One of the glories of common law is the presumption of innocence. Even so, U.S. courts have long permitted the seizure of assets before trial to make sure any damages can ultimately be paid. In 1970, the federal racketeering act expanded the government's power to freeze the assets of businesses if it can convince a federal judge that the assets won't be around when it comes time to collect. The 1989 savings-and-loan bailout law gave thrift regulators this extraordinary power.
It was bound to be misused. When the Office of Thrift Supervision on Mar. 2 barred partners in the New York law firm of Kaye, Scholer, Fierman, Hays & Handler from spending some of their personal and firm assets without the regulators' consent, it acted as both prosecutor and judge. Faced with mounting concerns from bankers and clients about its survival, the firm quickly settled for $41 million.
The OTS freeze was overkill. Kaye Scholer insists it did nothing improper. The OTS and the Justice Dept. had accused the firm and three partners of misleading regulators about the finances of now-defunct Lincoln Savings & Loan Assn. It claimed damages of $275 million.
Attacking a law firm with a pickax threatens to shift the precarious balance between attorneys' duties to their clients and their obligations to the public. The government certainly had enough evidence to build a case that Kaye Scholer crossed the line from advocate to accomplice in failing to disclose Lincoln's problems. That does not justify freezing their assets. In the event of a finding of liability, this 75-year-old firm would have paid the damages. Given the weapon's potential for putting a partnership or corporation out of business, the government shouldn't be using firepower that isn't justified.