Man Without Qualities

Monday, February 18, 2002

Turning Point?

There are signs that cooler heads are beginning to understand - or at least beginning to admit - that the evidence of wrongdoing against Enron, Arthur Andersen and their operatives is a lot thinner than much of the media has suggested. In contrast to much incoherent media coverage, especially in the New York Times, Carrie Johnson at the Washington Post today reports on just how difficult it is likely going to be to demonstrate liability, at least on the criminal front, in her article Enron Case Shapes Up As Tough Legal Fight. Some pertinent excerpts from the Post article are copied below, but the whole article is worth reading:

“As the case unfolds, a consensus has emerged in much of the legal community, including academics, former prosecutors and criminal defense lawyers, that a Justice Department task force is likely, eventually, to seek criminal indictments against some former executives at Enron and perhaps its outside auditing firm, Arthur Andersen.”

“But legal experts suggest that it may be difficult to make the charges stick.”

"’I have lived through these hysterical cases before,’
said John Dowd, a Washington lawyer who defended Sen. John McCain (R-Ariz.) during the Keating Five influence-peddling scandal in the 1980s.”

"’Despite all the huffing and puffing, it's not always as easy as it appears,’ Dowd said. ‘There are going to be some problems for the government, I think. There are an awful lot of accounting and attorney defenses in this case.’


“Simply using partnerships to move debt off corporate balance sheets, as Enron did, is not necessarily illegal if there was no intent to defraud, said Peter Romatowski, a white-collar defense attorney at Jones, Day, Reavis & Pogue in Washington.”

“Some companies have been caught in violation of securities laws by booking revenue from one quarter into another to artificially inflate their earnings. Enron pursued a complex web of measures to shift its debt and inflate revenue, many of which were blessed by their auditors, Romatowski said.”

’We're a long way from yet seeing described anything so simple and raw and clearly intentionally fraudulent’ as booking revenue in the wrong year, Romatowski said.”

The Washington Post previously published interviews pointing out that the Powers Report does not in fact attack the higher management of Enron in the way the company’s more hysterical critics have made out. For example, a February 4 report by Susan Schmidt. included this passage:

"Donald Langevoort, a securities law professor at Georgetown, said of the report: 'It certainly adds to the evidence we've already seen that there were deliberate falsifications that led to fraudulent accounting. The question becomes not so much were the financial reports accurate, but were they doctored -- and if so, by whom.'

“But Langevoort noted that the ‘language of the report is very measured with respect to its senior executives, in questioning what Lay and Skilling knew or should have known. There is a mile of difference between 'known' and 'should have known' that amounts to whether you can stick someone with securities fraud.’"

"’The report talks about a failure of management; it says Lay acted more like a director than a senior executive. That is not terribly unusual in a large corporation and certainly not the basis for liability,’ Langevoort said.”

“The report was prepared for the board of directors, and while it criticizes the board, those criticisms are mainly directed at its failure to live up to its responsibility to monitor management decisions and internal controls. The board could face negligence lawsuits, lawyers said, but on the basis of the report's findings, members would not likely be vulnerable to civil or criminal fraud charges.”

As stated here previously, the Man Without Qualities believes it is likely that the higher managment of Enron will be found to have at most negligently prepared the company's financial statements. As Mr. Langevoort and the Post point out, the Powers Report supports that position, and claims to the contrary are, in my opinion, attenuated and seriously misrepresent the Report. Further, it should be obvious that quoting fragments of this 200-plus page Report runs the serious risk of presenting the fragment out of its intended context.

I also note that the Wall Street Journal coverage has, in my opinion, been excellent.

In addition to what appears to be a growing understanding in the more reasonable media that the case against Enron is not easy or obvious, there are signs of desperation at The New York Times, which yesterday ran a front page article by Daniel Altman with the sinister title: “Enron Had More Than One Way to Disguise Rapid Rise in Debt.”

S-O-O-O-O SCARY! One has to read EIGHT paragraphs into this nasty article to find this sentence: “Enron's accounting treatment conformed to existing recommendations from the Financial Accounting Standards Board, the nation's accounting rule maker, said Timothy S. Lucas, director of research and technical activities at the board.” One would think that “hiding the ball” in the eighth paragraph of this article, might be worthy of the same accusations of disclosure irregularities the Times has leveled in such unmeasured terms against Enron itself. But the fact remains that the Times is now reduced to running front page articles accusing Enron of engaging in disclosure practices which DID COMPLY with the applicable FASB standards. I would ask if they had lost their common sense, if the answer hadn’t been so obvious for so long.

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