As the case involving Enron kingpins Lay and Skilling heats up, time to remember some of what is going on – the problems that I’ve referred to as “criminalizing agency costs,” and the “corporate crime lottery.” .
Here's the basic problem. Given the multitude of pathologies that exist within a corporation, the pervasiveness of agency costs (which inherently cannot be reduced to zero), and the variety of market and legal mechanisms that address these problems, there is a severe line-drawing problem regarding what ought to be clearly wrong enough to be regarded as criminal. If the law doesn’t adequately draw those lines, we risk diluting the force of criminal liability. Moreover, there’s a severe risk of over-deterrence, since honest executives will give a very wide berth to conduct that has any chance of involving jail time – with the result that they may avoid legitimate as well as illegitimate activities.
The corporate crime lottery arises when it’s difficult to justify differences in punishment for crimes that seem to be equally serious. This problem inheres in criminalizing agency costs. We’re learning that one of the key determinants of corporate criminal liability is whether a jury is likely to be able to understand the evidence. So Kozlowski goes down because he “forgot” about $37.5 million in compensation when he went to do his W-2. But is this morally or instrumentally worse than engineering a multi-billion dollar fraud?
According to this WSJ story, it was the government’s fear of boring and confusing the jury that helped provoke it to make a deal with Causey, separating him from Lay and Skilling. Yet Causey’s misconduct, if misconduct there was, may have been greater than, say, Lay’s – who after all is only alleged to have been involved in the Enron misdeeds at the tail end. It will be hard to find justice in a lighter sentence for Causey than for Lay, or for Kozlowski (who, too, must do hard time in a state prison, another aspect of the “lottery”).
And now we learn about last-minute charges that Skilling lied to the SEC about his reasons for selling stock in September, 2001. The problem isn't so much the sale, but the reason given to the SEC – whether it was related to 9/11. Seems Skilling didn’t say that he tried to sell the stock before 9/11. In a close case, will Skilling end up going to jail, and not Lay, because he lied in connection with a civil investigation?
Again, my point is that these line-drawing problems are inherent in criminalizing agency costs, not unfortunate byproducts of an otherwise well-functioning system. It will be interesting to see, in this light, how the Enron trial plays out, and whether we are led to rethink the wisdom this recent branch of the criminal law.
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