WashPost: Sheriff-in-Chief Will Fall Short
truthout.org
Business Corruption Plan Not Likely to End Abuses
By Steven Pearlstein
Washington Post Staff Writer
Analysis: Stepped-up enforcement by the
sheriff-in-chief won't be enough.
Wednesday, July 10, 2002; Page A01
The world according to George W. Bush is often portrayed as a
matter of good and evil, you're either with us or against us. Yesterday,
he brought the same approach to issues of corporate ethics and
responsibility.
In a speech to business leaders on Wall Street, the sheriff in chief
vowed to clean up Dodge by deputizing new sheriffs (adding $100
million to the Securities and Exchange Commission budget), sending
out the posse (forming a corporate fraud task force at the Justice
Department) and pushing through increased jail terms for corporate
crooks.
"More scandals are hiding in corporate America," Bush
acknowledged. "We must find and expose them now so we can begin
rebuilding the confidence of our people and the momentum of our
markets."
Although the markets were not much reassured -- all the major
stock indexes declined -- business leaders and corporate governance
experts welcomed the president's emphasis on stepped-up
enforcement. Sending a few Enron or WorldCom executives to jail, all
agreed, would certainly make executives and accountants think twice
about cooking the books.
But experts in securities laws and corporate governance warned that
stepped-up enforcement by itself is unlikely to end the game-playing
and corner-cutting that became accepted practice during the boom of
the late 1990s.
"The English used to hang pickpockets," said John Coffee of
Columbia Law School. "And at every public hanging you still had
pickpockets working the crowd."
One big problem is that getting convictions for financial wrongdoing
turns out to be much harder than putting bank robbers and drug dealers
in jail.
As President Bush noted Monday in discussing his own brush with
the SEC a decade ago, cases of financial misstatements often turn on
arcane accounting issues that don't lend themselves to black-and-white
interpretations.
It's relatively easy and routine for the SEC to use its civil powers to
force a company to restate its earnings. But securities lawyers say it is
much more difficult to persuade a jury unschooled in financial matters to
conclude unanimously, beyond a reasonable doubt, that executives
intentionally defrauded investors -- particularly when their accounting
firm signed off on it.
In the recent prosecution of Arthur Andersen LLP, for example, the
government thought it had a pretty open-and-shut case that the audit
firm had obstructed justice by destroying documents related to Enron
Corp. But even in that case, it took the jury more than a week to come
to a verdict on a single count -- and even then some jurors made
statements revealing their profound misunderstanding of the case.
"Corporate fraud, it turns out, is very hard to detect and even harder
to prosecute," said Theodore Sonde, a former associate director of
enforcement at the SEC.
Sonde said that given the current climate and the added resources,
the chances of successful prosecution are probably better now than at
any time since the securities laws were first passed.
But others warned that two headline proposals in the Bush plan --
increased jail terms for financial fraud and requiring chief executives to
personally certify the accuracy of financial statements -- are unlikely to
increase actual sentences or conviction rates. "Securities fraud is an
institutional problem," said Lynn A. Stout, a law professor at the
University of California at Los Angeles specializing in securities
litigation. "It takes a lot of people to make a securities fraud."
Indeed, some experts complained yesterday that the real problem
with Bush's prosecutorial focus is that it fails to deal with the much
broader deterioration in corporate ethics during the boom years.
While the criminal system may be well suited to dealing with
outright fraud, many of the activities now coming under question fall
short of that legal standard -- and in fact were often hailed by the
financial press and the stock market as creative, cutting-edge
management.
All sorts of incentives were put in place that encouraged investors
and managers to focus on short-term swings in stock prices rather than
long-run profitability.
Huge pay packages and stock options for top executives became
accepted practice.
An overemphasis on sales and earnings growth led to a mania of
unwise mergers and acquisitions.
"As a former businessman, Bush had the opportunity to challenge
his peers on a whole range of other issues that determine whether we
really change the culture of American business," said Leon E. Panetta,
a chief of staff in the Clinton White House and co-chairman of a New
York Stock Exchange panel on corporate reforms. "In that respect, I
think the president's speech fell short. It's not just the fraud we have to
deal with -- it's the whole get-rich-quick, boost-the-stock-price
environment that invited it and encouraged it that we need to address."
Among Democrats like Panetta, and even Republicans like Sen.
John McCain of Arizona, the way to address those broader problems is
for the government to put new rules in place governing corporate
behavior. They would set down specific rules on what other work
auditors can do for their corporate clients, repeal tax laws that
encourage companies to pay executives with stock options rather than
salary or bonuses, require executives to hold on to their company stock
until they retire, and forbid Wall Street analysts from working with their
firms' investment-banking divisions.
But while Bush touched on many of these issues, he stopped short
of calling for any government action, preferring exhortation to regulation.
His view, shared by many in the business community, is that it's now
up to the business community and the financial markets to recalibrate
the ethical compass and set out what is and isn't acceptable corporate
behavior. And that process, they argue, is well begun.
In the end, however, it is likely to be the investing public that will
decide how much or how little government regulation is required to
regain its trust. And the recent numbers on that are hardly encouraging.
A Gallup Poll released last week found that 6 in 10 investors said that
corporate and accounting fraud now make them reluctant to invest in
the stock market.
"I don't think we can solve this mess we're in just by better
enforcement," said Barry Barbash, a lawyer at Shearman & Sterling
who spent five years heading up the SEC's investment management
division. "What we need now is more clarity in the rules and more
muscle in the systems of checks and balances. And I'm concerned that
we're not moving fast enough on that."
Staff writer Jonathan Krim contributed to this report.
(In accordance with Title 17 U.S.C. Section 107, this material is
distributed without profit to those who have expressed a prior interest in
receiving the included information for research and educational
purposes.)
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