Monster Backdating Case May Spur Reporter Ruling

James Treacy
James Treacy, former chief operating officer of recruitment services giant Monster Worldwide Inc. exits Manhattan federal court following his indictment on April 30, 2008, in New York. Photographer: Louis Lanzano/AP

A former Monster Worldwide Inc. executive’s appeal of a fraud conviction for backdating stock options may wind up generating a decision on when reporters can be forced to testify at criminal trials.

James Treacy’s lawyers argued in the U.S. Court of Appeals in New York today that he was denied his right to a fair trial when the judge hearing his case limited the cross-examination of Charles Forelle, a reporter for the Wall Street Journal. Forelle, forced to testify by the government, told jurors about comments Treacy made to him in an interview. The Journal’s stories helped trigger a national stock option backdating probe.

News Corp.’s Dow Jones unit, owner of the Journal, is using the case to obtain a ruling that protects reporters from government subpoenas. In a “friend of the court” brief, the publisher said the First Amendment is threatened when journalists are compelled to testify about their reporting. The company wants the appeals court to spell out strict guidelines for when federal prosecutors may call reporters as witnesses.

“This is very much a live issue in most courts around the country,” Jane E. Kirtley, a professor of media ethics and law at the University of Minnesota, said in a phone interview.

The Manhattan-based appeals court, which hears appeals from federal courts in New York, Connecticut and Vermont, has never decided when prosecutors may compel reporters’ testimony at criminal trials, Dow Jones told the court. Bethany Sherman, a Dow Jones spokeswoman, declined to comment.

On a Pedestal?

“Is he on some sort of pedestal?” U.S. Circuit Court Judge Peter Hall asked at today’s argument, questioning why Forelle wasn’t subjected to full cross-examination.

“It was so limiting,” another judge on the panel, Jane Restani, said of Forelle’s narrow cross-examination. Restani sits on the U.S. Court of International Trade and was a visiting on the appeals court.

The National Association of Criminal Defense Lawyers, or NACDL, backed Treacy in his appeal. The judge set a “dangerous precedent” by curtailing Forelle’s cross-examination and elevating his privilege over Treacy’s right to confront a witness against him, the group says in court papers.

The court didn’t issue a ruling. Neither the NACDL’s lawyers or Dow Jones’ attorneys were permitted to argue at the hearing. Assistant U.S. Attorney Deirdre McEvoy told the three-judge panel that the trial judge acted properly and permitted Treacy’s lawyers to pose enough questions to establish what they wanted to.

Truthfulness Test

“The defense was able to test the truthfulness of the testimony,” she said.

Treacy, who was Monster’s chief operating officer, was convicted of conspiracy and securities fraud for backdating employee stock options to days when the share price was at or near a periodic low, and not disclosing it in public filings. Monster is the world’s largest online-recruiting company.

When backdated options are exercised, the holders typically profit from the inflated difference between the market price and the relatively low price they paid.

While it isn’t illegal to backdate options, it’s a crime under federal law to fail to disclose such backdating, prosecutors said. Monster’s compensation expenses were understated by $339 million from 1997 to 2005 through the backdating scheme, prosecutors said.

After the Journal exposed backdating in 2006 in a series of Pulitzer Prize-winning stories, at least 225 companies disclosed internal or federal investigations involving option grants. Executives were charged with crimes at more than 10 companies, including New York-based Monster.

Two-Year Term

Treacy, who left Monster in 2002 and is serving two years in prison after last year’s conviction, earned at least $6 million more than he was entitled to by backdating options, prosecutors said.

At his trial in Manhattan federal court, prosecutors sought to use Treacy’s comments to the Journal as proof that he lied by saying he didn’t participate in backdating other employees’ grants. Treacy said he “had no involvement” and “didn’t notice the favorable strike prices” at which shares could be bought, according to the story.

Prosecutors subpoenaed Forelle, a member of the reporting team, to verify that Treacy made the quoted remarks. Forelle invoked the reporter’s privilege not to testify through the newspaper’s lawyers, saying his testimony wasn’t relevant and prosecutors had other ways to present the evidence. The government disagreed on both points.

Judicial Compromise

U.S. District Judge Jed Rakoff struck a compromise. He ordered Forelle to testify, while limiting both sides’ questions to the three statements Treacy was quoted as making.

In the appeal, Treacy’s lawyers said the bar to full cross-examination kept them from proving Treacy’s remarks in the interview referred only to his own options, not those of others at the company.

The judge violated the Sixth Amendment guarantee that anyone charged with a crime has the right to be confronted with the witnesses against him, his lawyers argued.

“Three narrow questions prescribed by the court were no substitute for full cross-examination,” they wrote. “What the Confrontation Clause guarantees is adversarial testing of the witness’s account.”

The NACDL, representing 12,800 attorneys, agreed in its own brief.

Clash of Rights

“In the guise of upholding the First Amendment interests of a free press,” Rakoff’s decision dangerously erodes the Sixth Amendment right of the accused to challenge evidence, the group said. “Forelle’s status as a journalist did not immunize him from challenge.”

For Dow Jones, the case is an opportunity to limit prosecutors’ ability to summon journalists to the witness stand. The New York appeals court has previously decided when criminal defendants or civil litigants may force reporters to testify, not when prosecutors may do so, the company says.

“The government should be forced to overcome a heightened standard before it can overcome the reporter’s privilege,” the company says.

The reporter’s privilege provides that journalists won’t be forced to testify or disclose sources of information in court, according to the Reporters Committee for Freedom of the Press, an advocacy group in Arlington, Virginia.

In federal court, it is a judge-made rule whose application differs from circuit to circuit and depends in part on whether the information sought from the reporter is confidential or not, according to the Reporters Committee.

New York Rule

The U.S. Court of Appeals in New York set forth the basis for the privilege in a 1998 case, saying that litigants would routinely “sift through press files in search of information” if permitted. That would result in “heavy costs of subpoena compliance” for the media, might deter sources from speaking, and may make it appear as if journalist are part of the “investigative arm of the judicial system,” the court said.

More recent rulings have been unfavorable to the media, said Kirtley of the University of Minnesota, a former executive director of the Reporters Committee. Beginning in 2003, the federal appeals court in Chicago said in two cases that the privilege didn’t exist.

In 2005, the appeals court for the District of Columbia said a grand jury’s need for information outweighed any reporter’s privilege after New York Times reporter Judith Miller refused to testify about sources for a story on a Central Intelligence Agency operative. Miller spent 85 days in jail before agreeing to testify.

Failed Attempts

“There have been a lot of attempts to get information from reporters and reporters have had to testify,” Stephen D. Solomon, a journalism professor at New York University, said in a phone interview.

In its brief, Dow Jones said it recognizes that criminal defendants have a right to cross-examine government witnesses, and it warns that defense questioning of journalists may lead to questions about unpublished or confidential information.

To avoid that, the publisher proposes that trial courts adopt a strict rule saying when reporters can be called to testify at criminal trials. The company doesn’t take a position on whether Treacy deserves a new trial.

“The government must prove that the requested information is ‘critical’ or ‘essential’ to its case and that the information is not available from other sources,” Dow Jones says. “Forelle should not have been forced to testify.”

Fatal Delay

Treacy’s lawyers, Bruce C. Bishop and Evan T. Barr of Steptoe & Johnson LLP, urged the appeals court not to consider Dow Jones’s argument. The publisher lost its chance to contest Rakoff’s ruling by not immediately appealing it during the trial, they say in court papers.

“Attacks on credibility are the essence of confrontation,” Bishop said in court today.

Bloomberg LP, the parent of Bloomberg News, competes with New York-based News Corp. and its Dow Jones division in providing financial news and data.

The trial court case is U.S. v. Treacy, 1:08-cr-00366, U.S. District Court, Southern District of New York (Manhattan). The appeal is U.S. v. Treacy, 09-3939-cr, U.S. Court of Appeals for the Second Circuit (Manhattan).

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