The Streets Were Paved with Gold - Ken Auletta [58]
And yet some of the same laws could apply to past city financial practices:
(1) Federal laws pertaining to fraud—the filing of false statements and failing to make full disclosure. The Securities Exchange Act of 1934, particularly Rule 10b-5, makes it a potential crime—fraud—to fail to “disclose any material fact” in the sale of notes or bonds. Section 1001 of the U.S. Code, Title 18, makes it a crime to file false statements where the federal government is directly or indirectly involved, as they are in the sale of all securities; Section 1014 makes it a crime to file a false document with a bank insured by the federal government.
(2) The New York State penal laws pertaining to fraud. Sections 175.30 and 175.45 define the differing degrees of crime committed when a person files “a false instrument … with intent to defraud.”
(3) The New York State Blue Sky Law, Chapter 20, Section 352. This law permits the state attorney general to investigate any fraudulent “advertisement [or] investment advice” in connection with the sale or transfer of any securities.
(4) The New York State larceny laws. According to Article 155, it is a crime to “deprive” someone of his property. Section 155.40 says it is a crime for someone to “use or abuse his position as a public servant by engaging in conduct within or related to his official duties, or by failing or refusing to perform an official duty in such manner as to affect some person adversely.”
Violations of these laws entail severe penalties. Sentences range from one to ten years; fines, from $500 to $10,000. For federal and state felonies, the statute of limitations expires after five years; for a state misdemeanor, after two years. The statute of limitations for violations of state law by public officials, however, is extended to “within five years after the termination of such service.” Thus for a state felony the statute of limitations extends up to ten years; for a misdemeanor, up to seven.
Fraud laws can be pretty stern. In a 1925 case involving the city of Long Beach, New York (People v. Reynolds), a state court convicted municipal officials of fraud for making false entries in the city’s books, even though they did not personally benefit from their acts. In the 1967 Walston case, underwriters of municipal bonds were found guilty for failing “to make diligent inquiry” to ensure that “all material facts” presented to investors were correct. In the 1974 Ferguson case, a bond counsel was judged guilty and censured because “he should have known” that a securities prospectus omitted important facts. And one does not have to commit a “willful” or knowing act to become vulnerable to prosecution. “If you are so negligent, at some point you become criminally liable,” explains a prominent attorney who advises MAC and is an expert on securities laws. “It’s like an engineer on a train who falls asleep and the train crashes and kills fifty. He did not intend to kill those people, but he is criminally liable.”
If these laws and precedents were applied to persons involved in “balancing” and financing city budgets during the last twenty years, a stadium would be needed to house the defendants. The roll call of those implicated would read like a Who’s Who of government and banking: Wagner, Lindsay, Beame, Nelson and David Rockefeller, former Treasury Secretary William Simon (in the late sixties and early seventies, he was the chief municipal bond dealer for the Wall Street banking firm of Salomon Bros, and served on the City Comptroller’s Technical Debt Advisory Committee), Harrison Goldin, former Deputy Mayors James Cavanagh and Edward Hamilton, former Budget Directors Melvin Lechner and David Grossman, former speakers of the state