Did Enron Break the Law?
On his blog, Malcolm Gladwell, the author of The Tipping Point, discusses his “semi-defense of Enron”:
Can anyone explain—in plain language—what it is Jeff Skilling and Co. did wrong?
I’m not asking for an explanation for what they did wrong as businessmen. That’s plain. They did a mountain of stupid and arrogant things. Nor is this about what Skilling and company did that was unethical or in bad faith. There’s a mountain of evidence on that too. The question is strictly a legal one: according to the way the accounting rules were written at the time, what specific transgressions were Skilling guilty of that merited twenty-four years in prison?
In the New York Times, columnist Joseph Nocera takes Gladwell up on the challenge:
But while Enron’s dwindling cash flow, poor return on capital and so on suggested internal problems, there are lots of poorly performing companies with similar problems. They are not necessarily out-and-out frauds, as Enron was. And that’s where Mr. Gladwell’s argument falls apart. His view is that more disclosure, which is what the Securities and Exchange Commission tends to strive for, would not have made any difference. But what Mr. Skilling (and others, including Enron’s founder, the late Kenneth L. Lay) were charged with was not hiding things in plain sight — but hiding things out of sight that would have exposed the fraud. That is, they lied to the investing public about the true condition of the company. And no matter how you slice it, that’s against the law.
In a previous life, I was a financial regulator - the Deputy Commissioner of the California Department of Corporations. While there, I wrote the Department’s mission statement, which began with “Ensure an efficient and accessible financial services marketplace in California.” By lying, Skilling was intentionally obstructing both efficiency and accessibility. He got what he deserved.
