It’s not particularly surprising that Enron Corp.’s former top two executives, Kenneth Lay and Jeffrey Stilling, were found guilty Thursday on most criminal counts that prosecutors brought against them relating to the demise of what was once the nation’s seventh-largest company. Both men face the prospect of spending the rest of their lives in prison.
Lay was convicted of conspiracy and fraud, and Skilling was convicted on similar counts, plus charges of insider trading and making false statements to prosecutors. Basically, federal prosecutors accused the two men of artificially inflating the value of the company, then conspiring to keep the bad news away from investors. That amounted to a massive fraud that ultimately cost investors $70 billion and eliminated 4,500 jobs, most of them in Houston, the site of the trial.
There was news of celebrating by former Enron employees, retirees and investors at word of the verdicts. Who wouldn’t be happy to see some punishment meted out for what arguably was one of the nation’s most prominent cases of corporate abuse?
Government’s role in public life should be limited, and corporations should largely be free to operate as they choose, but fraud is a criminal act. The government has every right to prosecute officials for committing such acts. Free markets cannot function properly when corporate leaders commit fraud.
Investors in publicly traded companies make decisions based on the timely truthfulness of a company’s leaders. When those leaders lie or hide material facts, investors and the markets are compromised.
That said, we were troubled by two things from the publicity-soaked trial. First, there’s the sense among many observers that this case isn’t so much about the misdeeds of Enron’s executives but about the cause of corporate reform.
A Los Angeles Times editorial, entitled “Enron arrogance on trial,” argued that Enron “became the poster child for … business abuse; its leaders, the faces of corporate greed and dishonesty.” That is no doubt true, but we like to be certain that individuals are convicted based on the facts and the law, not as representatives of Greedy Corporate America or because of their arrogance.
Although Lay and Skilling seemed to have committed a scam, it’s disturbing that the prosecutor in the case gave a populist final argument that focused mainly on the high salaries these executives had earned, said Tibor Machan, a Chapman University business ethics professor and libertarian adviser to Freedom Communications Inc. He is bothered by the “rush to judgment” in the case that seeks to paint all corporate executives as evil.
Second, in the Enron trial, there was limited hard evidence of fraud or a conspiracy, but mostly damning testimony from Lay’s and Skilling’s underlings. The testimony clearly was credible, but some civil libertarians have raised legitimate concerns about the way the government gathered it.
Writing in the Chicago Sun-Times this month, Jerry W. Markham, author of “A Financial History of Modern U.S. Corporate Scandals from Enron to Reform,” argued that “the Enron case was broken by extorting a guilty plea from Andrew Fastow, Enron’s chief financial officer. Fastow had refused to plead guilty even after the government doubled up on the charges against him. The prosecutors then indicted his wife, Lea, and demanded the Fastows be tried together so their children would be orphaned if they were convicted. That worked … .”
We’re pleased to see some accountability in the Enron case, but believe the cautionary points are worth raising.