Is Ken Lay a Criminal?

William Anderson is an economics professor at Frostburg State University and an adjunct scholar at the Mises Institute. Here is an earlier post in which Professor Anderson challenged the reasoning behind an indictment earlier this year of several former executives of Houston-based Reliant Resources.

In this article that he co-authored with California attorney Candice E. Jackson, Professor Anderson challenges the conventional wisdom that the indictment of former Enron chairman and CEO Kenneth Lay is justified:

The “prosecutor as hero” theme reverberates in the media. What follows (from the July 19, 2004, edition of U.S. News) is typical of the state-worshiping press in the wake of the Lay indictments:

The federal prosecutors mopping up after corporate scandals can remember the summer of 2004 as their season of sweet victory. Last week a jury convicted Adelphia Communications founder John Rigas and his son Timothy Rigas of conspiracy, bank fraud, and securities fraud. A judge denied Martha Stewart’s bid for a retrial and will deliver her sentence this week. And charges finally reached the top in the biggest case of all when a grand jury indicted former Enron CEO Kenneth Lay on 11 criminal counts, including bank fraud, securities fraud, and making misleading statements.

One would remind people that the supposed pursuit of “justice” is not a game in which we have “victory.” These are legal procedures that destroy families, incarcerate talented people, and eviscerate legitimate business firms, apparently so that U.S. attorneys can bask in the glory that only the news media can provide.

Indeed, in Professor Anderson’s view, Mr. Lay is a political prisoner:

Ken Lay is a political prisoner. To put it another way, the charges against him are political, not criminal in nature. He was in charge of a company that had a spectacular fall, which is not a surprise, given that Enron was riding the crest of a speculative bubble that almost certainly was going to burst.

And such criminalization of ordinary business behavior likely would not change under a Kerry Administration:

The problem with the Lay indictment, according to Kerry, whose campaign advertisements tout his experience as a prosecutor, is that it did not come soon enough; Bush’s friendship with Lay delayed what Kerry claimed should have been done three years ago.

This is disconcerting, to say the least. It took a long time for the DOJ to put together a case against Lay that even is presentable, and the indictment itself presents a weak (but politically charged) legal case. Kerry’s response makes one wonder if he even believes that Lay should receive a fair trial at all — or, for that matter, even a trial, as opposed to summary judgment or the infamous military tribunals.

Professor Anderson is particularly unimpressed with the substance of the indictment:

Indictments are written for maximum effect, and Lay’s is no exception. . . Yet, after one slogs through the 65 pages or so (another ploy by the government to imply guilt — the longer the document, the more guilty someone must be) in the federal indictment, one is struck by the lack of criminality.

The most “damning” charges stem from stock sales Lay made after it became clear that Enron was headed for trouble. Yet, his behavior during this whole episode does not square with the criminality that the government is alleging. For the most part, Lay held the bulk of his investments in Enron stock. When some of his financial advisors told him to diversify, he insisted on borrowing against his Enron stock to purchase other securities.

However, at times he received margin calls, which means that the borrower must produce cash immediately; the only thing he could sell quickly was his Enron stock, but then he also continued to purchase that stock even in the face of company problems. At the same time, he urged employees to purchase the stock, as he was doing.

Or, as the Wall Street Journal’s Holman Jenkins put it shortly after Enron filed its chapter 11 case, “if Mr. Lay was committing securities fraud, he was shooting himself in the foot while doing it.”

Professor Anderson then decries the media and the government’s unwillingness to confront the weakness of the criminal case against Mr. Lay and the fact that he really does not have — under the inflamed circumstances surrounding Enron’s demise — any realistic chance of receiving a fair trial:

These matters are public record, yet news accounts have made statements like “he was quietly dumping his Enron stock at the same time that he was urging employees to buy more,” which says more about the integrity of U.S. mainstream journalists than it does Lay’s stock sales. Even a cursory glance at the record demonstrates that reality is not what the government is claiming. But then, neither the government nor mainstream journalists are bound by truth; nothing should get in the way of a good story or a politically popular indictment.

[W]we are pessimistic about Lay’s chances of avoiding conviction. His jurors most likely will consist of middle-class individuals who are loyal to the U.S. Government and will be of the mentality that anyone in the dock must be guilty by definition. Since the media has a vested interest in having been “right” in its demonization of Lay, it is doubtful that the coverage of the trial and pre-trial activities will change in its pro-prosecution, pro-government bias.

Professor Anderson then notes that Mr. Lay’s failures are better dealt with in the civil justice system rather than the criminal justice system:

It’s doubtful that Lay is guilty of criminal activity, especially in the sales of Enron stock. However, as the chairman of the firm, he had fiduciary responsibilities to the firm and stockholders. Moreover, many of the decisions he made, in good faith or not, resulted in huge business losses for investors, not to mention employees who purchased large blocks of Enron stock.

These matters are better suited for civil, not criminal court. Historically, this has been the venue where issues like this were argued and — at least to a point — resolved. By muscling into this legal realm, U.S. attorneys not only are criminalizing acts that are not traditionally criminal, but they also ensure that the people who should be receiving real justice are left out.

In closing, Professor Anderson provides a disturbing insight into the current psyche of American society in regard to business leaders:

There is no doubt that there will be cheering when Lay’s guilty verdict is announced and he is sentenced to what effectively will be a life term in prison. Americans have become people who enjoy watching others suffer — particularly watching leaders fall from grace — and perhaps one should remember that business executives have wives and children who also will have loved ones incarcerated for many years.

While U.S. attorneys are not providing bread and circuses to the masses, they are giving the public the next best thing: public humiliation of wealthy executives and their families, many of whom have committed the crime of being successful. Others, apparently, have committed the crime of not being successful enough.

Read the entire piece. As Professor Ribstein aptly notes in his blog today regarding yesterday’s post about the Global Crossing, Ltd.:

Yes, it is true, that the market often got it wrong during the speculative bubble that ended with Enron. But as I’ve discussed, many people share the blame for this mass delusion, not least investors themselves. We are going to find as these cases go to trial that there are nuances here the headlines have missed, and that raise serious doubts about dealing with these cases as criminal matters.

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