Maxxamum Justice

The Wall Street Journal

"This is a cautionary tale," begins U.S. District Judge Lynn Hughes's ruling last week against the Federal Deposit Insurance Corporation, and is that ever an understatement. The judge ordered the agency to pay -- "for its betrayal of the public trust, its vindictive political assault on a private citizen" -- $72 million in attorneys fees to a company controlled by Houston financier Charles Hurwitz. The FDIC is considering an appeal, but if it has any shame it'll reconsider.

The government's legal battle with Mr. Hurwitz dates to 1995. Triggered by a dispute over a failed Texas thrift, it morphed into a saga concerning logging and the redwood forests of California. Ultimately Mr. Hurwitz became the whipping boy for environmentalists working hand in glove with federal agencies willing to be used as political weapons. "When the government invokes the authority of the judiciary," said Judge Hughes in his salty, 131-page opinion, "it is obliged to follow the rules."

The FDIC didn't follow the rules. It bent them to satisfy the political agenda of the Clinton administration. In 1995 the agency sued Maxxam, a conglomerate headed by Mr. Hurwitz, claiming it had been obligated to dump more money into a Maxxam-controlled S&L that collapsed in 1988. Mr. Hurwitz said there was no such capitalization requirement, and the FDIC has never been able to prove him wrong.

The FDIC finally dropped its suit in 2002, but it then proceeded to illegally fund an investigation of the same matter by another federal regulatory agency, the Office of Thrift Supervision. Fed up, Mr. Hurwitz countersued on the grounds that the government's actions were politically motivated and had little to do with Maxxam's management of a failed thrift. What the feds were really trying to do, he maintained, was placate environmentalists by forcing a separate Maxxam subsidiary, the Pacific Lumber timber company, to give up some 5,000 acres of redwood forest in Northern California.

Mr. Hurwitz wasn't being paranoid about the government's motives. As Judge Hughes noted in his ruling, an investigation of the FDIC by Congress in 2000 uncovered drafts of internal memos that showed the agency's own lawyers had predicted long odds that its original lawsuit would succeed on the merits. Moreover, the same inquiry revealed that the FDIC lied repeatedly when it said it hadn't been in touch with environmental groups prior to suing Mr. Hurwitz in 1995.

In fact, those contacts were extensive, with the ultimate goal being a "debt-for-nature swap" whereby the government would force Maxxam's hand by suing its subsidiaries to create "debt" and compel Mr. Hurwitz to settle by surrendering trees, or "nature." "The record shows that the swap was the only reason for this suit," said Judge Hughes. "It also shows that the FDIC knew that it had no factual or legal basis for its claims and that its cases here [in Houston] and in Washington were shams."

The judge goes on to describe the agency's attack as "a perverse combination of personal and political hostility. The personal part was political, too, since it was derived from the bureaucrats' and their like-thinking co-conspirators' appreciation of a successful entrepreneur as the personification of what they opposed in America."

Government abuse of power is nothing new, of course. But Mr. Hurwitz's breathtaking ordeal is a reminder of how unconstrained partisan agents of the government can wreak havoc on businesses, reputations and lives. In this case systematic abuse can't be laid to current FDIC officials, who inherited the lawsuit. But the current leadership could go a long way toward restoring some public trust by dropping the Javert act, acknowledging its past mistakes, and apologizing to Mr. Hurwitz.