March 02, 2005
ebbers and scandal trials
Posted by David Skeel

Now that Bernie Ebbers has taken the stand, it's tempting to compare his criminal trial to the scandal trials of the past.  The two most important of the last sixty or seventy years were the trials of Samuel Insull and of Richard Whitney.  Insull created one of the most elaborate (and deceptive-- think Enron) utility holding companies of the 1920s in the Chicago area (he had started out as Thomas Edison's right hand man); his collapse was one of the most notorious of the 1930s.  In a famous campaign speech (authored by Adolf Berle, it turns out), Franklin Roosevelt railed agst the "Ishmael or Insull whose hand is agst every man's" and promised to clean up corporate America, which he did.  Interestingly, when Insull was dragged back to the US for trial in the early 1930s, he ended up getting off.  Unlike Ebbers (and Lay and Scrushy), Insull didn't claim that he didn't understand the company's accounting shenanigans; he argued the accounting wasn't illegal.  One moral of his tale is that acquittal doesn't necessarily mean vindication in the public eye, and it doeesn't necessarily preclude regulation.  Congress completely restructured the utilities industry in 1935, after Insull's acquittal.  (Much more about this in my new book, Icarus in the Boardroom; one of the hidden agendas of the book is to retrieve Insull from the dustbins of history).

In contrast to Insull, Whitney headed the New York Stock Exchange and embezzled large amounts of money from the Exchange.  Once his scandal came to light, there was little doubt abt his guilt.  Joel Seligman points out in The Transformation of Wall Street (p.171) that J.P. Morgan, Jr fueled public outrage about the scandal by saying if he'd known about the embezzlement, he wouldn't have informed the SEC.  William Douglas and the SEC used the outrage to force a dramatic restructuring of the Exchange.

Whatever happens with Ebbers, the trial isn't likely to presage any further reform.  The pressure for reform faded long before the trial started.

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