During Enron, supine boards failed to notice when their executives were looting their firms or lying to their shareholders. The post-Enron era clamped down on such negligence. Stringent laws were passed. Honest but ignorant directors paid losses out of their own pockets.
There was a correction in what I've called the post-post-Enron era. Juries acquitted, cases were dismissed, laws were delayed. And now the definitive event of the post-post-Enron era: one of the sleepy gatekeepers may be on the way to the Supreme Court!
As summarized in the Tribune, while Harriet Miers was managing her law firm – one of her main business and leadership resume items – the firm paid more than $30 million in two separate settlements. What’s more, the money was paid by the Attorneys' Liability Assurance Society Inc., on whose board she served. In fact, she was on the claims management and loss prevention committee that reviewed malpractice allegations against the coop’s members and made sure they were paying attention. ALAS no longer insures Miers’ firm.
The settlements were paid to investors who were bilked by the firm’s clients, Russell Erxleben and Brian Stearns. The Tribune story says that “[b]oth state court suits argued that Locke Liddell should have screened its clients more carefully or should have known that its clients were engaged in criminal activity and warned investors.” Prior to the fraud that led to the firm’s settlement, Stearns was already on probation for a 1994 felony grand theft conviction for a previous investment scheme.The Erxleben suit alleges that Erxleben also had a bad reputation for investment schemes before the firm took him on. For the frauds that gave rise to the settlements, Erxleben was sentenced to seven years in jail, Stearns to 30 years.
When the Erxleben suit was filed, Miers said the firm “has done nothing improper, and in our judgment never should have been named as a defendant." Yet the firm paid $22 million six months later. It didn’t admit liability so of course we shouldn’t draw any inferences merely from the size of the settlement, or from the fact that it was a significant fraction of the total damages.
For comparison, it's worth recalling that WorldCom and Enron outside directors were required to pay out of their own pockets to settle claims involving those firms. These directors were not managing directors, their firms were much bigger, and they did not also have important positions at the firm's insurers. But those cases were from another era.
Readers of this blog know that I have not been in favor of over-zealous punishment of business people. I have said that the market can take care of some of these problems. Incompetent managers won’t be allowed to hang around and continue doing damage. They will incur reputational penalties.
I have to admit that going to the Supreme Court is not what I had in mind. Though at least I suppose we can expect Justice Miers to be understanding if she hears any corporate crime cases.
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