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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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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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