Topic: Regulatory Studies

You Shouldn’t Be Criminally Liable If You Don’t Have a Guilty Mind

Todd Farha, CEO of WellCare Health Plans, was convicted of knowingly executing a fraud by submitting false expenditure reports to the state. However, the district court decided that “knowingly” didn’t actually have to mean that Farha knew that the reports were false, but only that in submitting the reports Farha acted with “deliberate indifference” as to whether they were accurate. Essentially, a non-lawyer was convicted for being insufficiently cautious in adopting an interpretation of an ambiguous regulatory statute.

The U.S. Court of Appeals for the Eleventh Circuit upheld Farha’s conviction even in the absence of the required statutory mental-state element (what lawyers call mens rea). The appellate court decided, in agreement with the district court, that deliberate indifference toward falsity may stand in for knowledge of falsity. The practical implication is that the court lowered the mens rea standard and used a civil standard of liability to a criminal case. (You can be liable in a civil lawsuit even if you’re not guilty for criminal-punishment purposes.)

Cato has now filed a brief supporting Farha’s request that the Supreme Court review his case. The lower court’s holding is out of step with precedent, with bedrock principles of statutory interpretation regarding the mental-state elements of a criminal offense, and with common sense notions of justice. The most egregious aspect of the ruling is that mens rea elements are seen as so crucial to the criminal law that the Supreme Court has been willing to read them into a statute when the statute is silent regarding necessary mental state.

Yet the Eleventh Circuit took the opposite approach and read out of the statute mental-state elements that make the crime too hard to prosecute. This decision is especially troubling in an era of over-criminalization, with an estimated 300,000 separate federal crimes. This situation is exacerbated by the fact that many of the crimes are inherently complex, leading to ambiguity in underlying regulatory-compliance requirements that makes it incredibly challenging for people to understand what they must do to avoid liability.

Unfortunately, instead of attempting to rectify some of this ambiguity, the court here added more ambiguity—because arguably any crime can have a lower mental-state requirement added by the court at trial. This ruling has given prosecutors more weapons and made it even harder for businesses to comply with rampant regulations and made their owners and officers subject to arbitrary legal jeopardy. Many people will now be stripped of their liberty simply on the grounds of an incorrect interpretation of complex and ambiguous statutes. With the deck already stacked in favor of the government—and with myriad civil remedies available—there’s no logical reason to add the weapon of a diluted mens rea to the government’s arsenal.

For further discussion of Farha v. United States and other issues attending regulatory crimes, tune into this Federalist Society teleforum today at 3pm ET (and the audio recording should appear at that link later).

Yes, Suspend — Then Repeal — Dodd-Frank’s Conflict Minerals Rules

Here’s good news: President Trump may sign an executive order suspending the failed conflict minerals provisions of the Dodd-Frank law. Days before, Securities and Exchange Commission Acting Chairman Michael Piwowar had issued two statements directing the SEC to revisit its enforcement of the same provisions.

The provisions, enacted in 2010 as part of the wider Dodd-Frank law, impose a complex and in places impractical disclosure regime on publicly held companies that make products containing such minerals as tin, tungsten, tantalum, and gold. The idea is that laying bare supply chains leading to war-torn areas of central Africa will facilitate consumer boycotts. Some reports on the draft executive order, such as that in the Guardian (via Simon Schama on Twitter), seem intent on judging the Loi Obama (as it was known in some of the affected regions) by these original intentions rather than by its actual results. Yet those actual results are no secret. More than two years ago, the Washington Post, confirming what was widely known already, ran front-page reportage about how the law had

set off a chain of events that has propelled millions of miners and their families deeper into poverty, according to interviews with miners, community leaders, activists, and Congolese and Western officials, as well as recent visits to four large mining areas.

As the economy of the area had destabilized, some miners with no other way to support their families had themselves thrown in with lawless armed groups.

At the same time, the law was set to impose billions of dollars in cost on American companies and consumers. I won’t repeat the case against the rules, since I summarized it in this space two years ago, and little appears to have changed since. (For more, check the coverage at Overlawyered.)

The rumored draft of the executive order looks good, but a president’s leeway under the law extends only to suspending its effect for a time. Putting this fiasco to an end will call on Congress to repeal the relevant sections of Dodd-Frank, and that is what it should now proceed to do.

President Trump’s “One-in, Two-out” Rule: Lessons from the UK

Monday saw President Trump force through another executive order - “Reducing Regulation and Controlling Regulatory Costs. The headline was the introduction of a new “one-in, two-out” rule for new regulations:

for every one new regulation issued, at least two prior regulations be identified for elimination, and that the cost of planned regulations be prudently managed and controlled through a budgeting process.

Anything that can be done to focus regulators’ minds on the costs imposed on private businesses and groups of new regulation is probably, on net, positive. But the UK has had a policy like this since 2005, first adopting a “‘one-in, one-out” rule, then a “one-in, two-out” rule and now a “one-in, three-out” variant. The results are widely acknowledged to be mixed. Here are 4 lessons from the UK the Trump administration should bear in mind.

1. Focus on costs, not counting regulations

What really matters is not the number of regulations but the costs imposed on private businesses and civil society organizations. A “numbers” approach could be gamed: a department could introduce a new regulation, and remove a defunct one, while imposing new business costs. Thankfully, both the UK government and Trump’s executive order now recognize this. Section 2, part c) of the order says:

any new incremental costs associated with new regulations shall, to the extent permitted by law, be offset by the elimination of existing costs associated with at least two prior regulations

In the UK though, “one-in, one-out” eventually meant that for every new regulation introduced with a net cost to business, regulations up to an equivalent net cost would be eliminated. It would be better named a “pound-for-pound” rule. When upgraded to “one-in, two-out” every new regulation with net costs to business had to be compensated for by regulatory removal or revision at double the monetary cost of the new regulation. And so on. Whether badly drafted or otherwise, Trump’s version reads more like the “one-in, one-out” rule on cost, albeit having to find the cost compensation across two regulations. If implemented in this way, it could become messy to implement for many agencies. Judging regulation by pure cost rather than numbers, as the UK has done, would be a stronger constraint.

2.  Judge by net costs rather than gross costs

Any new measure, whether regulatory or deregulatory, will generate some costs to private businesses and civil society. If Trump is serious about deregulation, it therefore makes much more sense to assess “net” costs, rather than “gross” costs as a target for the new rule. This was recognized in Britain which now carries out the net cost methodology. Otherwise perverse incentives are created: departments or agencies will be cautious about ever proposing deregulatory measures where benefits to business exceed new costs, because they would still have to find gross cost savings elsewhere. As Stuart Benjamin outlines, steps taken to make pipeline construction easier, for example, otherwise might end up delayed as the agency scrambles around finding existing regulations with gross costs to remove to compensate for the very small costs of a deregulating measure. This might seem an obvious point, but at the moment the order is ambiguous – simply stating that the Director of the OMB will provide guidance “for standardizing the measurement and estimation of regulatory costs.”

Heritage Forum: Trump and Infrastructure

On Friday, the Heritage Foundation hosted a panel of experts to discuss prospects for infrastructure policy during the Trump administration. You can watch the event on C-SPAN.

I discussed why infrastructure activities should be devolved to the states and private sector, and why the Trump plan to subsidize equity investments in infrastructure is not a good approach.

There were numerous points of agreement on the panel, which included Michael Sargent of Heritage, Robert Puentes of the Eno Center, and Marc Scribner of CEI. We all favored greater private investment in traditionally public infrastructure, and we all agreed that the Trump administration should put a high priority on air traffic control reform this year.

I make the case for privatizing air traffic control in a new op-ed in The Hill.

You Ought to Have a Look: On Fixing Science

You Ought to Have a Look is a regular feature from the Center for the Study of Science. While this section will feature all of the areas of interest that we are emphasizing, the prominence of the climate issue is driving a tremendous amount of web traffic. Here we post a few of the best in recent days, along with our color commentary.

This week we focus on an in-depth article in Slate authored by Sam Apple that profiles John Arnold, “one of the least known billionaires in the U.S.” Turns out Mr. Arnold is very interested in “fixing” science. His foundation, the Arnold Foundation, has provided a good deal of funding to various research efforts across the country and across disciplines aimed at investigating how the scientific incentive structure results in biased (aka “bad”) science. His foundation has supported several high-profile science-finding replication efforts, such as those being run by Stanford’s John Ioannidis (whose work we are very fond of) and University of Virginia’s Brian Nosek who runs a venture called the “Reproducibility Project” (and who pioneered the badge system of rewards for open science that we previously discussed). The Arnold Foundation has also provided support for the re-examining of nutritional science, an effort lead by Gary Taubes (also a favorite of ours), as well as investigations into the scientific review process behind the U.S. government’s dietary guidelines, spearheaded by journalist Nina Teicholz.

Apple writes that:

In my conversations with Arnold and his grantees, the word incentives seems to come up more than any other. The problem, they claim, isn’t that scientists don’t want to do the right thing. On the contrary, Arnold says he believes that most researchers go into their work with the best of intentions, only to be led astray by a system that rewards the wrong behaviors.

This is something that we, too, repeatedly highlight at the Center for the Study of Science and investigating its impact is what we are built around.

Apple continues:

[S]cience, itself, through its systems of publication, funding, and advancement—had become biased toward generating a certain kind of finding: novel, attention grabbing, but ultimately unreliable…

“As a general rule, the incentives related to quantitative research are very different in the social sciences and in financial practice,” says James Owen Weatherall, author of The Physics of Wall Street. “In the sciences, one is mostly incentivized to publish journal articles, and especially to publish the sorts of attention-grabbing and controversial articles that get widely cited and picked up by the popular media. The articles have to appear methodologically sound, but this is generally a lower standard than being completely convincing. In finance, meanwhile, at least when one is trading with one’s own money, there are strong incentives to work to that stronger standard. One is literally betting on one’s research.”

Stop California’s Attack on Charitable Giving

Privately funded efforts to address social problems, enrich culture, and strengthen society are among the most significant American undertakings and have been for hundreds of years. The United States is among the most generous nations in the world when it comes to charitable giving, with gifts by individuals (including bequests) totaling over $298 billion in 2015—a record-breaking sum. Over one million nonprofit organizations benefited from those donations, including religious groups, schools, hospitals, foundations, social-welfare organizations, and, yes, think tanks. This number includes approximately 118,000 registered charities in California alone.

America’s culture of charitable giving has flourished because its legal framework—including the national individual deduction for charitable donations and income-tax exemption for charitable organizations—marks a critically important boundary between government and civil society, one enshrined in our Constitution. Regrettably, the state of California has pushed to collect, in bulk, the names of charitable donors who choose to give anonymously—without any immediate need. Nearly an eighth of all U.S. charities are registered to solicit donations in California, so the stakes for donor privacy and freedom in this case implicate donors and charities across the country.

Americans for Prosperity Foundation is resisting this request, but a district court ruled against them. Now before the U.S. Court of Appeals for the Ninth Circuit, Cato has joined the Pacific Research Institute and Competitive Enterprise Institute on an amicus brief.

The Supreme Court ruled unanimously in NAACP v. Alabama (1958), that “freedom to engage in association for the advancement of beliefs and ideas is an inseparable aspect of the ‘liberty’ assured by the Due Process Clause of the Fourteenth Amendment.” As a result, the state of Alabama could not compel the NAACP to reveal the names and addresses of its members because doing so would expose its supporters “to economic reprisal, loss of employment, threat of physical coercion, and other manifestations of public hostility” and thereby restrain “their right to freedom of association.”

This case implicates the same concerns. It cannot seriously be questioned that many donors simply will not give unless they can keep their donations confidential. Many donors, for example, give anonymously out of deeply held religious or political convictions. Some do so to live a more private life. Others do so for the same reasons articulated by the Supreme Court in NAACP v. Alabama—to avoid “economic reprisal, loss of employment, threat of physical coercion, and other manifestations of public hostility” associated with supporting unpopular or controversial causes. Others may fear public or private retaliation and harassment, while still more do so to avoid unwanted solicitations by other groups.

Forced disclosure of donor names to state governments threatens serious consequences for both donors and charitable organizations. At the same time, California already has ample tools for carrying out its proper role in protecting the public from fraud and deceptive solicitation practices, including targeted use of the attorney general’s supervisory authority and subpoena power.

In Americans for Prosperity Foundation v. Harris,* the Ninth Circuit should reject the attorney general’s policy of unfettered donor disclosure and its chilling effect on constitutionally protected activity. This bulk disclosure policy—which has no statutory basis, serves no compelling state interest, and could be accomplished by less restrictive means—adversely affects the rights of all donors and nonprofit organizations operating in the nation’s largest state.

*For some reason the change hasn’t yet been made, but with Kamala Harris’s departure to the U.S. Senate and Xavier Becerra now California’s attorney general, the case will very soon be known as Americans for Prosperity Foundation v. Becerra.

Privatize Washington’s Metro System

Some members of Congress are considering restructuring DC Metro’s management and oversight. Big reforms are needed given the disastrous service, safety, and financial performance of the system in recent years.

Why not privatize Metro? Countries around the world have been privatizing their transportation infrastructure in order to improve management and efficiency. Privatizing Metro buses would be straightforward, but even privatizing the subway system would not be an unheard of reform.

Hong Kong privatized its subway system in 2000. In a recent study on infrastructure, McKinsey reported:

Hong Kong’s MTR Corporation has defied the odds and delivered significant financial and social benefits: excellent transit, new and vibrant neighborhoods, opportunities for real-estate developers and small businesses, and the conservation of open space. The whole system operates on a self-sustaining basis, without the need for direct taxpayer subsidies.

MTR’s railway system covers 221 kilometers and is used by more than five million people each weekday. It not only performs well—trains run on schedule 99.9 percent of the time—but actually makes a profit: $1.5 billion in 2014. MTR fares are also relatively low compared with those of metro systems in other developed cities. The average fare for an MTR trip in 2014 was less than $1.00, well under base fares in Tokyo (about $1.50), New York ($2.75), and Stockholm (about $4.00).

That sounds pretty darn good. The average fare on the DC Metro is about $3. The on-time record of Metro is unclear, but in technical terms I think “crappy” best describes it. Note that Hong Kong’s 99.9 percent on-time record means that “of the average 5.2 million passenger trips made on the MTR heavy rail and light rail networks on each normal weekday, 5.195 million passengers safely reach their destinations within 5 minutes of their scheduled arrival times.” In 2014, “the system ran for 120 consecutive days without a single delay over eight minutes.” Wow.

That stellar performance induces strong demand for the Hong Kong system, which in turn generates high fare revenues. The ratio of passenger fares to operating costs is a high 185 percent, which means that fares fully cover operating costs and part of capital costs. MTR raises other funds for capital from real estate deals under which it gains from land value increases near stations. The Hong Kong system is profitable and unsubsidized. By contrast, the average ratio of fares to operating costs for U.S. subway systems is just 46 percent, and the systems are heavily subsidized.

The MTR is probably the best-run subway system in the world. The system is an “immaculately clean, well-signposted, cheap, regular, convenient system.” And there’s free Wi-Fi in most stations.

The system is so admired that MTR has been contracted to run systems in other cities. CNN says: “MTR Corporation now operates the London Overground, and two lines of the Beijing Metro, as well as parts of the Shenzhen and Hangzhou Metro systems in China, the Melbourne Metro in Australia and the Stockholm Metro in Sweden … London Overground enhanced its punctuality from 88.4% in 2007 to 96.7% in 2013 after MTR took over its operation for a year.”

Can we get MTR Corporation to expand into Washington? Metro Board Chairman Jack Evans wants a federal takeover of Metro, but how about a private takeover?