a failure to coordinate prices might also have subjected the companies to antitrust action. Then she observed that the conspiracy had grown out of the government’s own wartime price-fixing, which had supposedly served the public interest. She went on to cite antitrust’s treble-damage penalty as stripping the defendant companies of their ability to mount a defense. She quoted a description of the bare-knuckles anti-racketeering tactics deployed against the businessmen on trial. And finally she expressed her disgust that the individual defendants’ charitable activities—rather than their productive activities—had been traipsed before the judge in an attempt to escape prison sentences. But seven did not escape, and Ayn Rand
concluded, “These seven men were martyrs.” In response to a thank-you letter from the wife of one the imprisoned defendants, Rand wrote: “He and his fellow martyrs are the symbol of the battle I am fighting—and to the extent to which I have a public voice, I will continue calling this country’s attention to the worst injustice in its history.”
Unfortunately, the electrical-equipment conspiracy case’s claim to being “the worst injustice in [American] history” would not last long. The punishment imposed in the 1961 case was thirty days’ imprisonment (minus time off for good behavior), and, as far as one can tell at this distance, the businessmen sentenced to prison were decent but ordinary executives who knew they were at least nominally committing crimes. In November 1990, the greatest financial innovator in a decade was sentenced to ten years in prison after having been bludgeoned into pleading guilty to six minor regulatory transgressions. I cannot imagine what Ayn Rand would have thought.
Michael Milken revolutionized the bond market by promoting the insight that high-risk bonds compensate for their default potential by their superior rate of interest.
Michael Milken’s achievements are well known, or ought to be. In essence, he revolutionized the bond market by promoting the insight that high-risk bonds compensate for their default potential by their superior rate of interest. The subsequent acceptance of high-risk bonds provided takeover groups with a tool for ousting entrenched and stodgy management. That, of course, made Milken many enemies among corporate traditionalists in the executive suites and on Wall Street. Not for nothing is the most insightful book on Milken’s ordeal called Payback: The Conspiracy to Destroy Michael Milken and His Financial Revolution (Daniel Fischel, HarperCollins, 1995).
By the time U.S. Attorney Rudy Giulani got through with Milken, he was facing a ninety-eight-count indictment. In the prevailing anti-business, witch-hunt atmosphere, no twelve jurors would unanimously acquit him of every single charge. Probably, they would not even understand the charges involving complex financial deals. In one of Giulani’s earlier financial cases, the prosecutors had told the jury to forget about the complex technicalities and look at the defendants’ “sleaziness.” What jury would understand bond selling and bond trading as legitimate finance rather than as sleazy paper-shuffling for personal gain? Worst of all, from Milken’s viewpoint, Giulani had started to go after his family. His younger brother Lowell Milken had already been indicted, and FBI agents had been sent to interrogate his ninety-year-old grandfather. Consequently, after much soul-searching, Milken gave up his fight and agreed to plead guilty to six counts of violating securities regulations.
Because he had pleaded guilty, largely in exchange for the government’s dropping charges against Lowell, Milken’s lawyers were not free at his sentencing hearing to say that he had done nothing wrong. They had to go along with the pretense that Milken was genuinely contrite for having committed crimes. But they did point out that his offenses “had rarely, if ever, been subject to criminal prosecution at the time of Michael’s acts.” It did no good. Judge Kimba Wood apparently bought the prosecutors’ argument that “not unlike the Kingpins of other sophisticated criminal enterprises, Milken used his criminal enterprise to insulate himself from detection.” Arguing that “crimes that are harder to detect warrant greater punishment in order to be effective in deterring others from committing them,” Wood came up with the draconian sentence of ten years. She did say that she would consider a reduction of sentence if Milken cooperated in other prosecutions, but that was an unlikely prospect. He had insisted that his plea bargain specifically not require him to cooperate in other prosecutions. He would go to prison himself, but he would not help send other innocent people to prison.
In the second year of his sentence, however, Milken did agree to testify as a government witness about the details of one of the “crimes” to which he had pleaded guilty. There was no harm in that, and his lawyers could bring his cooperation before Judge Wood in an effort to get his sentence reduced. So it was that Milken described, for the first time in open court, the precise nature of what he had done and what others had done that landed him in jail. His testimony astounded the judge, Louis Stanton, who in turn astounded the government prosecutors. After Milken’s testimony was completed, Judge Stanton ruled that the charge in question had to be thrown out: The situation Milken had described involved no crime! Given that it was one of the “crimes” for which Milken was serving ten years in prison, the judge went on to observe guardedly that he made his ruling with full “understanding of the anomaly” it involved. Moreover, as a result of Milken’s testimony, the jury found the defendant innocent of all other charges, except for one minor count, for which he received probation. As a government witness, it appeared, Milken would win no prizes for his assistance.
But Judge Wood’s eyes had apparently been opened by her colleague’s ruling. Of course, she could not admit that she had been hoodwinked by the Giuliani’s prosecutors. So she declared that, in light of Milken’s “substantial cooperation” with the government (ruining their case?), she was reducing his ten-year sentence to two years. Five months later, he was freed.
In Payback, Daniel Fischel laments that by pleading guilty Michael Milken assured “his legacy would be as an admitted felon.” But I think that is not true, not in any sense that matters, and largely because of what Fischel himself has done. I know of more than a few Republicans who have read Fischel’s book and have sworn that, because of the Milken case, they will never vote for Rudy Giuliani. As professor Larry Ribstein of the Chicago College of Law has put it: “We must not forget that punishing business and constraining free markets [was] not just a youthful fling. Like Kerry’s Vietnam, it was the cornerstone of Rudy’s career.” Payback time, indeed.
What Michael Milken was to the 1980s, Frank Quattrone was to the 1990s: the financier who made it all happen. But as his accomplishments are less well known, they are worth a brief notice.
An apparently prejudicial judge had ruled that the jury could convict Quattrone without finding that he had had any intent to obstruct justice.
After getting a business degree from Stanford University in 1981, Quattrone joined Morgan Stanley and put down roots in Silicon Valley. At the time, “big Wall Street firms regarded tech banking as just an interesting niche. But Quattrone believed that the tiny struggling companies that then made up the tech galaxy were destined to become fast-growing giants. Building relationships with them was certain to pay off, he argued, even if it took a long time. All that, of course, seems obvious in hindsight. But at the time it was revolutionary. ‘He was the first guy in the New York investment banking world to take Silicon Valley seriously,’ says well-known tech investor Roger McNamee. ‘He was the first guy at a major firm who bet his career on Silicon Valley’” (Peter Elkind and Mark Gimein, “The Trouble with Frank,” Fortune, August 13, 2001).
Over the years, Quattrone put together the initial public offerings (IPOs) for such companies as Cisco Systems, Amazon, and Netscape. By the end of the nineties, Quattrone had come to Credit Suisse First Boston and had made the company a major player in the underwriting of IPOs, tripling its underwriting fees. Of course, Quattrone was also doing well for himself. The nearly twenty years he had spent living in Silicon Valley and playing “the unbanker” to its Bohemian techies was finally paying off. As the century ended, his salary and bonuses were estimated to be running $100 million a year.
But no capitalist deed goes unpunished, not if the rabidly anti-capitalist news pages of the Wall Street Journal have anything to say about it. In late January 2003, the Journal was tipped off about an e-mail sent by Frank Quattrone in December 2000 that suggested his colleagues follow the company’s document-retention policy before taking off for the holidays. It could, if you looked at it in just the right way, giving no benefit of the doubt to its sender, be interpreted as an attempt to get rid of documents that might be used in a criminal investigation. That is, it could be seen as obstruction of justice. Within days, James B. Comey, the U.S. Attorney for the Southern District of New York, and Eliot Spitzer, the Attorney General for New York State, were fighting over who would get to perform the celebrity scalping. (Comey won, and went on to become Deputy Attorney General of the United States, in which capacity he appointed his close friend Patrick Fitzgerald to conduct the Valerie Plame investigation.)
Of course, Quattrone was duly convicted, as virtually any high-tech investment banker would have been in the days after the Internet bubble burst. Indeed, the miracle was that his first trial ended with a hung jury. The government had to try him a second time to get the result it wanted. But Quattrone refused to concede defeat. One by one, the legal flaws that had allowed Quattrone’s conviction were picked apart his lawyers, and even by some independent analysts in the legal community. The most obvious flaw in the trial was this: An apparently prejudicial judge had ruled that the jury could convict Quattrone without finding that he had had any intent to obstruct justice. That instruction was eventually overruled by the Second Circuit Court of Appeals, which also took the unusual step of removing the presiding judge from Quattrone’s case. And at that point, the government gave up. Apparently, prosecutors decided that they could not win a criminal conviction against Quattrone if they bore the terrible burden of showing—before an impartial judge, no less—that Quattrone had actually had a criminal intent.
In August 2006, Frank Quattrone went free, unlike Michael Milken. He had paid a terrible cost in money spent and life forgone, not to mention the two years of agonizing he and his family suffered because a hostile judge’s eighteen-month prison sentence hung over his head. But in the end he did go free. After laboring for twenty years to make real the high-tech visions of Silicon Valley, Frank Quattrone received his reward from a grateful nation: He was not sent to prison.
The prosecution of Martha Stewart differed from those of Michael Milken and Frank Quattrone, for it did not target anything that she did in her career or at work, but something she did in the course of her personal investing. Nevertheless, a small tribute to Stewart’s career is in order.
After working as a model and stockbroker, and renovating her own home in Westport, Connecticut, Stewart started a catering business in 1976. Success in that line led to her writing articles for the New York Times and columns for House Beautiful. But Stewart’s career did really not take off until, at the age of 41, she published a best-selling book called Entertaining. More books and book tours followed, keeping Stewart in the public eye, and in 1990, she managed to persuade Time Inc. to test a magazine concept, Martha Stewart Living, which immediately proved successful and was launched the following year. Regular appearances on the “Today” show further enhanced Stewart’s visibility and led in 1991 to her own weekly (later a daily) television show, which truly made her a national figure, reaching 84 percent of the country’s broadcast markets.
In 1995, she was able to renegotiate her relationship with Time and become head of an entire subsidiary, Martha Stewart Living. In 1997, Stewart acquired a majority interest in the subsidiary, renamed it Martha Stewart Living Omnimedia, and became its chairwoman, president, and CEO. Although the company went public in 1999 and is listed on the New York Stock Exchange, Stewart holds a majority of the voting rights. In 2001, Stewart was named the third most powerful woman in America by Ladies Home Journal. By 2002, her company had nearly 600 employees and approximately $300 million in sales. Her personal wealth, based almost entirely on her company’s stock, once stood at more than a billion dollars, but in 2007 was estimated by Forbes magazine to be nearer to $640 million.
That was what Martha Stewart achieved, in the twenty-five years between ages 41 and 66.
In the anti-business frenzy that followed the December 2001 Enron bankruptcy, no one as wealthy as Stewart could afford to have the slightest cloud cast on his financial dealings. And so it was her very bad luck that on December 27, 2001, her Merrill Lynch broker, Peter Bocanovic, learned from his assistant, Douglas Faneuil, that the daughter of Stewart’s friend Sam Waksal had told Merrill to dump her shares in her father’s company, ImClone. Waksal himself had Merrill transfer his shares to his daughter’s account, and his accountant sought to have those shares sold. Bocanovic then called Stewart’s secretary and left a message that she recorded as “Peter Bocanovic thinks ImClone is going to start trading downward.” Since Bocanovic was carrying out some late-year tax selling for Stewart, and since they had discussed including ImClone is these sales only a week earlier, the call was not surprising.
Later in the day, Stewart called her office and discussed business matters with her secretary, who then patched her call through to Bocanovic’s office. Because Bocanovic was on vacation, Faneuil, his assistant, took the call. Stewart directed him to sell her remaining 4000 shares for approximately $230,000. After selling all her shares, Stewart called Sam Waksal’s office and left a message that was recorded as “Martha Stewart something is going on with ImClone and she wants to know what.” In fact, what was going on was that Waksal had learned the FDA was going to reject an application to review his company’s anti-cancer drug, Erbitux. (Two years later, the drug was approved by the FDA.)
What Sam Waksal had tried to engage in, by shifting his shares to his daughter’s account and having them sold, was classic insider trading. (Whether or not that should be a crime is a different issue.) But Stewart was not an ImClone insider, and when she was indicted in June 2003 on five criminal counts, none of them related to insider trading. Four counts involved false statements she had allegedly made while under investigation for insider trading. The most serious of the criminal charges was particularly outrageous. It accused Stewart of “securities fraud,” a crime carrying a penalty of ten years in prison, simply because she had protested her innocence. That, the U.S. Attorney charged, had been an attempt to deceive investors and keep the price of her company’s stock up. Fortunately, the judge in Stewart’s trial threw out this ridiculous count before it went to the jury.
The other charges against Stewart were based on the allegation that she had lied to investigators who were looking for a crime that turned out not to exist. These supposedly false statements had not been made under oath, which would have been perjury. Stewart had simply responded to questions from federal agents in a manner that they believed untrue. In the end, of course, Martha Stewart was convicted on the four remaining counts against her and served five months in prison, as well as five months of house arrest. A 2006 SEC settlement prevents her from serving as a director of her company or as an executive for five years.
Why go after Stewart? U.S. Attorney James Comey (who had indicted Frank Quattrone two months earlier) declared: “This case is about lying. . . . Martha Stewart is being prosecuted not for who she is but for what she did.” Really? The intense media scrutiny of a case involving a famous billionaire had nothing to do with her being prosecuted? The busiest U.S. Attorney in America always throws the weight of his office into securing jail time for every non-criminal who he believes tells falsehoods to his investigators? He never exercises prosecutorial discretion in such matters? If so, the jails must be crammed with people doing time for lying.
Comey went on to justify his destruction of Stewart’s life with this helpful analogy between federal agents and American citizens. “It’s a tragedy that could have been prevented if [she] had only done what parents have taught their children for eons. . . . that if you are in a tight spot, lying is not the way out.” But citizens are not children and federal investigators are not our parents. If prosecutors will not distinguish between a cover-up of real crimes and an impulse for self-preservation when confronted by incriminating but innocent circumstances, then people will simply treat all public investigators as enemies, right from the start, and say nothing to them. The republican conception of government, which holds that the state is the agent of the people and an institution deserving public assistance, will give way to the oppressed’s conception of government, which holds that public officials should always and everywhere be met with silent, sullen resistance.
The “persecuted minority” that Rand called “symbols of the battle I am fighting” continue to be persecuted even as I write. Yesterday brought word that the publisher Conrad Black had been convicted of—what else?—obstruction of justice. Today, welcome news: A judge has thrown out the cases against thirteen defendants in the KPMG tax case, because the prosecution used tactics that weakened their ability to defend themselves. Defeats are many, but victories are possible.
Why, then, do we not see the great capitalists and industrialists banding together to defend their economic liberties? Are they indifferent to the sword that hangs over their heads? Are they unconcerned about the fate of the free-enterprise system that allows them to flourish? Are they morally confused? Are they psychologically apathetic? In her lecture, “America’s Persecuted Minority,” Ayn Rand called for a Business Civil Liberties Union that would undertake to defend all victims of anti-business persecutions, on principle and as such. It was a wonderful idea, and, decades later, it still is. Yet, a couple of years ago, when I proposed to plant a few modest seeds for such an organization, in the form or a Business Rights website or blog, I found no interest among American capitalists.
And so one returns to the question Ayn Rand asked in the bitter days after the publication of Atlas Shrugged, when the intellectuals’ response to her book was typified by the snide remark that it made “well-poisoning seem like one of the kindlier arts.” “Never mind that,” she told Nathaniel Branden. “The question is, what of the people I am defending, the men of ability? Where are they? Why don’t they come forward? Why don’t they speak up?”