Conscious ignorance as a corporate crime

The Quattrone reversal raises the point, as discussed in today's WSJ, that a key issue in the Lay-Skilling trial may be whether the judge should instruct the jury that they can convict if the defendants consciously avoided knowing the truth.

The problem with such an instruction, is that, as one lawyer is quoted as saying, “the line between conscious avoidance on the one side and recklessness and negligence on the other is difficult to enunciate.”

That kind of line-drawing characterizes the whole area of criminalizing agency costs, as I’ve written. In Enron, it may be easy for the jury to conclude that Lay and Skilling should have paid more attention. And if they should have, they weren’t good managers. Then fire them.  Maybe the ignorance gets to a level they should be civilly liable. But criminalizing this conduct draws a line honest executives want to stay miles away from. This may cause behavior, such as excessive attention to detail, that's not in the shareholders’ interests.

Another example is raised by yesterday’s testimony by a former Andersen partner who worked on Enron. The witness said Lay was trying to avoid a write-down of expenses relating to Enron’s water business by suggesting that Enron was still building the business on the eve of bankruptcy. There was other testimony that Lay falsely told analysts that Andersen’s review of the writedown issue was "preliminary and incomplete."

Assuming the truth of the testimony, is this just Lay’s famous optimism – the same optimism that drove his building of the business -- or intentional fraud? Sure it looks delusional now, but can we be sure it was based on what he knew then?  In other words, did he know he was lying, did he “consciously avoid knowing,” or was he putting a very positive spin on what he was hearing, just as he had always done? 

The jury’s answer to these questions may determine whether Lay spends a significant part his remaining life in jail. Later, an appellate court may be asked to determine whether the jury should be answering this type of question.

To be clear:  I'm not saying Lay should be able to get away with lying just because he was optimistic.  The question is what kind of conduct should send him or other executives to jail.  Last Friday at Berkeley Harvey Goldschmid emphasized that criminal penalties really get executives' attention.  That's certainly true, but it's not necessarily a good thing.

Update: More from Tom Kirkendall, and a Lattman roundup.  The Quattrone reversal raises many other issues, including the future of obstruction in corporate crime cases.  And there's much more to say about corporate crime not directly raised by Quattrone, including prosecutorial conduct in investigating crime in large organizations, touched on in my Berkeley post. All possible subjects of future discussions.