Friday, May 26, 2006

The Way the System Works

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Now that former Enron executives Jeff Skilling and Ken Lay have been found guilty by a jury on twenty-five of the combined thirty-four counts against them, a judge will sentence them on September 11. That date may not have been chosen entirely at random. As the Washington Post points out today, Enron was the September 11 of Wall Street. "More than any other case, Enron symbolized the collapse of the 1990s stock market bubble and the revelation that many of the nation's highest-flying companies were far less substantial than they seemed."

In a post from the trial's start back in January, I tried to sum up the crucial factors of the case in a tongue-in-cheek manner.

Yes, Enron executives did many, many very bad things . . . except Lay and Skilling . . . they didn't do them. ...more »The actual misdeeds were done by guys like Andrew Fastow, Enron's former Chief Financial Officer . . . and Richard Causey, Enron's Chief Accounting Offices . . . and a whole bunch of middle management slobs.

The question for jurors is whether Lay and Skilling knew about all the lies . . . even encouraged all the lies . . . to keep Enron stock prices high . . . so they could sell their shares and make a mint before the market caught onto what was really happening.
Many legal analysts felt it would be a difficult case for prosecutors to prove. Most posters responding to me also expressed a certain cynicism regarding justice prevailing. That is not surprising. For starters, as a society we have a tendency not to see corporate or "white collar" crime as vile and destructive in comparison to physical felonies, such as armed robbery or drug trafficking. Secondly, CEOs and other top executives know how to distance and insulate themselves from tangible acts of malfeasance.

The two defendants in this case certainly believed they were safe; they may have even genuinely believed they were innocent. Reports say that both were physically shaken by the guilty verdicts delivered against them and perhaps for reasons that go beyond the prospect of time in prison.

Ken Lay said outside the courtroom that he was "in disbelief . . . even shocked" by the jury's conclusions. He restated his firm belief in his own innocence and issued dire warning about the precedent being set. "If I were a CEO today, I would say it sends a very dangerous message," Lay thundered. "[It] basically makes an innocent act criminal." For his part, Skilling was in a more pragmatic temperament. "Obviously, I'm disappointed," he told reporters. "But that's the way the system works."

He's right. Or, more precisely, that's the way the system works now. That is what makes this case and this jury's decision so important.

It is as much an indictment against arrogance as criminal wrongdoing – a sense of entitlement that allows certain men and women to manipulate inconceivably large amounts of money, sometimes to the profit of others and sometimes at their expense, in order to pad their own personal wealth. The great tragedy of Enron is that the company's management initially did many aggressive and innovative things that the market loves to reward. It fell into corruption when its top leaders allowed underlings to manipulate, lie, and steal in order to continue lining their own pockets at the expense of others.

Interestingly, the jury said they found Lay and Skilling to be far more damning witnesses against themselves than the array of mid-level Enron executives with whom the federal government cut plea bargains. Lay came across as a micromanaging control freak and Skilling gave masterful explanations of Enron's complicated and arcane financial transactions. The jury simply could not believe that such hands-on managers could be the unwitting dupes they portrayed themselves to be.

The standard of responsibility to which the jury held Lay and Skilling was drawn from their own lives. Juror Freddy Delgado, an elementary school principal, summed it up nicely. "Personally, I can't say 'I don't know what my teachers are doing in the classroom.' I'm still responsible if a child gets lost."

This conviction will hardly mark the end to white collar crime. A (hopefully ever-improving) Sarbanes-Oxley Act is far more likely to aid in prevention. Likewise, the dishonorable end of guys like Skilling and Lay – along with WorldCom CEO Bernard Ebbers, Tyco International CEO Dennis Kozlowski and CFO Mark Swartz, Adelphia Communications founder John Rigas and his son Timothy, Credit Suisse First Boston investment banker Frank Quattrone, Cendant Vice Chairman Kirk Shelton, and sixteen other Enron executives – will not prove an unassailable deterrent to other corporate heads, precisely because the arrogance that can commit such crimes cannot believe itself capable of being stupid enough to get caught.

But this case makes it clear that society does now regard the corporate criminal as every bit as vile and destructive and with victims as real as that of any thief, rapist, arsonist, or murderer. It also makes it clear that society insists on culpability being shared right up to the very top – CEOs need not have "pulled the trigger" but only hidden the smoking gun for their own profit to be guilty.

It is just the way the system works now. It is an unprecedented response but also the proper response to crimes of the magnitude of those committed at Enron by its highest- ranking officers.