Beneath Contempt, Did the Justice Dept. Deliberately Bankrupt INSLAW?
by Maggie Mahar
"BARRON'S NATIONAL BUSINESS AND FINANCIAL WEEKLY"
March 21, 1988
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"A VERY strange thing happened at the Department of Justice..."
What that very strange thing was was described in clear and exhaustive detail in Judge George Bason's blistering ruling before a packed Washington, D.C., courtroom last September. In a quiet voice, Bason, a 56-year-old federal bankruptcy judge with a reputation for being meticulous in his judicial approach, told the astonishing story of INSLAW vs. the United States of America.
In his ruling on the case, Bason explained how "through trickery, deceit and fraud," the U.S. Department of Justice "took, converted, stole" software belonging to INSLAW, a Washington-based computer software firm. In 1982, INSLAW signed a $10 million contract to install its case-tracking software, PROMIS (Prosecutor's Management Information System) in the Justice Department's offices. But instead of honoring the contract, Bason asserts, Justice officials proceeded to purposefully drive the small software company into bankruptcy, and then tried to push it into liquidation, engaging in an "outrageous, deceitful, fraudulent game of cat and mouse, demonstrating contempt for both the law and any principle of fair dealing."
Ultimately, the series of "willful, wanton and deceitful acts" led to a cover up. Bason called statements by top Justice Department officials "ludicrous ... incredible ... and totally unbelievable."
Some of the evidence against the department came from one of its own. During the course of the litigation, Anthony Pasciuto, deputy director of the department's Executive Office for United States Trustees, met secretly with INSLAW'S president, William Hamilton. At that breakfast meeting at the Mayflower hotel, Anthony Pasciuto told Hamilton and his wife, Nancy, how the Justice Department had pressured Trustee officers to liquidate their company. Later, a superior confirmed Pasciuto's story. But at the trial, a horrified Pasciuto listened while his superior changed his testimony. Close to tears, he, too, recanted.
Judge Bason believed Pasciuto's original testimony however. On Feb. 2, 1988, he ordered Justice to pay INSLAW about $6.8 million in licensing fees and roughly another $1 million in legal fees. Bason wasn't sure whether he could assess a department of the U.S. government with punitive damages. If so, damages could run as high as $25 million. Bason struggled with that legal question and finally postponed the decision to a later date.
Now, no one knows how Judge Bason would have ruled on the question of damages. In November, Judge Bason rejected a Department of Justice motion to liquidate INSLAW. A scant one month later, the Harvard Law School graduate and former law professor discovered that he was not being reappointed. The decision to replace him followed from a recommendation made by a four-man merit selection panel appointed by the chief circuit judge, Patricia Wald, a former Justice Department employee. The panel was headed up by District Judge Norma Johnson, another former Justice Department lawyer.
Judge Bason stepped down in February. He was replaced by S. Martin Teel Jr., 42, one of the Justice Department lawyers who had unsuccessfully argued the INSLAW case before Bason. Even jaded, case-hardened Washington attorneys called the action "shocking" and "eerie."
INSLAW'S case will be assigned to another judge for disposition of damages. Meanwhile, the Justice Department is appealing Judge Bason's initial $8 million award to U.S. District Court. And, last week, the Internal Revenue Service descended on the Hamiltons, demanding that the bankrupt company pay $600,000 in back taxes-- immediately.
"I restrained the IRS from going after the Hamiltons personally--just a few days before I left the bench," Bason recalls. "But that restraining order lasts only 10 days. I don't know what's happening now."
"It seemed as if the controversy was winding down," observes INSLAW'S former attorney, Leigh Ratiner. "It would follow a natural course in the press, and then fade from view." Inslaw would become another shocking event that slinks off into obscurity: Someone occasionally might dimly remember and idly ask, "What ever did happen to Bill Hamilton and those INSLAW people? A real shame ... I heard the judge was back teaching law somewhere...."
But at the end of last week Anthony Pasciuto instructed his lawyer to write a letter to Deputy Attorney General Arnold Burns. Pasciuto has decided to tell the full story that he began telling at the Mayflower last spring. And, in an interview with "Barron's" at the end of the week, Pasciuto explained how the Justice Department black-listed INSLAW. It was a tale that involved two U.S. trustees, a federal judge who told two versions of the same story, and a Justice Department that routinely refused to pay certain suppliers: "If you're on the bad list, you go in this drawer," another Justice Department employee explained to Pasciuto.
Pasciuto knows what happened--but not why. In the trial, INSLAW claimed that C. Madison "Brick" Brewer, the Justice Department employee responsible for administering the department's $10 million contract with INSLAW, held a grudge against the company: INSLAW's Hamilton had fired Brewer in 1976. But since the trial, Hamilton has become convinced that Brewer alone could not have been that powerful. Bason's removal and Pasciuto's account suggest that what motivated the remarkable behavior of the Justice Department was something of greater moment than a middle-level employee's petty grievance.
Indeed, three people have lost their jobs as a result of the INSLAW scandal--but not paradoxically, those responsible for the scandals. The trio of victims includes Judge Bason and Pasciuto-- who received notice that he would be fired after he testifed, and just two days after Judge Bason was informed that he would not be reappointed. The third casualty of the Inslaw affair was Leigh Ratiner a former partner at Dickstein Shapiro and Morin, the firm that represented Edwin Meese during his confirmation hearings for Attorney General.
Why Bason and Pasciuto got the axe can easily be inferred. Ratiner's forced departure is a little more complicated. In January 1986, Elliot Richardson asked Ratiner to take on INSLAW'S defense. Ratiner agreed, and named D. Lowell Jensen, then the Deputy Attorney General, and a long-time Meese friend, in a complaint. Not long after, Meese discussed the case with another Dickstein, Shapiro partner, Leonard Garment, the attorney who, along with E. Robert Wallach, represented Meese in his confirmation hearings. Meese acknowledged the conversation in a pretrial interrogation. Shortly thereafter, his partners at Dickstein, Shapiro asked Ratiner to resign.
The Senate's Permanent Subcommittee on Investigations is now looking into INSLAW--a sign that the lawmakers, too, think that the whole story of the "something strange" that happened in the Justice Department has yet to be told. The Hamilton's attorneys aren't sure why a department of the U.S. government wanted to liquidate their company. Anthony Pasciuto doesn't know. Judge Bason is still trying to piece together who had it in for him and why. But Bason, Hamilton and the attorneys involved in the case are beginning to define the pieces of the puzzle with some pointed questions.
Why did the Justice Department hire Brick Brewer, a former INSLAW employee, to supervise a contract with his former employer? "The person is going to be biased in favor of the former employer- -or he is going to be biased against the former employer," Bason pointed out in his decision.
The judge also noted that D. Lowell Jensen, the former deputy Attorney General named by Ratiner in his complaint, was questioned on this issue. Jensen, now a federal judge in California, "recognized the general principle that it is a bad idea" to hire a former employee, disgruntled or otherwise, for such a task, Bason observes. But, Bason wrote, he was amazed to find "no hint in Jensen's testimony that he recognized there was any possible applicability of that general principle to the case of Mr. Brewer and Inslaw."
Hamilton discloses that Mr. Jensen himself was already familiar with INSLAW. Hamilton ran into Jensen in the early 1970s, when Hamilton was developing PROMIS, the case-tracking system that he contracted to sell to the Justice Department. At that time, Jensen, a long-time friend of Ed Meese, was district attorney in Alameda Country in northern California, developing his own computerized case-tracking system, DALITE. Jensen competed with Hamilton's PROMIS head-on-head. PROMIS won.
Hamilton and others familiar with the case ask: Could Jensen still be feeling competitive? People who have "tracked" the INSLAW case point to the coincidences of timing: INSLAW'S problems with the Justice Department erupted soon after Jensen was promoted to Associate Attorney General--the No. 3 person in the department--in 1983.
Hamilton reveals another curious coincidence: About 90 days before the Justice Department contract began to fall apart, he received a phone call from Dominic Laiti, chairman of Hadron Inc., a company in which Earl Brian, a long-time Meese colleague, holds an interest (see "Brain's Meese Connection" posting following this one, from Barron's Jan. 11, 1988 issue). Brian's Infotechnology controls four of six seats on Hadron's board. Laiti told Hamilton, according to Hamilton, that Hadron intended to become the dominant supplier of computer software and services to law enforcers and courts and related agencies, and that Hadron wanted to buy INSLAW. "We have ways of making you sell," Hamilton quotes Laiti as saying.
Laiti insists: "I have no memory of this. It all sounds ridiculous to me."
The bizarre web of coincidences and connections includes AT&T. AT&T had a contract with INSLAW and, during bankruptcy proceedings, declared itself a major creditor. Then, Hamilton alleges, AT&T's attorney began to behave less like someone representing a creditor interested in salvaging the company than like an attorney for the Justice Department bent on liquidating it. More coincidences: AT&T's outside counsel, Ken Rosen, was with an obscure New Jersey firm, but formerly had been a member of Deputy Attorney General Burns's New York law firm. Rosen's co-counsel, Shea & Gould, is not AT&T's usual outside counsel, either, though it is the firm used by Earl Brian.
Bason questions the failure of high Justice Department officials to take any action to investigate serious allegations of misconduct. Both Hamilton and his attorney, Elliot Richardson, complained about Brewer's handling of the contract, and requested an investigation.
"There's such a contrast between the total inaction on the part of Justice Department regarding Mr. Brewer--and the hammer and tongs approach they're using with Mr. Pasciuto," Bason observes.
Last Thursday, Pasciuto's attorney, Gary Simpson, delivered his letter to Deputy Attorney General Burns--and met with the Senate committee. At the end of the week, that committee met with Bason, as well. Senator Nunn's committee may find some answers--and ask more questions--that will illuminate this bizarre story.
For now, Pasciuto does know what happened to him and his tale provides a window on the strange thing that happened to INSLAW.
In March of 1982, William Hamilton could probably envision his face on the cover of Fortune. He had just won the $10 million, three-year contract with the Justice Department to install PROMIS in the department's 20 largest U.S. Attorney's offices, and to develop a separate program for its 74 smaller offices. Hamilton, who had contracts with private firms as well, now had a deal with the nation's premier law firm: the Department of Justice.
PROMIS was unique, and those 94 U.S. Attorney's offices represented an entering wedge: Hamilton could dream of capturing the federal judicial system's entire caseload. In the fiscal year October 1, 1982, INSLAW's revenues went up about 35% to $7.8 million, with more than half of those revenues coming from the Justice Department contract.
But then, that funny thing happened. The Justice Department began postponing payments. In July 1983, Hamilton says, the department suspended nearly $250,000 in payments, alleging that the company was overcharging the government for time-sharing. In February 1985, the government terminated the contract with smaller offices that had been generating revenues of $200,000-$300,000 a month.
INSLAW's cash flow shriveled. By Feb. 7, 1985, the government had withheld $1.77 million. Inslaw twisted and turned, trying to negotiate with the Justice Department, desperate to find out what went wrong. Finally, in financial shambles, INSLAW filed for bankruptcy in late February. The Department of Justice kept the INSLAW software--and kept on using it.
In his decision, Bason compares the Justice Department to someone who decides to test drive an automobile: "So the customer drives off with the car and this is the last the dealer ever sees of him. I think that is approximately what the Department of Justice has done in this case."
In last week's letter to Deputy Attorney General Burns from Pasciuto's attorney, Gary Simpson, Pasciuto suggests a pattern of harrassment that helped drive INSLAW into Chapter 11. According to Pasciuto, in June of 1984, Robert Hunneycutt, who worked in the Department of Justice's finance offices, told him about his practice of dividing contractors' bills into three piles. "One pile he would pay right away; the next pile when he got around to it; and then he opened a drawer and pointed to some invoices in the drawer and said: "These invoices may never get paid.'" Hunneycutt then identified such invoices as belonging to companies on the "bad list."
"Mr. Pasciuto asked who was in that pile," the letter to Burns goes on, "and he said that INSLAW was an example and that `People in the U.S Attorney's offices don't like INSLAW they are in this pile....'"
When "Barron's" phoned Hunneycutt, he returned the call, and left this message: "Mr. Hunneycutt knows nothing." In a subsequent conversation, he denied the conversation with Pasciuto.
But Hamilton claims that the Justice Department was trying to starve INSLAW. They didn't just push to bankrupt the software firm, he insists, they wanted to liquidate it, converting it from Chapter 11 to Chapter 7, as soon as possible. Why? Hamilton speculates that Justice may have wanted to push INSLAW into an auction where PROMIS could be purchased cheaply by someone that the department viewed more favorably.
Indeed, the Justice Department did move for liquidation. And on St. Patrick's Day 1987, Anthony Pasciuto met with the Hamiltons at the Mayflower and gave them a fuller picture of what was happening to them. A mutual friend, Mark Cunniff, executive director of the National Association of Criminal Justice Planners, asked Pasciuto to go to that breakfast meeting at the Mayflower.
"I said, `Don't you know what you're asking me to do?'" Pasciuto recalls. "He said, `I know.'"
"I knew him for 19 years," Pasciuto explains. "I said, `Mark, I'm doing it for you--and for these poor people.' I knew they had five kids," adds Pasciuto, a graying 44-year-old All-American "nice guy" with a strong Boston accent, and an open, slightly pockmarked face. Pasciuto has been married for 21 years, in government service for 21 years, and still wears his class ring--U. of Mass., 1965.
So, at the Mayflower, Tony Pasciuto remembers he tried to help Bill and Nancy Hamilton--and confirmed their most paranoid fantasies: The Justice Department was out to get them.
At the meeting with the Hamiltons Pasciuto told them that his boss, Thomas Stanton, director of the Justice Department's Executive Office for U.S. Trustees, was pressuring the federal trustee overseeing the INSLAW case. William White was being pressed to liquidate INSLAW. According to Pasciuto, in 1985 White told him that he was resisting the pressure. As a result, White informed Pasciuto, Stanton denied White's Alexandria office administrative and budgetary support and, at the same time, tried to have an assistant from the U.S. Trustee's office in New York take over the case and convert it.
The Hamiltons were told by Pasciuto that Cornelius Blackshear, the U.S. trustee in New York at the time of INSLAW's Chapter 11 filing, knew all about Stanton's plan. Pasciuto said that Judge Blackshear had repeated this tale of pressure in the presence of United States Court of Appeals Judge Lawrence Pierce in the judge's chambers in Foley Square in New York. Pasciuto also told the Hamiltons that the Justice Department had blacklisted INSLAW on the department's computer system procurements.
On March 25, 1985, INSLAW's lawyers deposed Blackshear, and he confirmed the story of pressure to liquidate INSLAW. The very next day, March 26, Blackshear met with a Justice Department representative, and signed a sworn affidavit, recanting, and saying that he had confused INSLAW with another case--United Press International, which had also been involved in bankruptcy proceedings in Judge Bason's court.
"I know the difference between UPI and INSLAW, I'm not that dumb," Pasciuto observes. He spells it out with a finger: "U--P-- I."
Cornelius Blackshear left his position as United States Trustee and became a United States bankruptcy judge the following fall.
According to Pasciuto, Judge Blackshear discussed INSLAW in Judge Pierce's chambers. But when questioned on the point, Judge Pierce told "Barron's": "I have made it my business not to get into the particulars of whatever Tony [Anthony Pasciuto] got himself into the middle of. Apparently, he thought his employer was doing something that was not kosher. I told him I didn't want to know about it--if he needed to, he should hire an attorney."
When "Barron's" offered to recount the details Pasciuto allegedly discussed in his presence, the judge grew agitated: "Don't tell me--I don't want to hear it. I don't want to know about it."
"I did ask him for help--six months before it all happened. I didn't know what to do," Pasciuto recalls. "Judge Pierce and I go back to the time when I was an assistant dean at the School of Criminal Justice in Albany--in 1972. He was a visiting faculty member for one year. We became good friends. I considered him a father figure.
In his ruling, Judge Bason noted that Blackshear had given "two different versions of the same event" and decided that other evidence supported the first version. White also denied the story of political pressure in court and Judge Bason asserted in his June 1987 ruling, "What I do believe is that Mr. White has a capacity to forget ... a capacity which probably all humans share to some degree or another."
Judge Bason went on to point out: "Mr. White has just recently joined a large law firm that practices primarily in Virginia and primarily in bankruptcy matters. Mr. White's future with the firm that he so recently joined could well be dependent on income- producing work that he does.... It seems to this court that Mr. White is not in a position at this point in his career to jeopardize his relationship with the U.S. Trustee's office in Alexandria, and for him to testify in a way that would be strongly disliked and disfavored by the Executive Office for U.S. Trustees could well have an adverse impact on the relationship between the executive office and the Alexandria office and, in turn, a relationship between Mr. White and the Alexandria office."
But in late spring of 1986, White was still a U.S. Trustee, and Pasciuto recalls one more incident involving INSLAW. White called Pasciuto and asked for an extra filing cabinet for his INSLAW files. "I said, `You've got plenty of them over there,'" Pasciuto recalls. White responded, "I know, but I need another one because I need to put all the INSLAW files in one cabinet and lock it."
White was discreet. So, on June 1, 1987, when Anthony Pasciuto walked into that packed D.C. courtroom to take the stand in the INSLAW case, he knew that White would not support his story. He also knew that Judge Blackshear had changed his original story. As Pasciuto's lawyer puts it in the letter to Burns: "Mr. Pasciuto was now the only person with recollection of conversations with U.S. Trustees in which Mr. Stanton was identified as having put pressure regarding the INSLAW case. Other people's recollections were being erased by mechanisms best known to them."
Pasciuto's boss, Stanton, apparently put his own pressure on Pasciuto. Beginning in 1985, according to the letter to Burns, Pasciuto began reporting his concerns about substantial deficits in the U.S. Trustee's office to Stanton. In 1986, Pasciuto spoke to the Department of Justice's finance staff and by late 1986, he says he had gone on record with the Office of Professional Responsibility about financial indiscretions by Stanton. According to Pasciuto, Stanton in September 1986 called him a "traitor." Pasciuto began actively looking for other employment, including a job as Assistant U.S. Trustee in Albany, N.Y. But no transfers were available for Anthony Pasciuto--until he was subpeonaed to testify in the INSLAW case.
"Within an hour of receiving that subpeona to testify, Mr. Pasciuto was given a copy of an appointment paper for a job as the Assistant United States Trustee, Albany, New York, signed by Mr. Stanton," Simpson, Pasciuto's attorney, reports in last week's letter to Burns. After the trial was over, however, Pasciuto was told that the procedure "was changed" and that the deputy Attorney General would have to sign off on the form. That never happened.
But Pasciuto, who believed the signed appointment papers, sold his house in Maryland for $200,000 and bought a house in Albany for $250,000. On the day the movers came, he was told that the sale of the Maryland house had fallen through. "We had to move, we had to carry two houses--and we couldn't even move into the Albany house yet because the owners wouldn't be moving out for a month," Tony Pasciuto recalls. "So, we stayed with in-laws for a month." That was May 22, 1987. Nine days later Tony Pasciuto walked into court.
When he entered the court room on June 1, 1987, Pasciuto was not represented by counsel. According to Simpson, his attorney: "The Justice Department attorney who was handling the INSLAW case, Mr. Dean Cooper, did not prepare him well for his trial testimony. The paralegal who was taking notes during the witness preparation says that he has lost the notes of that meeting."
When the questioning began, Pasciuto must have realized that the Justice Department attorney was not going to guide him gently through his story. One of Cooper's first questions was "whether [Pasciuto] had been seeing a doctor about a stressful condition."
In his letter to Burns, Simpson explains: "Mr. Cooper apparently knew that Mr. Pasciuto had been seeing a psychiatrist in connection with personal problems that he had been experiencing and Mr. Pasciuto ... now knew that the United States Department of Justice was prepared to stoop to the level of bringing his personal problems into the INSLAW case to get him to be careful about what he said."
Apparently, the tactics worked. Pasciuto recanted, saying that the statements he made to the Hamiltons at the Mayflower were made in an effort to hurt Stanton, who was blocking his promotion.
Judge Bason remembers the scene: "Mr. Pasciuto seemed to be basically a very honest person who had been caught up amongst a gang of very tough people--and he just didn't know what to do. He was a career federal employee and he was petrified. He probably had a vision of losing his job, his marriage, everything. Probably he thought the only way he could save anything was to recant. I had to adjourn at one point during his testimony--he was close to tears."
But Pasciuto didn't save his career. And now, in the letter to Burns, he has come forward to make a full disclosure.
Last week's letter to Burns contains a compelling, painful vignette of a chance meeting between Pasciuto and Blackshear, about a month after the trial, on July 11, 1987. If Hamilton felt floored by Pasciuto's testimony, so Pasciuto must have felt betrayed by Blackshear's change of heart. The meeting was awkward.
As Simpson tells the story in the letter to Arnold Burns, it was six in the evening, when Pasciuto and his wife were leaving the home of a mutual friend, Harry Jones, now U.S. Trustee for the Southern District of New York. Judge Blackshear came up to Tony Pasciuto, put his arm around him, and said, "I am sorry, it will be all right."
Pasciuto replied: "No, it is not going to be all right, they are going to fire me."
Blackshear responded, "They are not going to fire you. Don't they know how much you know?"
Pasciuto: "Yes, but they don't care."
Blackshear: "But you told the truth."
Pasciuto: "Of what importance is the truth if everyone else is lying?"
Blackshear: "These people came up from Washington and the U.S. Attorney's office; I got confused. I thought that by changing my story I would hurt less people. I didn't know you were subpoenaed until I saw your testimony, which was sent to me by Barbara O'Connor."
Pasciuto: "Do you remember what we talked with Judge Pierce about?"
"I wanted to see if he was going to continue his crap," Pasciuto recalls. "But he dodged--literally backing away from me--saying, again, `They sent someone from Washington and someone from the U.S. Attorney's office. I felt the easiest thing to do was recant. I felt less people would be hurt if I just bailed out.'"
In Simpson's version, Judge Blackshear had received two telephone calls from William White the day he changed his story. White told him he had the wrong case.
Pasciuto, exclaimed, sarcastically: "What! They asked you about converting *another* case [from Chapter 11 to Chapter 7]?"
Blackshear, waving his hand: "I don't want to get into it and who the hell cares?"
Today, after listening to Simpson's version, Blackshear states: "I don't remember the specifics, word for word, but I do remember having that conversation. And I don't have any problems with what Tony remembers."
Recalling the scene, Pasciuto says: "You know, even now--I'm not angry. I can't help it. I'm not. Blackshear is basically a wonderful person. It's sad--I'm sorry, I'm not angry. It really is sad. I feel devastated."
Tony Pasciuto now has a house in Albany, and soon will have no job either in Washington or New York. Over the past nine months, he has spent $12,000 commuting from Albany to the job he still clung to in D.C. Legal fees are draining his savings--the bills total $25,000 so far. "We're lucky that my wife and I were always frugal and have the money saved," he says proudly.
But Tony Pasciuto is frightened. "At work, ever since I got the letter saying they were firing me, I've felt like I was under house arrest," he relates. "People come by my office to see if I'm there. If I leave, I have to sign out. Everyone is supposed to, but normally very few people sign out. If I don't, they try to track me down. If I go to the Men's Room, they come looking for me.
"I'm just a GS 15," adds Pasciuto, referring to his level in government service. "Stanton, my boss, can't fire me. Stanton made the accusations, but the deputy Attorney General, Arnold Burns, will fire me. How does it feel to know that the deputy Attorney General of the United States wants to destroy a GS 15? It's scary. It scares me to death."