A Different Legal System for the Rich: Imagine Getting Off Easy for Hit-and-Run Because You Run a Hedge Fund

It's not just the recession that's killing the middle class -- it's how the legal system is being used to establish a two-tiered society.

Our lopsided wealth distribution makes the U.S. look more like a banana republic than one of the richest, most highly developed nations in the world. But having a small, wealthy elite living it up among a nation of struggling workers doesn't make a country a banana republic. In a true plutocracy, you also need a bifurcated legal system, with one philosophy of justice for the wealthy and another for the little guy.

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While that’s the case to (greatly) varying degrees in every justice system in human history, in a banana republic that class divide is systemic -- it’s baked into the cake. And that may be exactly what’s developing, gradually, in the United States.

Recently, a modest crime that made big headlines provided an eye-opening anecdote. In July, Dr. Steven Milo, a surgeon, was riding his bicycle on a Colorado road when he was struck from behind by a Mercedes. According to the Vail Daily, Milo “suffered spinal cord injuries, bleeding from his brain and damage to his knee and scapula,” causing “disabling spinal headaches” and requiring “multiple surgeries for a herniated disc and plastic surgery to fix the scars he suffered in the accident.” His attorney said Milo “will have lifetime pain.”

The driver of the Mercedes took off, stopping later not to call for help for Milo, left bleeding at the scene, but for service for his damaged luxury sedan. In Milo’s words, the man “fled and left me for dead on the highway,” a serious felony.

Or it would be if you or I had committed the offense. But the driver that day was 52-year-old Martin Joel Erzinger, a Morgan Stanley Smith Barney money manager who oversees more than a billion in assets for “ultra high net worth individuals, their families and foundations.” District Attorney Mark Hurlbert was apparently concerned with Erzinger’s future -- SEC rules would have required him to disclose the felony within 30 days of being convicted, which might have cost him his job -- and decided to accept a misdemeanor plea, over the objections of Milo and his attorneys. “Felony convictions have some pretty serious job implications for someone in Mr. Erzinger's profession,” Hurlbert said, “and that entered into [the decision].”

There’s nothing new about high flyers getting off the hook for traffic accidents with a wink and a nod from friendly prosecutors, but what makes the story noteworthy is that Hurlbert, who ran as a Republican in an unsuccessful bid for the state senate last year, felt comfortable acknowledging his reasoning to reporters. That he’d freely admit to considering an accused felon’s social status in charging Erzinger suggests a cultural shift in the works.

Economically, the birth-story of America’s new Gilded Age is fairly straightforward. In 1928, on the eve of the Great Depression, those in the top 10 percent of the economic pile grabbed about half of the nation’s income. With the emergence of the New Deal, a powerful labor movement and World War II -- and the GI Bill that followed the troops home -- a large middle class developed, and by 1953, that slice had been cut to less than a third. But by 2006, the middle class’ gains had been entirely reversed, and the top 10 percent were again taking around half of the nation’s income.

As I explain in my book, The Fifteen Biggest Lies About the Economy, that didn’t happen by accident. It was the result of a decades-long class war from above. And there has been a philosophical framework underpinning that war that holds the wealthy to be these perfectly virtuous and hard-working "job creators" on whose backs the rest of society attaches itself like a swarm of parasites.

In war, there’s always “collateral damage,” and an economic assault based on such a depraved and antisocial moral framework is bound to spill over into other areas of society -- into the broader culture. The Erzinger affair was but one of a series of recent events that suggests, if only anecdotally, that Rand’s vision of society may indeed be infecting our judicial system (which never exactly treated everyone alike regardless of their station).

Not Just a Local Tale of Injustice

The scandal was just a local Colorado story, but it’s emblematic of broader trends in America's criminal justice system. Compare, for example, the zeal with which we punish nonviolent drug offenders with the attention -- and resources -- we devote to locking up corporate criminals who are no more violent but create many more victims.

According to Human Rights Watch, the number of Americans behind bars quadrupled between 1980 and 2002, while violent crime rates were “relatively constant or declining.” In 2003, three-quarters of new admissions to state prisons went in for nonviolent offenses. “Perhaps the single greatest force behind the growth of the prison population,” the human rights watchdog reported, “has been the national ‘war on drugs.’" The number of drug offenders increased twelvefold in the two decades following Ronald Reagan’s election in 1980.

The enforcement trend has looked very different when it comes to white-collar crime. As I noted last week, during the savings and loan scandal of the Reagan era, 1,100 bankers went to jail for fraud, but so far the current financial crisis -- rooted in a mortgage-based securities scam that may prove to be the greatest Ponzi scheme in history -- has yielded no high-level prosecutions to date (only a few low-level loan officers have faced criminal sanctions). There are a number of reasons for that, but one of the biggest is a simple matter of resources. While the financial sector has grown significantly since the 1980s, and the securities Wall Street peddles have gotten far more complex, David Heath reported that the FBI had just 240 agents working on mortgage fraud cases last year, compared to 1,000 white-collar investigators it employed at the height of the S&L crisis.

Civil Injustice

The disparities get even more egregious in the civil courts. Consider the difference in how we approach two sides of a debt obligation.

The Minneapolis-Saint Paul Star-Tribune reported that the debtors’ prisons of the 19th century  -- or their modern equivalents -- are returning for human persons who fall into a spiral of debt. The original prisons were abolished in the United States over a century ago, but according to the report, “people are routinely being thrown in jail for failing to pay debts” in states like Minnesota, “which has some of the most creditor-friendly laws in the country.”

Technically, they’re not being imprisoned for owing money, but for missing court-ordered payments. But the effect is the same. Fueled by “a growing industry that buys bad debts and employs every means available to collect,” the Star-Tribune noted that in some “extreme cases, people stay in jail until they raise a minimum payment.” One Illinois judge sentenced a debtor "to indefinite incarceration" until he came up with the $300 he owed a local lumberyard.

It’s a case of using public resources to secure private profits:

Taxpayers foot the bill for arresting and jailing debtors. In many cases, Minnesota judges set bail at the amount owed.

In Minnesota, judges have issued arrest warrants for people who owe as little as $85 -- less than half the cost of housing an inmate overnight.

How often are debtors arrested across the country? According to the report, “no one can say. No national statistics are kept, and the practice is largely unnoticed outside legal circles.”

But contrast that with how we deal with corporate persons on the other side of those loan transactions. Last month I wrote about how the banks traded millions of U.S. mortgages around the global financial system -- sliced and diced and repackaged and resold -- without the documents, required by law in most states, that prove who legally owns the underlying assets. Now, as those loans are going belly-up, judges around the country have started ruling that lenders don’t have the right to foreclose. As the Washington Post reported, “these fundamental concerns over ownership … should they continue to spread, could call into doubt the ownership of mortgages throughout the country, raising urgent challenges for both the real estate market and the wider financial system. “

It would also cost Wall Street untold billions. But the legal system seems uniquely suited to letting the banks off the hook. Rolling Stone’s Matt Taibbi visited “a special super-high-speed housing court” in Florida, and reported on these little-known backwaters of our legal system.

This "rocket docket," as it is called in town, is presided over by retired judges who seem to have no clue about the insanely complex financial instruments they are ruling on — securitized mortgages and laby­rinthine derivative deals of a type that didn't even exist when most of them were active members of the bench. Their stated mission isn't to decide right and wrong, but to clear cases and blast human beings out of their homes with ultimate velocity.

The system, wrote Taibbi, “exists to launder the crime and bury the evidence by speeding thousands of fraudulent and predatory loans to the ends of their life cycles, so that the houses attached to them can be sold again with clean paperwork.”

Those are examples of some specific legal processes. But consider for a moment how the very notion of liability is diverging for individuals and corporations in this country.

In 2005, armed with dubious claims that they were being victimized by widespread bankruptcy fraud -- that mega-banks were being screwed over by the little guy -- Wall Street parlayed a $100 million lobbying campaign into the Bankruptcy Abuse Prevention and Consumer Protection Act, which made it harder than ever for struggling families to use the bankruptcy laws to get out from beneath a mountain of debt. They were on the hook for their obligations, and needed to be held accountable.

But accountability for corporations that routinely rip off their customers may soon become elusive in the United States. Just five years after tightening the bankruptcy laws, the Supreme Court stands poised to close the doors of the courthouse to consumers with grievances against corporations with a key case that so far has gotten little attention.

In AT&T Mobility v. Concepcion, the Supreme Court is expected to make a decision that could effectively end class action suits in the United States. It began as a typical petty ripoff -- AT&T was charging customers sales tax on the full price of its discounted cell phones. But the amount of damages -- $30 per customer -- wasn’t enough to justify any single customer taking the mobile phone giant to court. That’s why class action lawsuits exist -- so that it’s worth lawyers’ time to sue over (often small) claims that affect a large number of people doing business with a firm.

AT&T said its customers had signed a contract that mandated they participate in individual arbitration, and didn’t allow them to join in class action suits. AT&T had basically tried to exempt itself from class action proceedings with a line of fine print. But as Vanderbilt University legal scholar Brian Fitzpatrick wrote in the San Francisco Chronicle, “under California law sometimes a contract can be so one-sided or otherwise violate public policy that it is unenforceable.”

A federal court found that AT&T’s provision did just that, and AT&T took the case up to the Supreme Court, where most observers expect the Roberts court to side with the telecom. “The current court is very friendly to businesses,” wrote Fitzpatrick, “and there is nothing businesses would like more than to exempt themselves from class action proceedings.”

If the court goes down AT&T's path, the consequences could be staggering. It could be the end of class action litigation. In light of Supreme Court decisions in the 1990s that made it difficult to certify personal-injury class actions, virtually all class actions today occur between parties who are in transactional relationships with one another… Once given the green light, it is hard to imagine any company would not want its shareholders, consumers and employees to agree to such provisions.

While you and I must be personally accountable, Fitzgerald stated the obvious in describing the likely outcome of such a decision: “if people don't sue, businesses know they can cheat people out of small amounts with impunity.”

To Control the Economy, Influence the Law

Now, one might argue that these are separate and unrelated threads -- anecdotes that don’t necessarily demonstrate a trend. And that may be true.

But consider that the same wealthy conservative donors who invested billions of dollars to build their own media and a network of think-tanks and PR agencies to inject their ideologically informed economic views into the mainstream also invested heavily and strategically in influencing our legal culture.

Take, for example, the efforts of the John M. Olin Foundation. According to Rightweb, “Since the 1970s, the foundation has been providing funding to law and economics programs in schools across the nation, and to legal organizations such as the Federalist Society,” which was founded in 1982 by former attorney general Ed Meese, controversial Supreme Court nominee Robert Bork, and Ted Olsen (who years later would win the infamous Bush v. Gore case before the Supreme Court in 2000 and then go on to serve as Bush’s solicitor general).

According to the New York Times, “Much of Olin's giving has centered on law schools,” where the Federalist Society has had a significant impact.

The society now has chapters at almost every law school, and a swarm of alumni in the Bush administration dedicated to what the group calls limited government and judicial restraint. "It's not clear whether we would have existed without Olin's support," said Eugene Meyer, the society's president.

Olin has spent $68 million on law and economics programs, including those at Harvard, Yale, Stanford and the University of Chicago. "I saw it as a way into the law schools -- I probably shouldn't confess that," [Olin director James] Piereson said.

In 2005, the John M. Olin Foundation actually declared “mission accomplished,” and closed up shop. The New York Times reported that after “three decades financing the intellectual rise of the right,” the foundation’s services were no longer needed.

Given the success Olin and other like-minded philanthropists have had, these may not be unrelated anecdotes, but taken together with our increasingly lopsided distribution of wealth, these stories may represent more evidence of our gradual slide into plutocracy.