June 01, 2006

Judges and juries
Posted by Larry Ribstein

In my previous post I pointed out that applying the criminal law to agency costs requires the kinds of judgments that the criminal justice system was not designed to, and should not, make. But it gets worse, because I didn’t take into account the problems judges and jurors face in drawing these lines in actual cases.

For many people -- judges and juries -- what goes on in an executive suite may as well be happening on Mars. When people have to make judgments that transcend their experience and knowledge, they engage in heuristic shortcuts. They may not be able to determine whether precise conduct crossed a precise line, but they do know that bad people should go to jail, good people shouldn’t.

Who’s bad? When it comes to businessmen, most people get their information from the newspapers and television. There you hear the word “greed” a lot. In fact, apart from business publications like the Wall Street Journal (and even there, a lot of the time), much of what people read and see about corporate executives is negative – they get paid too much, they fly around in corporate jets, they don’t take responsibility for corporate failure. There’s very little about what the executives’ jobs actually entail, about what good management entails.

So the Enron the jurors knew that Enron spectacularly collapsed and many people lost their savings and jobs. And lo, here before them, are two prime specimens. If the jurors can’t trace every step in the prosecution’s case – it they have to connect some dots – what connections would you expect them to make, given what they've been exposed to?

This is not to say that executives shouldn’t be tried for corporate crimes just because judges and jurors might get it wrong. But it is to say that, even if it is theoretically possible to distinguish criminal and non-criminal behavior in the agency costs context, we need to be realistic about actual jurors' ability to make these distinctions.

Conglomerate Forum: Enron, Enron

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Comments (4)

1. Posted by jake on June 1, 2006 @ 22:42 | Permalink

Two observations.

1. Congress has not seen fit to codify an "agency costs" defense in Title 18, U.S. Code. Other than law professors who advocate this world view, what sort of economic rent seekers might lobby for such legislation?

2. Of course "we need to be realistic about actual jurors' ability to make these distinctions between "criminal and non-criminal behavior in the agency costs context" (setting aside the plain fact that the law, outside of law schools and journals, recognizes no "agency cost" defense). How to implement that realism?

Lay and Skilling could have called expert witnesses, for the jury's benefit, to boil complex financial transactions down to their essential substance. Of course, that tactic depends on whether you want the jury to comprehend the real substance of the transactions, as opposed to giving them a lot of pious mea culpas.

Alternatively, or additionally, Lay and Skilling could have opted for a bench trial. The average Article III judge (many of whom by now have attended "law and economics" seminars, a sound idea) can comprehend complicated issues of fact. Oops! Ken Lay tried that with the bank fraud charges, without success.

Can anyone in this discussion identify any occasion on which an executive accused of corporate crimes has retained and called an expert witness to explain an "agency cost" defense to a jury?


2. Posted by Larry E. Ribstein on June 2, 2006 @ 6:01 | Permalink

Part of the problem I was discussing is that the law doesn't draw a clear line between agency costs and criminal activity. Now that the costs of this failure of clarity are clearer, I'm hoping we will get a sensible statutory distinction.

In my post, I deliberately did not distinguish between judges and jurors. I'm not sure that the average trial judge actually is better than the average juror on this.

Skilling did have an expert witness waiting to testify along the lines suggested in the comment -- Dan Fischel. I don't think he testified, and I don't know why not. I do know that testimony of this sort is common. However, there are close questions whether such testimony would be viewed as being on the "law," and therefore admissible.

The bottom line is that these problems are not attributable to the failings of the individual decision-makers, but are built into the law.


3. Posted by John Davidson on June 2, 2006 @ 8:53 | Permalink

Having defended WCC for more than 20 years, it is pretty clear to me that the person engaging in heuristic shortcuts is the author, who has no idea about either what goes on in board rooms or court rooms. It is pretty plain that he is making judgments that transcends his experience and knowledge.

As Mark Lanier said at the end of the first day of the Enron trial, "It doesn't take much practice to tell the truth."

One only has to read one shareholder letter from Warren Buffett and compare and contrast his candor with the mendacity of Lay, Skilling, and Enron to get a full and complete picture.

Lay and Skilling were charged with and that is what they were convicted of failing to do--failing to tell the truth.

For Ribstein to argue he doesn't know what happened, what went wrong, is just totally disingenuous. Why did they lie--Skilling, for no capital investment, ended up with $200 million in his pockets.


4. Posted by Jake on June 2, 2006 @ 9:16 | Permalink

Having spent a lot of time arguing complicated financial deals before numerous federal trial judges, I've not been disappointed with their comprehension of such matters. Disappointed in the outcome, at times, but that's typically because the judge (or adversary) has an analysis that is sounder than mine.

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