Fred Tung said last week, referring to the recent attention (see Fred's links) being given to the problems of "criminalizing agency costs," that
some of the criticisms surrounding the Enron prosecutions are not unique to that case or white collar prosecution in general, but are endemic to criminal justice generally--and perhaps require fundamental reform. . . . even if one believes that Lay and Skilling are guilty only of bad management, it seems to me that the case for not subjecting agency costs to criminal prosecution is an analytically separate question from these various standard features of criminal justice.
This is a fair point, so it's worth once again summarizing the problems of applying the criminal justice system to corporate agency costs.
1. The difficulties inherent in the continuum of conduct within firms. Is mutual fund timing like options timing? Where does either stand in relationship to the cookie jar reserves offense that landed Jamie Olis in jail for 24 years?
2. Crime requires, or should require, proof of mens rea. This is especially difficult when there is a continuum between ordinary business practices and criminal offenses. That's been the difficulty in the Enron trial, and why the supposed multi-billion dollar accounting fraud is coming down to a few stock sales by Skilling and Lay.
3. Assuming somebody committed fraud, who should it be pinned on? Business firms diffuse responsibility.
4. The penalty depends on the harm. There are often intractable problems of determining "loss causation" and the contribution of any individual defendant to that harm (Jamie Olis again).
5. Jurors lacking business sophistication are more likely to be moved by biases and emotions than jurors in non-business cases. Heuristics are ways of reducing the complexity of the world. If it's nearly impossible to understand with any certainty what really happened, jurors may resort to a shortcut, "informed" by, for example, press accounts of corporate "greed."
6. Many of the above problems make it very difficult for prosecutors to prove their case. Who did what? What did they know? If prosecutors are going to be successful in these cases, it's only natural that they assume they should have the necessary tools. This becomes a justification for the significant leverage conferred by the Thompson memo in securing agents' cooperation.
7. Corporate agents aren't like conventional criminals. Criminal sanctions – and prosecutors' threat to use them – may have more bite with people who have never even had a traffic ticket. This increases prosecutors' leverage.
8. All of this means that in order to prosecute corporate agency costs we have necessarily given lots of discretion to prosecutors. The result is a potential prosecutorial agency cost problem that threatens to rival the corporate agency costs being prosecuted. The KPMG hearing next week will focus on this problem.
These points focus on the problems from the criminal justice system perspective. For a good discussion more focused on the corporate angle, see Steve Bainbridge's recent TCS column.
The Microsoft anti-trust action, the Martha Stewart persecution and Enron, the major share price loss occurred when criminal charges were filed. In each case, the criminality was there only with the most tortured explanation. I am still unconvinced the public was served by the action.
Posted by: Walter E. Wallis | May 01, 2006 at 08:53 AM