Lay and Skilling convicted

First report here. 

Interesting that Skilling was acquitted of most insider trading charges.  Does this mean that the jury thought he didn't know enough about what was happening to bar him from trading, but that he did know enough to go to jail for fraud? 

Comments

[Michael Guttentag]

I would guess the failure to convict Skilling on all insider trading charges was the result of Skilling providing a plausible, alternative justification for why he was selling the stock when he did. With the fraud charges, there was not a comparable, benign explanation.

[William Henderson]

Larry, based on this jury verdict, you should consider re-examining your "criminalizing of agency costs" analysis, especially in light of your antipathy toward SOX.

In short, Lay and Skilling were convicted on New Deal securities law reforms passed in the wake of the Enron of the 1930s, the Insull Holding Companies debacle. ... In short, there is/was ample deterrence without SOX.

It comes down to a political atmosphere / willingness to actually enforce the laws on the books; that was in short supply in the late 1990s and 2000-01. bh.

[Jeff D]

Bernard Ebbers still hasn't gone to jail even after being sentenced to 25 years, many months ago.......

WHAT'S THE DEAL WITH THAT?

[Marc Hodak]

Bill H.,

I'm not sure what you're asking Larry to reconsider. I thought the gist of his analysis was that SOX was overkill. The fact that Skilling, Ebbers, Kozlowski et al. were convicted based on pre-SOX fraud and conspiracy laws belies the "there ought to be a law" outrage which led to SOX. When the cries about our "broken" system were loudest a few years back, I was challenging the impatient accusers with the question: "What, exactly, have these men gotten away with?" Today, we have the final answer.

[William Henderson]

Sure, there is ample evidence that SOX may be doing more harm that good.

That is my point. One way to show that SOX is overkill is to point out the adequate deterrence effects (not just money, but jail time) of pre-SOX laws if they are enforced. To not charge Skilling and Lay because their conduct was garden variety agency costs (a theory that would apply to civil suits as well) = no penalty / legal fallout from the Enron debacle; no change in corporate conduct.

[Mike Guttentag]

Bill,

You write “there is ample evidence that SOX is doing more harm than good.” This probably isn’t the right place to address this issue, but I not as convinced as you (or certainly Larry) are of this conclusion. Granted there is evidence that SOX is costly. We know there are direct costs from implementing SOX measures, and work such as Kate Litvak’s suggests there may even be a net cost to the firm from putting SOX in place.

But SOX was primarily implemented to reduce corporate fraud. Is it achieving this purpose? Are the benefits provided in this respect greater than the costs? Who knows? The fact that SOX is costly to implement, even on a net basis for an individual firm, does not mean that SOX is doing more harm than good. I think we should be careful not to claim to know more about the costs and benefits of SOX than we actually know.

[Bill Henderson]

Mike, that is a fair point. My attitude is influenced by research in a paper I wrote with Judge Richard Cudahy, From Insull to Enron: Corporate (Re)Regulation After the Rise and Fall of Two Energy Icons. Securities laws are only as useful as the political will to enforce them; and during the late 1920s and late 1990s, the nation's political class--Republicans and Democrats alike--were unwilling to interfere with the financial hijinks and enact new laws or enforce the laws already on the books (The article reviews the evidence in great detail.)

Good or bad, SOX is a bubble law (just like the '33 and '34 Acts). If history is our guide, SOX will not be rigorously enforced if it creates too much political friction--essentially ad hoc administrative repeal. And investors are arguably more focused on fundamentals now than in 2000. Finally, in a bubble, fraud has a higher payoff at the same time that the public resists government interference in the financial markets.

To my mind, these factors are more relevant that some abstract notion of whether SOX is good or bad. In the current climate, I am skeptical whether the benefits outweigh the costs. Litvak's paper seems to corroborate that view, though it is not dispositive.

[Marc Hodak]

In the wake of the Lay and Ebbers verdicts, we can confidently predict that CEOs will have a much greater concern for governance risk, with or without SOX. (For my vote, Mike, the answer is perfectly clear about the net benefits to our economy of SOX--SOX is a disaster.) My question, based on observation of executive behavior, is whether such verdicts may have too much effect, since governance risk is intertwined with other corporate risks. Does every confident, optimistic CEO risk jail time if their company fails? What if their stock drops 75%?

After all the talk of executive incentives to commit fraud, I am more concerned with the incentives of prosecutors to find it in the uncertain corners where agency costs lay.