Enron’s managerial miscreants Kenneth Lay and Jeffrey Skilling are facing a lifetime in prison, and the press is gleefully reporting every last detail. After all, this was a bracing confirmation of not just the glories of the American criminal justice system but also, implicitly, the idea that this time things are Really Going to Be Different in Corporate America. Henceforth, corporations will be caught and punished with the certainty that one would have expected at the end of an old “Dragnet” episode. More prosecutions are coming, count on that. As Gretchen Morgenson put it in the New York Times on Sunday, the Lay-Skilling convictions were, “at best, the end of the beginning of this dispiriting corporate crime wave.”
All this is true, I suppose, if what we have is indeed a 1950s-style “crime wave,” its parameters defined as a grim statistical count of arrests, convictions and sentencings. But that’s not what we have at all. Like the pipe-puffing Freudian liberals of that era, I prefer to examine the root causes, the home environment, in which regulatory agencies like the Securities and Exchange Commission function in the manner of an indulgent, all-too-forgiving Montessori school headmaster. Corporate delinquents, having failed to respond to counseling, are turned over to the blue-uniformed constabulary of the Justice Department only when they become too obstreperous to control.
Alas, the root causes of Enron are still with us, and getting worse. I am pained to report that in the breeding grounds of corporate crime, the teeming Gold Coast mansions and sweaty polo clubs, little has changed in the executive attitudes that brought us Enron. If Ken and Jeff are the incorrigible Billy Halop bullies in this melodrama, we — society as a whole, my friends — must share the blame. Did we not hear their yelps of greed? Their defensive blame shifting? The keening of their flacks?
How easily we forget the root causes: the pampering, the permissiveness. How easily we forget the SEC’s granting Enron, in 1997, the exemption from the Investment Company Act that it needed in order to structure its operations to shift debt off the books. The media functioned as an unofficial pep squad, and the earliest warnings were sounded not by reporters but by “short-sellers,” market players who bet that stock prices will decline.
Shorts are always on the lookout for a good stock fraud, which makes them almost universally despised, particularly by corporations with something to hide. Short-sellers were the earliest naysayers concerning Enron, with short-seller James Chanos acknowledged to be a source for Bethany McLean’s early groundbreaking article in Fortune. Chanos saw to it that the bad news about Enron traveled fast — and, in the process, he made a few bucks. As both the bearers and profiteers of bad news, short-sellers are hardly winning popularity contests. They were already ancient, reliable scapegoats by the crash of 1929, and remain so today.
But the traditional hatred of shorts was forgotten after the Enron scandal broke in late 2001. During that brief window of time, Congress and the SEC were stirred to action, and even the somnolent financial press became enlivened. The details of Enron (basically a lot of crooked accounting with some insider trading thrown in) were murky, and that proved propitious when it came time for the putative guardians of our financial markets to come up with “solutions.”
Sarbanes-Oxley, or “Sarbox,” as it is known, was enacted in July 2002, when the post-Enron hysteria was at its highest. At the time, the Washington Post quoted some law professor as calling Sarbox “the most consequential reorientation of corporate behavior in living memory.” However, the actual text of the legislation seems more attuned to the sleepy rhythms of the Federal Triangle than the rip-your-throat-out culture of Wall Street and corporate boardrooms.
The law set up something called the Public Company Accounting Oversight Board, whose purpose is to keep watch over the corporate auditors who failed so miserably to detect the book cooking at Enron. Its first chairman was former CIA director William Webster, whose qualifications included serving as the audit committee chairman of a company with accounting problems and a CEO who was a member of the Future Felons of America. Webster’s successors had more humdrum backgrounds, and the PCAOB continues in existence to this day — functioning innocuously, setting rules and occasionally disciplining some accountant you’ve never heard of.
Theoretically, Sarbox would have prevented Enron from happening. Realistically, it wouldn’t have done a thing, because an exec with “derring-do” such as Skilling (to quote a February 2001 Business Week cover story) would surely have found a way around it. Not that it would have taken much effort. Sarbox requires, for example, that at least one member of every board audit committee be a “financial expert.” It requires that an “internal control report” describe how management has done a good job of tackling all those pesky numbers and checked ‘em real good. And, of course, the company must tell us — immediately! — about any changes in the “code of ethics” for its chief number crunchers. The cost of complying with these and similar requirements has annoyed some smaller companies, adding to the overall luster of Sarbox when viewed from afar.
What Sarbox has never done, and never could do, is change corporate behavior, anymore than you can stop a car thief by taping a Do Not Steal sign to the dashboard. Remember that CEOs who are going to pull off a mega-scam like Enron, or even a routine stock swindle or accounting trick, are not going to be deterred by a law book or someone with a stinkin’ badge. They have a more pragmatic view of corporate responsibility — they feel they don’t have any. If you listened closely, you heard the Enron management credo at the trial. It is the same philosophy that has been employed by second-story men and Mafia bosses since the dawn of the first proto-scam. It can be summed up as, “If it’s broke, it ain’t broke, and anyway it ain’t my fault.”
Under this credo, if a company has some kind of difficulty, whether it be a massive fib on its balance sheet or a simple tendency to lose money, the problem is not the company, and heaven forbid not the CEO or the board of directors. It is them. The objects of blame can be short-sellers, “Wall Street,” journalists, independent analysts (another post-Enron Good Thing we are supposed to cherish) or sometimes all of the above working in cahoots. Lay and Skilling personally acknowledged the popularity of this latest corporate rage at their trial, when they testified that Enron was a victim of evil short-sellers working in league with journalists, unfairly driving down the share price.
The them defense is gaining currency, bringing the paranoia of UFO-ers and four-shooters-at-Dealey-Plaza wackadoos into the boardrooms and business news programs of America. The media, instead of scoffing at such rubbish — there are notable exceptions — either ignores them or actively promotes their cause.
A good example of the media swallowing this line of corporate swill came in July 2005, when “Dateline NBC” told the sad story of a company called Eagletech Communications that was “mysteriously” victimized by those awful short-sellers. What “Dateline” left out was that Eagletech was an old-fashioned stock rig, and that a federal grand jury in Newark had indicted some reputed Mafia guys for manipulating Eagletech like a yo-yo and, in the process, cornering nine-tenths of the company’s unrestricted stock. There had even been two guilty pleas by airtime. “Dateline” also left out that Eagletech’s stock registration had been revoked for not filing all those lovely, Sarbox-seal-of-approval financial statements. Reams of indictments and SEC complaints were readily available to “Dateline,” and not a single one claimed the company was a “victim” of short-selling or even that such trading had taken place at all. All that stuff notwithstanding, the “Dateline” piece parroted the company line that whatever went wrong was not the fault of Eagletech’s management. It was them.
The grotesque procession of phony CEO “victims” continues. In March, “60 Minutes” highlighted the “plight” of Eugene Melnyk, CEO of a company called Biovail, whose accounting is under investigation by the SEC. Melnyk, however, prefers to talk about them — in this case a hedge fund and an independent stock-research firm called Gradient Analytics that he says conspired to screw Biovail. The business news channels have given ample airtime to the self-promoting them-blamer Patrick Byrne, who runs a money-losing Internet retailer named Overstock.com, and who spends considerable time waging what he tastefully describes as a “jihad” against the horrible people victimizing his company. The them-blaming cause gained a further boost recently when the vice chairman of General Motors, Robert Lutz, claimed that those dastardly short-sellers — not GM’s massive pension woes — were behind the negative stories about his company.
Three very different companies with very different problems, but with one thing in common: their stock price is in the dumpster. No, make that two things in common — it’s the fault of them!
If you read the conspiracy literature being circulated on the Internet, the ranks of corporate “victims” is a large and illustrious one. Terrific companies ranging from Enron to Martha Stewart Living to wonderful little diamond-mining stocks and tout-sheet specials have all been “victimized” — not by their managers or stock promoters but by pernicious external forces, all plotting evil.
Ah, you laugh. But the SEC has taken up the cudgels of this lunatic-fringe obsession, passing a rule that makes it harder to short-sell the Eagletechs of the future. Even worse, it has turned its regulatory gun sights on Byrne’s and Melnyk’s enemies — launching an investigation into Gradient, which is being sued by both companies, and reporters to whom the firm has allegedly given information. In the process, the SEC (before backing off under pressure) subpoenaed phone records from two tough Dow Jones journalists, Carol Remond and Herb Greenberg, as well as the manic CNBC host Jim Cramer. In effect, the SEC is intervening on behalf of blame-shifting companies, and investigating the investigators. It’s the epitome of weirdness, and wimpy SEC officials will no doubt see to it that it happens again.
Only last week, the picture got even more bizarre as Lay and Skilling were being hauled down the Via Dolorosa. Utah quietly rushed into law a bill aimed at advancing the “it’s them” agenda of local resident Byrne, who is the top campaign contributor in Utah, according to the Deseret Morning News. The them cause strikes considerably closer to home than other past Byrne causes, such as the Swift Boat Vets and POWs for Truth. The new Utah law targets “naked” short-sellers supposedly besieging the state’s companies. The searing irony of all this is that Utah has achieved quite a reputation over the years for its worthless mining stocks and penny-stock scams. But that’s not a problem, in the view of the state of Utah.
The them campaign is the antithesis of everything we have supposedly “learned” from Enron, with its shifting of responsibility, banal dishonesty and exploitation of shareholder ignorance. Yet it is gaining adherents far beyond the Great Salt Lake.
Some weeks ago I spoke to a writer for a small but influential media journal about those SEC-subpoenaed reporters, and we chatted about short-selling. Short-selling has never driven a company out of business, I said. Yes, it has, he responded.
“Well,” he said, “I would say Enron is an example.”
I then listened, in amazement, as an opinion leader in medialand went on to recite from the Enron defense playbook, detail for detail, with the credulity and naiveté of a teenager discovering the joys of chemistry for the first time.
Ken Lay and Jeff Skilling are facing life in jail defiantly, sort of like Jimmy Cagney in one of those old Warner Bros. movies. Out there in the gold-lamé tenements, meanwhile, the slums of the rich are still breeding corporate delinquents and Pat O’Brien is nowhere in sight.