With all of the talk about evil corporate agents, we tend to forget about the agents the public uses to try the cases and decide what cases to try. Although it may be difficult to think of these heroes as merely human, they are. For many of them, Enron is far from a disaster – it’s a launching pad into lucrative big firm practice or political career. Who knows, you might even get to be thought of as a presidential candidate some day. Prosecutors have little incentive to abort the launch by deciding not to prosecute. And of course when they do prosecute, they want to win.

That’s good, isn’t it? Yes, but just as we want them, and our corporate agents, to win, we also want them to play by the rules. All the more because the results of their mistakes are so much worse than dented portfolios.

The problem is that what makes criminalizing agency costs problematic for the criminal justice system also makes corporate crime trials challenging for prosecutors. They have to get the jurors to see the criminal conduct buried in the accounting and and distinct from the run-of-the-mill unfaithfulness of their colleagues.

Corporate employees have the relevant facts, but don’t have a lot of incentive to disclose them to the prosecutors. So highly motivated prosecutors would like some shortcuts to get them where they want to go. They want to be able to choose who says what at trial. It’s helpful to let a whole bunch of peripheral players know that they, too, are potential defendants. Don’t indict them, just yet. But also don’t give them immunity for testifying. In other words, shut them up. Of course you need some people in the company to talk. You might threaten employees, and maybe even their family members, with hard time.

None of these people are hardened criminals – even a day in jail will be a big deal. They scare easily – just the pliable sorts prosecutors love to deal with. We may never find out if they actually did anything wrong, because they don’t go to trial. But they will help the prosecutors get the big splashy Lay/Skilling fish they’re especially interested in hooking.

It’s also helpful if you can get the company to cooperate. Tell a still-thriving firm, we won’t prosecute you if you do what we say. Tell your employees to cooperate or else. Don’t pay defense costs. It’s all in the Thompson memo.

The result is a potential prosecutorial agency cost problem that threatens to rival the corporate agency costs they're prosecuting.

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Some say that, for all its potential flaws, we need corporate criminal liability because it’s the only sanction that will keep the Lays and Skillings of the world honest. In other words, it’s a necessary deterrent. Given the serious problems with corporate liability, we’d want to be sure about this. But it’s really a dubious proposition.

In the first place, consider 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.

In fact, we have to ask, why would somebody like Jeff Skilling risk spending the rest of his life in jail just to lie to the shareholders, particularly if it’s not even clear he gained personally from these lies? Well, of course, he had no idea he was taking this risk – this ex post facto problem with making up corporate criminal liability as we go along is a big part of the problem.

But let’s focus on the Lays and Skillings of the future, now that they know what can happen to them. As I discussed in my initial SOX article, published as Market v. Regulatory Responses to Corporate Fraud, 28 J. Corp. L. 1, 19-22 (2002), people may be overconfident in their judgment and ability to control future events. In fact, Don Langevoort argues that it’s the most self-confident, those with the most self-esteem, that tend to make it to the top of high-flying firms like Enron. These are just the sort of people who could persuade themselves that everything was ok even in the face of evidence that would persuade more reasonable people to the contrary.

Moreover, once these people realize that things are going downhill, a different heuristic steps in. Now they see they’ve already lied and gotten themselves in big trouble. Even if they’re not going to jail, they stand to lose their jobs and reputations. At the same time, they still believe that lying is the morally right thing to do. After all, the shareholders are being misled by the market’s fleeting judgments, while the insiders are sure their business plan is really still sound. Now they will be willing to participate in a cover-up even if it has only a small tendency to succeed in the long run.

This is why even criminal liability is not an effective deterrent. Only the strongest measures have any chance of penetrating the reality shields the worst offenders have erected around themselves, and these sanctions can only make things worse by increasing incentives to cover up.

Suppose that we can find some way to ratchet up the criminal liability and kick it in at precisely the right point to achieve some significant marginal deterrence. Should we do it? Well, we still have all the problems I’ve discussed in prior posts, plus the cost of over-deterring innocent managers. These are the sort of reasonable people who are fully immersed in the real world. They will want to stay very far away from conduct that has even the slightest chance of landing them in jail. Why should they take even the slightest chance just to get a few extra bucks for the shareholders?

Moreover, it’s not just the careful people we’re deterring. The risk-prone executives discussed above aren’t necessarily criminals. They’re the sort of people who do the really stupid-seeming things that end up being spectacular business successes, like competing with the US Postal Service (Fedex) or with Ma Bell (WorldCom).

Some of these people might end up as crooks under the wrong conditions, but some will just be the founders of great, world-changing companies. As things stand, they’re going to hesitate before doing it in companies that are subject to the criminal penalties of the US securities laws.

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As I've said, one of the problems with criminalizing agency costs is that it diverts attention from the important task of finding out what actually happened. Criminal trials are about fastening guilt on particular people. While tremendous resources are being spent for and against this end, we lose the bigger picture – what really went wrong. The defendants have very strong incentives not to lay it all out. The prosecutors are lasered in on what they need to convince the jury of. Meanwhile our obsession with throwing a couple of people in jail obscures important potential lessons for the future like what was the legitimate part of Enron’s business and what, exactly, went wrong.

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For the next two days, we will be focusing our attention on criminal law and corporate governace, using last week's convictions of Ken Lay and Jeff Skilling to focus our discussion. We have a great lineup of participants, and we hope that you will join the discussion.

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On June 1-2, we will be hosting Conglomerate Forum: Enron, an online symposium to explore issues relating to the use of criminal law as a corporate governance mechanism in the wake of last week's guilty verdicts against Ken Lay and Jeff Skilling. In addition to the Conglomerate bloggers, confirmed participants include:

Matt Bodie, Hofstra University School of Law
William Bratton, Georgetown Law Center
John Coffee, Columbia Law School
Thomas Joo, University of California at Davis Law School
Vic Khanna, University of Michigan Law School
Don Langevoort, Georgetown Law Center
Ellen Podgor, Stetson University College of Law
Nancy Rapoport, University of Houston Law Center
Larry Ribstein, University of Illinois Law School

Conglomerate Forum: Enron is modeled on our previous online symposium, last fall's Conglomerate Forum: Disney, which you can find archived here. Participants will post their observations and insights spontaneously -- that is, without any predetermined assignments or ordering -- and the rest of us will engage them in the comments. Simple as that.

We hope that you will join us on Thursday and Friday.

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