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Enron Convictions

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The insider-trading law that Skilling was convicted under should not be a law, although it would be a reasonable principle of fiduciary duty, had such a condition been required by the stockholders, for example. But a breach would be a civil matter to be pursued by the injured parties in the form of a lawsuit, and not the government's business. Fraud, on the other hand, is a legitimately prosecutable criminal matter. But on the third hand, we would need to look at the hard facts to see if there is actual fraud. I'd be surprised if there actually was fraud: rather, the government has expanded the definition of fraud to include, I dunno, "making money" or something like that.

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Despite the objections of friends in business, I have often regarded today's shareholder practices as rather parasitic. They invest their money and expect to be number one on the priority list of the company. Of course, the companies treat them this way, too. I feel like, if you're going to invest in a company, it should be because you value its products or services, believe in its business practices, and see a future in it not because you expect it to do everything possible to make you a buck despite what it means to its employees. You shouldn't expect to have a claim on that company. You made an educated decision, and you took your chances. I look at it as, here's my money, I think that you run a good business with good business practices, so have at it. If I was wrong, so be it. I screwed up. Instead, we have companies that do anything to please their shareholders even when it leads to the demise of the company and the loss of the retirement savings of its employees who can little afford to have that happen. Maybe I'm just business ignorant, but that's pathetic.

As for what happened to these jokers, I agree with D.Odden.

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DamnGirl, The shareholders own the company. In a sense, they are the company, except that their liability for actions of the company is limited to the extent of their shareholding. So, in most ordinary situations it would be a contradiction to say that a company that does "anything to please their shareholders even when it leads to the demise of the company" (i.e. the extinguishment of the shareholders' investment).

In practice, managers run companies. While they are appointed by shareholders, those shareholders -- even the big ones -- often do not view it that way. If they do not like management, shareholders will typically sell their share and move one to something else.

At best Enron was a case of self-deception of the managers, who then attracted shareholders who believed in their "story" (or were similarly guilty of self-deception). More likely, the deception was conscious, with the managers fabricating information to give the shareholders an incorrect picture of the company. It could also be that some fraud was involved. I consider this to be very likely.

There's a lot that can be said about this topic. For instance, there are some on Wall Street who share the immorality of such managers and are happy to encourage them. Also, their are the finance professors who preach a message of ignorance, saying that one should invest in companies without caring overly much about their fundamentals.

[Added: Also see this thread.]

Edited by softwareNerd
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  • 5 months later...

I recently got a press release from ARI seeming to claim that Skilling was innocent. Does anyone have a link to more details on this?

Ayn Rand Institute Press Release

The Media's Mistreatment of Jeff Skilling

October 23, 2006

Irvine, CA--Upon hearing the news that former Enron CEO Jeffrey Skilling was sentenced to 24 years, most Americans, trusting the newspaper articles and books they have read on Enron, think that justice has been served. But, said Alex Epstein, a junior fellow at the Ayn Rand Institute, "Jeff Skilling has not gotten justice, and the media bear a major portion of the blame.

"Few Americans know that during Skilling's trial, the prosecution came nowhere near proving its central allegation that Jeff Skilling engineered a conspiracy to defraud investors. Few know that Skilling, upon leaving Enron five months before its collapse, destroyed no documents, nor did anything else resembling a criminal cover-up. Few know that the prosecution, unable to prove a conspiracy, spent huge swaths of the trial taking pot-shots at Skilling with issues not even mentioned in the indictment, such as the failure of Skilling, a multi-millionaire many times over, to disclose a failed $50,000 investment to Enron's board.

"The media's misportrayal of the case against Skilling long predates the trial. Ever since the fall of Enron, most of the media have treated as fact every conceivable smear against Skilling made by ax-grinding prosecutors or ex-Enron employees, while treating as absurd Skilling's claim that he neither engineered a conspiracy nor lied to investors.

"There can be no doubt that the media's treatment of Skilling contributed to his conviction for a phantom conspiracy--and to the outrageous 24-year sentence that he has now received. And the mistreatment of Skilling is part of a broader trend: the trend of treating businessmen as guilty until proven innocent. Our journalists and intellectuals, accepting the idea that the pursuit of profit is morally tainted, assume that whenever anything goes wrong in business, it is the result of crooked behavior by greedy, rich CEOs--and slant their coverage accordingly. This practice is putting numerous innocent men in jail, and instilling terror throughout corporate America.

"During Skilling's appeal, let us call for the media to start treating Skilling--and all businessmen--fairly."

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I had the same question and checked out a few previous ARI Op-eds. Here are some selected quotes and links:

Link to full article

But James Taggart sounds a lot like the folks at Enron, who thrived on questionable Third World energy deals, advocated massive new environmentalist regulations (while hoping to cash in on the subsequent spike in natural gas prices), and ran to the Treasury Department for a bailout when their schemes came crashing down.

Link to full article

"Enron executives do not represent the proper ethics of capitalism," said Tracinski. "They only represent the liberals' caricature of these values. And there is only one realm in which these Enron ethics--the view that personal or party advantage is to be gained by unprincipled, short-range opportunism--is normal. That realm is politics."

Link to full article

Enron is described as a cabal of free-marketers seeking to profit from electricity deregulation. This is wrong on three counts. First, electric utilities have not, by and large, been deregulated; California's power "deregulation," for example, was enacted through hundreds of pages of new regulations. Second, Enron does not represent the free market; it was a major proponent, for example, of the global warming scare. Enron sought to profit, not from free markets, but from the higher demand for natural gas caused by government restrictions on other fossil fuels. Last but not least, Enron clearly did not profit from anything; it went bankrupt.

Link to full article

"But all this is wrong," said Alex Epstein, junior fellow at the Ayn Rand Institute.

"Enron did commit fraud, but its fraud was primarily an attempt to cover up tens of billions of dollars already lost--not embezzled--in irrational business decisions. Enron began as a truly productive, innovative company in the field of energy--but the company's leaders were not honest with themselves about the nature of their success.

Link to full article

Enron was not brought down by fraud; while the company committed fraud, its fraud was primarily an attempt to cover up tens of billions of dollars already lost--not embezzled--in irrational business decisions.

Enron rose to prominence first as a successful provider of natural gas, and then as a creator of markets for trading natural gas as a commodity. The company made profits by performing a genuinely productive function: linking buyers and sellers, allowing both sides to control for risk.

Unfortunately, the company's leaders were not honest with themselves about the nature of their success.

...

Time and again, Enron executives placed their wishes above the facts. And as they experienced failure after failure, they deluded themselves into believing that any losses would somehow be overcome with massive profits in the future. This mentality led them to eagerly accept CFO Andy Fastow's absurd claims that their losses could be magically taken off the books using Special Purpose Entities; after all, they felt, Enron should have a high stock price.

Smaller lies led to bigger lies, until Enron became the biggest corporate failure and fraud in American history.

Link to full article

...fraud laws themselves are often not clearly defined. It is apparent, for example, that Enron executives were guilty of some form of fraud. Much of it was tied to their use of special purpose entities (SPEs) that they designed to move company debt and risk off the books and thereby mislead stockholders. However, SPEs themselves are legal under current laws. Fraud laws did not specify that SPE risk and debt should be reported to stockholders. In sum, the government is spending too much time and effort persecuting the innocent and too little time and effort stopping real fraud. In such a nightmarish business climate--the inevitable outcome of a mixed economy--who will be most at home? Why, of course, the pragmatist. His focus will be not on running an honest business but seeing how much he can get away with before everything comes crashing down.

From this, I'm not sure how to interpret "the prosecution came nowhere near proving its central allegation that Jeff Skilling engineered a conspiracy to defraud investors", in the more recent op-ed.

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Regardless of the specific offenses (or lack thereof) of Enron, I don't think there should be criminal penalties (jail time) for civil offenses such as losing people's money through bad investments. Is fraud a civil or criminal matter, anyway?

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Thanks, softwareNerd. I'm still curious about the details of the case and the evidence (or lack thereof) on the specific cases.

Megan: Interesting question. Which is the bigger crime, stealing an unattended purse with $100 in it, or causing an an investor to lose $100,000 by deliberately misrepresenting the state of a company's finances? Both seem criminal to me.

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I recently got a press release from ARI seeming to claim that Skilling was innocent. Does anyone have a link to more details on this?

If you read the release, it says that Skilling didn't get a fair trial - a very different claim from saying that he's innocent.

O.J. didn't get a fair trial either, but he's not innocent.

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^^It's not that clear, which is why I used "seeming."

From the release:

"the prosecution came nowhere near proving its central allegation that Jeff Skilling engineered a conspiracy to defraud investors."

"... Skilling ... destroyed no documents, nor did anything else resembling a criminal cover-up."

"conviction for a phantom conspiracy"

So the ARI writer seems to be claiming not just that the prosecution failed to prove guilt, but that there was no conspiracy or coverup at all. That certainly sounds like a claim that he was innocent.

Edited by Godless Capitalist
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Is fraud a civil or criminal matter, anyway?
Fraud is statutorily prohibited in all civilized jurisdictions, so it is a crime. It is also a tort (civil matter), but you can't be jailed for it. As a criminal matter, it depends on the specific statute you're charged under. This is the type of detail that is virtually always omitted from popular reports of events. It looks like the authority comes from 15 USC 78, if you want to spend a month or so sifting. There is a reprehensible trick used in writing laws where the law says "For the purposed of this section, 'fraud' is defined as..." and then they give something that isn't the definition of fraud, but because of the power of ipse dixit, it becomes the definition of fraud in a limited context.
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The problem was the Andersen partner on Enron named David Duncan that allowed the dubious accounting to take place.

Enron shelled its liabilities into SPEs or "special purpose entities" to keep them off the balance sheet. This is a big no-no in accounting, but it happened all the time prior to Enron. Duncan, as the partner in charge on Enron, "oked" these transactions and it was a snowball effect from there.

The managers at Enron were creating these SPEs named after their children to shell the liabilities away. There was also the shreading of documents that the SEC warned Andersen against.

I'm not privy to the trial or Skilling, but I'm not apt to believe that he is an "innocent" man.

Also, Sarbanes-Oxley wasn't in reaction to Enron, but rather WorldCom. WC capitalized billions of dollars in expenses inproperly, leading to the biggest bankruptcy in history IIRC. $70 billion I think it was... alot of money kept off income statements.

Now we only have four large accounting firms due to the breakup of AA which may be the worst of our problems. The accounting industry has a chokehold on Congress and regulatory agencies. It's only a matter of time that the big-4 turn into the big-3 and then we won't be worrying about SOX anymore :worry: :worry:

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