Convictions Drive Home the Point Again

By Steven Pearlstein
Friday, May 26, 2006

Ken Lay and Jeff Skilling are right about one thing: The games they played at Enron were no different than the games being played at hundreds of other big public companies during the late 1990s. So in that respect, it is unfair that Lay and Skilling (and their partner in crime, Andy Fastow) have been singled out for criminal prosecution. Unfair -- and totally necessary.

The point of criminal prosecution of corporate crime is not really retribution or restitution. Former Enron shareholders and employees are not better off because of yesterday's verdict. And to the degree that there is monetary compensation to be had, civil suits are sufficient for the task.

Rather, the point of these prosecutions -- like those of executives at WorldCom, Tyco and Adelphia -- is to burn into the consciousness of all those other masters of the corporate universe that they, too, could wind up in the federal pokey if they try to enrich themselves at the expense of shareholders, creditors and employees.

For all the nuance and sophistication of our legal system, the convictions of Lay, Skilling, Bernard Ebbers, Dennis Kozlowski, the Rigases and the Arthur Andersen accounting firm amount to nothing more than old-fashioned hangings in the public square. They are the way by which a capitalist society gets its most powerful economic actors to abide by the rules that make free markets work. They are less about justice than they are about sustaining a system that fundamentally rests on a foundation of trust. And as we've seen time and again -- during the junk-bond scandal, the savings and loan debacle, the Asian financial crisis and the bursting of the Internet bubble -- when that trust evaporates, entire businesses and markets can quickly collapse.

The defense of selective prosecution, like Churchill's famous defense of democracy, is that the alternatives are even worse.

Relying simply on civil prosecution -- the approach favored by much of the business community -- would provide only a modest deterrent. After all, the hundreds of millions of dollars in fines extracted from Fannie Mae or the old Computer Associates, for example, is merely money out of the pockets of the shareholders who were the biggest victims. And in those cases in which corporate executives are forced to disgorge all their ill-gotten gains, the unspoken message is that the worst that can happen if you get caught stealing cookies from the jar is that you only have to put back what took.

On the other hand, it's simply not possible to prosecute every company and every executive during those frothy periods when corporate misbehavior becomes commonplace. It took dozens of lawyers and FBI agents more than four years to investigate and prosecute the fraudsters at just one company, Enron. And there aren't enough jail cells in all of Christendom to hold all the corporate executives who engaged in "earnings management" during the late 1990s.

So, we are left with the imperfect justice of selective prosecution. That was certainly the case in the 1980s, when Michael Milken, Ivan Boesky, Dennis Levine and Drexel Burnham Lambert had to pay for the sins of legions of junk-bond traders and corporate raiders. That was followed by the S&L crisis, when Charles Keating took the criminal heat for countless executives and directors before his conviction was overturned on appeal.

And, by and large, it worked. After a rocky start, junk bonds are now a staple of corporate finance and a part of many diversified investment portfolios. And despite a prolonged period of loose money and surging real estate prices, there have been almost no failures of banks or thrifts. And even while debate continues on the wisdom and fairness of the criminal prosecution of Arthur Andersen, I think you'd have a hard time today finding a partner at one of the remaining big accounting firms who would risk turning a blind eye to a suspicious off-balance-sheet transaction.

There is, however, one set of professionals up to their knickers in corporate misdeeds who have not only escaped responsibility, but may have actually profited from the prosecution of others. I refer, of course, to the lawyers.

By hiding behind attorney-client privilege and insisting that they are subject only to discipline by captive and incompetent state regulators, few lawyers, if any, have been held to account for their prominent role in blessing and hiding corporate fraud. Four years ago, the American Bar Association asked that lawyers be allowed to police themselves. Now that self-regulation has failed so miserably, the lawyers who run the Securities and Exchange Commission need to set aside their professional loyalties and bar a few $750-an-hour attorneys from providing any more advice and services to publicly held companies.

Steven Pearlstein can be reached

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