Man Without Qualities

Wednesday, February 12, 2003

Saint Kenneth, Holy Fool II

Tom Maguire asks whether Kenneth Lay and Enron may have legal problems separate from the allegations of insider trading against Mr. Lay from which the New York Times and, apparently, the Justice Department have now backed off.

Of course they could, technically. Even the Times article points out, for example:

None of this means Mr. Lay may not ultimately face criminal charges. Prosecutors may decide that he structured his selling to hide his actions improperly from the market or was aware of nonpublic information that should have led him to halt his trading. They could also conclude that he is criminally liable for some other element of Enron's collapse. But prosecutors are said to be close to a decision on whether to charge Mr. Lay, and there has been no indication that they have pursued other avenues.

The point here is not that Mr. Lay or Enron is now shielded from all possible criminal liability. What the Times is saying is that there is no evidence that Mr. Lay didn't think that Enron was every bit the company he said it was in his public statements. Technically, Enron has its own disclosure obligations under the Exchange Act, as a public company, for example. Enron's Exchange Act reports (including the financial statements with those now notorious footnotes) essentially contain what the public knew about Enron - up to materiality. An "insider trading" charge is nothing more than a charge that Mr. Lay knew material facts that the public didn't know. Mr. Lay read those Exchange Act reports. So in the real world a conclusion that Mr. Lay didn't engage insider trading is practically the same as saying that Mr. Lay thought the facts contained in the Exchange Act reports were materially correct and complete. And, practically, that means that he cannot be charged criminally with causing Enron to lie to the public. Other possible charges against Mr. Lay also fall apart practically in the dame way - even the ones that aren't technically tied to the "insider trading" allegations.

That's probably why the Times reports: there has been no indication that [prosecutors] have pursued other avenues against Mr. Lay. And it's also probably why John C. Coffee Jr., a securities law expert at Columbia University told the Times that "This would be a case that the government would normally shy away from." That's an understatement. In fact, if the Times story is accurate, further action against Mr. Lay would be evidence of government obsession.

And, speaking of obsession, all those silly Paul Krugman allegations go out the same practical window the same way:

Mr. Lay should be indicted? Really? Why should a man who personally believed that his company's reports to the public were correct be indicted? Is it possible Mr. Lay committed some crime which warrants his indictment? Of course it is. It's also possible that Herr Doktorprofessor Krugman committed some crime which warrants his indictment. But there appears to be no substantial evidence that either of these men committed any such crime. So I will not call for either of them to be indicted.

Enron may have "defrauded" its investors while breaking no law? If so, then its Chairman and Chief Executive Officer got defrauded in the same way - and lost a lot of money because of it. Are new laws necessary to protect the public from public companies employing devices that "fool" their own top management? Please. Life is too short and even angels have to prioritize which pin heads they use for ballrooms.

Enron bought "split dollar" insurance on Mr. Lay, which may protect some of his assets from his creditors now that Enron has gone "belly up" (to use the technical Krugmania term)? The whole point of the Times article was that Mr. Lay believed in his company and didn't think it was anywhere near going "belly up" - so this is highly unlikely to have been a motivating factor in the decision to by the policy, a very common perk. Mr. Lay lives in Texas - which has an unlimited homestead exemption. yet he maintained second homes in Colorado and other places. If he wanted to shelter assets against a possible "belly-upping" of Enron, why didn't he sell those other homes and buy or build a bigger primary home in Texas? Also, Herr Doctktorprofessor doesn't mention any split-dollar insurance on Mr. Fastow. But he would have been the first to know that Enron was at risk of "belly upping" and his assets were and are the most exposed.

But, more centrally, how does Herr Doktorprofessor Krugman justify demonizing a man who believed in his company? Of course, technically the Krugmania charges may be able to survive for the moment. Many of Enron's finanical footnotes and structured finance transactions technically may have complied with disclosure standards.

It is still possible that Mr. Skilling or Mr. Fastow or even other board members or officers may have caused Enron to lie to the public. Mr. Fastow is by far the most exposed. But, as I point out in a prior post, letting Mr. Lay go is probably making Mr. Fastow and his lawyers very happy indeed. For example, if Mr. Fastow caused Enron to defraud its investors and violate its Exchange Act disclosure requirement, then he must have done it in a way that eluded Mr. Lay's knowledge and securities trading pattern. But regardless of whether a Chief Financial Officer thinks his company os going "belly up," it's not usually considered a career-advancing strategy for the Chief Financial Officer of a public company to keep his Chairman in the dark and cost him lots of money while exposing him to potential criminal and civil actions under the securities laws. That's not a conclusive argument, of course. But it probably is "reasonable doubt."

But, as I have pointed out previously, the most significant aspect of current coverage of the Enron matter is that Enron failed. That means there are very few people now with incentives to defend Enron or its operatives. The money in such activities is scarce - so even where good arguments exist, they don't get out very well or quickly. It's a lot easier for most people just to condemn Enron and argue that whatever economic entity or interest that is providing one's incentives isn't like Enron at all.

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