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Pat Sullivan / AP Photo Lawmakers are pushing for a Wall Street overhaul. But nothing will come of it, if history is anything to go by, argues Enron whistleblower Sherron Watkins.
Remember Enron? Remember the 24-year prison sentence that was meant to discourage similar corporate malfeasance?
Well, this past week, Jeff Skilling, Enron's former CEO and my former boss—who was convicted and sentenced to more than two decades behind bars in 2006—won a partial victory in an appeal before the U.S. Supreme Court.
The appeal, however, is not likely to spring Skilling from his prison cell in Colorado. Even if he gets some convictions tossed, federal sentencing guidelines will probably keep him behind bars for at least another decade, given the size of Enron's multibillion-dollar financial collapse.
Enron was Ebola in a Petri dish, and instead of stamping out the virus, we let it fester.
But the appeal—and recent financial-reform push—has set me thinking, once again, about how we deter the next generation of corporate miscreants, especially now that a new financial-reform bill is making its way through Congress.
By now, after the fallout from executive overreach/malfeasance/gambling at Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs, and AIG—even after Skilling—it is clear that lengthy prison sentences do not do the trick. The convictions of the Enron CEO and other executives from our scandal-plagued start of the century have, ultimately, been ineffective warnings to the corporate daredevils, and, later, bailout recipients.
At the heart of Enron's meltdown, and the recent Wall Street collapses, is a single issue: compensation systems run amok.
In the case of Skilling, the U.S. Supreme Court rejected the prosecution's use of an anti-fraud law known as "theft of honest services" and sent his case back to the appellate court to consider the impact on his multiple convictions.
"The government charges Skilling with conspiring to defraud Enron's shareholders by misrepresenting the company's fiscal health to his own profit, but the government never alleged that he solicited or accepted side payments from a third party in exchange for making these misrepresentations," the high court said in its recent ruling.
My question to the government is this: What constitutes a modern-day bribe or kickback? Is a perpetrator off the hook because he or she uses the market to pay the kickback?
In 1993, Congress passed a law disallowing tax deductions for compensation in excess of $1 million. This new law was an attempt at reining in CEO pay; instead, it fueled the use of stock options to compensate executives for the loss of their salary above $1 million.
As COO and then CEO, Jeff Skilling was both contractor, builder, and owner of various stock-option and stock-grant plans put in place for his benefit as well as other Enron executives and employees. In the U.S. government's indictment of Skilling, he was accused of hiding Enron's true financial condition in the years 1998 through 2001 by using various means to fill the "gap" between actual results and budgeted goals, all the while benefiting from this deception by selling stock and options in the marketplace that netted him more than $89 million in profit.
Sound familiar to those reading the Lehman Brothers' Bankruptcy Examiner's reports?
In 2002, in the wake of the collapses of Enron, WorldCom, Adelphia, HealthSouth, and others, Congress again focused on the issue of compensation and the use of stock options.
In congressional testimony to the Committee on Financial Services, Paul Volcker said this as early as June 2003: "I think it is clear that the grotesque escalation of executive pay over recent years has been importantly a function of the greatly expanded use of fixed-price stock options for a small group of senior executives," he said. "That development has been encouraged and defended by the theory that such options align the interests of managers and owners… Experience provides ample evidence that the relationship between reward and performance is capricious."
12 June 29, 2010 | 12:52am Twitter Emails
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Skilling and Lay get jail time - Frank and Dodd get a 'reform' bill named after them. Go figure...
Lay did not get jail time, he died first. Frank and Dodd broke no law
"In 1993, Congress passed a law disallowing tax deductions for compensation in excess of $1 million. This new law was an attempt at reining in CEO pay; instead, it fueled the use of stock options to compensate executives for the loss of their salary above $1 million. As COO and then CEO, Jeff Skilling was both contractor, builder, and owner of various stock-option and stock-grant plans put in place for his benefit as well as other Enron executives and employees" Kids, altogether spell it with me now: C-O-N-F-L-I-C-T O-F I-N-T-E-R-E-S-T
"conflict of interest" can equally apply to Ms. Watkins. Do I assume incorrectly that she has an axe to grind as a former Enron employee? That is, she herself lost money from the disappearance in the value of Enron stock? If so, why did she not disclose this in the piece? It is entirely reasonable to assume that she could have had a 401(k) or options herself, so disclosing to us whether she did or did not have an interest in this area is crucial to the issue of conflict of interest.
Not true she was a whistle blower. A status that is intended to provide protection but often does little
There are many who feel that Ms. Watkins tells only one side of the story. Indeed, there are those who feel Skilling is 100% innocent. If you want to get the other side of the story, read Malcolm Gladwell's "Open Secrets" from the New Yorker. It is online in its entirety: http://gladwell.com/2007/2007_01_08_a_secrets.html
Great Link thanks. I'm not sure they really are saying different things. Ms. Watkins says we have not learned anything from Enron and Mr. Gladwell agrees. He of course couches it in the mystery vs puzzle dichotomy and adds that they probably did nothing 'overtly' wrong, although he false way way short of calling them innocent. FWIW, I look at the ENRON scandal like a child you scold for doing something he shouldn't only to have him do the exact same thing and argue innocence on a technicality. These people were doing wrong (NO income in 5 Years) and the Board should have fired them all, and all the tricky accounting is intended to deceive (as Mr. Gladwell states, they needed some of it to get loans). Bottom line, the whole thing stinks.
...but the one institution that did NOT have a problem with Enron was the I.R.S. They knew that Enron wasn't making money and had absolutely no problem with their books. Somehow, everyone else was caught up in an irrational exhuberance that made it the 10th biggest company in the world. Who was responsible for that...Skilling? Lay? Did they lie or hide anything from the public? Gladwell seems to say "no" and, indeed, if anything, they provided too much information. More than stinking, the question on my mind is: was Skilling a scapegoat or did he do anything wrong? And if he did wrong, what exactly because it certainly wasn't withholding info...
The thing is it is possible when Watkins saw the book, she knew right away how fudged the books really were and what trouble Enron leadership was really in, and Watkins knew that Skilling and Lay were going to get caught or were in the process of being caught, and the book and the movie should have been called the smartest gal in the room, those guys were quiet stupid to think that fear was going to protect them. Even with so much of the paper work being shredded, the path traced backwards shows what happened cause numbers when added up don't lie. People lie. An accounting system works even when the legal system is structured to benefit the one who can benefit the lawyers. Enron was really about the people who lied, not about numbers that lied. Arguing that revising SOX to save on compliance costs and firing people based on will not based on cause was basically very similar to the Enron culture as far as I can see, and the shareholders were the ones that got ripped off. Big swinging dick culture which manipulates share price based on fear and lack of disclosing how the earnings are created, and calling an investor an asshole for asking to see the balance sheet, and using the excuse I am not an accountant, when it is up to the managers to know the numbers are representative of the truth, is not good for the market and why it is supposed to be illegal to fudge the books. Madoff should have never got away with what he did for so long if SEC had been doing their job of overseeer. Now if SEC has the power to fire who they like in the overseer board, I think the same old fear thing could come back, possibly even bigger, because if accountancy independence is compromised and seems to be every time these big frauds are uncovered, then accounting law could be flaunted like many laws often are, as long as someone has enough money to act like the big swinging dick of share price control.
Maybe the Skilling defense will be able to convince the judge it wasn't his duty to be honest, but I doubt the linemen and other shareholders who lost their retirement funds, would agree. I would guess they would argue that they had the right to expect that the corporate insiders were not misrepresenting the financial health/structure of Enron to shareholders. The accountants had a duty to maintain their independence. If the system is allowed to benefit the insiders at the expense of the shareholders, than the trust in the market will be lost and market crashes will not bounce back, unless possibly if algorithms are written for fat fingering stimulus, the bubble will get blown a bit then. Still trust and honesty matters, I believe.
I don't think this issue is about compensation as much as it is about full disclosure and benefiting from the lack of it in the form of compensation, which of course could be the motive for for not disclosing the true financial health/structure, which enables the benefiting from inside trading. Fudging the books so that possibly worthless stock is inflated into extremely inflated/valued stock is, in my opinion the core of what this is about. Then the compensation based on the overly valued stock is the response to the manufactured condition of the share price. It is the same old thing, SOX verses dirty socks.
Are you so sure, dooreen, that Skilling wasn't honest? We have Ms. Watkins telling us that -- a whistleblower who has a vested interest in Mr. Skilling being guilty -- and you have a jury of 12 people and a judge a public who wanted him to be guilty because something terrible had happened ($60 billion in equity was lost)...but what exactly did he do wrong? Can you tell me?
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Randall Lane is editor-in-large at The Daily Beast. The former editor-in-chief of Trader Monthly, Dealmaker and P.O.V. Magazines, and the former Washington bureau chief of Forbes, he is the author of The Zeroes: My Misadventures in the Decade Wall Street Went Insane.
Tom Cruise's Failed Comeback
Gina Piccalo spent a decade at the Los Angeles Times covering Hollywood. She's now a contributing writer for Los Angeles Magazine and her work has appeared in Elle, More and Emmy. She can be found at ginapiccalo.com.
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