As a social practice that operates through language, law confronts two limitations: The imprecision of words—what the great legal theorist H.L.A. Hart called “open texture”—makes their application to particular instances uncertain. Compounding the problem, limitations of human foresight mean lawmakers cannot see everything the future will produce.
Consider the law of fraud. The most famous such law is “Rule 10b-5,” prohibiting securities fraud, which prosecutors have used to levy severe punishments for everything from the accounting shenanigans at Enron to the sort of insider trading in the hedge fund world depicted on Showtime’s Billions. This rule, like other criminal fraud laws, has enormous open texture. It punishes “any scheme to defraud” and any “practice which operates as a fraud or deceit.” In other words, don’t commit fraud or you may go to federal prison for a long time.
The virtue in this flexibility is that no matter how fast and enormous the changes in technology in industries like finance, laws against fraud remain potent. But greater generality and vagueness in law mean more of that “open texture.” And uncertainty in meaning is an especially serious worry in criminal law. In a society organized around liberty, citizens have a right to be clearly warned about what behaviors will incur punishment. Likewise, laws must give authorities clear guidance about who is eligible for arrest, lest power be arbitrary and absolute.
What, after all, is meant by the seemingly simple concept of “fraud”? The word implies a kind of purposeful deception, with the aim of getting something from someone else. The trouble is that—in a vibrant and competitive capitalist economy—not all deception, by a great measure, is fraud. “I won’t go lower, this is my final price.” “Our network has the best reception.” “Our company’s future growth potential is fantastic.” And so on.
To protect the right to fair notice, the legal system has tended to fall back on the idea that guilty fraudsters are the ones who can be shown to have known they were doing something wrong—within the market in which they plied their trade, whether that market was more like a priory or a shark tank. So the word “fraud,” in the practice of criminal law, is understood to mean something more like “deception that is clearly out of bounds on the field of play in question.” (Think, for example, of the difference between golf, where even the smallest violation must be self-reported based on the sport’s honor code, and hockey, where a sharp elbow is acceptable so long as the refs don’t see it.)
This is one reason it’s been so difficult for prosecutors to imprison bank executives whose trading models wrecked the economy in 2008. Clear, purposeful, out-of-bounds behavior has been a hard thing to prove in the market for mortgage-backed securities. There, sharp bankers dealt with each other as both buyer and seller in trades that, by design, were high on both risk and reward and necessarily contemplated both a winner and a loser in the zero-sum game of predicting housing and mortgage markets.
The declaration “fraud!” sounds clear and convincing when Steve Carell’s character in The Big Short uses it to describe the totality of how a securities market took the economy for a ride. And an accusation of a “scheme to defraud” is charged language that might momentarily excite jurors, or at least the press.
But legally, proving fraud requires digging much deeper to find enough to justify imprisoning one banker for a security sold to another. Over a long, hard-fought trial against the best of defense lawyers, prosecutors would need to prove beyond doubt that bankers trading these securities knew—at the time they sold them—that they were cheating the buyers: e-mails telling colleagues to hide facts, documents shredded or falsified, and the like. With fraud, not only is the cover-up worse than the crime, sometimes it’s the only way to prove the crime.
Buell is the Bernard M. Fishman Professor of law and author of the new book Capital Offenses: Business Crime and Punishment in America’s Corporate Age (W.W. Norton). Before joining the Duke Law faculty in 2010, he was a federal prosecutor and a lead prosecutor for the Department of Justice’s Enron Task Force.