As I heard of the verdict against Skilling and Lay, I was pleased, even though intellectually I have serious reservations about the criminal case against them. The pleasure was emotional, tied to my fear that an acquittal would have been a seen as vindication for two people who did not deserve vindication. But I doubt that they deserve their forthcoming sentences, either, and that is what I will try to explain.
I am prepared to assume that the two were sufficiently aware that what was being reported varied materially from the underlying economic reality at Enron. They also believed that the company's disclosures were blessed by the lawyers and accountants, who had (to use a phrase I love) "gotten comfortable" with what was being done as de facto lawful under the reporting norms of the late 1990's and early 2000's. That having been done in the official disclosure "space" they were free to adopt the norms of hyping and selling expected of executives in other domains. Indeed, to borrow from the cognitive psychology literature (Cain & Loewenstein's recent work), their sense that the official cautionary disclosures had been made gave them greater freedom to act opportunistically -- investors would be expected to pay close attention to the disclosures, not the hype. Their defense that there was nothing wrong at Enron, which failed to persuade the jury, was essentially that this disclosure was indeed "good enough" as a matter of law and thus protective, and what they said in the public domain didn't really matter. (We securities lawyers might easily see the point, though it was probably not intuitive to the jurors.)
My sense is that the jury didn't appreciate the disconnect between financial reporting and economic reality. And it probably had little sense of how many causal steps there are between things like what defendants said or did and the harm that seems so visible . I doubt that justice could possibly be done in a case like this absense a thorough understanding of these, which is what -- intellectually, at least -- troubles me about the verdict.
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1. Posted by John Davidson on June 1, 2006 @ 7:21 | Permalink
It seems to me that the reason why Lay and Skilling were convicted is that "the jury . . . appreciate[d] the disconnect between financial reporting and economic reality.
Said differently, the jury realized, correctly, that Enron was run by amoral men who fully intended to exploit a fundamental misunderstanding by most people. They got up every morning engaging in fraud.
Lay and Skilling thought that this was being smart, making them the smartest guys in the room. To the contrary, they exhibited the most antisocial aspects, fully justifying being identified and punished as criminals.
One learns this difference in the first few weeks of law school. The amoral members of the class love their contracts teacher who says the law permits one to make a contract and then to deliberately breach such, paying only "damages" after all the economic and emotional waste of a jury trial.
The honest paid attention in crime, where they quickly learned that, fortunately, it is a crime (18 USC 1341) to breach a promise.
Now, at the present time, we have a supreme court populated with the amoral members of our classes, which gave us Central Bank of Denver. It should come as no surprise to anyone that lawyers and accountants who don't face personal liability for aiding and abetting a fraud will start telling clients like Lay and Skilling what they want to hear in order to sell legal and accounting services.
Said differently, what Lay and Skilling brought was bad counsel, for they were not told the truth about the law, if their lawyers and accountants said what you imply.
All of this was settled more thant 30 years ago. Fortunately the law has always been that Section 1341 controls. United States v. Simon, 425 F.2d 796 (2nd Cir. 11/12/1969)
In sum, justice in its most basic sense was done by the verdict.
2. Posted by Brett McDonnell on June 1, 2006 @ 8:32 | Permalink
I think I'm with John on this one. The posts so far are making me increasingly skeptical of the tendency among corporate and securities law profs to question criminalization in this area. I'm afraid that the underlying attitude is "hey, these are people a lot like me; they could be my students or donors to my school; they shouldn't be going to prison with those other sorts of people, who have nothing to do with me and my kind." There are some buried assumptions about class and what the criminal justice system is for that I think underly a lot of the commentary, and I find it rather disturbing. Well, the jury didn't go along with our assumptions; good for them.
3. Posted by ellen s podgor on June 1, 2006 @ 9:26 | Permalink
Yes, But I wonder if the jury would feel that these individuals deserve life imprisonment. Further, I wonder how a jury outside of Houston might have felt.
4. Posted by John Davidson on June 1, 2006 @ 12:39 | Permalink
I wish I could be as articulate as Brett McDonnell. The defense of Lay/Skilling has been all about elitism and class, which I find more than disturbing.
5. Posted by Christine on June 1, 2006 @ 14:50 | Permalink
Although John and Brett make good points, we are conflating two types of consequences -- civil liability, as was the case in Central Bank, and criminal liability. I, at least, am not saying that overreaching securities laws should not be actionable by investors. I am uncomfortable with saying that overreaching in a way consistent with accounting norms should send someone to prison for the rest of their natural life. (Strange how the law has made corporate law "undercivilized," but "overcriminalized" in that under the same set of facts it is easier to go to jail than be sued for damages.
Also, I think much of the "throw away the key" reaction is colored by our opinions that Lay and Skilling ar "amoral" or "antisocial," characteristics which aren't crimes. Prison should be a consequences of a concrete act with requisite intent which is in fact a crime.
6. Posted by John Davidson on June 1, 2006 @ 15:54 | Permalink
Christine, "we are [not] conflating two types of consequences"
If you would bother to read what was stated before projecting your jargon, you would have understood that I was explaining that a lack of a meaningful civil remedy resulted in Lay and Skilling trying to buy a "good faith defense" If you understood enough about markets to understand why bad money drives out good, you would understand this event.
While amoral and antisocial characteristics aren't crimes, amoral and antisocial actions are and both Lay and Skilling committed such in abundance.
Last, whether you are comfortable or not, United States v. Simon, 425 F.2d 796 (2nd Cir. 11/12/1969) is the law and is good law.
7. Posted by Michael Guttentag on June 1, 2006 @ 16:53 | Permalink
To echo Brett's comments, I find it hard to feel sympathetic about the penalties imposed on Lay and Skilling, when the Supreme Court recently upheld a 50 years to life penalty for some one who stole a handful of videos from Kmart (the penalty was imposed under California's three strikes law). First things first, and the injustice we tolerate for Leandro Andrade is far more troubling.