“These CEO’s, man…If you’re that ruthless, you’re a scary dude. I tell you, now when I walk past a little gang banger, I don’t even blink. But if I see a white dude with a Wall Street Journal, I haul ass. Before I walk past the Arthur Andersen building, I cut through the projects. If you cut through the projects, you may just lose what you have on you
that day. I ain’t never been mugged of my whole future."
After a brief period of high visibility, corporate and financial crime are fading into the background again. In December of 2001, Enron imploded in a wave of accounting fraud and declared the largest bankruptcy in U.S. history, although, within months, Worldcom’s financial wrongdoings resulted in an even larger bankruptcy. Numerous other companies issued “restatements” of financial results, including Tyco, Global Crossing, Quest, Xerox,
Adelphia, MicroStrategy, AOL-Time Warner, K-Mart, Haliburton, Lucent Technologies, Rite Aid, and Waste Management to name just a few. The scandal implicated accounting firm Arthur Andersen, which was closed down because it was already the subject of a Securities and Exchange Commission cease and desist order for misleading financial statements. Some major banks like Citigroup and J. P. Morgan Chase were implicated for helping firms book loans as revenue.[2] [For
background, see Getting Tough on Corporate
Crime? Enron & A Year of Corporate Financial Scandals]
Prosecutions got off to a slow start, especially with Enron, because “Attorney General John Ashcroft and virtually the entire legal staff of the United States attorney’s office in Houston [were] disqualified from the Enron criminal investigation” writes the New York Times. Enron, and its Chairman Ken Lay, were major donors to the Bush campaign, and Ashcroft received substantial donations from them for his failed 2000 Senate campaign.[3] The Justice Department also had other—apparently more important—priorities, such as
Operation Pipedream, which resulted in the February 2003 indictment of 55 individuals for selling drug paraphernalia over the
internet.[4] Although each week through 2002 brought news of another major U.S. company shaken by financial misdeeds, and federal authorities were diverting resources to terrorism, the administration made it a priority to follow through against such “threats” to the public welfare as pipesforyou.com and ten other internet sites. [See
archives of websites and commentary from memoryhole.com]
A Tale of Two Criminals grew out of
several invited lectures I gave, including a Distinguished
Visiting Faculty Lecture at Eastern Kentucky University that they
recently posted on YouTube. (6 parts, approx 60 minutes)
Many thanks to Carole Garrison and EKU multimedia for making
this happen.
While the recent
string of prosecutions and convictions is noteworthy, Enron’s Ken
Lay has still not been criminally indicted nor have his assets been
frozen so they could potentially be recovered. Lay, affectionately
known to his longtime friend President Bush as Kenny Boy, helped
secure the deregulation that facilitated Enron’s massive fraud and
manipulation of the California energy crisis; he is given credit for
building Enron into what it was and being its leader through the
period of wrongdoing. One day near the beginning of Enron’s
collapse, with its stock price plummeting, Lay told stock analysts,
“We're not hiding anything." Yet, a special committee of
Enron's board found “a systematic and pervasive attempt by Enron's
Management to misrepresent the Company's financial condition."
While Lay was advising employees to continue buying the stock, he
cashed out many of his own shares to the tune of about $103 million.
In the days surrounding the analyst’s call and the advice to
employees, Lay took $19 million in cash advances from Enron that he
repaid with stock – a trick that led some people to refer to as
Ken’s personal ATM.[5]
Later that same day,
Lay took questions from employees, one of whom wrote: "I would
like to know if you are on crack? If so, that would explain a lot.
If not, you may want to start because it's going to be a long time
before we trust you again."[6] The sad reality is that it is
more likely that Lay would have been in trouble with the criminal
law if he had smoked crack – especially if he was a minority in
the inner city –than he currently is for getting rich while
leading his employees and stockholders on to the loss of their
retirement accounts. Indeed, as we noted last year, Forbes magazine
commented "If the president wants to make the case that his
administration will not tolerate corporate wrongdoing, what better
way than to indict his old friend and former Enron CEO, Kenneth
Lay?" That was July 8th, 2002.[7]
Perhaps Ken Lay didn’t know. It appears he didn’t use email. He refused to sign documents, and when offered reports after meetings, he declined them, pushing them back to the person trying to show him a copy. Because of his repeated statements denying knowledge of a wide range of situations and problems at Enron, Forbes calls him “The Man Who Didn’t Know Too Much.”[8] He seemed very much ”out of the loop” and, though not responsible for anything, managed to get paid $103 million in salary, bonuses, incentives, annuities and cash advances for being Enron’s leader in 2001.[9]
Further, why is it that asset forfeiture applies to other cases where the owner didn’t know of criminal behavior only to find their car or house seized? As part of the drug war, houses owned by couples have been seized even if one party didn’t know of the criminal activity. If a man takes his girlfriend’s car and gets caught in a prostitution sting, the car can be taken even if she didn’t know about his extracurricular activities.
As the Cato Institute notes: “the family home is fair game for forfeiture if a son, relative, or friend were to use it unlawfully--say, by using the telephone to arrange a drug
purchase.”[10] In one ‘reality’ police show like COPS, a scene involving this topic gets cut, but the police tell a drug suspect: ”We’re going to asset-seize your property. We’re going to asset-seize your vehicles. We’re going to asset-freeze your money. We’re going to send your girlfriend to prison and your kid to child protective services. That’s what I’m saying.”[11]
But Kenny Boy causes widespread damage and contributes to a loss of faith in the financial system and there’s no response from the criminal justice system.
To be sure, a number of mid-level executives have been prosecuted and sentenced – and indictments have started to reach the upper tiers of management. While some of these cases are still in progress and some initial attempts have resulted in mistrials, the perception that the criminal justice system has been vigorous in bringing corporate criminals to justice is bolstered by celebrity cases like Martha Stewart’s conviction for obstruction of justice. Prior to 2002, any corporate criminal getting prison time was newsworthy. Now, the shock comes from sentences like the 10 years Enron’s Chief Financial Office (CFO) Andrew Fastow received under a plea bargain.
From the news headlines about prosecutions and sentences, many people seem to believe that the tide has turned and the U.S. is now tough on corporate crime. In short, the point made by the Rich Get Richer and the Poor Get Prison about the unequal treatment of white-collar crime compared to street crime is seen by some as overstated or no longer valid. Further, as the Sarbanes-Oxley reform law is implemented, businesses are starting to complain more and more loudly about its cost and the burden it imposes on them. Their argument is that there were just a few bad apples, so the sweeping changes mandated by the law are unnecessary and impose excessive costs on honest businesses.
Both of these beliefs are false and dangerous. In the sections that follow, we will compare the wrongdoing and sentencing of Fastow to a case last year in which the Supreme Court upheld a sentence of 50 years for two counts of shoplifting videos worth a total of $155. Of course, the Rich Get Richer critiques unnecessarily harsh sentencing schemes - and the point is not to ‘get tough’ for the sake of getting tough. Instead, the point, as discussed in the conclusion of Reiman’s book, is that the punishment should fit the crime and the crime should fit the harm done. To appreciate why the harmful acts of corporate wrongdoers are worthy of serious criminal charges, the reader is urged to review
Chapter 2 of The Rich Get Richer, where Reiman engages the objections of the “Defender of the Present Legal Order” in a debate about why we need to take white-collar crime more seriously.
Of course just
after we write this, Lay is indicted. Ironically, he complained
that it was a political move of the part of his longtime friend
President Bush because the indictment came right before the
Democratic Convention. With Lay indicted and all the pictures of
him in handcuffs doing the 'perp walk' before the cameras, it
would be harder for the Democrats to use the scandals against
Bush.
From "Guilty or Not, Lay Was an Irresponsible CEO"
by Allan Sloan (Washington Post 13 July 2004, p E03): The Justice Department's criminal case is very narrow. It focuses primarily on Lay's alleged actions from August through December 2001. August 2001 is when
Lay... took back the CEO job when Jeffrey Skilling surprised Wall Street by quitting, sending tremors through the company. December 2001 is when Enron went Chapter 11.
Lay and his lawyer, Michael Ramsey, have repeatedly portrayed Lay as a victim. But if Lay were as clueless as he claims, he should turn over his entire net worth -- which he estimated last week at $20 million after legal expenses and fines -- to Enron's employees, creditors and shareholders. That's because Lay knocked down tons of money -- a five-year total of at least $325 million in salary, bonuses, stock-option gains and stock sales to the company -- for a job he couldn't have been doing properly if he really had no idea what was going on.
As an Enron director and (from August 2001 on) its CEO, Lay had legal and moral fiduciary obligations to place the interests of the company's shareholders (and later its creditors) ahead of his own interests. At the very least, he should have stopped borrowing from Enron when the company ran into cash problems -- but he didn't. He even sold the company $2,275,660 of stock on Oct. 26, 2001, the day Enron signaled its dire straits by drawing down its entire $3 billion line of credit. The company sure could have used that money for something other than bailing out the boss.
Finally -- and worst -- on Sept. 26, 2001, Lay was touting Enron's stock to employees in an online chat, saying that he'd been buying in previous months. Public records showed that to be true, to the tune of around $4 million. But Lay had also sold $24 million of stock to Enron in the previous two months. He didn't mention that.
From Focus Kept Narrow in Indictment Of Lay
by Brooke A. Masters (Washington Post 10 July 2004, p E01): The 53-count indictment charges former Enron chief executive Jeffrey K. Skilling and former chief accountant Richard A. Causey with making false SEC filings dating back to 1999, engaging in insider trading and playing a role in the off-the-books partnerships that hid Enron's staggering debt for years. Lay is charged with 11 of the counts -- the overarching conspiracy and 10 wire fraud, securities fraud, bank fraud and false statements counts tied specifically to lies he allegedly told to company employees, analysts and his personal bankers, most in the fall of 2001. Skilling is charged in 35 counts; Causey in 33. Skilling and Causey have also pleaded not guilty.
"There's nothing about this indicating that Ken Lay was a kingpin," said former federal prosecutor Jacob S. Frenkel. "Even though Lay is higher up in the hierarchy, the indictment suggests that the fraudulent activity centered around Skilling. To the extent that Ken Lay was the ultimate target, the fact that they couldn't say more about him is as telling as the charges they brought."
Stories of
Lay's arrest from CNN.com
or the Houston
Chronicle (Enron's home town newspaper). Both have
extensive links to related stories. The
Law Library of Congress also has a document collection
about Enron.
White-Collar Crime Victims and the Issue of Trust
by Basia Spalek (Papers from the British Society of Criminology Conference,
2000). This full text article article reports on interviews with
a number of people whose pension fund was defrauded in a British
case.
Later, we will take up the current arguments that claim that Sarbanes-Oxley goes too far in trying to reform the system. Many people seem already to have forgotten how widespread and systemic the fraud was, thus necessitating the need for far-reaching and systemic reform. Unfortunately, the congressional response has been the reverse. According to the authors of Big Money Crime, soon after the Savings & Loan crisis, Congress went on a wave of “cavalier” financial deregulation, creating the “paradox of increasing financial deregulation coming on the heels of the most catastrophic experiment with deregulation in history”[12] The legacy of Enron and other financial fraud that has hurt so many American investors and holders of retirement accounts should not be another wave of deregulation or even a regression to the conditions under which so much corporate wrongdoing occurred.
Why are we so willing to try
juveniles as adults, and even execute them, because they are
responsible for their actions, but so unwilling to apply high
standards of personal responsibility for executives whose job is
to run a company?
After 30 years of 'tough on
crime' and mandatory sentencing schemes (even for 5 grams of
crack) why do we still not have decent laws to prosecute major
financial crimes?
"civil forfeiture laws apply
indiscriminately to property, regardless of the innocence of the owner, and render it subject to forfeiture if it is used
unlawfully by anyone. Thus, the family home is fair game for forfeiture if a son, relative, or friend were to use it
unlawfully--say, by using the telephone to arrange a drug purchase"
[Cato
Institute policy analysis]. But the assets of many CEOs -
including Ken Lay - have not been frozen. [Additional
asset forfeiture info from Drug Policy Education Group]
NOTES
AND REFERENCES
1. Sykes, Wanda. 2003. Tongue Untied. Comedy Central Home Video.
5. Witt, April and Peter Behr. 2002. Losses, Conflicts Threaten Survival: CFO Fastow Ousted In Probe of Profits. Washington Post. July 31, p A01. Peter Behr, “Chairman Told Workers Stock Was ‘Bargain,’” Washington Post (January 19, 2002), pp. A1, A6; Daniel Altman, “Enron Had More Than One Way to Disguise Rapid Rise in Debt: Billions Were Listed as Trades Instead of Loans,” New York Times (February 17, 2002), pp. 1, 26; Peter Behr, “Skilling to Face Senators, Accusers,” Washington Post (February 26, 2002), pp. A1, A10; and Gimein, “You Bought. They Sold,” p. 68.
6. Witt, April and Peter Behr. 2002. Losses, Conflicts Threaten Survival CFO Fastow Ousted In Probe of Profits. Washington Post. July 31, p A01. This article is an installment of a five part series on the fall of Enron.
11. Seagal, Debra. 1993. Tales from the Cutting Room Floor: The Reality of ‘Reality Based’ Television. In, Paul Leighton and Jeffrey Reiman (eds)
Criminal Justice Ethics. Upper Saddle River: Prentice Hall (2001), p 507.
12. Calivita, Pontell & Tillman, Big Money Crime: Fraud and Politics in the Savings and Loan Crisis.
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