In the news and public relations business, Friday afternoon is usually a good time to float news that someone involved doesn’t want many folks to notice. News tends to die over the weekend. Monday brings new news. Friday’s news is already old.
This past Friday’s news along those lines was that Joseph Cassano and other former American International Group executives involved in the AIG meltdown that almost brought the world’s financial system to its knees would not be subjected to criminal prosecution.
Inasmuch as the same thing that happened to Enron in late 2001 happened to AIG in late 2008 (as I predicted it could happen in 2005), it’s not particularly surprising that the federal government would like the news that it has elected not to pursue criminal charges against former AIG executives to die over the weekend news cycle.
I mean, really. Other than acknowledging the randomness of the criminalization of business lottery, how could anyone rationalize the government’s decision not to prosecute AIG executives, on one hand, with the government’s brutal treatment of business executives involved in Enron-related business, on the other?
Well, some would say at least the government finally got the decision right in regard to the AIG executives. Better late than never, right? Cassano and the other AIG executives are still subject to multiple civil class action lawsuits in which the responsibility for AIG’s meltdown will be allocated among all of the multiple parties involved. That’s the way this type of thing should be handled, right?
Well, yes, except that all of the mainstream media reports that I read about the government’s decision not to prosecute the AIG executives failed to mention that multiple business executives who did nothing other than be involved in transactions with AIG have already had their careers ruined and their lives uprooted by dubious criminal prosecutions.
Why weren’t these men and their families spared the trauma of facing the brute force of a federal criminal prosecution and a prolonged prison sentence? Likewise, why were these men forced to endure the incalculable human cost of the government’s criminalization-of-business policy?
Meanwhile, the human cost or that dubious policy continues to mount.
This past week, Joe Hirko, the former Enron Broadband executive who copped a plea bargain in the face of a draconian trial penalty, was visited by his wife Kathleen in the California prison where he is serving his sentence.
During her visit, Mrs. Hirko was stricken by either a heart attack or stroke and died, leaving her husband, three children and four grandchildren to pick up the pieces of their lives.
Unlike the news about the government’s decision not to prosecute the AIG executives, Kathleen Hirko’s tragic death did not even register a blip on the mainstream media’s radar screen.
I wonder how much the past seven years of prosecutorial hell that the Hirko family endured contributed to Kathleen Hirko’s death? And what beneficial public purpose did the infliction of that emotional trauma achieve?
A truly civil society would find a better way.
I guess they AIG folks were politically in the know. I am also struck by the absence of wall street prosecutions. Didn’t they “lie” to their stockholders? The draconian sentences make for bored inmates who waste precious years of their lives while their spouses suffer the financial, family and social consequences. The family members are the ones who have to face those who lied to the feds, implicated others to save themselves. Look at the before and after pictures of the wives, in particular. Suffering shows.
Tom: perhaps criminal charges aren’t being filed because, unlike with Enron, AIG didn’t do anything illegal? AIG made a series of very bad bets… but unlike Enron, AIG executives didn’t secretly cut their boyfriends in for a piece, they didn’t lie about the ownership of off-balance sheet entities, they weren’t selling stock while touting the stock in public and they weren’t entering into fake transactions to boost quarter ending numbers. Shouldn’t you be happy that prosecutors didn’t try to gin up charges in the face of public anger?
And if Hirko was so clean, he could and should have gone to trial. His decision to take the plea is evidence that his actions were, at best, very gray. Executives that play that close to the line shouldn’t be surprised when prosecutors go after them.
Steve,
Don’t be so naive. Do you really think people plea b/c they are guilty. That is a joke. The Fed Gov’t can be very persuasive (think Stalin, Lenin, Mao) especially if Prosecutorial Misconduct is running wild in the Justice Dep’t.
You just need to wait and see the Skilling appeal to the Supreme Court.
Steve, I am happy that no criminal charges were brought against the AIG executives. That is the correct result.
But rest assured that almost all of the executives who faced criminal charges in the Enron-related cases did nothing materially different than the AIG executives. And you are straining credulity if you think that AIG executives were not engaged in the same type of transactions to make earnings estimates that the Enron executives were engaged in.
In fact, in most of the cases, the executives involved in the Enron cases were involved in transactions that resulted in far less financial damage than the AIG executives. There is simply no rational basis for why those executives involved in the Enron cases should have faced destruction of their careers in criminal cases and the AIG executives do not.
Finally, your point about Hirko’s plea bargain lacks perspective. The government tried Hirko once and lost. After millions of dollars of attorneys’ fees, six years of litigation and the threat of another trial, who could blame Hirko for hedging the risk of a long prison sentence?
It’s not a choice that he should have had to make.
Same type of transactions? Did AIG sell barges, with or without the private assurance they’d buy them back later or move liabilities off-balance sheet by lying about the ownership of those entities? And how did AIG manipulate quarter ending results, by selling insurance with undisclosed side deals that the buyer could cancel the policy if/when they wanted? If you want to equate the actions of the two companies, you should provide examples.
And it doesn’t matter that the AIG losses were larger than Enron’s, if there is no crime, the amount of damage is irrelevant. And the reverse holds, if you commit fraud, you should go to jail; the amount of damage should only factor into how long you go to jail. You’re not arguing for going after AIG executives because of the amount of losses, do you think Enron should have gotten a no-prosecution card just because they didn’t steal too much?
While I agree with you on a lot of aspects of Enron’s prosecution, a number of guys there went way beyond the line, beyond mere aggressive business and into out and out fraud. You lie about the ownership of OBEs like Fastow, you deserve to go to jail. You make undisclosed side deals, you deserve to go to jail.
Steve, examples of the similarity between AIG’s earnings management and Enron’s are here, here andhere. Cassano’s aggressive CDS sales unit was used by the post-Greenberg AIG management to smooth AIG’s earnings until the lid blew off in the fall of 2008.
You miss the point with regard to AIG’s losses. Absent clear evidence of a corporate crime such as embezzlement or taking a kickback, I don’t think any of the AIG or Enron executives should have been prosecuted. But if the government is going to attempt to regulate business through criminalizing transactions than end up causing financial damage, then isn’t it more logical that transactions than nearly brought down the world’s financial system should be prosecuted rather than a small barge deal that caused no damage to any investor?
The point is that the government’s “policy” of attempting to regulate risk-taking through criminalization is misdirected, random and arbitrary. Such capriciousness ultimately undermines respect for the rule of law.
Finally, I agree with you that Fastow should have been prosecuted for several of his shenanigans with regard to the SPE’s. However, I disagree with you that any executive should be prosecuted for “an undisclosed side deal” (not a kickback) that is expressly voided by the deal documents that the parties to the transaction sign.
What is the point of even asking your question in the second paragraph since we both agree government shouldn’t prosecute solely on the basis of the extent of financial damage?
As to the barge ‘side deal’, the jury presumably concluded that notwithstanding the documents, the parties had an agreement (substance over form) that Enron would buy the barges back… and if that is the case, then they should have been prosecuted.
Lots of companies engage in earnings manipulation.. but unlike Enron, they do so legally, they stay within the envelope… so to compare the two is apples and oranges. Put another way, if AIG had even come close to the line in managing its earnings, don’t you think the government would have gone after them? The absence of prosecution is evidence that AIG was nowhere near the line.
And I disagree with your sweeping statement that the government is criminalizing risk taking. People aren’t getting prosecuted for taking risks, or even for taking a risk and failing, they’re getting prosecuted because they commit fraud in the course of doing so (and, in my opinion, they do so when they realize their venture isn’t living up to expectations). While glory seeking prosecutors may rummage around the debris looking for something to justify prosecution, it is the executives themselves who provide the rope. If, for example, Lay had stopped his stock sales when he was touting the company, he might have avoided prosecution… or at the least, conviction. The same for the barge executives, if they had kept their mouths shut and hadn’t said anything about buying the barges back, they wouldn’t have been prosecuted.
Steve, since special issues are not given to juries in criminal cases, we really don’t know what the barge jury was thinking. Remember, the barge defendants were convicted of honest services fraud, which the prosecution characterized as merely a breach of fiduciary duty (which begs the question of what duty the ML executives owed to Enron, but that’s another issue). And remember, too, that the jury acquitted Sheila Kahanek, who knew all about the discussions regarding buy backs.
You suggest that the government would have prosecuted AIG if it had come “close to the line” of illegality in managing earnings. But what makes you think that? The government has been so tied up in the management of AIG post-Greenberg that it is not surprising to me in the least that it would prefer to allow AIG to win the criminalization of business lottery.
Skilling was most definitely prosecuted for excessive risk-taking — the trial transcript is replete with prosecution arguments that he breached his duty of honest services to Enron shareholders through several risky deals. And your suggestion that Ken Lay would have avoided prosecution or conviction if he simply had stopped selling stock to pay his margin account (while buying stock at the same time, I might add) is simply without basis.
Finally, there was nothing wrong — much less illegal — for ML executives to request that Enron buy back the barges. That type of unenforceable request is commonly made between contractual parties. That the Enron Task Force used that as a basis of a prosecuting those men and ruining their careers proves the nebulous nature of the foundation upon which the government’s regulation of business through criminalization is based.
I would hope that Steve understands the larger picture. We have a government that has “off-budget” transactions that are fraudulent, a government that makes all sorts of false claims, and yet this government is permitted to make judgments on all financial losses of a firm such as Enron?
What if ANY corporation engaged in the same kinds of business transactions we see from the government on a daily basis? Think of the Ponzi schemes, the unfunded liabilities and the like, yet this government uses vague laws to claim fraud where none exists. If you don’t like what Tom is saying, perhaps this from Harvey Silverglate might present a different picture. Harvey is not a conservative Republican, but a liberal Democrat, yet he truly understands what the government is doing:
http://www.forbes.com/2010/05/27/goldman-sachs-finance-economy-opinions-contributors-harvey-a-silverglate.html
By the way, any time we see prosecutors leaking grand jury information, as they did in the Enron case, that is a felony. Yes, a felony. Steve, have you ever seen a federal prosecutor indict himself after he breaks the law? Don’t make me laugh. Is Rudy Giuliani a hero to you for what he did to Michael Milken? Yet, Rudy’s top lieutenant bragged to a law school group at Rutgers two years later that the DOJ “criminalized” things that had not been criminalized before.
Furthermore, Giuliani committed a number of felonies, including leaking grand jury information AND obstruction of justice by telling the Wall Street Journal he had 100 more superceding indictments when, in fact, he had none.
So, you can make heroes out of these people if you would like, but I recognize a criminal and a liar when I see one.