May 01, 2006
Criminalizing Agency Costs?
Posted by Fred Tung

As the Enron trial proceeds, Larry Ribstein's catchy disparagement of the prosecution as "criminalizing agency costs" has grown legs. Most recently, Steve Bainbridge's piece, Are We Criminalizing Agency Costs?, just appeared in the TCS Daily.  Similar themes were apparently discussed at Lisa Fairfax's recent conference on the Criminalization of Corporate Law. The basic fear is that corporate officers are being prosecuted for taking legitimate business risks wholly within their legal discretion as corporate officers--in effect that they are being punished for bad outcomes.  This overdeters corporate actors from taking the very business risks that diversified investors want them to take.

Now, I confess to knowing very little about criminal law generally, or about white-collar crime in particular.  Only what I see on Law & Order (all 14 variations).  But as I sift through the blogosphere casually following this issue, it seems to me that some of the criticisms surrounding the Enron prosecutions are not unique to that case or white collar prosecution in general, but are endemic to criminal justice generally--and perhaps require fundamental reform. 

For example, Larry (here and here) and others have noted the price a defendant pays for going to trial.  The co-defendant who pleads and rats gets a lighter (sometimes much lighter) sentence than the plausibly innocent one who insists on a trial.

Similarly, the lottery-like nature of a criminal trial and the plague of ambitious and/or politically motivated prosecutors bringing the weight of the government to bear on individual defendants--these are not unique to Enron.

At some level, maybe these specific criticisms are just natural offshoots of the idea that we shouldn't criminalize agency costs--i.e., subjecting these folks to the particular burdens of the criminal justice system are outrageous because their behavior does not justify prosecution in the first place.  But that explanation seems a bit unsatisfying.  Nevermind that it seems hard to know at this point who knew what when, and whether it's just agency costs that are being prosecuted.  Every criminal defendant--presumed innocent--suffers these burdens, regardless of the crimes they are alleged to have committed. And if they unfairly burden Lay and Skilling, imagine their effect on less resourceful individuals.

Perhaps the particular nasty features of the criminal justice system are especially objectionable when targeted at otherwise productive and sophisticated members of society.  OTOH, the recent financial scandals show just how much more you can steal with a briefcase than a gun (nevermind that Puzo was referring to lawyers . . . ), and the harm that can do.  Perhaps the defendants here really should be presumed innocent, while the garden-variety criminal defendant should not?

Now, I'm not defending the prosecution tactics in Enron--some of which seem heavy-handed--or opining on whether Skilling or Lay committed crimes or "deserve" to be prosecuted.  And I suppose if I went to a bad movie, I'd complain about the theater's crummy sound sytem as well.  But even if one believes that Lay and Skilling are guilty only of bad management, it seems to me that the case for not subjecting agency costs to criminal prosecution is an analytically separate question from these various standard features of criminal justice.

UPDATE:  Larry Ribstein replies, summarizing the problems of applying the criminal justice system to corporate agency costs.

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