Sue them on grounds that their negligence caused irreparable damage to your future earning prospects. Settle for a hundreds of K's. Use the money to launch a contracting career. Incorporate, do C2C contracts. Background checks are uncommon. Been at it for 2 years now and love it.

I suspect that having sued a previous employer might block off more future employment opportunities than a conviction record.

This. It's crazy, but criminal record can make or break us white collar workers. It's sad that people and corporations don't have a forgive and forget mentality towards convicts. I think that the only way out is to be your own boss. When people buy a product (software or better yet hardware) they are much more removed from the people producing it. I'd be interested in how you are handling all this. And how common you think this situation is among white collars. Good luck in your future.