This post from earlier this week addressed the wide-ranging negative effects of the Sarbanes-Oxley legislation that was supposed to curb and correct the corporate fraud that supposedly prompted the bursting of the stock market bubble earlier in the decade.
Meanwhile, Krispy Kreme‘s (previous posts here) board released earlier this week a summary of an internal investigation that detailed over $25 million in accounting errors and related management failures that occurred as the trendy company was rapidly expanding and fascinating investors. When rumors of those management failures became public last fall, Krispy Kreme’s stock price tumbled.
Before enactment of Sarbanes-Oxley, revelations of such management failures would have almost certainly resulted in an internal board investigation and a shareholders’ deriviative lawsuit. Reviewing all of this within the lottery framework of criminalizing agency costs, Larry Ribstein observes wryly:

[M]ost of the stuff at Krispy Kreme happened after Sarbanes-Oxley. And it?s getting fixed by a special committee and a derivative suit that the company has allowed to proceed. So what is it, exactly, that we are getting from Sarbanes-Oxley?

Given that American Insurance Group, Inc. restated $3.9 billion of profit earlier this year, had various government investigations wipe out about $60 billion of market capitalization, was sued by regulators, and unceremoniously dumped its longtime chairman and CEO Maurice “Hank” Greenberg, you would think that its leaders would at least acknowledge that the company’s year has been about as bad as that of Mike Lamb.
Not so, and the reason is that the cost of the foregoing setbacks was merely the price of forging a productive relationship with the Lord of Regulation and other government regulators, as current AIG interim Chairman Frank G. Zarb told AIG shareholders yesterday in the company’s annual meeting:

“A.I.G. in recent months has forged a productive, constructive, professional relationship with our regulators. This company is committed to working openly, without reservation.”

Thus, the foregoing statement makes clear that AIG has changed its tune toward regulators from the position espoused by Mr. Greenberg, who once observed that regulators turn “foot faults into murder charges.” It remains decidedly unclear whether that relationship will prove as valuable for AIG’s shareholders as Mr. Greenberg’s management of the company.

On the heels of this post from yesterday, this NY Times article reports on the plea bargain of Domenick DeGiorgio, a 42 year old former managing director at the New York branch office of Munich-based HVB, (formally known as Bayerische Hypo & Vereinsbank) under which he pled guilty to fraud, conspiracy and tax-evasion charges in the federal government’s first criminal conviction in its investigation of allegedly fraudulent tax shelters that KPMG LLP created and promoted. Here are the previous posts on the KPMG tax shelter saga.

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A frequent topic on this blog has been the government’s questionable tactic of bludgeoning business executives into plea bargains by playing on the executive’s fear of a draconian prison sentence (often an effective life sentence) if the executive has the temerity to assert his or her Constitutional right to a fair trial by jury. Although prosecutors justify such tactics as a reasonable tool in seeking the truth about criminal acts of others, plea bargainers often undermine that goal by testifying falsely in order to obtain the favorable terms of the deal.
In this post, Ellen Podgor — who blogs with Peter Henning over at the smart White Collar Crime Prof blog — compares the sentences to date arising out of the prosecutions of former WorldCom executives, notes the wide disparity between those who cooperated with the government and those who did not, and then asks the right questions:

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You know that the criminalization of business in the post-Enron era has become routine when it’s newsworthy that the government has decided not to use its prosecutorial power to prompt another Arthur Andersen-type meltdown of a major accounting firm.
This NY Times article reports that KPMG and federal prosecutors have agreed in principle to a deferred prosecution deal under which the accounting firm would avoid a devastating criminal indictment for its involvement in the creation and promotion of questionable tax shelters in return for KPMG paying a hefty fine, which the Times article reports could be as much as half a billion dollars. Here are the earlier posts on the KPMG tax shelter probe and related problems.

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A couple of months ago, this post noted Wall Street Journal columnist George Melloan‘s op-ed on the Supreme Court’s Andersen decision in which he harshly criticized the government’s abuse of the rule of law to pursue currently unpopular businesspeople. Today, in this WSJ ($) Global View column, Mr. Melloan focuses on a common subject of this blog — the unjust nature of criminalizing corporate agency costs.
Mr. Melloan’s column focuses on the agency cost of corporate accounting:

Corporate accounting, contrary to popular belief, is chock-full of judgment calls. It’s a happy hunting ground for a prosecutor looking for decisions he can say were intended to mislead investors and might thus constitute criminal fraud. If an admiring press rewards him with a big headline, who’s to know, . . ?

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Assuming that you have not already been chloroformed by the recent discussion of the Nigerian Barge criminal case, this AP story reports on a development last week that tees up Merrill Lynch‘s involvement in that transaction where it ought to be examined — in a civil lawsuit.
This past Friday, the plaintiffs in the main Enron securities fraud class action lawsuit filed a motion for partial summary judgment against Merrill Lynch requesting that the federal district court find that the jury findings in the Nigerian Barge criminal case collaterally estop Merrill from defending itself in the class action on the liability issue regarding its alleged participation in Enron’s misleading financial reporting to investors. If U.S. District Judge Melinda Harmon were to grant the motion, then the parties would proceed to trial with a liablity finding against Merrill Lynch and the only issue for the jury to determine in regard to Merrill would be the amount of damages that should be assessed against Merrill. As Morgan Stanley can tell you, that’s not a position that a corporate defendant wants to be in at the beginning of a trial.

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