These are surely not the last words on Enron, but I wanted to share a few thoughts on the conclusion of Conglomerate Forum: Enron.

First, many of the commentators have discussed the deterrent effect of criminal law on corporate executives. As Nancy Rapoport's post from downtown Houston illustrates, however, this case was not about deterrence for most people. This was about punishment. And, in some cases, a felt need for revenge.

Second, several commenters, including most recently John Kroger, have expressed shock that some of the participants have reservations about the guilty verdicts. Yes, Enron was a colossal fraud. But the pre-trial narratives were mixed about Lay's and Skilling's roles in that fraud. Even though I followed the trial closely, and I thought the prosecutors did an excellent job, I find it hard to shake the notion that the real villain in Enron was Andy Fastow.

Third, this brings us to Lay's and Skilling's defense. Why did they believe that they could convince a jury that nothing untoward was happening at Enron? Why didn't they go with the pre-trial narratives that portrayed Lay  as clueless and Skilling as distracted and emotionally troubled? Would that have made a difference?

Finally, I want to thank all of the participants and commenters in the Forum. I have very much enjoyed reading the posts and comments. I feel like I have learned a lot.

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John Kroger is an Associate Professor of Law at Lewis & Clark Law School. He also was a member of the U.S. Justice Department's Enron Task Force. I asked him to comment on the symposium, and here are his thoughts:

I am shocked at how skeptical most of these blog entries are.  Of course, as a former prosecutor in the case, I am certainly biased.  That said, here’s a quick reality check.  In 2000, 96% of Enron’s reported net income and 105% of its reported funds flow came from accounting manipulation schemes, the vast majority of which clearly violated GAAP.  At the same time, Enron managed to keep some $25 billion in company debt off its financial statements, hidden from investors.  Lay told his employees to keep buying more Enron stock while he was secretly selling his own.  Both men made millions spinning the socks off investors for a company that was, in the end, revealed as an empty shell.  The jury heard months of testimony and concluded, quite reasonably, that the defendants knew precisely what was going on.  In the United States, we don’t always treat poor criminals and rich criminals alike, but we should.  When people commit fraud, they should go to prison.

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Several commenters have expressed some concern about the severity of criminal sanctions for Lay & Skilling's actions.  My question is then: what punishment would be appropriate?  Are the civil sanctions sufficient?  Larry believes they are enough: "[C]onsider the other deterrence mechanisms we have at our disposal – crushing civil liability, loss of a prestigious job and livelihood, the destruction of a hard-earned reputation. Petty crooks and drug dealers don’t worry a lot about these things, but corporate executives do." 

But is the civil liability really "crushing"?  Can't most of these folks survive the damages and fines and live fairly comfortable lives after that?  And sure, your reputation is hurt, but having your freedom and millions still in the bank probably eases the pain.

For me, one of the most important aspects of the criminal conviction is the loss of the bankruptcy homestead protection.  Perhaps you've seen pictures of Skilling's gated mansion -- his "homestead."  Under Texas bankruptcy protections, Skilling and Lay could shield their homes from repossession to pay outstanding judgments.  However, housing is only protected up to $125,000 if you've been convicted of securities fraud.  I'm not sure if this new provision is retroactive, but sanctions like this actually put some bite into non-incarceratory punishment.

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Remember immediately after Enron collapsed, the big story was the loss of employees’ retirement savings tied up in Enron stock?

Remember how Ken Lay’s 11th-hour trades were seen not just as “insider trading” (whatever that is) but as stabbing Enron employee-investors and retirees in the back?

And remember how Congress then leaped into action, ignoring the cheap thrills of perp walks and "corporate governance reform" and instead reforming 401(k) and IRA legislation to encourage wise investment and portfolio diversification and safeguard the privatized portion of our national retirement system to avoid future multibillion-dollar losses by legions of middle-class retirees who invested their 401(k) dollars unwisely and end up seeking public assistance in their golden years?

Oh wait...Never mind.

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Following up on posts by Lisa, Vic, and Larry, I wanted to add some thoughts on how the jury arrived at its verdict.  In order for jurors to believe a defendant's story, the story must be familiar and relatable to them.  As Larry noted, the Enron jurors had no guideposts to imagine the daily business of being the President or CEO of a fast-growing company like Enron.

As a law student, I spent a semester interviewing jurors in death penalty cases as part of Texas' Capital Punishment Clinic.  I was regularly surprised by the heuristics that jurors used to assess guilt.  Most often, jurors stopped listening to the defendant's story because elements of it were not part of their everyday, middle-class life.  Some statements I heard:  "What kind of person is hanging out in a park at 2:00 a.m.?"  "What kind of person hitches a ride to Dallas with someone they just met?"  The oddest shortcut I witnessed was a woman who told me that the defendant was probably guilty because his dad was in jail.  When I asked her why she thought his dad was in jail (he wasn't), she said that they let him out of jail to testify, and he was in his jail uniform.  Unfortunately, he was in his highway construction worker uniform.

I think this phenomenon is at work in white-collar trials as well.  What kind of person has to take out loans from his own company when he has millions?  What kind of person doesn't think it's worth mentioning that he's made an investment in a company that does business with Enron?  What kind of person can't remember if he invested $60k or $180k in it?  What kind of a person calls $22 million a "rounding error" for a company like Enron?  What kind of person has a Ph.D in Economics but doesn't know his CFO is crooked?  The business world where millions of dollars can be a rounding error and where executives with millions also leverage their portfolios with debt is as foreign to a juror as a world where poor young men hang out in parks at night and road trip with people they just met.  Those worlds can't exist, so there must be more there to the story.

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I think one can view the Enron verdict as a referendum on the laissez faire way in which CEOs practice business.  On the one hand, it seems clear that the Enron jurors found it unbelievable that two smart and “hands on” people such as Lay and Skilling could be unaware of the affairs within their own corporation.  In this sense, the prosecution did its job and the verdict is simply a statement about the Enron executives and their credibility.

On the other hand, it also seems that jurors did not appreciate any claims that Lay and Skilling were unaware of issues that arose within the company they were charged to run.  Indeed, jurors spoke a lot about responsibility, and the fact that ultimately Lay and Skilling had to be held responsible for the actions of the people within their command.  In so doing, jurors analogized their own lives and employment situations to those of Lay and Skilling.  Hence, one juror said that all of the jurors with jobs had to juggle their jury duty with their regular responsibilities, and could not shirk any of them.  Most notably, the juror who was an elementary school principal said that parents hold him responsible for the welfare of the students in his school, and hence it is insufficient for him to claim that he does not know about things that occur in the classroom.  By this token, he did not appear to appreciate Lay and Skilling seeking to shirk their responsibility by claiming they did not know about things that occurred in their company, or otherwise seeking to lay the blame on someone else’s doorstep.  These kinds of statements make me less comfortable with the verdict.  Their message is that executives should be held responsible for knowing about events in their company—particularly those with catastrophic consequences.  Thus, as one juror said, “it’s not right” to claim a lack of knowledge about company affairs. 

At first glance this policy of accountability seems appropriate and even intuitive.  Who else should be held accountable for the failures of the public company but those in charge of running it?  Then too, this policy resonates with the public who, like the jurors, appear to believe that the “buck must stop” with those at the top.  Finally, I think there is a strong argument to be made that the state system of accountability is defective, and hence we may need some other mechanism to achieve our accountability goals.  However, the policy of accountability, while easy to pronounce, seems difficult to implement in the context of a large publicly held company.  The policy also seems to run counter to the policies within corporate law that allow corporate officers and directors the flexibility not only to rely on others when carrying out their duties, but to make even grossly negligent mistakes.  It also seems that the policy cannot be implemented the same manner in every context.  Indeed, should we view the accountability of executives through the same lens as the accountability we expect from a school principal?  Finally, the policy seems particularly problematic when we use the criminal justice system as a vehicle for framing it.  From this perspective, to the extent that the verdict reflected the juror’s (and society’s) blanket desire for executives to assume more responsibility, and have more accountability, for the companies they run, I am uncomfortable with them expressing that discontent in the form of a criminal verdict.   

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Thanks Gordon and the rest of the Conglomerate for the opportunity to comment.

Bill [Bratton], your excellent post points out that de jure criminality rarely reaches corporate officials because of the diffusion of responsibility in the corporation. Thus we rely on “de facto criminality” to nab corporate bigwigs in corporate scandals. [By the way, I’d like to add that the concept of “de facto criminality” should be understood to include relatively Mickey-Mouse offenses that are de jure crimes but are charged as proxies for a non-de jure offense: the “Al Capone” approach we saw, for example, in Martha Stewart’s perjury and in all kinds of “terrorist” prosecutions, most recently Umer Hayat’s customs violations.]

The de jure criminal standards are unlikely to be changed, Bill argues, because to do so would discourage business risk taking. So why use de facto criminality? It also has the potential to discourage risk taking; maybe a greater potential, because it’s so hard to tell what a court will find illegal after the fact. I think the reasons have to do with political rent-seeking, not a desire to increase the efficiency of corporations or capital markets.

De facto criminality increases the power of courts, but, as you point out, Bill, it’s prosecutors who bring the charges after the smoke has cleared and they have the luxury of “sifting” through the facts. The de facto approach, as opposed to a revision of de jure standards, gives prosecutors greater discretion.

Legislators like this because it allows them to pass the political buck. Rulemaking is hard. The executive branch likes it because it enables selective prosecutions for political gain. The political gain is threefold—one, it wins populist votes by giving catharsis to angry citizens; two, it creates the misleading impression that fraud has been cleaned up and market risk has been reduced [yes, Bill, this is your argument from “Enron and the Dark Side of Shareholder Value,” which I steal borrow every chance I get], thereby restoring capital flows, increasing securities prices, and wining votes on Wall Street. And three, executive branch likes expanded discretion for its own sake. Pretty much every modern US President has tried (and mostly succeeded) to increase executive prerogative. The current Administration is particularly interested in and successful at this. I don’t mean to say the current Administration invented the de facto approach, or has used it more than usual in the corporate context, but the de facto approach is certainly symbolic of the current concentration of power in the executive branch.

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Many thanks to the Conglomerate folks for the invitation to such a great forum.

I suppose I should begin by revisiting my earlier post: The Enron Trial: Reasons Not to Watch.  There I argued that the trial of Ken Lay and Jeff Skilling would not be the must-see corporate law event that it was being made out to be.  Was I wrong?  Although the trial itself was fascinating, with a somewhat surprising conclusion, it was fascinating as theater -- not as a corporate law watershed.  Why?  Well, here are the reasons I gave in my initial post.

• The real bad guy was not on trial.  Although both Lay and Skilling were convicted of multiple crimes, the true villain in this tale is Andy Fastow.  He masterminded the scheme which made himself and his closest associates wealthy at the company's expense.  When Fastow gets a lighter sentence than Lay and Skilling, Larry Ribstein is right in saying that it's a penalty for going to trial.
• The outcome may not have rested on ultimate guilt or innocence.  I don't see a lot of folks saying that Lay and Skilling were actually innocent.  But I do see them saying that Lay hung himself with his defensive, cantankerous testimony.  (See, e.g., Peter Lattman, seconded by the good Professor Bainbridge.)  In fact, all I see is praise for the prosecution in keeping it simple, maintaining a black-and-white narrative, and avoiding a lot of the accounting complexity.  In addition, the trial was not about the overall downfall of the company, but instead about the efforts by Lay and Skilling to hide the results of Fastow's malfeasance.  As Bill Bratton pointed out earlier, this trial intersected the real scandal only incidentally.
• Enron overload.  Yes, I'm contributing to it.  But there has been so much written about Enron, it was unlikely that the trial would shed much new light.  Did it?  Well, we now have two convicted executives, and a real sense that justice has been served.  But did we learn anything new about their conduct?  The only real grabber from the trial, from my perspective, was that Lay's son was an Enron short-seller.  As the good Professor noted, the Powers Report remains the "go to" document for a discussion of the scandal.  (I would also add Bill Bratton's pathbreaking piece, Enron and the Dark Side of Shareholder Value.)

Does that mean that Enron or this trial are not worth talking about?  Of course not.  My point is that we should not mistake the results of this trial as the final word, or even the most important word, in the whole Enron mess.

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I was walking around downtown Houston yesterday and passed by a convenience store in our tunnel system (think:  Minneapolis skywalks, but underground, to avoid the heat of the sun).  On the wall nearest the store's door was the classic Houston Chronicle (collector's edition) headline, "Guilty! Guilty!"  It struck me that, if a downtown convenience store has that headline up on the wall after last week, then it's clear that Houston's still angry about the whole Enron mess.  And that anger isn't just from employees and shareholders--it's from the hundreds of small businesses, like this store, that lost serious income from Enron's collapse.

Sure, the bankruptcy gave some people closure, and the guilty verdicts (one more today, in the broadband retrial) are giving some others closure.  There's still the sentencing phase to go through on the criminal side and the civil trial still waiting in the wings, so the closure's by no means complete.  Here in Houston, we may never get closure, because we knew the people involved so much more intimately than the rest of the country knew them.  We remember seeing Ken Lay at various events and thinking to ourselves, "There's Ken."  (Never "there's Mr. Lay"--he was always "Ken" to us.) 

The cognitive dissonance that many of us felt when the whole Enron debacle was unwinding is probably still there, to a much lesser degree.  How could we have missed so many clues that Enron wasn't what it seemed?  The clues were there, if we'd only paid attention to them.  (For one article about the clues, you might want to take a look at an article that my husband and I wrote, Dr. Jekyll & Mr. Skilling: How Enron's Public Image Morphed From the Most Innovative Company in the Fortune 500 to the Most Notorious Company Ever--also available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=505662).   For me, the most obvious clue was Bethany McLean's article on whether Enron's stock was overrated.  So why didn't we pay closer attention?

I really do think that cognitive dissonance was one of the biggest reasons Enron did what it did (and did it for so long).  The board's cognitive dissonance led it to waive the conflict of interest rules to let Fastow engage in self-dealing--not such a atrange leap, given how many directors had their own consulting deals w/Enron.  The triangulation of blame that the Powers Report described (board blamed accountants and lawyers, lawyers blamed accountants and Enron, accountants blamed lawyers and Enron) is yet more evidence of cognitive dissonance:  "We're all smart, good people, and what we're doing MUST be correct--it's just 'aggressive.'"  The cognitive dissonance of the market included people saying, "OK, so Enron is a black box.  But it's making money, so I should buy stock anyway."  For Houstonians, too, it's hard for us to believe that someone so famous and so earnest-looking might not be as attuned to staying on the straight and narrow as we had thought.  To be honest, I've followed all of the developments in Enron, and I'm still struggling with cognitive dissonance myself. 

When you add cognitive dissonance to the fact that no one seemed to be minding cash flow after Rich Kinder left Enron and to the fact that the market had nowhere near the correct information that we all needed, it's not that hard to see why Enron failed.  The question is whether there's really anything that we can do about it that would stop future Enrons, and I'm pessimistic.

This is my first blog ever, so please be kind....

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Nothing beats the threat of jail time for focusing a client's attention.  Looking ahead, however, the effectiveness of the Enron conviction as a deterrence tool depends on the story that is remembered.

The evil executive narrative.  To secure a conviction, the Enron prosecutors made a sensible choice:  by and large they told a story that made each executive out to be greedy and evil, a liar and a thief.  A villain.  This story made it easier for the jury to convict.  Even if we don't personally know an evil executive, it's a familiar enough narrative from popular culture.  It doesn't take a lot of work for the jury to fit the facts into the story.  Pop culture has already primed the pump.

The problem is that the effectiveness of the narrative in securing a conviction bears an inverse relationship to the effectiveness of the narrative in deterring future corporate fraud.  Lay and Skilling are now villains.  Will CEOs considering overly aggressive accounting maneuvers be deterred?  Not unless they seem themselves as evil. 

Men-of-Action.  Which, of course, they don't.  They can't imagine themselves in Lay and Skilling's place.  They imagine themselves in a different narrative entirely.  They see themselves as men-of-action.  As ordinary men placed in extraordinary circumstances, doing what needs to be done to get the results their board members, shareholders, and employees demand.  If Jack Bauer were a CEO, wouldn't he bend a few rules too?  (Recall Lay's testimony that "rules are important, but you should not be a slave to the rules, either.")  At worst, CEOs see themselves as flawed heroes. 

Cheater, cheater, pumpkin-eater.  A more effective narrative in terms of deterrence would be to remember Lay and Skilling as cheaters.  There is nothing worse than being called a cheater, as Barry Bonds knows every time he enters a visiting ballpark.  The relentless public shaming of Barry Bonds serves as a more effective deterrent to younger players considering steroid use than any league rule or potential perjury conviction.  So too with Lay and Skilling:  other executives cannot imagine themselves as evil.  But when they manipulate earnings, like Bonds applying the Cream, they know deep down that they are cheating to get ahead.  And they might think twice about it.  Lay and Skilling should be remembered as grifters.  I hope that's the narrative that sticks.   

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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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The jurors heard the evidence and presented a thoughtful verdict that demonstrated a careful deliberation of the charges against Jeff Skilling and Ken Lay. This was not a technical accounting fraud case.  It was a simple case of - did Lay lie to people - and did Lay & Skilling participate in illegal activities that caused harm to many. The prosecution did an outstanding job of keeping the case simple despite the very technical nature of much of the evidence presented.

The questions as I see them are: 1)  what allowed the government to keep it simple, and; 2) should this be the standard used in cases with penalties that may reach levels never seen before in white collar cases. 

The government had an array of offenses available in its arsenal that were so broad that it is easy to fit just about any conduct.  For example, Ken Lay was convicted of one count of wire fraud, a statute predicated on the mail fraud statute, and a statute with a long history of being broad.  Chief Justice Burger went so far, in dissenting opinion, to call it "a stopgap device to deal on a temporary basis with the new phenomenon, until particularized legislation can be developed and passed to deal directly with the evil."  (Maze)

The problem with the possibility of giving enormous sentences to these two first-offenders is that despite the outcry to punish them, in the back of some of our minds is the question of whether they would have engaged in this conduct if they thought they might be facing criminal charges.  To so many in this situation, it is a business decision, albeit in many cases unethical, that triggers criminal statutes when the government feels the need to punish someone because of the harm suffered by so many. To some, however, the criminality is not apparent.  We all know what murder or burglary is, but how many really understand wire fraud.

Some may argue that punishing Lay and Skilling will serve as a deterrent of future criminality.  And there is some truth here, perhaps.  But my response is two-fold: 1) perhaps we could have prevented the conduct before it happened if there were clearer rules in place that were easily understandable by individuals who are not lawyers, and 2) could we accomplish the same deterrence with significantly lesser sentences.

I have some other suggestions, and they can be found on the white collar crime blog here.

(esp)

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Bill Bratton is traveling in Spain, and we had some difficulty getting him registered. Nevertheless, he has checked in with this insightful post on "De Facto and De Jure Criminality":

The thing to remember about Enron is that no scandal followed from the firm’s collapse and bankruptcy.  During the autumn of 2001 people watched the cards implode open-mouthed, trying to figure out the economic substance underneath the accounting restatements (and not succeeding).  The December bankruptcy registered as the biggest ever, but nobody was talking about criminal investigations.  Enron became a criminal matter only when shredding stories appeared in the newspapers in January 2002.  Shredding being something a federal prosecutor can get his or her hands around, a civil disgrace became a criminal scandal overnight.  That shredding had nothing to do with the company’s collapse and the losses suffered by its investors and employees, mattered not at all.

Of course, accounting treatments, financial reports, and the operation of the business all did take central places in the wider theater of scandal.  Indeed the scandal’s substantive script took its basic shape within a couple of weeks of the criminal transformation, when the Powers Report appeared.  The substance was scandalous and we appropriately treated it as criminal.  But it was criminality de facto, not de jure.  De jure criminality was defined by the indictments in the two main criminal actions, one against Andersen and the other against Lay and Skilling.  These were the lawyerly creations of prosecutors sifting fact and law in search of high probability convictions.  And so was the entire Andersen firm destroyed for shredding while the Sarbanes-Oxley Congress simultaneously asked for a report about the problem of concentration in the accounting industry!  I can’t think of a time when I saw two branches of the federal government working at such obvious cross-purposes, at least on a business law subject matter.  In contrast, the Skilling and Lay prosecutions at least had ties to the substance of the scandal.  But even here the script followed from the requirements of a successful fraud prosecution, intersecting the real scandal only incidentally.  Indeed, facts tied to the heart of the scandal – Enron’s the shameless gaming of the system’s formal attributes to create illusions of value – came up mostly from the Lay-Skilling defense team.

So why didn’t de jure criminality follow the facts of the case?   Because corporate decisionmaking processes diffuse responsibility, making culpability hard to attach in the inherited legal context of fraud.  The legal context could of course be changed.  Blue collar crime provides the templates.  But making the change would discourage risk taking by capitalists.  And so no changes will be made, and finance capitalism will retain its uneasy de facto connection with substantive criminality.

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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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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.

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