Coyote Blog

Whether crimes were involved in the failures of Enron, Lehman, & Bear Stearns is still being debated.  All three essentially died in the same way (borrowing short and investing long, with a liquidity crisis emerging when questions about the quality of their long-term investments caused them not to be able to roll over their short term debt).  Just making bad business decisions isn't illegal (or shouldn't be), but there are questions at all three whether management lied to (essentially defrauded) investors by hiding emerging problems and risks.

All that being said, MF Global strikes me as an order of magnitude worse.  They had roughly the same problem - they were unable to make what can be thought of as margin calls on leveraged investments that were going bad.  However, before they went bankrupt, it is pretty clear that they stole over a billion dollars of their customers' money.  Now, in criticizing Wall Street, people are pretty sloppy in over-using the word "stole."  But in this case it applies.  Everyone agrees that customer brokerage accounts are sacrosanct.  No matter what other fraud was or was not committed in these other cases, nothing remotely similar occurred in these other bankruptcies.

A few folks are talking civil actions against MF Global, but why isn't anyone up for criminal charges?  Someone, probably Corzine, committed a crime far worse than anything Jeff Skilling or Ken Lay were even accused of, much less convicted.   This happens time and again in the financial system.  People whine that we don't have enough regulations, but the most fundamental laws we have in place already are not enforced.

Ken Lay and Jeff Skilling were convicted on numerous counts of fraud but were acquitted on most counts of insider training.  Professor Bainbridge has some quickie analysis.

I worked for Jeff Skilling for a brief period of time at McKinsey & Co.  Jeff was easily one of the smartest men I ever met, as well as the most detail-oriented.  It was this latter quality that forced me to concede that he was probably lying to Congress back when he said "I didn't know any of this stuff was going on in my organization."  Whatever else they did, Lay and Skilling will never be forgiven by my family for sucking in a couple of our family friends who were not business people (doctors and such) onto the Enron board, perhaps as dupes who had no hope of crying foul at the complex business machinations that were taken place.  Whatever the reason, our friends will spend the rest of their lives dealing with Enron lawsuits.

My only regret in this case is that I hate seeing some pretty scary prosecution practices get rewarded.  The guilt of Lay and Skilling does not change the fact that we need to start reigning in heavy-handed prosecutors, and disavowing the Thompson memo would be a good start. Update: Tom Kirkendall has much more on prosecutorial abuse in this case and possible appeal points.

In the next few weeks, Enron leaders Lay and Skilling will or will not be found guilty of various fraud-related charges (betting is that they will be).  You, in turn, may or may not agree with the verdict. (Disclosure:  I used to work with Skilling at McKinsey.  From my knowledge of his brilliant mind and his attention to detail, I thought that his Congressional testimony that he was unaware of the shenanigans in the SPE's was unconvincing, and so thought at the beginning of the trial he would be found guilty.  However, the prosecution's case has had surprisingly little to do with the SPE's and was weaker than I expected, so I am less sure now).

Wherever you are on guilt or innocence, you should be concerned about the increasingly aggressive tactics that prosecutors are getting away with in this and related cases.  Tom Kirkendall is all over this story, and reports:

the Enron Task Force refused Ken Lay and Jeff Skilling's request to
have the prosecution recommend to U.S. District Judge Sim Lake that
half-a-dozen former high-level Enron executives who have declined to
testify during the trial on Fifth Amendment grounds be granted immunity
from having their testimony used against them in a subsequent
prosecution.

Those witnesses -- several of whom have been mentioned prominently
in testimony during the trial -- would likely provide exculpatory
testimony for Lay and Skilling if they were to testify. The
Lay-Skilling defense team limited their immunity request to those six
witnesses even though the Task Force fingered the unprecedented number
of the Task Force identified over 100 former Enron executives
as unindicted co-conspirators in the case for the transparent purpose
of preventing the jury from hearing the full story of what happened at
Enron.

Another potential outcome may be the weakening of attorney-client privilege.

I don't know John Bolton from Michael Bolton, so I can't comment on whether he is an appropriate choice for the UN.  Nevertheless, there are a couple of things I do know:

1. Absolutely no one in the Senate gives a crap if Bolton has a temper or sometimes was tough on subordinates.  I am willing to wager about any figure you can name that many of the Senators commenting on Mr. Bolton are themselves strutting prima donnas who have blasted subordinates.  I remember that former CA Governor Gray (Grey?) Davis supposedly had some incredible temper tantrums with subordinates, but at the time that was not thought to be a disqualifier for office.  Why is it that stupid issues like this (or the immigration status of nannies) seem to dominate confirmation hearings rather than the person's qualifications and philosophy?
2. I have worked for not one but two men who have been featured on that famous "Toughest Bosses in America" list.  Compared to some of my encounters with these two, the stuff being talked about with Bolton is a joke. 
3. When you hear "the UN" when any senator is talking, substitute the word "Enron".  This is not quite appropriate, because in many ways, as referenced here, the UN scandals are much worse than Enron.  However, if this comparison is at all apt, why is it so inappropriate to send an ambassador who is openly skeptical of the UN in its current state?  When the feds sought out a prosecutor to oversee the Enron investigations, did they go looking for a person who had a high degree of respect and friendship for Ken Lay and Jeff Skilling?

Its amazing to me that Andrew Heyward still has his job at CBS.  Many others are asking the same question, including Ernest Miller, Rathergate & Captains Quarters.  The overriding question is this one:

The report clearly shows that the head of the embattled news organization did not perform as one would expect the head of a news organization to perform. Though Heyward clearly realized that there were problems with the reporting on the segment and issued a directive to clear up the matter, he does not appear to have provided sufficient overview or leadership to ensure that his directive was followed promptly and systematically. Instead of focusing on good reporting, as the head of a news organization should, he seems to have been primarily interested in damage control and not following up on his own directive.

Here is CBS's opinion of Heyward's performance in this matter, from Les Moonves:

But Heyward is an executive of integrity and talent, and the right person to be leading CBS NEWS during this challenging time

OK, so their position now is that the subordinates are at fault, and that the leader is not responsible for their actions or for the climate and controls in the organization that allowed the problems to occur.

This is really, really different than CBS's editorial position on OTHER organizations and leaders.  Check out the CBS editorial here on Enron.  Should Ken Lay be held accountable or was he an innocent dupe?  Hah, the editorial jumps right past this question, moving up a notch and asking why the board of directors weren't being held accountable. 

Ken Lay argues that he was duped and didn't know what was going on.  Note that this is his criminal defense - which may or may not work - but it certainly would not have worked to keep his job, even if Enron were alive today.  In Heyward's case, he admits he knew what was going on, but didn't get things fixed.  Heyward had his chance in the first 24 hours to save the credibility of CBS News and he blew it.