I have often written about the problems of "criminalizing agency costs," most recently here. If Lay and Skilling lied to the shareholders, what is it about this offense that should give us pause about whether they should go to jail? Here I want to talk about what I see as the main problem: drawing a bright line between criminal and non-criminal conduct by corporate agents.

The basic point is this: Depriving people of their freedom is the most serious thing our government can do, short of killing them. This is justified if we’re very sure the conduct deserves society’s severest condemnation. If we’re not sure, we risk diluting the moral force of the law and raising serious concerns about injustice. Just as we don’t want to have a reasonable doubt about whether a particular defendant is guilty as charged, so we shouldn’t have any doubt about whether the conduct he’s been charged with is criminal.

While you can’t be a little bit pregnant, agents can be, and almost always are, a little bit unfaithful. Otherwise they would be slavishly devotion to their tasks, 24/7; never use their power in the company to influence their compensation; never empire-build to enhance their own power instead of making money for the shareholders; always tell the whole truth about their stewardship, unless there’s some business reason the owners would want you to be quiet. As Justice Cardozo said, “[n]ot honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.”

But we don’t actually expect the “punctilio of honor” from our agents. We want agents to maximize our interests, and sometimes that requires hiring a slightly unfaithful genius rather than a slavishly faithful fool. We impose cost-effective duties and restrictions so that we’re not spending $100 to catch $10 of cheating. These are the hard facts of living in a world of human beings.

And sometimes being even a slavishly faithful agent involves being less than perfectly faithful to somebody else’s interests – a customer or the government. Principals might sometimes want their agents pushing the regulatory envelope if this maximizes the company’s interests. Indeed, arbitraging bad regulations can be in society’s interest. At what point does an executive cross the line from what he was entitled to think were ordinary business practices into the mens rea that should be required for criminal offenses?

Disciplining agents also requires pinning responsibility for corporate failure on particular people in the organization. If Andy Fastow’s cheating crossed the criminal line, who else in the organization should be held criminally responsible for it? The lawyers, accountants, banks and other executives who enabled it? All those who knew about it and didn’t speak up? Sherron Watkins who told only those who wouldn't listen? Those who should have known about it but didn’t?

Using the criminal law to make these sensitive distinctions is like using a tactical nuclear device to drive a nail. Is mutual fund timing like options timing? If a cookie jar reserves offense can put Jamie Olis behind bars for 24 years, what should we do to the executives at Fannie Mae, let alone Lay and Skilling? When some of these people walk free while others spend their lives in jail, you create a wide perception of injustice. When all of them go to jail, you dissipate the moral force of the criminal law.

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