Prosecuting Those With Bad PR

CEO's of companies struggling on the brink of failure often make happy, confident public statements that all is well.  Is that a crime?

Well, it depends on how you look at it.  It comes down to a CEO's fiduciary responsibility to the company's investors, and how that is regulated for public companies.  We think of fibbing to inflate the company stock poorly serves investors, but what about when the company is facing a liquidity crisis?  Isn't public optimism in a liquidity crisis exactly what is needed to serve shareholder's interests?  Consider Treasury Secretary Paulson, and his near criminal declaration of a financial crisis, and the effect these ill-considered statements have had on the economy.

It is hard for me nowadays not to think about Jeff Skilling, who sits in jail for making what the jury thought to be overly optimistic public statements about the company's financial health  (I know you are thinking that he was put in jail for all that off balance sheet accounting and gimmickry, but in fact the prosecution never chose to bring these charges in the trial).  Even Skilling's jury, which was pretty clearly predisposed to convict, seemed to acknowledge that he did not make these statements for personal gain.

So why is Skilling in jail and not, say GM CEO Rick Wagoner?  Wagoner was making a lot of happy-face statements just a few months before his company acknowledged they were facing chapter 11 if Congress did not bail him out.  For extra credit, Wagoner told Congress $15 billion would be enough of a bailout, when he had to have been pretty confident it was not going to come close to cover the hole he faced.

Tom Kirkendall asks some of  the same questions, and looking at the cases he cites, it seems fairly clear that the difference between prosecuted and un-prosecuted CEO's has more to do with their like-ability, celebrity status, and general PR position than their specific actions.

Postscript: I have actually been thinking about the Enron bankruptcy a bit lately for another reason.  Remember that massive natural gas shortage we had when Enron went bankrupt?  Neither do I.  That's because chapter 11 is a pretty well-oiled process in this country.  Enron shareholders, bondholders, and management lost most their investment (and their jobs) but Enron's productive assets and skilled employees didn't disappear.  Enron's assets were bought by other companies who hopefully will employ them more profitably and productively than Enron had.

The same goes for GM.  We have a well-understood and proven process for taking a company like GM through bankruptcy.  However, we are instead replacing this well-understood and practiced process with a new process, called something like "Congressionally-managed restructuring funded with taxpayer dollars."  Does anyone really think this new process is better than the one we have?  Its only advantage, at least to some, is that it may preserve some management jobs, and shareholder and bondholder value, at the expense of taxpayers and any real effort for long-term reform of how GM's assets are managed.


  1. Kit:

    The solution could be very simple: legalize insider-training. A CEO's upbeat statements would be look out of place when the staff are shorting the stock. Would an "ENRON" ever happen if insiders could have traded?

  2. Will H:

    The difference between Enron and GM is the Democrat Controlled congress and the United Auto Workers of America. I.E. Democrats protecting union jobs.

  3. concrete:

    Hi Coyote. Saw your post via Maggies Farm...."Remember all the natural gas shortages when Enron went bankrupt?"....

    It was the electricity (some of which was made from natural gas) that was the issue I think. There were very serious price run ups and rolling power blackouts in California and then a long drawn out legal process. Lawyers and legislators were busy, busy. The deregs that allowed Enron to sell off hard assets were legislated in Sacramento, iirc. Wash. and B.C. got stuck with some large account receivables on the power that was traded during the price run ups for electricity. Trading electricity is so much more profitable, as compared to making it, i.e., owning and maintaining dams and power plants and power lines. In B.C. (Canada), gov't corps are usually not allowed to sell off hard assets like a dam or a powerline. Commie or good government? Maybe some of both. Enron was a big disaster, a calamity, for investors and consumers and an opportunity for more gov't regs and more lawsuits accompanied by the big name prosecution. A disruptive monetary mess with the legislators seemingly unaccountable. Also, was it maybe the first big derivative meltdown, fueled by traders without assets but who are good at math and computers?

  4. Olivier Schreiber:

    Great article--especially the part linking to Tom Kirkendall.
    Skilling got a bad press because of the rolling power blackouts in California. The culprit was not Enron but the half-baked so called energy deregulation allowing the price run ups to happen.

    I would go even further than Kit's insider-training (or even trading) legalization:
    Abolish the SEC and FTC to get a true Free Market.